The alternative to Ludwig Erhard's social market economy, introduced in 1948, was the Social Democratic vision of an “economic democracy” (Wirtschaftsdemokratie). For the postwar Social Democratic Party (SPD), an economic democracy consisted of a decentralized planning system held together by the public ownership of major industries, such as heavy industry and finance, and the institutionalization of equal union influence on those corporate bodies, such as Industrie-und Handelskammern (IHKs), that had traditionally regulated the German economy in the name of self-administration (Selbstverwaltung). The concept of an economic democracy owed much to Social Democratic thought during the 1920s, from the observation of a modern “organized” capitalism (Rudolf Hilferding) that had effectively replaced the free market, to Fritz Naphtali's advocacy of greater worker influence in his 1928 pamphlet “Wirtschaftsdemokratie.” But the post-1945 SPD also felt itself part of a worldwide movement toward economic planning and social democracy involving the New Deal, the Labour government, and the Monnet Plan, legitimated by Keynesian macroeconomics. From 1945 to 1947, Social Democrats found themselves in the position to transform the German economy and German industrial culture because the British appointed Viktor Agartz, a leading SPD and trade union economist, head of the central office for economics (Zentralamt der Wirtschaft) at Minden in the British zone. From this position, and also with SPD members occupying the economics ministries in all the new Länder as they formed, the British intended the SPD to dominate the reconstruction of the economy in the crucial, industrial British zone.

The year 1957 marks a convenient end point for a study of the introduction of the social market economy. The anticartel law passed that year, though disappointing to many of its supporters, nevertheless represented the ideological foundation for the social market economy. After all, the idea of a social market had gained prominence within the context of postwar debates about how best to address the problematic legacies of German economic and industrial history. To the neoliberal economists who supported Erhard, the great problem of German history had been a level of organization that sapped not just the economic potential of the individual, but the meaning of individuality in German politics and culture as well. The high levels of cartelization evident during the Wilhelmine era and the Weimar Republic had represented the economic manifestation of a nefarious “cult of the colossal.” Within the context of the occupation, when Allies and German administrators attempted unsuccessfully to cope with the legacy of National Socialist “collectivist” organizations, social market theorists made the argument that a market economy maintained by a strong state could better achieve the social ends deemed essential in the twentieth century. The free competitive order that the anticartel law of 1957 aspired to establish gave meaning to the word social in the term social market economy.

Today, the term social market economy is well-nigh synonymous with the European welfare state.

With the possible exception of Japan, no society has become more associated with its economic system than postwar Germany. The social market economy, introduced by Economics Minister Ludwig Erhard in 1948, ended Nazi-era economic controls, ushered in West Germany's “economic miracle,” and offered a socially conscious model of market capitalism. In a society in which national identity had been discredited, the social market economy gradually assumed a political and cultural significance in West Germany that transcended its ostensible purpose as a set of economic policies. Along with serving as an explanation for West Germany's remarkable economic and social success in the decades following World War II, the social market economy became a metaphor for social justice itself.

During the last several years, united Germany's social market economy has come under attack. Now well-nigh synonymous with the western European welfare state, the social market model is blamed for sclerotic rates of economic growth, a regulatory regime that inhibits innovation, and frustratingly persistent high levels of unemployment. After acquiring a well-deserved reputation for fiscal stability over fifty years, Germany now struggles with chronic budget deficits. Indeed, it appears unlikely that the Germans will meet the terms of the “stability pact” (that is, no budget deficit over 3 percent of gross domestic product [GDP] and no overall public debt exceeding 60 percent of GDP) that it forced upon its neighbors as a condition for entry into the European Monetary Union.

In early 1973, Deere and Company of Moline, Illinois, transferred my father to its European headquarters in Mannheim, West Germany. My parents, with two daughters, aged 7 and 1, and one son, aged 4, decided to live in a relatively remote village in the hills of the Odenwald forest, a village called Wilhelmsfeld, instead of settling among many of the American expatriates in nearby Heidelberg. Without having ever studied the language, without any near relatives who had even so much as been to Europe, and with the experience of only one brief trip outside of the United States, my mother and father resolved to “plunge” into Germany. They deliberately sought out German friends, rapidly learned the German language, and sent my sisters and me to German schools. We returned to Illinois during the summer of 1976, but our experiences in Germany made an indelible impression upon all of us. Unlike my parents, I have grown up with a relatively privileged access to Germany and Europe, a plethora of German friends, and the opportunities to indulge my interest in German history that so many have not had, and that neither of my parents had had at the same age. From the outset, then, I wish to express my appreciation for our experiences in Germany from 1973 to 1976, which greatly shaped my intellectual interests, and perhaps even more important, my intellectual opportunities in the years to come.

Ludwig Erhard claimed that the social market economy represented a decisive break with Germany's past. But his political opponents in the SPD and the new trade union federation, the Deutsche Gewerkschaftsbund (DGB), despaired the return of a capitalist economic system they held responsible for the rise of Nazism. The West German left had hoped to transform German industrial culture through the socialization of key industries and the introduction of an “economic democracy.” In response, Erhard and his supporters argued repeatedly that the defining characteristic of Germany's economic and industrial past had been its highly developed and rigid organization. The economist Wilhelm Röpke, for example, wrote that Germany's organized and, he would add, collectivist economy contributed to a “cult of the colossal,” which had contributed to an alienation favorable both to Nazism and, in the future, socialism. As an alternative, Erhard championed free competition as a means both to solve the immediate problem of increasing productivity and to dismantle Germany's still highly organized and, thus, stifling industrial culture. To backers of the social market economy who rallied to Erhard in 1948–49, this emphasis on competition, this belief in the ability of a competitive framework to achieve essential social ends, distinguished the social market economy from the laissez-faire capitalism they agreed had led to Nazism.

