On Wolfgang Streeck Re-Forming Capitalism: Institutional Change in ...

Socio-Economic Review (2010) 8, 559–580 Advance Access publication May 26, 2010

doi:10.1093/ser/mwq011

DISCUSSION FORUM II On Wolfgang Streeck Re-Forming Capitalism: Institutional Change in the German Political Economy, Oxford, Oxford University Press, 2009 Panel at the SASE 2009 Annual Meeting, Paris, France Keywords: Germany, institutional political economy, capitalism, liberalism, social order JEL classification: B52 institutional, evolutionary approaches, P1 capitalist systems, P48 political economy

Bruno Amable University of Paris I & CEPREMAP, Paris, France Correspondance: [email protected]

Wolfgang Streeck’s (2009) Re-Forming Capitalism is a major contribution to comparative political economy and institutional theory in at least three respects. First, it proposes an analysis of the transformations that the ‘German model’ has experienced over the past two decades or so. By thoroughly reconstructing the trajectories followed by five sectors of the German economy—namely, collective bargaining, intermediary organization of capital and labour, social policy, public finance, and corporate governance—Wolfgang Streeck shows how a great deal of change has made the most important pillars of the German model more fragile and, most importantly, how the evolution of each sector has reinforced the impact on the coherence of the whole model caused by the transformations taking place in the other sectors. The conclusion to be drawn from the first part of the book is that the German model either no longer exists or will not exist for long. The second contribution of the book is a theory of institutional change. Criticizing the most static and functionalist aspects of the Variety of Capitalism literature, the book argues that

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a theoretical framework focusing on (historical) change, not stability, should be adopted. The principles presented in Re-Forming Capitalism could be used profitably for the analysis of models of capitalism other than the German one. Third, taking inspiration from K. Polanyi, Wolfgang Streeck proposes a dynamic theory of capitalism based on the opposition between the disorganizing principle of capitalism, in its quest for profits, and the desire of society for organization. The analysis of the five sectoral trajectories is not just an important contribution to the empirical work on capitalism in general and Germany in particular; it is also a significant application of the theory of institutional complementarities to the analysis of institutional change. Most critiques of this theory have targeted its alleged static character and functionalism, and some parts of Re-Forming Capitalism echo such criticisms (p. 102 and p. 106, for instance). Nevertheless, the book is an illustration of how the theory of institutional complementarities can contribute to the analysis of the destabilization of a model of capitalism. Just as cumulative principles may lead to ‘virtuous’ or ‘vicious’ cycles, institutional complementarities may reinforce the functioning of the most important institutions of a model . . . or work the other way around once one or more institutions start to weaken. The reinforcing mechanisms will then combine the destabilizing forces at work within each sector and accelerate the demise of the system. The evidence proposed in the book makes it very clear for Germany that the same complementarities that once reinforced the German model have worked to weaken it. This mechanism of ‘institutional complementarity in reverse’ is also important if we are to understand that the transformations of the German model are not the result of evolutions taking place in one sector alone, such as the financial sector, which then disturbed an otherwise perfectly stable and efficient system. The book shows convincingly that most of the other sectors had experienced a weakening of their key institutions before the changes in the corporate governance sector took place. Re-Forming Capitalism argues convincingly against the predictions of the bulk of the Variety of Capitalism literature on the process of ‘bifurcated convergence’, according to which under the pressure of globalization, liberal market economies would become more liberal whereas coordinated market economies, such as Germany, would tend to become more coordinated. Far from this perspective, the analysis proposed by Wolfgang Streeck does not find much evidence of self-correcting mechanisms that could bring the German model back to a coordinated economy equilibrium. On the contrary, the evidence points to an accelerated demise of the model. The evidence also shows that the reforms undertaken in the past decade, allegedly to improve the sustainability of the model, have actually weakened its foundations. Transformation and change are the main themes of Re-Forming Capitalism. In discussing what the adequate framework for the analysis of institutional change should be, the book raises the old ‘history vs. structure’ problem. Although

