Chapter IX MARKET ECONOMY AND WAGES

MY CONSTANT BATTLE to secure true and free competition aims at supporting in the first place those forces in our country which are beneficial, and which above all should help the German economy towards a permanent progressive increase in productivity. Where there is no competition, there is a standstill which eventually leads to general stagnation. Everyone then defends just what he owns, that is, he is no longer interested in increasing his own efforts—so important a factor for the prosperity of the national economy.

This increase in economic efficiency is by no means an end in itself. The facts of the case of the social market economy can only be regarded as completely fulfilled when, in keeping with growing productivity, prices are lowered, thus making increases in real wages possible.

I shall never cease to work towards this end—and I shall continue to do so even when many no longer believe that a policy to cut prices is possible or likely to be successful. This aim must not be lost sight of just at that phase of economic development through which we are now passing. Did we not face a similar problem during the Korean crisis? At the C.D.U. meeting in Goslar on October 22, 1950, when the waves of price movements ran high, I could point to the fact that the Volkswagen works had lowered its prices by 10%, in spite of higher raw material costs and a simultaneous increase of 10% in wages and salaries. I explained that such a policy ‘completely corresponds to the aims of a social market economy’.

These pointers may suffice to make clear the close link between the effort to maintain competition and the desire for a higher standard of living. In the long run it is economically impossible to want the one and simultaneously to forgo the other. This indissoluble relationship can also be presented in another way: only competition can ameliorate the consequences of rising prices which we have experienced during three periods in the past eight years—namely in the second half of 1948, as a result of the Korean conflict, and now as a result of boom and full employment.

To maintain a competitive economy is in every sense a social obligation. We can learn from our own past, but also in looking at countries beyond the Iron Curtain we can see that in the planned economy, and even more in the State-controlled economy, the proportion of wages in the national income is and has always been smaller than in the market economy. The proportion of wages is always smallest in the State-directed collective economy, as at present under Bolshevism. It would be remarkable if it were different, for not only does the bulky bureaucratic machinery in the nature of things consume a large part of the national income, but the composition of the national income also shows that it is not meant to satisfy human needs. No one wishing to be taken seriously can declare or even wish to prove that the social and economic performance of a State-run economy can be greater than that of a market economy.

If I have here remarked that in the market economy competition is the ideal means of increasing productivity, and that this in turn makes lower prices and higher wages possible, then an historical explanation is needed.

A Rule for Businessmen

I have found it necessary to discuss publicly the trend of wages when this threatened to go beyond what was economically possible, and there was a danger that the limits set by the trends in productivity were going to be exceeded for political reasons. This state of affairs came about twice during the period when I was responsible for Germany’s economic policy—in the recent past and during the Korean crisis. During the other periods I have never raised general objections to a rise in wages, even though these were considerable. Those who are familiar with my economic beliefs know that an important part of them is reserved for a generous development in wages.

That is why I have repeatedly declared that the often exercised opposition of employers to wage increases in principle (which thanks to a rising yield of our national economy were not only possible, but necessary and sensible to maintain the stability of our currency) is not appropriate to the system of the market economy. Such opposition utterly disregards the aims of market economy as I understand it. To me it appears ill-founded if the employer himself never takes the opportunity to increase wages, except when the unions press him. Especially during the phases of a quiet economic upward trend employers, if they were prepared to raise wages on their own initiative because of improvements in productivity, would act with economic propriety and psychological astuteness. Naturally, the margin available to cut prices should not be entirely given away. A crass alternative would be to prefer cutting prices to increasing wages.

The objection that the trade unions must show victories to their members, and that therefore the position I recommend is inadvisable, cannot be regarded as justified in the national economic sense.

If the actual progress in productivity is regarded as setting limits to the activities of the trade unions, and to the scope for a voluntary increase in wages on the part of the employers, then the question now arises as to what protection can be found to prevent an infringement of these limits.

Wage increases not covered by increased productivity must always lead to price increases. But first it should be said without passion that employer and employee agree easily during a time of boom; both are concerned with production and tend to hope that the results even of a doubtful agreement will not directly affect them. But every agreement which ignores its broad effect on the national economy adds to the burden of other groups in the economy whose incomes change less quickly, and for whom every increase in price, above all of important goods, is detrimental in its effect.

Thinking of the Future

I have already drawn attention to these social—or rather antisocial—consequences of disregarding the limits of healthy changes in wages, when I discussed the question of the so-called ‘active wages policy’. This kind of expansionist wages policy, which tends to shake the price structure, must be damaging, unless for different reasons an inflationary trend is welcome. I do not and never shall accept such a conception, for a policy of this sort would slowly but surely inflame the inflationary trend until all desire to save was killed.

