Don't Confuse Germany's Wealth with Present Policy (1992), by Sean Gabb

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Don't Confuse Germany's Wealth
with Present Policy
by Sean Gabb

(Published in The Prague Post, Prague, June 9-15 1992

Note: In 1992, some lefty activist turned called Denis Macshane up in Prague and sprayed nonense at anyone who would listen. Here is my reply. Mr Macshane, went on to a glittering career as a Minister in the Blair and Brown Governments - rather, he crawled to the top of the NuLab dunghill, and sat there steaming for a while. Fortunately, he has since slid back down. Even so, I doubt his hands will ever shake as he opens his gas bill. My reply stands by itself, but also says enough in passing about a man whose turpitude and utter unfitness for any position of influence was early evidenced.

Densi Macshane's article ("Is Major's Visit a Major Blunder?", Prague Post 26th May 1992) is almost unanswerable. This is not through some overwhelming weight of reasoning on his part. It is simply through the heaping into one article of so many inaccuracies that only a book would be sufficient for refuting them.

In all, I counted 18 inaccuracies - for example: that John Major's visit was "a blatant and vulgar intervention" in this country's election; that its politicians have been bought; that its journalists and judges have been silenced by a new Thatcherite secret police; that lustration is a vengeful witch hunt and the ascription of collective guilt; and so the list continues.

I will leave these, however, and concentrate on the most dangerous of Mr Macshane's beliefs, that Czechoslovakia should reject free market economics and instead embrace the "Austrian or German model", by which he means the social market. Now, this is to many a tempting alternative. It is far less harsh. It seems to allow for both economic efficiency and labour protection laws, for compact disc players and free false teeth. Certainly, looking at Germany, it appears a viable alternative. If the wealthiest country in Europe has no taste for Manchester economics, why should Czechoslovakia?

The answer is simple. It is not the social market that made Germany rich. The German "economic miracle" began on Sunday the 20th June 1948, with a single dose of market reform. Before then, bombed into rubble, occupied by foreign armies, ravaged by inflation and shortages, the country looked utterly ruined. Economists despaired for its future. But Ludwig Erhard, Minister of Economics in the Western Zone, knew better. In a single decree, he introduced a new currency - the mighty Deutscehmark of today - and abolished all controls over prices and wages. He acted on a Sunday, he later said, because had his Allied masters been in their offices, they would have cancelled his decree.

It worked like magic. Within weeks, the shops had food in them. Within months, the factories were working again. By 1953, the war damage was repaired. By 1963, the French and British had been overtaken. Living standards in this time doubled and redoubled.

It was only after this recovery was complete that the German social market economy took its modern shape. Under the Social Democratic governments of the 1970s, longer paid holidays were imposed on employers, and hours and conditions of work were far more strictly regulated. New welfare benefits were granted, and taxes went up to pay for them.

Hereafter, the miracle went stale. Unemployment rose. Economic growth fell. All through the 1980s, the German lead over Britain steadily narrowed, as Mrs Thatcher's market reforms breathed life into a what had been a dying economy. If German growth is racing forward again now, it is only because reunion has led to an unsustainable inflationary boom.

In drawing his lesson from Germany, Mr Macshane has made the grave error of explaining present wealth by present policies. Germany is not wealthy because it has a social market economy. It has a social market economy because it is wealthy enough to afford one. The true lesson, had he looked a little deeper, is that nations grow rich through reliance on the market. The more complete that reliance, the faster they grow. The less that reliance, the more they are likely to stagnate.

This is the lesson that Czechoslovakia must learn - and must apply for the moment far more rigorously than any of its Western neighbours.

For the Western social democracies, however much their governments interfere in economic matters, are still fabulously wealthy. Germany, for example, now contains more capital than the whole world contained in 1900. It has an economy strong enough to bear the heaviest load of wasteful regulation. If more slowly than otherwise, it will continue to grow.

But Czechoslovakia is a poor country. It has no great capital reserves, no momentum that will carry it forward without present impetus. It cannot afford the luxury of social democracy. it will collapse under the weight, or will at best stagnate.

A millionaire, if he felt inclined, could sit all day in a railway carriage, throwing banknotes from the window. It would be an expensive pleasure. It would horrify any observers. But, so long as he threw out only low denomination notes, one at a time, he might still end the day richer than he began. Though he were wasteful, his investments, handled by others, would continue to grow regardless of how he used the income from them. Without a really big effort, he could only slow down his rate of further enrichment.

But for a poor man, that game would be suicidal folly. he would have no investments to continue growing despite his waste. He would instead be throwing out his dinner money, his rent, his family budget, his provision for old age. Starting the day poor, he would end it a pauper.

This is the social market economy that Mr Macshane urges on Czechoslovakia. Fortunately, he is not listened to by the country's leading politicians. There may or may not be, as he claims, "a concerted Anglo-Saxon attempt to set up a Thatcherist political economy in the heart of Europe". Undoubtedly, there is a Czechoslovak attempt to do just this. Ant that is why John Major was received so warmly in Prague and Bratislava, and why the utmost is being done to copy his and his predecessor's policies.