Re-forming capitalism

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insisting on the necessity to take history and change into account, Re-Forming Capitalism is based on a framework ‘sufficiently abstract to be applicable in principle to institutions in general, regardless of historical and geographical location’ (p. 102). This is indeed a necessity if social sciences want to go beyond mere storytelling. The analysis of social systems requires a certain structure of ‘deterministic causation’, even if it should be understood that the theoretical framework that one uses cannot entirely determine the historical situation which is analysed. This is, in fact, a prerequisite of any analysis. One must be able to define an object before analysing it, which can only be done with some hypothesis concerning the relative stability of this object; the minimal requirement being that the object of the analysis, in this case the German model, exists at all. The French regulation theory has met similar problems when dealing with the crisis of the Fordist mode of regulation. In order to understand the crisis of Fordism, one needed to analyse why Fordism had not always been in crisis. More generally, the question is to understand how a social structure in which crisis should prevail can have a relatively stable existence for a limited time period. Re-Forming Capitalism adopts the same viewpoint as the French re´gulationnistes: ‘In short, what needs to be explained are order and stability, while gradual change toward public disorder may be expected as normal’ (p. 246). The perishability of social structures is an important aspect of the theory presented in Re-Forming Capitalism. The identification of a structure does not imply its endless reproduction; its analysis should bring to light the forces whose development will lead to an alteration of the structure and its ultimate demise. The use of a theoretical representation of a social structure does not imply any assumption of functionalism, efficiency or global stability. Even the concept of ‘equilibrium’ is too often confused with the notions of uniqueness, efficiency, statics or stability. Cycles and irregular trajectories may be equilibriums, and multiple equilibriums may exist. For these reasons, a simple dichotomy between equilibrium and change is sometimes more misleading than enlightening. It is striking that some of the most significant propositions put forward in Re-Forming Capitalism could be analysed with the help of formal tools such as dynamical systems. There are several ways to introduce history into the analysis of a given structure, for instance through equilibrium selection: there may exist a multiplicity of paths ex ante, but a unique trajectory ex post. More importantly, the type of relatively slow decomposition that Re-Forming Capitalism analyses for the German case, with periods of acceleration of change once a certain threshold has been crossed, could be reproduced with the help of a dynamical system admitting both slow and fast dynamics1 (the former applying to parameters that govern the latter) 1

Lordon (1997) has formally modelled the breakdown of the Fordist growth regime with such tools.

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and bifurcation theory. In fact, the book seems to use the concept of bifurcation without naming it: a small smooth change in the parameter values of a system causes a sudden ‘qualitative’ change in its behaviour. Regarding the theory of institutional change that Re-Forming Capitalism proposes, some questions may be raised about the distinction between ‘Durkheimian’ and ‘Williamsonian’ institutions (Chapter 11). The former create obligations and are exogenously imposed, the latter reduce transaction costs and are voluntarily contracted. Wolfgang Streeck defines institutional change under capitalism as ‘[a move] toward progressive erosion of social obligations in favour of voluntary, individually “rational”, contractual social relations’ (p. 246). Like Karl Marx’s theory on the tendency of the rate of profit to fall, this is a strong statement that would need to be analysed at greater lengths. The proposition that capitalism would systematically imply the erosion of social obligations in favour of voluntary arrangements could be challenged from both an empirical and a theoretical point of view. Regarding the latter, one could formalize configurations of interests for different social groups in which it would be in the interest of both capitalism and capitalists to impose obligations and thus stabilize a certain social order. Regarding the former, the history of industrialization shows that the process of disciplining workers to fit the requirements of the factory organization has been based on (legal) obligations and sanctions and not just on contractual relations (Deakin and Wilkinson, 2005). The interpretation of factory legislation as a ‘defence of society, including capitalists, against the very real danger [. . .] of the capitalist modernization of production destroying its own foundations’ (p. 267), which Wolfgang Streeck reminds us was Karl Marx’s interpretation, raises the question of who ‘society’ is. The idea that ‘society’ (or ‘capitalism’) would be some entity able to take measures functional to its own survival would be contrary, of course, to the non-functionalist stance of Re-Forming Capitalism, and Wolfgang Streeck rejects the idea very explicitly. It remains that the dynamics of conflict between the drive to dissolve the social obligations and the desire for stability is not very tightly linked to the social groups that would support each alternative. Also, as an economist, I find fault in Re-Forming Capitalism for neglecting macroeconomic factors. More precisely, what is striking in Wolfgang Streeck’s book is its mostly pre-Keynesian treatment of the macro-economy. For instance, I think that Re-Forming Capitalism overemphasizes the labour-cost aspect of wages and pays no attention to the role of wages in aggregate demand. This concern with labour costs is extended to social benefits (and contributions) and the welfare state in general. The reader gets the feeling that, if the German model is falling apart, it is largely because of the ‘unreasonable’ growth of social expenditure and labour costs, which deteriorate German competitiveness, depress labour demand, and generate unemployment. The public (and social) finance problem is indeed at the centre of the book. Rising public debt is seen