In evaluating a policy which gives a small place to the stability of purchasing power, the general economic effects must be considered, quite apart from the anti-social results. In Germany if we are not in the long run to damage our exports we cannot and must not thoughtlessly raise wages and salaries. Even in a period in which we sometimes regard our export surplus as an evil, we must not forget that our goods are not being bought abroad just because they are German, but only when and for as long as we are prepared to persist in our efforts. As part of the world economy we must understand the connection in the sphere of wages. It must not be forgotten how much our proud successes in the field of foreign trade depend on the stability of our currency and on confidence in the constant value of our money. Only a policy directed in this way can impart the feeling of security for economic transactions, in the larger field of the national economy as well as in the smaller, i.e. in the sphere of the household.

This attitude must remain. These statements and views remain valid even in a period when the favourable trends in our foreign trade are safe from any danger that could threaten from that side. If a policy with an inflationary trend is accepted, or if such a policy no longer finds any resistance, then there will be no stopping of the consequences. The depreciation of money and increases in prices which would follow would mean that our surpluses would melt away like snow in the sun.

I believe equally that all employees should participate fully in the increasing productivity of our national economy, as I expect that the trade unions should show that responsible attitude in their wage demands which will guarantee the security of our currency and the further salutary upward trend of our economy. This warning for moderation can nevertheless only be justified so long as the employers do everything possible to reduce prices or, at the very least, maintain the stability of the prices of the goods they produce and sell, and in particular of consumer goods.

Autonomy and Responsibility

The question of joint management is connected with these problems. My views on this point are well known. Now, as previously, the Federal Government, the coalition parties, probably the whole of the Federal Parliament, want to give and preserve freedom of decision for joint management so far as wages and working conditions are concerned. This freedom is necessarily linked to the responsibility to use it sensibly, that is not to pursue a policy which would lead to higher prices, and so cut purchasing power, reduce the ability of the German economy to compete, and in the final instance endanger the currency. Freedom, without responsibility and a feeling of obligation, can only result in degeneration and chaos.

At the International Fair at Frankfurt on March 6, 1955, I was able to say with full conviction: ‘I am pleased to be able to declare that both sides in joint management are clearly acknowledging their responsibility. Until I have proof to the contrary, I am confident that from this direction no elements will disturb the German economy.’ But the trend since the spring of 1955 raises some doubts whether these confident statements, based on a belief in innate human good sense, are still valid today. A glance at the differences between the trend of wages and productivity confirms these doubts, especially since the growth of wages in 1956 far exceeds progress in productivity. During the first nine months of 1956, productivity rose by 3.8% over the same period of 1955, while the gross weekly wages of the industrial worker over the same period increased by 8.6%.

In this connection I should like to quote the views of a leading advocate of the market economy, Walter Eucken. He says:

‘If it is right that it is only possible to distribute what has first been produced, then the first concern of all social reformers must be with that economic order which is most effective. Only after that can other questions be asked. When in any kind of economic order all go equally hungry, then this is neither a solution of the problem of just distribution, nor of security nor any other social question. Nor is it impressive when efforts are made to render the effects of a bad order more palatable by ethical embroideries and appeals to the common interests of all.’

The Cake Must Get Larger

That is why I want to stress once more that my aim to raise the standard of living is concerned less with the problems of division than with problems of production and productivity. The solution is not to be found in dividing but in multiplying the national income. Those who pay attention to the problem of division frequently make the mistake of trying to distribute more than the national economy produces.

This does not mean that the present division is ideal or ‘just’ in every respect. In the long run changes are possible. But such changes, particularly if they are to be made quickly, bring in their train violent discussions, battles for more wages and perhaps even strikes. The economic energies of the nation needed for these purposes would be appreciable. That is why it seems to be more sensible to use this same energy to increase productivity, in order to obtain more for all in this, the only fruitful way.

What I have said here is brought out by trends in national income. Between 1949, when the Federal Government began its work, and 1955, we have succeeded in raising the gross national income (expressed in 1936 prices) from DM 47.1 milliard to DM 85.8 milliard. In the first six months of 1956 the national income, at roughly DM 44 milliard, was almost as large as that for the whole of 1936 with DM 47.9 milliard. The net income of employed workers correspondingly rose from DM 34.101 milliard in 1950 to DM 61.367 milliard in 1955 and DM 31.909 milliard in the first six months of 1956. Income during the first half year is usually well below that of the second half year, e.g. first six months of 1955, DM 29.393 milliard, second six months, DM 32.974 milliard.