The efforts of Erhard and his supporters to elevate free competition to the core of the social market economy resulted in the much criticized anticartel law of 1957.

On 20 June 1948, the Anglo–American military government introduced the Deutsche mark into the American and British zones. On the same day, Ludwig Erhard, the as yet politically independent bizonal director of the economy, released a series of consumer goods from the price controls that the Nazis introduced in 1936. The introduction of the free-price mechanism represented the first step on West Germany's path toward what became known as the social market economy by the following year. When Christian Democrats met in Düsseldorf in June 1949, they fully embraced Erhard's free market policies and entered into the first Bundestag campaign as defenders of the Marktwirtschaft against the hated Zwangswirtschaft. Henceforth, the social market economy served as the CDU's economic policy and as a model against which Christian Democrats could contrast not only the National Socialist command economy, but the East German Communist experiment as well.

The CDU's adoption of the free-market social market economy represents one of the most controversial topics of postwar German history. Until mid-1947, Christian Democrats had embraced the idea that the experience of Nazism discredited free-market capitalism. Driven by the so-called Christian socialists, the CDU adopted many of the same measures as the SPD to reform the economy, from the socialization of heavy industry to increased worker influence in industry, in the Ahlen Program of February 1947.

The case of occupied Germany provides the best example of truly international history. Following Nazism's collapse, the three principal allies (soon joined by the French) assumed full sovereignty over Germany as a whole. At Potsdam, in July and August 1945, the Allies agreed to govern Germany as a united country and created the quadripartite Allied Control Council (ACC) for that purpose. Owing to the unprecedented physical devastation of the country, each Allied power soon became deeply involved in the minutiae of political and economic reconstruction. At the same time, each Allied power wished to involve Germans in the politics and/or administration of its respective zone. The result was a system of relationships so complex as to transcend the boundaries of traditional diplomacy or national politics. The interplay between Germans on the ground, who confronted each other within the context of basic political, economic, or social debate; between Germans and the occupiers of their zones, who played the twin roles of supervisor and advocate; between the Allies themselves in the ACC, where decision making required unanimous agreement; and Allied representatives and the home capitals represented a process that historians have long tried to disentangle and explain.

For decades, a cold war paradigm offered an analytical framework within which to analyze and judge the history of occupied Germany. At war's end, each occupying power focused on reforming German institutions in order to eliminate the German threat to European security.

Perhaps the most controversial issue that faced the “Bonn Republic” throughout its existence was its relationship to the German past. Whereas the East German regime argued that Nazism's hatred of communism made the German Democratic Republic (GDR) fundamentally unresponsible for Germany's history before 1945, the Federal Republic enjoyed no such luxury. Though the myth of a Stunde Null enjoyed widespread popularity, acute West German observers from the beginning worried about the continued existence of institutions and prominence of individuals implicated in the crimes of Nazism. As Konrad Adenauer's Christian Democratic Union strove to establish the moral, as well as political, legitimacy of West Germany, many social scientists echoed the Social Democratic opposition in criticizing a “restoration” of preindustrial elites. The continued prominence of judges, lawyers, and civil servants, especially Hans Globke in the Chancellory, threatened the fundamental moral authority of the West German system. Similarly, the return to power of many Ruhr industrialists signaled to many the restoration of a capitalism that had brought Hitler to power.

The lack of deep structural reform in the Ruhr industrial basin proved fundamental to the restoration thesis. After all, in 1945, Ruhr industrialists were completely discredited. Not only socialists and Communists, but the Americans and British believed that the industrialists of the Ruhr had provided crucial support to Hitler. After Germany's defeat, the Social Democratic Party (SPD) emerged as the strongest political force in occupied Germany.

When Konrad Adenauer formed West Germany's first government in September 1949, the Christian Democrats had become the principal supporters of the social market economy. During the election campaign, the CDU contrasted Erhard's social market policies with the SPD's alleged wish to reintroduce the hated Zwangswirtschaft of 1936–48. The general decline in prices and the dramatic increases in productivity since the spring appeared to signal West Germany's economic recovery. Since he introduced the free-price mechanism in June 1948, Erhard had evidently confounded his critics who had argued that shortages of raw materials, private sources of capital, and consumer goods would lead to a dangerous inflationary spiral endangering the new currency, the Deutsche Mark. Instead, prices declined and productivity, especially in consumer and manufactured goods, skyrocketed. Adenauer responded by associating himself fully with Erhard's social market philosophy. Yet, although Erhard enjoyed his greatest prestige in late 1949, stormy weather lay ahead. As he had predicted, the elimination of price controls made consumer goods widely available for the first time in many years. But already in late 1949, shortages of raw materials, especially coal, and the lack of a functioning private capital market revealed bottlenecks in the economy surmountable only by the investments of which his critics had warned. In the ensuing three years, where to find adequate sources of investment became the central question of economic policy.

Erhard never denied the problem that investment posed for his social market economy.