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as both the consequence and cause of the demise of the German model, and the ‘unreasonable’ demands of pensioners and trade unions are said to make matters much worse than they would be otherwise. It is noteworthy that Re-Forming Capitalism pays relatively little attention to the receipt side of the problem and particularly to tax cuts. Also, the fact is somewhat overlooked that the public finance problem is, in large part, endogenous, not only because firms’ shedding of labour increases demands for social compensation—that part is taken well into account in Re-Forming Capitalism—but also, and maybe more importantly, because real wage stagnation has depressed aggregate demand—thus producing unemployment—and social contributions, which depend on the levels of employment and wages. Starting from this, one could easily develop another set of ‘destabilizing’ complementarities: low wages imply low social contributions and low aggregate demand; depressed demand leads to slow growth, which implies a rise in public deficits; the increased importance of exports in the dynamism of demand puts competitive pressure on wages, which further aggravates the problem. Simple statistics2 reveal that the problem may be located where Re-Forming Capitalism is not looking. Income distribution in Germany has been constantly evolving to the benefit of profits and the detriment of wages, at least since the early 1990s. Productivity per worker rose by over 10% between 1996 and 2008, whereas individual real wages fell by 5%. The comparison with other European countries is also telling. Household demand in the Eurozone, minus Germany, increased (in real terms) by about 15% between 2002 and 2009, whereas it remained stagnant in Germany. The level of unit labour costs in the Eurozone, minus Germany, stayed about the same between 1996 and 2008 but dropped by an impressive 15% in Germany. The consequence is that a cure of wage austerity and welfare state retrenchment could very well send the patient to the cemetery rather than to the recovery room. Finally, one may wonder, in the light of events in the past couple of years, whether the emphasis on public debt is deserved. Before the State, in Germany as in every other developed country, had to come to the rescue of banks, the problem of public debt was dwarfed by that of private debt. The forthcoming problems in public finance have indeed been caused more by the reckless behaviour of the financial sector than by the ‘unreasonable’ demands of trade unions.

References Deakin, S. and Wilkinson, F. (2005) The Law of the Labour Market: Industrialization, Employment, and Legal Evolution, Oxford, Oxford University Press. 2

See Natixis (2009a, b, c).

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Lordon, F. (1997) ‘Endogenous Structural Change and Crisis in a Multiple Time-scales Growth Model’, Journal of Evolutionary Economics, 7, 1 –21. Natixis (2009a) ‘La France et l’Allemagne face a` la crise : re´ponses conjoncturelles et re´ponses structurelles’, Flash Economie, 256. Natixis (2009b) ‘L’Allemagne pourra-t-elle conserver son mode`le de croissance?’, Flash Economie, 280. Natixis (2009c) ‘L’Allemagne, pays re´fe´rence de la Zone euro: une situation durable?’, Flash Economie, 309.

Werner Eichhorst Institute for the Study of Labor (IZA), Bonn, Germany Correspondence: [email protected]

Wolfgang Streeck’s recent volume on ‘Re-Forming Capitalism: Institutional Change in the German Political Economy’ is a highly important contribution to both the empirical and the theoretical debate on the development of industrial relations, the welfare state and the labour market. The book is a potential classic, as it, first, unites core insights into recent developments of the German political economy—which is particularly helpful for foreign readers—and, second, embeds the empirical story into an inspiring theoretical approach that will probably inspire further research. Given this, it seems appropriate to concentrate the discussion of the volume on five major comments: (i) the theoretical approach, (ii) the method, (iii) the empirical statements on the German case, (iv) the probable development of the German political economy in the current crisis, and (v) implicit normative implications. First, in particular, for readers who are familiar with the earlier work of Wolfgang Streeck on the German model of ‘non-liberal’ capitalism, the major contribution of the volume is not the empirical material presented but is the innovative theoretical approach. Wolfgang Streeck strongly argues against a static and functionalist view of institutional arrangements and developments as well as rejecting overly simplified ‘economistic’ reasoning when it comes to explaining institutional choices and changes. He is certainly right in stressing the open, often contradictory and, above all, historical character of the political economy and institutional environments in capitalist systems. What is particularly remarkable is the emphasis on the role of actors at the micro-level, who reproduces institutional rules only in an imperfect way—and they also work around the existing rules in pursuing their specific preferences. The approach suggested by Wolfgang Streeck stresses the process dimension of policies and institutions and the


