The magic hexagon of economic policy is based on the four quantitative goals of the magic square, which are expanded by two qualitative goals for the magic hexagon. The focus is on freedom, security, justice and prosperity. The defense against dangers caused by environmental pollution and climate change as well as a fair distribution of income and wealth are the content of the qualitative goals of the magic hexagon. In this respect, not only purely economic policy goals play a major role, but also socio-political values.
In this lesson you will learn about the magic hexagon, which is the sum of qualitative and quantitative goals. The practice questions at the end of the lesson will help you check your current level of knowledge.
English: magical hexagon
When does the magic hexagon matter?
According to percomputer, the magic hexagon as an extension of the magic square is the basis of many economic policy decisions. The four goals defined by the Stability Act of 1967 are expanded.
The magic hexagon plays an important role in:
- Corporate governance
- Expansion of the market position
- Use of tax advantages
- Expansion efforts at home and abroad
- Structural improvements
- Strengthening competitiveness
- Avoiding equity participation limits
- Integration of acquired companies
- Liability issues
The magic hexagon: qualitative and quantitative goals
Magic hexagon – economic policy goals
The magic hexagon is the sum of the four quantitative goals of the magic square and the two qualitative goals of the magic hexagon.
Quantitative goals or magic square:
- As high a level of employment as possible
- Steady and appropriate economic growth
- Stable price level
- External balance
Qualitative goals or magic hexagon:
- Preservation of an environment worth living in
- Fair distribution of income and wealth
If the economic or quantitative goals are achieved simultaneously and in full, a macroeconomic equilibrium has been established.
Why “magical” ?
The term “magical” indicates that it is basically impossible to fulfill all four or six goals at the same time. This is because the various objectives are not congruent and therefore cannot be reconciled with one another. Inevitable consequences of trying to meet all goals at the same time are rising inflation, falling investments and rising unemployment.
As high a level of employment as possible
The highest possible level of employment is one of the most important of a total of six goals in German economic policy. That assumes that there is almost no unemployment. This target is considered achieved when the unemployment rate is around 3% or below.
A high level of employment and the goal of steady and appropriate economic growth are positively related: if the economy grows, the level of employment also increases. That means higher purchasing power, so more workers are hired to meet rising consumer demand.
A high level of employment regularly goes hand in hand with high corporate profits, which is favored by positive framework conditions. Just as positive developments mutually support each other, negative developments can also be transferred. Declining economic output has a negative impact on employment, which as a result falls. At the same time, wages and salaries stagnate or fall, which also applies to demand, which in turn has a negative effect on purchasing power.
Steady and appropriate economic growth
A necessary condition for the long-term stability of a country is constant and adequate economic growth. This second goal of the magic hexagon in turn requires a high employment rate, which increases purchasing power, and tax revenue flows for the state. This is a cycle that would not work without trade.
It is important that economic growth is appropriate, with an increase in gross domestic product (GDP) of up to 5% annually being ideal. Appropriate because too rapid economic growth can, among other things, destabilize the price level, with the result that employment figures fall. If economic growth is too rapid, the external balance can also be shaken, which can lead to an economic crisis. The same applies to insufficient growth. State control measures can be, for example, tax cuts or tax increases.
What is the gross domestic product ?
If the economic performance of a country increases, this economic growth is reflected in the gross domestic product. It is calculated from all goods and services that are provided in a country within a certain period of time. The Federal Statistical Office is responsible for calculating the GDP. This does not include goods that are produced by German companies abroad. However, the gross domestic product says nothing about the actual prosperity of a country.
Stable price level
A prerequisite for a functioning market economy is a stable price level, which is the third goal within the magic hexagon. It not only allows acquisitions and investments, but also ensures social peace. A stable price level is promoted, among other things, by moderate wage agreements within the framework of collective bargaining and the creation of incentives to increase domestic demand.
Financial control measures can be an increase in the key interest rate and an associated reduction in the amount of money on the market. According to the European Central Bank (ECB), an inflation rate of 2% is ideal for a stable price level, while a rapidly increasing rate leads to an enormous loss of value in almost all goods.
The fourth goal of the magic hexagon is the external balance, which is the prerequisite for good trade relations. Foreign trade equilibrium means that a country’s imports and exports are in line with one another. Those who mainly import cannot build a functioning domestic economy, whereby the trade balance is measured by the gross domestic product.
The decisive factor is the external contribution quota, for the determination of which imports are subtracted from exports and divided by GDP. Foreign policy equilibrium can be achieved through targeted measures, for example through import restrictions or the introduction of export tariffs.
Preservation of an environment worth living in
A qualitative and the fifth goal of the magic hexagon is the preservation of an environment worth living in, which has been constitutionally guaranteed since 1994 in Article 20a of the Basic Law (Basic Law). Since then, around 300 laws and ordinances on environmental protection have been passed, which form a separate legal area under the collective term environmental protection law. Even before that, namely in 1986, the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety was established.
Today, environmental protection has not only become an object of economic policy, but an economic factor that is worth protecting. Maintaining an environment worth living in is a goal that goes against economic growth.
Example: Preserving an environment worth living in
For example, forests used for the timber industry are not easily cut down. The construction of roads, which leads to an improvement in the infrastructure and traffic routes, is also not so easy for reasons of environmental protection.
The second goal of the magic hexagon – constant and appropriate economic growth – and the fifth goal – the preservation of an environment worth living in – are therefore often contrary to each other. This makes it clear that an unrestricted implementation of the magic hexagon is not possible without difficulties.
Fair distribution of income and wealth
The sixth goal in the magic hexagon is social equilibrium through a fair distribution of income and assets. This goal cannot be achieved with the model of the social market economy practiced in Germany. In addition to safeguarding personal rights of freedom, for example the right to free economic activity and the possibility of setting up an independent business, this goes hand in hand with the guarantee of free market competition.
The design features of the social market economy include:
- free pricing for goods and services
- The pursuit of profit as an incentive to perform
- private ownership of the means of production
The fair distribution of income and wealth defined in the sixth goal of the magic hexagon cannot be formed arbitrarily, but is dependent on supply and demand.
The pursuit of profit as a performance incentive alone emphasizes the character of a performance society that is not congruent with a fair distribution of income and wealth. Instead, a network of social benefits protects those from economic hardship who are unable to take responsibility for various reasons.