The Importance of Constitutional Rules and Property Rights

Purpose of the book, reasoning for the topic, chronological framework

The aim of the monograph is to identify, characterize and evaluate the importance of selected formal institutions for the German economy in 1990–2015. The objects of study are: the Basic Law of the Federal Republic of Germany (FRG), i.e. constitutional rules and property rights (property rules). The study deliberately omits the constitutions of the German states¹ and the issue of intellectual property rights, limiting the consideration to the physical (material) aspect of property rights.²

An institutional perspective is still a promising approach in economics and other social sciences, including economic history. The gradual penetration of this approach into the mainstream in economics was formerly evidenced primarily by awarding the Nobel Prize in Economic Sciences to institutionalists (Gunnar Myrdal, James M. Buchanan, Ronald H. Coase, Douglass C. North, Oliver Williamson, Elinor Ostrom). In the context of economic history, it should be noted that nowadays, the institutional perspective is an attractive theoretical and methodological alternative to the paradigms³ dominating in the 20^th and 21^st centuries, i.e.: historical materialism, the French “Annales” school and the New Economic History (American cliometrics).

Institutional economics has challenged the existing way of studying economic reality, characteristic of orthodox (neoclassical) economics, which is based primarily on the assumption of the decisions’ rationality made by individuals and the resulting static perception of economic processes. As an alternative, institutional economics proposes to consider account the complexity and multifaceted nature of the reality under study, e.g. by using descriptive and historical methods in economic research. This work is intended as an attempt to recognize this problem and undertake theoretical and empirical research in setting the theory of institutional economics in a specific space-time, i.e. the German economy in 1990–2015. Thus, it is an economic history study embedded in the theoretical perspective of institutional economics.

←11 | 12→Despite its critical voices, the institutional approach continues to be recognized by theoretical and methodological economists and practitioners of this discipline. A significant interest in this trend can also be seen in other social sciences, e.g.: sociology, political science, law, and history. Therefore, research on institutions is often interdisciplinary in nature, which accounts for its high cognitive value.

Polish economics is dominated by theoretical and methodological studies on institutional economics. There are even comprehensive approaches in the form of handbooks or introductions to the concept.⁴ Empirical studies that set this approach in practice, e.g. through case studies, are less numerous. The situation is even worse in the field of economic history.

The year 2015 marked a quarter century since German reunification. This presented a unique opportunity to take stock of the German economy’s transformation and its co-shaping institutions. The German model of capitalism is based on an economic system, namely the social market economy. In turn, the doctrine of ordoliberalism is its theoretical basis. This concept distinguishes between the economic process and the economic order created by the legal and institutional framework. The state does not interfere directly in the economic process, which takes place within the economic order. It only shapes this order by creating laws and institutions. Thus, it turns out that there is a parallel between ordoliberalism and institutional economics. Institutions – the central concept of the last direction – are historically shaped frameworks in which societies function and political, economic, social, and cultural processes take place.

The choice of the Basic Law and property rights in Germany as the object of study is due to the fact that these institutions form the core of the formal rules’ catalog. Moreover, they exhibit a strong relationship with each other. Constitutional rules set the legal and institutional framework for a country’s economic system. Property rights are among them. In turn, they are often mainly anchored in constitutions and constitute one of the essential elements of the institutional architecture of the national economy. Therefore, they are among the most frequently studied rules in the field of institutional economics. It should be noted that the criticism of property rights, functioning in a centrally planned economy model, ←12 | 13→was one of the main assumptions of all transition programs in the former Eastern Bloc countries. This was the case, e.g., in the German Democratic Republic (GDR). The new constitutions adopted in these countries or amendments to the existing basic laws played an important role in this regard.⁵ Germany in 1990–2015 was an example of a highly developed country where the constitutional guarantee of property rights promoted economic efficiency by creating stable structures of human interaction.⁶ The mutual relationship between constitutional and property rules resounds throughout the different parts of this work.