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potentially transformative change stemming from slow, often unintended and endogenous change triggered not necessarily by formal policy-making at the national level or collective bargaining, but also emerging as a result of actors’ (partly) autonomous and somewhat ‘subversive’ agency. Perceiving history as generally open, heavily influenced by unintended consequences and spillover effects across policy areas in the absence of dominant strategic actors, is a plausible way to understand actual processes going on in politics, in markets for goods and services or in the employment sphere that eventually lead to a re-shaping of both formal rules and institutional environments in practice. However, while adopting a genuine historical approach to the political economy is a theoretical achievement that allows for real-world complexities and contingencies to be accounted for, the ideal-type ‘capitalist’ entrepreneur in a ‘capitalist’ system introduced in the final section of the book is not far from the economic concept of ‘homo oeconomicus’. In fact, it restates verbally what economists express in models and formulae. This points at a fundamental dilemma between historical, somehow more narrative analyses on the one hand and highly simplified and abstract theorizing on the other. But historical sociology should refrain from implicit over-simplified assumptions. These are two extreme ends of a continuum: one may be too parsimonious (economic modelling); or one may be grounded, but quite descriptive (historical economic sociology). The opposition of economics and sociology tends to be exaggerated in this perspective—and, in fact, there is some middle ground with ‘causal mechanisms’, abstract essences gained from the analysis historical cases, as Fritz W. Scharpf put it. The second comment concerns the empirical side and the methodology behind it. Wolfgang Streeck bases his arguments on a single case and one specific sequence of institutional changes: Germany from the 1970s onwards, with a main focus on ‘Modell Deutschland’ and its decay. Germany is certainly a crucial case in comparative political economy. But the theoretical approach built around this calls for a wider empirical horizon going beyond this single case (Germany), the relatively short period (the decline after the 1970s) and one core element of the political economy. Hence, the approach suggested by Wolfgang Streeck could show its full potential—but probably also its limitations—if the empirical base were broader in terms of time, country and sectoral coverage. Would it not help bringing in more empirical material supporting or qualifying the argument, in particular by covering a longer time line, especially the emergence of the German model and more recent developments, and other coordinated market economies? Further research in this respect would help elaborate and clarify the arguments made about Germany. The approach proposed by Wolfgang Streeck also suggests that the micro-level becomes more important than the meso-level over time, so it would be a necessary part of further research to analyze market dynamics and actors’ behaviour under collective bargaining.

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As a third aspect, the empirical description of the German case deserves some discussion. Of course, the case studies given in Part I of the volume draw on earlier work by Wolfgang Streeck, which has in fact fundamentally shaped our perception and interpretation of the German case. The volume brings together his view of institutional change in policy areas: (i) collective bargaining, (ii) social partner organization, (iii) welfare corporatism, (iv) the fiscal crisis of the welfare state and (v) the dissolution of traditional German corporate governance. Following Wolfgang Streeck, the equidirectional and interdependent change in these policy areas, which were essential pillars of the German post-World War II economic model, can be summarized under the six ‘big Ds’: decline, disorganization, decay, deterioration, self-destruction and ultimately death. This is not only a well-documented, but also a convincing story—nevertheless, one has to be careful for three reasons: (1) One has to be aware that the old system in place until the mid-1970s was not a perfect one, as it was neither sustainable nor socially inclusive. It basically relied on full-employment only for male breadwinners and adjustment via early retirement—hence, as Wolfgang Streeck points out, this model was not up to the challenges posed by the rise of the service economy and an increased female labour market participation. (2) Although the German political economy has undergone fundamental change since the mid-1970, the legacy of the German model is still apparent in some sectors. It is not completely disorganized. This is particularly true for highly competitive and innovative manufacturing requiring a trained labour force with specific skills. Germany is particularly strong in these areas, and in fact, quite a few ‘hidden world champions’ have successfully adjusted to a new global economy—but their institutional environment has also become more flexible and ‘voluntaristic’. Hence, it seems fair to say that the better elements of the German model continue to survive in certain niches, but, of course, they are much less representative for the German employment system nowadays. (3) This points to another issue which is rather underdeveloped in the volume. Actors have to and will cope with a new economic situation—they continue to act after the fiscal endgame and after the decline and demise of the old model. Actors not only suffer from losses of past certainties, they also identify new opportunities and organize new ways of production. This, of course, is completely consistent with Wolfgang’s approach. Such new opportunities have emerged in the service sector in particular. Today’s employment system in many post-industrial societies, including the German one, cannot be understood properly if one does not take the service sector into account. Quite in contrast to the institutional environment of manufacturing and some traditional services organized in a manner similar to


