Lecture 5 - Liberalism: Getting the economy to work

Question 1

Explain Germany’s economic situation post WWII

Answer 1

Post WWII Germany faced economic devastation, high unemployment and a lack of resources

Question 2

Briefly explain who Ludwig Erhard was and what he acheived

Answer 2

Ludwig Erhard was appointed as Economics Minister (1949) and later Chancellor (1963). Erhard’s policies transformed Germany’s economy

He achieved an economic miracle as he stimulated rapid economic growth and industrial revival, with Germany achieving high standards of living by the late 1950s

Question 3

State the key determinants and features that enabled the German Economic Miracle and explain each one briefly

Answer 3

• Currency reform (1948): Introduced the Deutsche Mark, stabilizing the currency and curbing hyperinflation
• Marshall Plan (1948-1952): Provided financial aid and resources jump-starting investment and recovery
• Ordo-liberalism: German economic philosophy that promotes a free-market economy within a regulatory framework to ensure fair competition
• Labour Market Reforms: Focused on productivity and encouraged high employment, with a shift from military to industrial workforce
• Industrial output growth: Industries, particularly steel, coal and machinery rapidly expanded due to favorable conditions and strong exports

Question 4

State the key determinants and features that enabled the German Economic Miracle

Answer 4

• Currency reform (1948)
• Marshall Plan (1948-1952)
• Ordo-liberalism
• Labour market reforms
• Industrial output growth

Question 5

State Ludwig Erhard’s Ordo Liberal Economic Policies

Answer 5

• Core Tenets
• Market Liberalization
• Tax reforms
• Regulation of monopolies
• Protection against cartels

Question 6

State and briefly explain Ludwig Erhard’s Ordo Liber economic policies

Answer 6

• Government’s role in markets: Erhard supported limited intervention, focusing only on creating the conditions for fair competition
• Regulation vs intervention: Ordo-liberalism posits that while the government should not control the market, it must prevent monopolies, guard against cartels and regulate mergers
• Price controls: Erhard eliminated wartime price controls, arguing that markets self-regulate when prices reflect supply and demand. This led to efficient allocation of resources
• Market efficiency: Erhard’s policies maximized welfare by allowing competitive equilibrium, increasing both consumer and producer surplus

Question 7

What were the consequences of using price controls during the time of the German economic miracle?

Answer 7

Policies limiting price controls allowed markets to reach equilibrium (PC), optimizing social welfare and economic efficiency

Question 8

How has Erhard’s approach been challenging to replicate in the modern day?

Answer 8

Erhard’s approach has been challenging to replicate due to its unique emphasis on balancing freedom with order

Question 9

State the benefits of regulation

Answer 9

• Ensures fairness
• Prevents monopolies and supports a functioning market economy

Question 10

State the drawbacks of over-regulation

Answer 10

• Excessive controls can reduce market efficiency, inhibit innovation and distort prices

Question 11

In conclusion, what does Erhard’s legacy demonstrate and what lessons can be learnt from his approach to the German Economic Miracle?

Answer 11

In conclusion, Erhard’s legacy demonstrates that effective market economies can exist with minimal intervention but require frameworks that promote competition and consumer protection