In times of crisis, we think about what we can do to get back on the path to prosperity and wealth. However, there is a tendency to mistake past manifestations of economic success – the sectors and products that the economy has successfully produced in the past – as the most fundamental source of success.
When Ludwig Erhard abolished price controls in 1947 and decisively shifted Germany’s economic system from strong interventionism to a free market economy, the stage was set for what is commonly, perhaps misleadingly, referred to as the “German economic miracle.” The rest is history.
Today, there is a fundamental misunderstanding about the origins of wealth, endangering the future of Germany’s already struggling economy. This misconception is also seen in other societies. The mistake is to view existing businesses and sectors that have emerged under successful economic systems as the determining factors for economic growth. For example, Germany’s economic system has produced an economy that is very roughly (and strictly speaking incorrectly, of course) focused on cars. One might therefore conclude that all that is needed to protect and revitalize the German economy is to protect and support the car production capacity of German car manufacturers. This is exactly what many commentators and politicians on Germany’s economic situation seem to believe. According to this view, the focus must be on securing favorable conditions for the automotive sector, which has proven to be an economic engine in the past.
This is not necessarily wrong. However, even if it is true, it only happens to be true and is not necessarily true. Consider that a system of free enterprise could lead to the production of certain goods and services, which could lead to attention to automobiles. However, it may also lead to specialization in other industries and more diversified economic activities.
The products and services that entrepreneurs focus on are not given or predetermined. Rather, in a free market, entrepreneurs who can produce profitably will be successful, regardless of the industry in which they operate. Perhaps car manufacturers are making exceptional profits. But the success of an automaker, or any other industry, is only worth celebrating if it is a manifestation of a healthy market economy.
So what’s the lesson? That is, the decisive factor for Germany’s economic success is not industrial production, automobiles, or any other sector. These are just particular manifestations of that economy in this particular time and place. What the economy needs is not the prosperity of a particular industry, but a market-tested system that guarantees success.
Rather, the determining factor is the economic system, in which entrepreneurs must be free to prosper while still being responsible for their actions. In other words, free markets are extremely important, and historically they were the reason for Germany’s incredible economic growth. In any economy in the past, this economic success would have been manifested in specific sectors that were central to the economy. Tomorrow, these very areas may happen again, but they may also involve completely different areas.
To maintain, and in Germany’s case, restore, its economic influence, society’s focus must be on its economic system, and not on the sectors under which it has historically emerged as the strongest. Simply put, what is needed is a return to free markets, not strengthening specific areas of recent success.
Now, let me be clear: there are certainly measures that not only promote specific sectors that have historically been successful, such as the German automobile sector, but also represent a return to free market principles. Consider deregulation and lower corporate taxes. But if the aim is to reignite the economy, the focus must always be on markets, rather than specific sectors that seem promising to politicians, such as energy price subsidies to industry.
This misunderstanding of what economic success means permeates not only German policy proposals, but also those of many other countries. To some extent, it is understandable that economic success manifests itself, or at least is primarily visible, in certain industries. But this is precisely to misunderstand the true origin of society’s economic miracle. Protecting industries that were successful in the past will not make people richer. Rather, we find a solid market economy based on economic growth. That is exactly what Ludwig Erhard restored in 1947 when he eliminated government intervention and freed his people from the constraints that prevented them from enriching themselves and others.