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manufacturing (e.g. banking and insurance or the public sector), the most dynamic parts of the service economy are evolving outside of or beyond the established institutional settings. Both high-skilled ‘creative’ segments of the service economy and the growing segment of labour-intensive lowskilled services exhibit low collective bargaining and social insurance coverage, few or no works councils, limited employment protection, a high share of ‘atypical jobs’ (part-time, marginal employment, self-employment or freelance) and a stronger reliance on general skills (very high or rather low). Working around the existing rules and exploiting institutional layering and conversion is paving the way for both high- and low-skill services. This implies new forms of (external) flexibility and much more heterogeneity in terms of skills, remuneration, tenure and types of employment. Hence, the German system is not only characterized by institutional exhaustion and decline in the policy areas the volume focuses on, but there is also something new and dynamic—built from below and often outside the core institutional arrangements. The service sector has a more liberal flavour, but the labour market could become more inclusive through this in the end. In major areas of today’s German employment system, social partnership, collective bargaining or employment protection in the traditional sense are no longer core features—in fact, it has become more and more important to look at the micro-level than at the meso-level. Of course, employment prospects have become more dependent on individual capabilities than on social partners and state legislation—and they require new forms of education and social protection. Hence, one could say that after the demise of ‘Germany Inc.’, the old model of corporate governance, the German system is increasingly characterized by ‘Me Inc.’, a term used for subsidized start-ups, but in a wider sense helpful in describing the growing importance of individual employability. One can no longer focus on decline and deterioration in only one particular part of the labour market without covering the (ever larger) rest of the story. The book came out at a decisive point in time, since Germany is currently, as are virtually all OECD countries, in the deepest economic crisis since World War II. While as of today it is much too early to assess the impact of the crisis on the German political economy and its production model, one can see at least a few highly relevant features. First, currently the highly competitive German model, which reinvented itself over the past ten years or so in order to regain competitiveness on a global scale, is under heavy pressure. Hence, it is not only the margin of the labour market but the very core of export-oriented manufacturing and standard jobs with decent pay, collective bargaining coverage and full dismissal protection which are at stake. Therefore, it comes as no surprise that policy initiatives

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were taken to stabilize the competitive core. This holds for an extension of the existing short-time work subsidies, a ‘cash for clunkers’ scheme designed to stimulate the car market and probably also for new early retirement schemes in order to deal with labour. These models fit with routine policies of the 1980s and the 1990s and show the political strength of the ‘old’ manufacturing sectors and their sectoral organizations, which are still capable of exploiting the welfare state and the federal budget (in an electoral year). This may nurture the impression that due to the crisis there is a renaissance of the old coordinated German model. However, this may only be a transitory phenomenon. While these policies may help mitigate the impact of the crisis in the short run, they maybe harmful in the long run and non-sustainable in terms of postponing structural change and furthering the undermining of the fiscal basis of the welfare state. We could also expect a new wave of concession bargaining and further flexibilization within industrial relations. Actually, current labour market data show continuing dynamic growth in the service sector, while manufacturing is starting to shrink. So after a phase of ‘artificial’ stability in the manufacturing sector, we will eventually see an accelerated structural change in the aftermath of the crisis. Some final words on the normative side. Wolfgang Streeck’s story of the institutional disorganization of the German model implicitly sees the development since the mid-1970s as a deterioration of employment conditions for workers due to the dissolution of ‘beneficial constraints’ on employers. Hence, he sees the last phase of truly co-ordinated policy-making as ‘a moment so lovely’ that we would want it to ‘stay a while’. It is only a slight exaggeration to say that Streeck adopts a rather pessimistic view regarding what came afterwards. This is not necessarily the only account that is plausible. One could also read the developments over the past three decades in a less pessimistic, more optimistic manner. If one focuses only on the disorganization of the core, one inherently tends to underrate actors’ creativity and adaptability and the new opportunities which have emerged since then. Hence, the creative destruction going on in the economy and labour market also generates new and additional jobs. And new types of jobs and firms in the service sector are not necessarily worse than the old world of manufacturing. Some of them, in fact, are probably less boring and allow for more individual creativity that manufacturing jobs. One can certainly ask if it is really the best option imaginable to work on a Daimler production line your whole life. Many jobs in the service sector are not necessarily inferior—despite the absence of collective bargaining and works councils. It is also possible to do fine without them. Hence, there is much less reason to complain, to worry and to be overly pessimistic. As Wolfgang Streeck correctly states: ‘Time’s up!’. The historical moment of ‘Modell Deutschland’ is long over. Times are changing, something new is here, and things will go on as people will and can


