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possible way (as it is collected and thoroughly processed by a
great number of independent and competing subjects).
Decentralized regulation can be implemented only
through competition. Without an efficient competition, the
market mechanism does not function. However, nowadays,
when business entities are trying to take the lead at least for a
while, an effective competition does not appear spontaneously
and can seldom maintain itself without being distorted or de-
generated. Therefore, the competitive mechanism needs to be
constantly supported by the state.
Before considering the state policy aiming at facilitating
competition, we will note two important factors that help to create
an environment for promoting competitive relations. These factors are freedom of enterprise, and consumer sovereignty.
Only business entities that are self-reliant and independent both from each other and from any central regulating
boards can compete. Therefore, German’s social market econ-
omy model relying on the competitive principles first of all
guarantees economic freedom, that is freedom of enterprise and
business activities1. It is the basic principle of a social market
economy, it is reflected in the Fundamental law of the FRG and
is consistently implemented in the economic policy of the state.
Free enterprise is an assumption of the decentralized regulation
of economy exercised via the competitive mechanism. None of
such things as cartels prohibitions, control over the behavior of
monopolists and other tools of the antitrust law will help if a
business is subject to administrative or economic restrictions
from the beginning.
The market economy assumes that enterprises are inde-
pendent and are responsible for making decisions on the pro-
1
After the National assembly of France had relinquished workshops and corporations in
March, 1791, enterprises started to quickly gain freedom in continental Europe. During the
period of Stein-Hardenberg's reforms (1807–1810), economic freedom was established in
Prussia, and in 1869 it extended to the North German union. By tradition, the principle of free
enterprise in Germany is called freedom of crafts.
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duction and use of resources, being guided by market indicators (first of all by market prices), rather than by any other in-
structions. At the same time, enterprises make part of a certain
competition system and submit to the rules and regulations established by this system.
Therefore, in a social market economy the state influences entrepreneurial structures mainly through establishing
and maintaining a competitive order, thanks to which:
• public stability is provided;
• enterprises get an opportunity to gain profit;
• it is supported by the overwhelming majority of busi-
ness entities and, consequently, does not require big costs for
implementation, control and sanctions.
However, in Germany, the state policy with regard to
business entities doesn’t suggest a complete non-interference.
An enterprise is not only a structure for the use of limited resources and production of necessary benefits, it also something
around which diverse and often very inconsistent interests are
centered. However, there are contradictions between owners of
the capital and managing directors, on the one hand, and hired
employees — on the other. The German state interferes with
this sphere as a kind of arbitration judge to reach a compromise. The factors which significantly smoothened these contradictions were both The Law on the Enterprise Charter (1972)
which introduced the institute of Works Councils and the Law
on the management partnership according to which large en-
terprises (joint-stock companies) are obliged to give a half of
seats of the corporate supervisory boards to the employees (or
their representatives) that are not shareholders.
In practice, the principle of employees’ taking part in the
management is implemented on a very sporadic basis: in some
firms, these Councils bear a formalistic character and perform
pretty much decorative functions, while other enterprises have
management partnership bodies that play an important admin-
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istrative role and truly participate in making certain decisions;
the management of these enterprises treat these bodies not as
something troublesome but as a kind of help. To be fair, it
should be noted that in most cases entrepreneurs subjectively
consider this system as troublesome, but they are not inclined
to refuse it, which is not only because of their law-abidingness
but also because this system is a guarantee of a relative social
peace. The potential of management partnership bodies de-
pends generally on the employees’ energies and willingness to
participate (where there’s a will, there’s a way).
In general, the positive effect of the management partnership system hasn’t been reached as far as it goes, but achieved
rather with the help of both the mechanism of the tariff auton-
omy and a strong social policy of German. However, it would
hardly have been possible to essentially relax the intensity of
the class conflicts in the country only by means of decisions on
salaries and social security within tariff negotiations, i.e. without management partnership schemes for which the German
labor unions actively fought. It is difficult to overestimate the
management partnership’s importance in regulating intergroup
relations within a business.
In Russia, many political parties take care of employees’
interests in the process of economic transformations. That’s
why, the idea of transferring business property (at least, of its
considerable part) to the personnel, which was to a great extent
implemented during the first stage of the privatization, extended widely. Both ideologists of the "national privatization" and
employees believed (or simply stated) that in this way the in-
terests of most workers would be served, and a possibility of
one person to be simultaneously a worker, owner and managing director would lead to a significant increase in production
efficiency. However, just titles of ownership did not give em-
ployees a chance to really perform administrative functions.
Besides, they were aiming at being retained and having pay
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rise that they were guaranteed in this case, rather than at participating in the management of the company. However, when the
wage system turned out to be amorphous, and the social securi-
ty system started to collapse, it became obvious that just titles
of ownership were of little interest to employees (to be exact,
of managing directors — the corporate management).
