Magic hexagon

In the following article you will learn everything important about the so-called magic hexagon in economic policy and economics. If you are still not sure what the goals of the magic hexagon are and what problems arise from it, the information will surely help you. A lot of fun!

What is the magic hexagon?

The magic hexagon is a guideline for all economic policy measures in the Federal Republic of Germany and is thus the basis for many economic policy decisions. These are six so-called modal targets or intermediate targets that policymakers are supposed to work toward. The focus is on the values of freedom, security, justice and prosperity.

The Magic Hexagon is an extension of the four goals defined by the 1967 Stability Act, also known as the Magic Quadrilateral. The magic hexagon is thus the sum of the four so-called quantitative goals of the magic quadrilateral and two additional qualitative goals.

The magic hexagon plays an important role, for example, in:

  • of the management
  • the leadership
  • the expansion of the market position
  • the use of tax advantages
  • of globalization
  • of expansion efforts at home and abroad
  • Structural improvements
  • the strengthening of competitiveness

What are the goals of the magic hexagon?

The goals of the magic hexagon include first of all those of the quadrilateral. These are the following targets:

  • a high level of employment or. Full employment
  • a steady and adequate economic growth
  • a stable price level
  • external balance

These goals are considered quantitative because they are measurable factors that can be expressed in values. The goals added for the magic hexagon are qualitative goals, because they cannot be expressed in values.

The added goals are environmental protection and a fair distribution of income and wealth. So overall, the magic hexagon looks like the graphic below:

Fig. 1: The magic hexagon

Source via: BWL Lexikon

Let us now take a closer look at the individual goals.

High level of employment

The highest possible level of employment is one of the most important of the six goals of the magic hexagon. This goal is considered to have been achieved when the unemployment rate is around 3% or below.

A high level of employment and the goal of steady and adequate economic growth are positively correlated. Indeed, when the economy grows, the level of employment also increases. This means higher purchasing power, so that more workers are hired to meet rising consumer demand.

Steady and appropriate economic growth

A necessary condition for the long-term stability of a country is a steady and adequate growth of the economy. This second goal of the magic hexagon in turn requires a high employment rate, because this strengthens purchasing power and generates tax revenues for the state. This is a cycle that would not work without trade.

It is important that economic growth is adequate, with an increase in GDP of up to 5% per year considered ideal. This value is appropriate because, among other things, too rapid economic growth can destabilize the price level, with the consequence of decreasing employment. In addition, if the economy grows too fast, the external balance can be upset.

Stable price level

Another prerequisite for a functioning market economy is a stable price level, which is the third objective within the magic hexagon. The stable price level not only allows purchases and investments, but also ensures social peace. It is favored, among other things, by moderate wage settlements through collective bargaining and by creating incentives to increase domestic demand.

According to the European Central Bank, an inflation rate of 2% is ideal for a stable price level, while a rapidly rising rate leads to an enormous loss of value for almost all goods.

External balance

The fourth objective in the magic hexagon is external balance, which is an important prerequisite for good trade relations. External economic balance means that a country’s imports and exports are in line with each other.

This is determined by the net exports ratio, which is calculated by subtracting imports from exports and dividing them by GDP. Measures to maintain foreign policy balance include import restrictions or the imposition of export tariffs.

Environmental protection

The fifth objective of the magic hexagon is the preservation of an environment worth living in, which is in Art. 20a GG has been constitutionally guaranteed since 1994. For example, the construction of roads, which leads to an improvement in infrastructure and transport routes, is not easily possible for reasons of environmental protection.

Today, environmental protection is not only a subject of economic policy, but has become an economic factor worth protecting. The preservation of a livable environment, however, is an objective that runs counter to economic growth.

Fair distribution of income and wealth

The sixth goal in the magic hexagon is social balance through a fair distribution of income and wealth. This is hardly feasible in a social market economy. In addition to securing personal liberties, for example the right to engage in free economic activity and the possibility of starting one’s own business, the social market economy goes hand in hand with guaranteeing market-based competition.

This defined equitable distribution of income and wealth cannot be formed arbitrarily, but depends on supply and demand.

The target relationships of the magic hexagon

As has already been indicated, some of the goals of the magic hexagon are not compatible, and therefore it is impossible in practice to meet all of them simultaneously and permanently. Hence the term "magic" hexagon. Thus, one distinguishes several target relationships:

  • Complementary – the goals complement each other
  • Indifferent – the targets do not influence each other
  • Competing – the goals are mutually exclusive or interfere with each other

So it becomes clear that there are certain conflicts between the goals, which I will now discuss in more detail.

The conflicting goals of the magic hexagon

Price level stability and economic growth

On the one hand, price level stability and economic growth are competing goals, because the economic upswing usually leads to an increased inflation rate, i.e. an increase in prices. To counteract such a rise in prices, the key interest rate would have to be raised. This makes credit more expensive and thus investment more expensive for businesses, which in turn inhibits economic growth.

Price level stability and full employment

Another conflict of objectives exists between the goal of price level stability and that of full employment. Indeed, the so-called Phillips curve shows that as the inflation rate increases, the unemployment rate decreases. For example, by printing more money, employment levels can be increased in the short term. As the money supply increases, so does consumption and investment, which is why companies need additional workers.

Environmental protection and economic growth

In the magic hexagon, environmental protection and nature conservation therefore compete with steady economic growth, since additional investments and expensive expenditures often have to be paid in order not to violate strict environmental regulations.

Economic growth and fair distribution of income and wealth

A very big problem is reconciling economic growth with a fair distribution of income and wealth. In a market economy, the state should intervene as little as possible in economic processes. Companies thus find it easier to work independently and efficiently. In the end, this also helps the national economy.

However, this also makes it more difficult for the state to distribute wealth and income completely equitably. Without strict regulation, market forces easily emerge, further favoring the gap between poverty and wealth.

Magic hexagon – Everything you need to know at a glance

Well, everything understood? So that you are best prepared for your next exam in economic policy, the following is still the most important information about the magic hexagon at a glance:

    The magic hexagon is a guideline for all economic policy measures in the Federal Republic of Germany. These are six so-called modal goals or intermediate goals that the policy should work toward.

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