The rates of increase in private consumption are particularly illuminating, having risen by DM 5.205 milliard in the first six months of 1955. If private consumption (all price changes being left aside) is calculated in 1936 prices, then these are the rates of increase for recent years:

Rates of Increase Since 1949

Private Consumption Expressed in 1936 Prices

1st Half-year
1950 compared with 1949	+ DM	1701 million 12.6%
1951 „ „ 1950	+ DM	1848 „ 12.2%
1952 „ „ 1951	+ DM	1037 „ 6.1%
1953 „ „ 1952	+ DM	1684 „ 9.3%
1954 „ „ 1953	+ DM	1761 „ 8.9%
1955 „ „ 1954	+ DM	2182 „ 10.1%
1956 „ „ 1955	+ DM	2372 „ 10.0%

2nd Half-year

1950 „ „ 1949	+ DM	2485 „ 15.9%
1951 „ „ 1950	+ DM	772 „ 4.3%
1952 „ „ 1951	+ DM	1844 „ 9.8%
1953 „ „ 1952	+ DM	2040 „ 9.9%
1954 „ „ 1953	+ DM	1625 „ 7.1%
1955 „ „ 1954	+ DM	2955 . 12.1%

Calendar year

1955 „ „ 1949

+ DM

21934 „ 75.5%

The great responsibility of every economic and social politician can also be seen from a new trend in economic developments. On the threshold of the age of automation, at the beginning of a phase which many (if with some Jules Verne-like fantasy) would like to call the beginning of a second industrial revolution, we have here in Germany, as in other highly industrialized economies, a great need for capital, which must be satisfied in an orderly manner. In theory there are only three ways of dealing with it. The demand can be met through the free capital market, in which every citizen should participate as far as possible. Here capital comes to be generally available as the result of the small individual savings of the many. That is why this method must be regarded, not only as the classical one, but also as the healthiest. Unfortunately it must be said that, besides political mistakes, clearly due to the population’s worry about price trends, and in spite of increasing prosperity, savings have recently fallen (see graph on savings since currency reform on page 65).

If this natural way of finding capital through the capital market becomes blocked owing to the action of the people, then there are two further possibilities. One is finance through higher prices. But I do not believe that any of my readers will think that this is a useful or—in the long run—a politically defensible method. If we were to try to exploit this procedure then I am firmly convinced that our social and economic order would soon break down. Such an attempt would contain so much social dynamite that it could only lead to a catastrophe.

As a final solution there remains the appeal to the State; that is, the State should make available the necessary means for investment. As so often is the case with such transparent political demands, no one asks where the State is to find the necessary means. Without endangering the currency and without disturbing the price level no State can lend out more in capital than it has first received in taxation from its citizens. Thus this method means not only confiscation without compensation in favour of mammoth State capital ownership, but forces every individual citizen into the position of slave-like dependence on an all-powerful State. A free national economy based on private initiative is then doomed to moulder.

If the Socialists support an ‘active wages policy’ and acknowledge the need to increase investment, yet at the same time stick to the view that the problems of automation cannot be solved by private economy, then little imagination is needed to detect that the Socialists believe that they have found the hook on which to hang a social revolution. Soon State planning and a new dirigisme will be introduced as the answer to the apparent need to deal with the new technical developments. I can only say that I warn those who feel tempted.

Finally, there remains the possibility of letting the demand for capital slacken—i.e. to let investment, which is needed for the national economy, fall away. It is clear that we would then leave the circle of the modern industrial economies and would slowly but certainly drop back to a more primitive existence.

If we are to tread the path which seems to me to be the only fruitful one, then we must lay the basis for creating sufficient capital. We can achieve this aim only if and so long as the German people have confidence in the stability of the political, social and economic order. But for the man in the street this is symbolized by the price which everyone pays for the essential things of life. That is the focal point where our efforts for an appropriate wages policy, and for securing the stability and basis of the economic, social and political future of our people, must meet and combine.

From these reflections it will become increasingly necessary for the individual to become conscious of the limits to his own demands or to those of his group. Some wage increases, for example, seem beneficial to the worker, and even appear particularly tempting, but if they shatter the price structure they will carry the seed of evil in them and, as is the nature of things, will injure those who hoped to benefit.

Though man has been successful in splitting the atom, it will never be possible to explode that old economic law which tells us to live reasonably and within our means, and which forbids us to consume more than we can produce or want to produce.