The German model in which most employees are not
owners of the enterprises for which they work, but have con-
siderable rights at negotiations both for salary rates (through
labor unions) and for decision-making (through their represent-
atives in the Council of the enterprise and in the supervisory
board), did not attract the Russian legislators. However, if this
system had been, though transformed, implemented in Russia,
it would have been very useful in terms of both satisfying
needs of hired employees and their employers and in terms of
testing enterprise management methods to find effective ones.
In Russia, the state on behalf of managing bodies interferes,
though usually inefficiently, with the solution of specific problems at separate enterprises and in certain regions instead of
establishing regulations of interactions between both the parties
— the hired personnel and owners of enterprises.
In Germany, the state establishes basic rules of interactions of business entities — interactions between suppliers and
customers, between creditors and borrowers, between producers and consumers. In this respect, one should note an essential
role of the Trade code (Наndelsgesetzbuch) as a code of such
rules and regulations.
Freedom of agreements registered in the Constitution pro-
tects interests of all those who cooperate with a certain firm, i.e.
interests of the personnel, clients, creditors, suppliers. It is impossible to force somebody to sign an agreement if it is not beneficial
for (or if it is not desirable to) this person. However, if an agree-
ment is signed, its non-execution will cause problems.
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It is not the right which is imposed by the state. It is only
authorized business standards that have been developing in a
business environment throughout centuries. However, it is the
state (more precisely, the court) which strictly watches these
regulations’ being observed.
Sometimes, the state should also use administrative regu-
lating levers so as, for example, to protect the environment
about which entrepreneurial managers are not really enthusiastic (because this causes additional unproductive costs reducing
production efficiency). Nevertheless, they are forced to respect
these rules as they are not so much afraid of judicial sanctions
(penalties, etc.), as of gaining an ill reputation in the country.
However, this is the highway to bankruptcy.
Besides, the state can directly influence entrepreneurial
decisions, inducing enterprises to a certain type of production if
it is about public benefits. In this case, the state fulfills specific
orders of the interested firms (for example, orders for arms, for
nuclear reactors) or declares its participation in financing some
program (for example, in financing the construction of solarenergy power plants).
Enterprises of different production profiles can also compete. For instance, management, responsibility, publicity (a de-
gree of public disclosure) characteristics (legally established
for separate full-liability companies, limited liability companies, joint-stock companies, limited societies, cooperative entities, commandite companies, group enterprises) help an entrepreneur to choose a tactics and at the same time to initiate
competitiveness of enterprises of different production profiles,
in each of which the owners aim to use benefits inherent to
these enterprises.
There is also another type of competition between enterprises. This is because alongside private businesses, other types
of companies operate: public (state-owned, municipal) enter-
prises; hybrid enterprises; "free public enterprises" (for exam-
165
ple, church hospitals and nursing homes are non-state, but they
perform public functions); enterprises performing public functions (private enterprises which are legislatively obliged to carry out public economic functions, for example, in the insurance
and credit spheres). Here, certain forms abolishing any compe-
tition in this sphere can be established, which is done to solve
problems that are not connected with cost efficiency (for ex-
ample, social or political ones).
The state has an especially great influence on those en-
terprises the owner of which is the state itself — wholly or partially. It is necessary to emphasize, however, that this influence
is generally exercised at the level of appointing administrators
of enterprises, after which these administrators act according to
the established market rules. Besides, the financial regulation is
characterized by a special character: the profit (that is its part)
gained is transferred to the budget, and the losses which arise
are covered by the government grants. Public enterprises —
and even the whole public sector of the German economy — is
a separate big problem.
The German national policy in the business sphere is
generally confined to providing and guaranteeing economic
freedom as well as to the legislative registration of rules of
economic behavior. However, in some cases (those that are set
in law), the state uses administrative (directive) levers or interferes with economic processes. It is impossible to speak about
what tools are better — what is important is their balance.
Germany’s experience (where the country is still trying to establish a balance) has shown: any direct regulation of processes
is inefficient if “freedom and order" are not guaranteed in busi-
ness.
Yet, though enterprises play a very important role, a key
figure (in term of competition) is the consumer although he or
she often seems to live in the shadow of both the analysis of
economic patterns and the policy implementation. Consumer’s
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desires, i.e. their effective demand, represent a regulation basis
in a competitive economy. The consumer is a sovereign over
whom there is neither any directive power, nor administrative
authorities and economic structures. Of course, it happens only
if consumers are many, free and do not submit to either pro-
ducers’ dictatorship or instructions of the state departments or
other power structures. Besides, consumers have to be econom-
ically free, that is they are to have enough money to make deci-
sions in the world of options, but they shouldn’t be strictly ne-
cessitated to satisfy only vital requirements.
Though in reality consumers suffer a strong external pressure (for example, through advertizing, the state restrictions about
the range of provided benefits, etc.), the status of the consumer as
of a market economy sovereign is to some extent preserved. Pri-
vate market structures can only place certain limits on this status,
while the state can deprive the consumer of his/her status through
its totalitarian policy. If the state interferes with the process of using income and limits access to the markets, it saves us effort of
speaking either about the dominating role of the consumer or
about an efficient competition.