Over the last decades, studies have appeared, mainly English and German language ones, which treat the subject matter.⁷ It turns out, however, that they emphasize other issues and do not take into account many of the detailed themes of this book, focus on the influence of selected aspects of the FRG Constitution on the economy, analyze shorter chronological periods, do not organically combine institutions of the Basic Law of the FRG and property rights or the considerations included in them are made from different theoretical and methodological positions than those used in the present economic history study. As a result, this work is ←13 | 14→complementary and broadening in relation to such monographs and offers an economic historian’s perspective on constitutional and property rules as a whole, as well as shows the channels of relations between them and selected segments of the economy.

The chronological framework of the work covers the years 1990–2015. The opening point of the consideration is the reunification of Germany in 1990. From the economic history point of view, new circumstances occurred then, as well as the systemic transition of the former GDR, and the unification, integration, and convergence of two parts of the country became the challenge. In the light of ordoliberal economics, this date could be referred to as a “historical moment.” Following Walter Eucken’s proposal, the constitutive principles of economic order (institutions), which had previously been in force only in the FRG. They were extended to new federated states at the moment of German reunification, which created utterly new conditions for their functioning.⁸ Therefore, it is not legitimate to speak about continuity in the context of the functioning of the analyzed formal institutions in the FRG and their significance for the economy before 1990 and after that.

The literature offers a variety of publications on the balance sheet of reunification in political, economic, social, and cultural terms. The book adds to these works the problem of the relevance of constitutional rules and property rights for the German economy between 1990 and 2015. References to later years are not made. Firstly, not all source materials were complete when the research was conducted (especially statistical data). Secondly, this kind of treatment would have made the analysis inconsistent. Thirdly, the year of closure marked – according to some researchers – a new period of the German economy’s evolution. Although no revolutionary changes in constitutional and property rules were made at that time, in 2015, the German economy entered a phase of confronting challenges arising largely from the immigration crisis, perturbations in the Eurozone, or changes in the general trends of the global economy.⁹

←14 | 15→The analysis of the institutions of the Basic Law of the FRG and property rights over the course of 25 years is thus part of the “second level” of social analysis by Olivier E. Williamson. It concerns research into the “institutional environment,” especially property rights and “positive political theory.” Within this level, Williamson additionally indicates the “first-order economizing,” i.e. the creation of proper formal institutions by adequate state bodies.¹⁰

A study of German economic history covering only the last 25 years may be accused of looking too shallowly into the past. However, the quarter-century of economic transition in Germany after reunification deserves a thorough analysis of the course and effects of changes combined with a critical assessment. At the same time, one should be aware of the fact that formal institutions such as the Constitution and property rights are rules that emerged in West Germany already after World War II. The incorporation of the Eastern Länder into the FRG in 1990, so far concentrated in the GDR, created new circumstances and conditions for the economic development of the entire unified state. In 2016, Werner Plumpe convincingly stated: “The economic history of Germany following reunification has yet to be written, although numerous drafts exist already and the chorus of contemporaries who have felt called on to pass economic judgment since the early 1990s is almost uncountable.”¹¹ Moreover, the practice of contemporary history helps to understand the present better and, on that basis, to formulate responsible predictions. Thus, the study of economic processes and phenomena after 1989 from an economic history perspective is fully justified.

Main hypothesis and research questions

The following (specific) research questions, corresponding to the themes of subsequent chapters of the work, served to verify the main hypothesis: (1) What theoretical understandings of the category of institutions are found in the social sciences, especially economics and economic history, and how does this result in research on economic transformations? (Chap. 1); (2) What kinds of macroeconomic differences existed in the economic structures of the FRG and the GDR just before German reunification? (Chap. 2); (3) What was the role of the Basic Law ←15 | 16→of the FRG in the context of the integration of two different economic systems after the GDR joined the FRG? (Chaps. 3–4); (4) To what extent did West German property rights contribute to economic transformations in the former GDR? (Chaps. 5–6).

