Seven principles for recovery
Published in Insights, The New Zealand Initiative’s newsletter, 24 April 2020
How do you get an economy going again when entire industries are destroyed? How do you encourage private consumption when families are trying to make ends meet? How do you run a government when public finances are in disarray?
These are the questions that will also be on the minds of New Zealand parliamentarians today. But just imagine how much more intimidating your task would have been in Germany in 1945.
There were many people who believed back then that a government-run recovery would be the way forward.
Practically in the whole of Europe, governments took the lead in planning for their nations’ recoveries.
Not so in Germany. Because Germany had a group of economists around Ludwig Erhard.
Erhard knew that Germany would only recover if the recovery grew from the bottom up. It could not be planned for by the government. And Erhard knew that it would only be a recovery deserving its name if it brought “Prosperity for all”.
“Prosperity for all” was more than a slogan. It was more than the title of Erhard’s famous book. It was the essence of Erhard’s policies.
Economic policy is not about propping up some big companies. It is not about preserving the privileges of the few. It is not about the government picking winners and controlling the economy.
No, the ultimate goal of economic policy is to bring hope and prosperity to all people.
Ludwig Erhard achieved this. Under his leadership as economics minister and later as Chancellor, the country experienced a boom like never before. It was a true economic miracle.
So, you may now wonder what was Erhard’s miracle recipe? What did he do to turn the ruins of an economy into an economic powerhouse? And what can we, in New Zealand, learn from this?
The truth is: there was no miracle formula. Erhard did not micro-manage the economy. He did not control individual industries. He did not print money to finance his projects. Nor did he pay favours to any businesses.
Erhard followed a principles-based approach, which he called the “Social Market Economy”. And that is the approach I recommend to New Zealand today.
Erhard’s friend and economist colleague Walter Eucken distilled seven principles of the “Social Market Economy”:
- A functioning price system
- Monetary stability
- Open markets
- Secure private property rights
- Freedom of contract
- Liability for one’s actions and commitments
- Steadiness of economic policy
Each of these seven principles is as relevant to us today as it was in 1945. If we follow these principles, we can build New Zealand’s recovery and bring prosperity to all New Zealanders.
This is an edited extract of Dr Oliver Hartwich’s speech to the New Zealand Parliament’s Epidemic Response Committee. Read the whole speech here.