Social Market Economy of Germany - Case Study Example

Social Market economy of Germany Contents Introduction 3 Analysis 3 Development of social market in the early years of 20th century 3 Effects of Globalization 4 Roles of banking 6 Effect of several stakeholders 7 Role of the government 8 Effect of business on the economy 9 Conclusion 11 Introduction The concept of social market economy originated from Germany. The main reason behind developing this concept is to establish relationship between the socialist economy and laissez faire economic liberalism. Social capitalism as a political theory challenges the political system of the country. The importance of this theory is that the private markets are effective in allocation mechanism, but the ultimate output is maximized by the macroeconomic management of the sound state economy. Globalization has benefitted German during the 20th century. Due to the emergence of globalization in Germany, the exports rose to around 45% off the economic output and the global trade also increased during the period of 2000 to 2005.The legal system of Germany ensures that the firms are influenced by its stakeholder. Germany provides importance to several stakeholders in the economy while developing economic policies and adopting strategic decisions. The banks play a major role in controlling the financial system of the country. The banks introduced many new services during the twentieth century. The development of the social market economy during the 20th century favorable affected the growth and development of the business. The paper emphasizes on the concept of social market economy was not based on the political manifesto of the parties but on the basis of the philosophical views about the working of the economic systems and analyzing the economic order of the economy both past and present. Analysis Development of social market in the early years of 20th century Social market economy was developed for the purpose of providing social protection to the country. The pure market economics included risk which the population of the country was not prepared to bear without the expectation of receiving social protection in case of need. The concept of social market economy included ethical, social and human values which are considered as the most important aspect for the growth and development of the economy.1 The Global economic crisis led to the emergence of the social market economy in order to face the crisis during the first half of the twentieth century by abolition on the working of the price system and shifting to the planned economies. The lack of cooperation between the factors of production is the main cause of the economic problems faced by Europe at the end of the Second World War. The destruction of Europe after the two world wars was not only due to the consequences of war but due to the shift to the planned economy in various parts of Europe in the first phase of twentieth century. Effects of Globalization The development of social market led to the emergence of globalization in the economy. Germany was largely benefitted from globalization. The labor and economic policies allowed the country to face the economic crisis that prevailed during the period from 2007-2009.Germany is considered as the fourth largest economy of the world and the largest economy of Europe in terms of its trade and investment. The social market economy of Germany includes the development of partnership between the employers and the trade unions.2 The two contributing factors contributing towards the German miracle were the labor market reforms that solved the problem of unemployment in the country despite of the financial crisis prevailing in the economy. Globalization resulted in the increase in competition between the companies and the locations. The policymakers recognized one opportunity for developing the economic condition of the country at the national level by decreasing the tax burden for the companies. Germany is considered as the beneficiary of globalization during the 20thcentury but it is unable to gain full advantage of the various opportunities provided by globalization. The main problem is not the companies, but the location of Germany itself. Therefore in order to promote the economic development of the economy, the government is required to undertake the responsibility in improving the economic condition of the country ort the nation. The social benefits offered to the public must be strongly emphasized in order to increase the acceptance of globalization in the economy. The effects of globalization with the development of the concept of the social market economy in Germany are increase in productivity, greater funding provided by the government for its research and development activities and improving competitiveness. The governments of all countries mainly focus on the growth and prosperity of its economy. The future economic prosperity of the country mainly depends on the maintenance of the skilled employment and its ability to attract and retain large industries. The countries like Germany are competing with each other for acquiring these industries. The growing interactions of the financial and the real economy are considered as one of the most important features of financial globalization.3 Roles of banking The development of the social market economy also promoted the development of bank and financial system in Germany. The central bank of the country performed an important role in implementing the money supply policy required for stabilizing the monetary policy in the economy. The Central bank provided direction of investment, vigilance for restricting private competition, free collective bargaining within the regulations formulated in the labor law, reviewing the subsidies on a periodical basis and the assistance provided to the regions, persons or enterprises. Germany had faced several problems in controlling its money supply during the 19th century. Therefore, the development of the social market economy facilitated the economy in controlling the money supply. The banks were developed to eventually form the universal banks during the twentieth century. 4 The services provided by the banks during the twentieth century differed from that of the services provided during the nineteenth century. The credit bank of the country was engaged in lending to various firms and it drew other liabilities and its deposits from all over Germany. The most important contribution in the banking sector of the country during the twentieth century was the transformation and modification of the full scale Universal banks. The new economic policy formulated in the twentieth century created an economic program for transformation of the market order into the organization of the state. Germany adopted Euro as their official currency. Deutsche bank launched the cost cutting program in accordance with the international regulatory requirement for increasing the capital level of the state owned banks of Germany. The main aim or the objective of the competition and monopoly legislation was to induce the bearer of economic power to operate as a perfect competitor. The competition bills and the monopoly control were designed to dissolve the anti-market concentration required for taking decisions in the perfectly competitive market. Adequate freedom was provided to the workers, consumers and entrepreneurs for exercising their economic alternatives. 