Sources and literature

The queries were limited in two ways during the research on normative documents. Firstly, the detailed origins of individual acts and legislative processes were not analyzed. The focus was on the actual state of affairs by examining the final acts of statute law (Latin: ius civile). Secondly, the jurisprudence (especially of the Federal Constitutional Court) was deliberately ignored.¹² This represents the most commonly used perspective in the research workshop of (economic) ←16 | 17→historians and economists.¹³ The analysis of the above group of sources is thus based on the reading of the letter of the law, i.e. the applicable legal rules (norms), and the search for their significance for economic life. This dimension alone, without taking into account the additional one of legal culture, makes it possible to grasp such networks of relationships. In the institutional approach, the study of the statute law (in the form of the constitution, property rules, and legislation related to both institutions) concerns the de jure dimension (formal, normative, postulative) of the studied institutions. At the same time, their functioning in the practice of economic life refers to the de facto dimension (actual, positive, real).

In terms of statistical material, several observations need to be made. In some places in the study – where necessary – they were indicated. Firstly, it was a major problem during the research to reach complete data for the entire 25-year period. Secondly, data for reunified Germany have been available since 1991. Thirdly, since 2014, the fundamental macroeconomic values for Germany for the period since 1991 have been calculated according to the European System of Accounts (Europäisches System Volkswirtschaftlicher Gesamtrechnungen, ESVG 2010).¹⁴ This methodological standard thus covered data for the whole period analyzed in this work. However, it does not always allow for a full comparison of statistical information for 1990–2015 with the earlier period, i.e. the division of Germany into the FRG and the GDR. Fourthly, there are only estimates in some marked cases. Fifthly, data discrepancies can be found in certain materials. This concerns, among ←17 | 18→others, publications of the same state bodies published in subsequent years. In more recent reports, data was updated. However, the differences noted do not distort the drawn picture of individual dimensions of the German economy. Sixthly, it is sometimes challenging to find separate data for two parts of Germany, especially as regards the first decades of the 21^st century. For some researchers, this is an indirect justification for the progressive unification of the Eastern and Western Länder.¹⁵ Seventhly, the FRG and the GDR sources had different methods for compiling data. Methods of calculations in the Eastern Bloc differed from the Western rules.¹⁶ Therefore, attempts were made to reach materials that unified data for both countries. Some methodological differences also exist after reunification, so it is difficult to avoid mistakes when comparing the state of the German economy after 1990 and the FRG’s macroeconomic performance before reunification, let alone the GDR.¹⁷ Eighthly, statistics on the GDR are official. One has to be aware of the risk of propaganda and, therefore, false information.¹⁸

Interdisciplinary literature studies complemented the source analysis. The literature on the subject is vast. German and English language studies from the 1990s dominate in this field. This made it necessary to make an attempt at a constructive selection and ordering of the literature. Selected Polish, English, and German studies were used, mainly in the field of economics, law, history, and sociology. In justified cases, works from other disciplines were also used. Interesting and often lesser-known literature and source materials were provided by research conducted in 2018 in American libraries: the Lehman Social Sciences Library, Columbia University in New York, and the Baker Library, Harvard University in Cambridge.¹⁹ The work was also measurably influenced by two trips in 2020 ←18 | 19→to Germany for research internships, during which research was carried out at Fachbereich Wirtschaftswissenschaften, Zweigbibliothek Recht und Wirtschaft, Universitätsbibliothek, Justus-Liebig-Universität in Gieβen,²⁰ and Jacob-und-Wilhelm-Grimm-Zentrum, Universitätsbibliothek, Humboldt-Universität in Berlin.²¹

The detailed literature is indicated in the relevant sections of the book, so its presence in the Introduction has been dispensed with. However, a few remarks should be made. The literature on this problem includes works from disciplines that usually deal with these issues in the present. Although authors examine the changes in reunified Germany from a retrospective perspective, works of a strictly historical character (i.e. written by historians based on their characteristic research methods) are few. Political scientists, lawyers, economists, sociologists, and others are much more likely to comment on this topic, emphasizing political, legal, economic, and socio-cultural processes in turn. This underpinned the need for an interdisciplinary literature search. This corresponds with the fact that history as such and economic history are interdisciplinary. As a result, this study can fill a gap in the so far scarce economic history studies of economic changes in reunified Germany after 1990.

