Dont Mistake a Miracle for Its Cause

In moments of economic hardship, we often deliberate on ways to restore growth and wealth. A common error is to equate the previous indicators of economic success—the industries and products that an economy has historically thrived on—with the more foundational causes of prosperity.

In 1947, when Ludwig Erhard eliminated price controls and moved the German economy decisively away from heavy state intervention towards a free-market approach, this paved the way for what is often referred to as the “German Economic Miracle.” The subsequent developments are well-documented.

Presently, there exists a crucial misunderstanding about the roots of economic wealth that poses a threat to the future of the already vulnerable German economy. This issue can also be observed in other nations. The error lies in interpreting the established businesses and industries that have thrived under a successful economic framework as the key drivers of economic advancement. For instance, Germany’s economic landscape has largely centered around, simplistically put (and technically inaccurately), automobiles. Consequently, one might deduce that safeguarding and invigorating the automotive industry’s capacity to manufacture vehicles is the sole requirement for reviving the German economy. This perspective seems to be held by a number of analysts and politicians in Germany. According to this viewpoint, the focus must be placed on creating favorable conditions for the automotive sector, historically a powerhouse of the economy.

This perspective isn’t entirely incorrect—however, if it holds true, it pertains to specific circumstances, not universally. It’s vital to acknowledge that a system based on free enterprise can lead to the emergence of specific goods and services, which may indeed result in an emphasis on cars. Yet it could just as easily result in specialization in a different field or a more varied economic landscape.

The products and services that entrepreneurs choose to develop are not fixed or predetermined. Instead, in a competitive market, those who can generate profit will prevail, independent of the sector they are in. While it is possible that car manufacturers are exceptionally successful, the triumph of these companies, or any other industry, is commendable only when it reflects a robust market economy.

So, what is the takeaway? Neither industrial output, nor automobiles, nor any other specific sector constituted the cornerstone of Germany’s economic triumph. These are merely expressions of that economy within a specific historical context. What is critical for economic health is an environment that fosters market-driven success, rather than the protection of a particular industry.

The fundamental factor at play is the economic system itself, which must allow entrepreneurs the freedom to succeed while holding them accountable for their choices. Thus, the significance of the free market cannot be overstated—historically, it has been the catalyst for Germany’s remarkable economic expansion. In any economy’s history, this economic success will have manifested through various sectors that were pivotal at different times; whether those sectors will remain central in the future or if entirely new ones will take their place is uncertain.

To maintain—and in the case of Germany, to reclaim—its economic strength, a society must prioritize its economic framework over the sectors that previously thrived within that framework. In essence, what is necessary is a restoration of the free market, rather than the reinforcement of any one industry that has recently enjoyed success.

It is important to clarify that there are certainly actions that could not only bolster historically successful sectors, like the automotive industry in Germany, but also reflect a return to free-market ideals. Examples include deregulating the market and reducing corporate tax rates. However, the focus must remain on the market itself if the goal is to stimulate the economy, not on any particular sector that seems appealing to policymakers, such as subsidizing energy costs for industry.

This misconception about the true nature of economic success is not exclusive to German policy proposals; it is also prevalent in many other nations. While it is somewhat understandable, as the achievements of an economy typically become evident through specific industries, it is a fundamental error to misinterpret the genuine sources of a society’s economic achievements. Protecting an industry that was previously successful does not enrich its citizens. Instead, the underpinning of economic growth lies in a strong market economy—exactly what Ludwig Erhard reinstated in 1947 by abolishing numerous government interventions, allowing citizens to overcome constraints that had historically inhibited their ability to prosper.

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