5 Effect of several stakeholders Germany gives great importance to its stakeholders. Germany considers the interest of the stakeholders which includes the government, suppliers, creditors and workers when adopting and implementing strategic decisions. Competition may occur as a result of globalization between the countries where the firms from the shareholders society competes with the firm of these countries where the interest of the stakeholders are prioritized. 6The stakeholders are the risk adverse investors that are interested in maintain long term stability of the economy. The government focused on the innovation of new technology for growth and development of the economy. 7The banks in Germany consider themselves as the long term stakeholders rather than the speculators. The state governments are considered as important stakeholders of the economy. The universal banks are the benevolent stakeholders in many German firms. With the increase in globalization the stakeholder firms and the shareholder firms are competing with each other. The economic efficiency is witnessed by the social market economy. The social market economy promotes the free market economy with the intention of providing social protection in accordance with the rule of the market. The increase in wealth enables the society to carry out its moral and social duties. Role of the government The concept of social market economy should not only be restricted to German economy since this concept can equally be applied to other economies of the world. Globalization assisted the market to function effectively and efficiently to attract more revenues from the international trade. The government emphasized on German social security system also developed with the improvement in social market economy8. An expanding and developing economies, creates more job or employment opportunities for the individuals and thus increases the social security of the individuals. Growth cannot be termed as an ultimate end but it is considered as the base or foundation of the prosperous society for proving solution to various problems. The social benefits and the government programs are mainly financed through the tax revenues.9 But taxes are considered as the burden on those whose income contributes towards the prosperity of the economy. Therefore the main aim or the objective is to achieve social security in ensuring highest level of prosperity. 10The more successful a country is in terms of its social security, the less amount of social assistance is required. The development of the social market economy facilitated Germany in shifting towards the environmentally economic activity without sacrificing the growth and prosperity of the economy.11The government is engaged in improving the export of the economy. The government focused on generating revenues from other countries and establishing trade relationship between other countries. Effect of business on the economy The economic policies of Germany are developed based on the social market economy. The main idea behind the social market economy is to safeguard the freedom of all the participants on both the demand and the supply side. This means that the market creates a balance between demand and supply through the mechanism of prices. When the demand of the goods and services in the economy becomes scarce, the prices of all goods and services also increases which reduces the demand with the opening up of the profit opportunities for the additional suppliers.12 The suppliers of the economy will attempt to keep the cost of production as low as possible. This results in the efficient utilization of the means of production and lowering prices for the consumers. The continuous growth in Germany is closely related to the growth and development in Europe. Germany is considered as a host in the maintenance of growth and stability in Europe. German economy is significantly benefitted from the merging of the national markets into the international markets and also from the integration of the European economies.13 The positive aspect of the social market economy includes its ability to import new and innovative technologies and its ability to export successfully to other countries of the world. The opening and development of the international market facilitates the flow of foreign capital within the country and the migration of the skilled and talented labor to the country. Globalization assisted the market to function effectively and efficiently to attract more revenues from international trade. The German social security system also developed with the improvement in social market economy. An expanding and developing economy creates more job or employment opportunities for the individuals and thus increases the social security of the individuals. Growth cannot be termed as an ultimate end, but it is considered as the base or foundation of the prosperous society for proving solution to various problems. The social benefits and the government programs are mainly financed through the tax revenues.14 But taxes are considered as the burden on those whose income contributes towards the prosperity of the economy. Therefore the main aim or the objective is to achieve social security in ensuring highest level of prosperity. The more successful a country is in terms of its social security, the less amount of social assistance is required. The development of the social market economy facilitated Germany in shifting towards the environmentally economic activity without sacrificing the growth and prosperity of the economy. Conclusion The concept of social market economy emerged in order to overcome the shortcomings or the constraints associated with growth and development of the country or the nation. The social market economy cannot be related with the capitalism since social market theory is based on the concept of exchange, production and economic coordination of the nation. The comprehensive German social security led to the rapid growth and development of the German economy. The social security is not directly related to the successful growth and development of the market economy. But the development of the social market economy in the first phase of the twentieth century contributes towards providing of social security. The development in the social market economy increased the rate of export. The banking system developed for maintaining stability in the economy. The central bank performed an efficient role in maintaining monetary policy for controlling the credit supply in the economy. The German government supported the economy towards improvement in services by establishing targets. Germany is considered as the only country that provides importance to all its stakeholders. The strategic decision taken by the country is in accordance with the interest of all its stakeholders. The social benefit and the various government programs adopted are mainly financed through the tax revenues. 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