Particular interest was paid to studies with a more extended chronological scope to be able to look at the years 1990–2015 from an appropriate distance, trying at the same time to grasp the dynamics of the analyzed processes in all or most of the discussed period. For this reason, less frequent reference was made to the very rich literature of the 1990s, which de facto reported on the course of the former GDR’s transition and its integration into the FRG on an ongoing basis, sometimes formulating forecasts for the near future (often diverging).²²

Research methods

This book has an interdisciplinary character. It is an economic history study combining the theoretical perspective of economics with the research tools ←19 | 20→of an economic historian based on an extensive analysis of source material. Interdisciplinary work on economic history has two dimensions, which result from the specificity of this discipline. Firstly, it is direct interdisciplinarity, i.e. combining the perspectives of history (humanities) and economics (social science). Secondly, it is indirect interdisciplinarity, i.e. drawing on the achievements of other useful disciplines. In the case of this work, references primarily to law and sociology play a key role. Here and there, elements of the history of political and legal thought and a history of social and economic thought are visible.

The primary theoretical reference point is institutional economics, especially the new institutional economics, from which specific understandings of institutions, formal rules, and ways of implementing them have been drawn. Due to the choice of constitutional and property rules, it was essential to rely on other theories to study these institutions’ significance for the German economy in 1990–2015. These approaches show strong links with the new institutional economics: constitutional economics, especially its positive current, and property rights theory.²³ These were complemented by occasional references to the findings of other approaches, i.e. economic systems theory, ordoliberal theory, economic analysis of law (law and economics), transition theory or integration theory. Developing in various directions, they do not provide a closed and unambiguous catalog of research methods on the book’s issues. It should be noted, therefore, that the mentioned theories were not used autonomously in this study. They are complementary to each other. This is in line with the assumptions of theoretical-methodological pluralism or, as Thomas S. Ulen put it in another context, the “trans-methodological” perspective.²⁴ Such a research focus is also due to the interdisciplinary nature of this work and economic history as a discipline.

The conducted research within the monograph has a theoretical and empirical dimension. The first one was aimed at setting the necessary analytical and interpretative framework. The concepts of institutions and formal institutions were defined. The main assumptions of constitutional economics and property rights theory were discussed. On this basis, German constitutional rules and property rights as formal institutions were presented. Elements of other economic theories ←20 | 21→have been presented at appropriate places in the book only to the extent necessary to bring the key issues into focus.

Constitutional economics embeds constitutions in various economic contexts. This work is focused on the economic impact of selected provisions of the FRG Constitution during the analyzed period. In doing so, other perspectives offered by constitutional economics, such as the economic effects of political changes in the state or the economic logic of certain provisions of the constitution or legal doctrine, are deliberately omitted.²⁵ Stefan Voigt notes that the economic history perspective of constitutional studies is more concerned with individual countries. In contrast, (constitutional) economists are interested in a more nomological and comparative approach. On the other hand, he argues that economic history is a good discipline for the study of constitutional (or, more broadly: institutional) change because it sensitizes economists to the precise collection and application of data and warns them against being too detailed or general in the analyses they undertake.²⁶

Economic history also has an important place in studying the importance of property rights for the economy. The argumentation in this respect coincides essentially with the position of institutionalists. By adopting a retrospective perspective, economic history reveals the dynamics of the transformation of property rights and its impact on socio-economic reality. This is an alternative to, e.g., the neoclassical approach, which is considered abstract, static, and ahistorical, or the Marxist approach, which is based solely on one general logic of development. The economic theory of property rights provides economic historians with valuable references in this field. Because of their impact on production, investment, trade, resource allocation, or the long-term decisions of economic actors, property rights have played a vital role in the historical process of development.²⁷

←21 | 22→Thus, the subject matter of this book covers organically with economic history. Firstly, the study presents a retrospective view of the problem from the point of view of the studied space-time. In other words, the work deals with a past and closed (rather than present and open) period in Germany’s economic development. Secondly, the methods used in work (especially the critical analysis of historical sources and the historical description integrated with statistical methods) are fundamental in economic history. Thirdly, the approaches that study the analyzed institutions (constitutional economics and property rights theory) show links with economic history. However, institutional economics dominates these theories, strongly emphasizing the role of historical analysis in the study of the institutions’ significance for economic development.