Germany invented socialism. Karl Marx and Friedrich Engels were Germans. The Social Democratic movement that shaped the modern European welfare state also originated in Germany. Although the country profited greatly from its reintegration into the world trading system after World War II, Germany never really came to terms with Anglo-Saxon capitalism and skepticism about it still runs deep.

Now, with Germany’s economy no longer functioning smoothly, capital moving abroad, and unemployment rising, criticism of capitalism is again gaining momentum. The public is upset about top managers’ salaries and the fact that big German companies fire workers despite record profits. In response, the government has urged managers to publish their incomes and abolished the bank secrecy laws that were once considered sacrosanct.

This new critique of capitalism recently culminated in a series of attacks by the leader of the Social Democratic Party, Franz Müntefering. He accused entrepreneurs who outsource production to low-wage countries of showing excessive greed and lack of social responsibility, and he compared the managers of international equity funds to a plague of locusts that occupy companies, exploit them, and move on after their destructive work is done.

These attacks brought Müntefering vast public support and triggered a major debate. Germany’s media largely supports the critique. Günter Grass, a Nobel Prize winner in literature, joined the chorus of critics, complaining about the fading of political power in a time of globalization. He ridiculed today’s conditions as “stock market-defined liberty.”

Opposition leaders do not like the subject, but they avoid challenging it. Only a few economic journalists and university professors are willing to object. One Jewish professor at a Munich university actually compared Müntefering’s language to Nazi slogans. Entrepreneurs and managers swallow their anger and show their disapproval only by silently speeding up their relocation decisions.

But Müntefering has a point. Abolition of taxes on realized capital gains increased the sales of shares enormously. International equity funds stepped in, providing companies with urgently needed liquidity while disentangling the traditional ownership network. Germany, Inc. is on its last legs.

The good news is that Germany’s overblown conglomerates are being scaled down to an efficient size and that the capital market is able to do its job, improving the allocation of resources. The bad news is that financial capital is moving abroad to finance other overblown conglomerates. In net terms, though, there may be more growth worldwide as well as in Germany. Whatever the case, for many Germans the capitalist allocation processes they are seeing make no sense.

There were times when German capitalism was shown greater respect. In the postwar period, Germany’s economic miracle calmed skeptics of capitalism. Starting with extremely low wages and an underdeveloped currency, German workers succeeded in competing against the world. Wages rose rapidly and most Germans experienced growing prosperity. Ludwig Erhard’s liberal economic approach worked and the socialist ideas found in the party programs of the Social Democrats and Christian Democrats were forgotten.

During the 1970’s, Germans went overboard, confusing capitalism with self-service shops. They began to expand their welfare state, pushing the government’s share in GDP from 39% to 49% and welcoming union-proposed double-digit wage increases. The signs of the fading miracle became visible when Japanese competitors and other Asian Tigers succeeded in wiping out substantial parts of Germany’s labor-intensive textile, optical products, and precision engineering industries. Nevertheless, the public still believed in perpetual growth.

Only after the Iron Curtain’s fall and the establishment of market economies in ex-communist countries did the lack of competitiveness of German workers become apparent. The country with the highest labor costs in the world was confronted with low-wage competitors next door. Wage costs in the ten new EU member countries are still only one-seventh their level in western Germany; wage costs in Rumania and Bulgaria are one-tenth. Chinese wages are even lower, at just 4% of the western German average.

German firms reacted by outsourcing the labor-intensive parts of their production chains and curtailing their investment in Germany. The share of net investment in GNP is now the second lowest in all OECD countries. Because investment is so low, net capital exports from Germany are nearly 4% of GDP.

Now unemployment is Germany’s biggest problem, standing at a postwar record. This alarms the public and incites anger against capitalists who do not reinvest their profits. Müntefering simply caught the popular mood in developing his theory of locust capitalism.

But this useless reaction to the laws of the global market economy hides the fact that Germany’s problems are largely a result of an overblown welfare state and extremely aggressive union policies over the last thirty years. Even Marx knew that the iron laws of economics could not be overcome by wishful thinking. Müntefering should have consulted his party’s forefather more carefully before opening his mouth.

Hans-Werner Sinn is Director of the Ifo Institute for Economic Research in Munich.

Copyright: Project Syndicate, 2005.