Besides, to make the slogan "the man is the customer"
work, one needs to eliminate (or prevent appearance of) those
factors which turn a consumer into the producer’s slave. First
of all, one should provide protection of consumers’ safety and
health, to ensure the market transparency (publicity in the market sphere), to constantly widen choices, and, therefore, to in-
tensify competition. Thus, the policy of consumer rights pro-
tection (emphasis) becomes an important component of the
competition facilitation policy.
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10.2. ECONOMIC POLICIES FOCUSING
ON COMPETITION PROMOTION
10.2.1. PERFECT COMPETITION (LAISSEZ-FAIR)
AND WORKABLE COMPETITION
Germany’s economic policy focusing on competition
promotion aims to achieve different goals that are not always in
line with each other and represented in various concepts of
both competition and its regulating policies.
Competition policies rely on the fact that we want to
achieve certain performance effects of particular business activities as well as some type of market behavior and market
structure (i.e. effects adequate for the market system). In fact,
the actual results, standards of market behavior and market
structures can be more or less different from what we expected,
and deviation from our expectations can be painful or even de-
structive for the system. Therefore, it is necessary to take certain "preventive" and the "medical" measures so as to make the
economic results obtained approach the hypothetical results of
perfect competition.
However, there is another approach, characteristic of the
classical theory: competition plays an important role of exercising
freedom of actions. This function plays not only an important role
in developing the personality and establishing a fair democratic
system, but is essential for allowing for the market self-regulation.
Free choice as well as freedom of decision-making are possible
only in a competitive environment. Any monopoly more or less
curtails business freedom, in this way interfering with looking for
rational ways to use limited resources. Moreover, a non-
competitive environment shows that decentralized decisionmaking, which involves attempts to solve problems in an authori-
tative way, turns out to be inefficient.
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Principles of freedom are in a conflict with principles of
testing separate market processes for their competitive poten-
tial; the main factors pushing the state to start its antimonopoly
intervention are "unwanted" and "negative" effects of market
processes. Here arise the following questions: how is it possi-
ble for extra-market forces to estimate the market adequacy of
these or those results, ways of behavior, and structures? What
body should be responsible for carrying out this check, and on
the basis of what criteria should the examination be made (who
establishes these criteria)?
Adherents of the classical paradigm (for instance, repre-
sentatives of the Austrian school the most distinguishable of
whom is Friedrich von Hayek) asserted the necessity to forbid
or prevent only those activities that limit other agents’ free-
dom; as for "predicting the future effects of the market pro-
cesses, this process turns out to be of a speculative character".
Walter Eucken as well as other ordo-liberal theorists also
considered freedom to be a primary goal of any competition.
At the same time, they, however, did not deny the fact that the
state had to control market structures, because a spontaneous
development, as a rule, tends to spread, this way destructing
the polypolistic structure necessary for actual competition. This
raises the necessity to prohibit not only the actions limiting
competition, but also to create an environment favorable for
competitive relations.
Thus, free competition does not guarantee, though, its
true actualization because ruling establishments tend to operate
with a free hand so as to curb freedoms of other (weaker) market participants. Gradually, this type of competition leads to
concentration of production, creating powerful monopolistic
structures that align themselves with the state and as well as to
liquidating the most competitive forms. Powerful economic
units (cartels, concerns), establishing control over the market,
can set prices on their own, this way defying competitive prin-
169
ciples. That sort of competition which does not force business
entities to make decisions on the basis of the prices established
in the market, does not make their costs adjust to these prices
as well as doesn’t make their product volume and product vari-
ety satisfy the consumer’s needs, — this type of competition
loses its efficiency. Competition based on economic freedoms
(freedom of agreements, freedom of coalitions) can be ruined.
This conclusion does not mean that competition cannot play
an effective regulating role in any modern economy. On the con-
trary, the potential of the competitive mechanism is very high, but
this potential is fulfilled only if certain competition rules are followed and if the state purposefully supports competition. Repre-
sentatives of “Freighberg School” headed by Walter Eucken made
this idea the basis for a social market economy. Besides, Ludwig
Erhard tried to implement it in practice.
A workable (effective) competition is to be understood as
a mechanism forcing economic subjects to act rationally to
work under the pressure of market parameters. Cartels and
concerns in Germany, though seem rather attractive for certain
types of market ("organized capitalism", "the latter period of
socialism", "makers of scientific and technical progress", etc.)
slowly but steadily reduced the general economic efficiency.
German’s defeat in World War I and World War II was also
more or less caused by the domination of power economic
structures that grew together with the state. At the same time,
competition expansion, on the contrary, made the German
economy dynamic and highly effective.
10.2.2. CREATION AND EVOLUTION
OF MODERN COMPETITION PROMOTING POLICIES
For a long time, Germany was considered to be "a typical
country of cartels". Its rapid growth at the end of the 19th century confused not only the liberals seeing them as a threat to an
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