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cope with new situations. And this is, in fact, quite compatible with Wolfgang Streeck’s perspective on history and agency.

Neil Fligstein Department of Sociology, University of California – Berkeley, USA Correspondence: [email protected]

1.

Introduction

This is a highly ambitious work. It simultaneously works as a critique of the ‘varieties of capitalism’ approach to understanding the trajectories of capitalist societies, an empirical study of how Germany has transformed itself in the past 40 years, and finally as a set of ruminations on capitalism more generally. There is much that I like in the book. But, in order to be provocative, my essay focuses on my critique of the book. The main argument of the book is that the German system of organized capitalism has disappeared and been replaced by an unorganized capitalism that is breaking down all of the social arrangements of post-war Germany that worked to create the German social market economy. The key argument is that capitalists will always work to break down such social protections because they will need to find new ways to make profit. My main criticism of the book is both theoretical and empirical. Theoretically, Professor Streeck never considers that there might be a new form of capitalism emerging in Germany, one that has a different underlying set of structural dynamics. Because he is convinced that there is no new structure to German capitalism, he never gathers data on what exactly German firms are now doing. Empirically, this makes the evidence Professor Streeck has presented difficult to interpret in two ways. First, it is not clear what the actual effect of the changes in German capitalism have been. Second, there is little effort to establish the exact role of capitalists in this process. Indeed, one is constantly left wondering if the old German system has been reformed (as is suggested in the title of the book) and not replaced by the anarchy of the market. Professor Streeck makes it clear that he does not like capitalism, capitalists, or the unbridled enthusiasm for the market that he believes has transformed organized capitalism of the German variety into a system that honours greed and consumerism. But, one can question Professor Streeck’s portrayal of German capitalism. German capitalism is among the most successful in the world. It is this success that has provided all Germans with a high standard of living and an

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admirable social safety net. My own view of the adjustments made in the German political economy is that they amount to neither disorganization of German society nor the triumph of neoliberalism. Instead, firms, workers and the government are involved in trying to resolve their real crises as they are presented to them over time. The solutions that have evolved reflect difficult decisions being made in line with the relative balance of interests and power between groups. 2.

Problems with the theory and its application

The main theoretical problem with the book is that it implicitly assumes that there are only two models of capitalism. The first is a German style model where there are legal relationships between labour and capital that guide their interactions, legal relationships between firms that are indexed by ownership relationships, and of course, extensive legal underpinnings of the welfare state (what he calls a Durkheimian set of institutions). The only other possible condition for Professor Streeck is disorganization characterized by his ideal type of liberal capitalism where there are no institutions, laws or customs, and actors are able to pursue their unbridled self-interest and greed. He views this situation as Williamsonian (inspired by Oliver Williamson). If there are any customs, they are voluntaristic and not enforceable by law and therefore lack in being institutions at all. This formulation is consistent with his reading and use of Polyani. Now the problem is that Professor Streeck ignores the main thrust of contemporary economic sociology: all markets are socially embedded, including the so-called liberal markets. Every time anyone seriously looks at any market, they discover social organization everywhere, relationships, formal institutions, the government and market participants who know one another and take one another into account in their actions. They discover cultural understanding and norms that structure social behaviour. Contemporary economic sociology offers a profound critique of Polyani. The American shareholder value model, for example, is a historical, cultural product that rose in the economic crisis of the late 1970s and now has many forms of institutional underpinning, including laws. The main implication of my criticism is that Professor Streeck never pursues an empirical strategy that would allow him to decide whether or not German labour markets, Germany, Inc. or the German welfare state have in fact become disorganized or instead if their principal participants remain on the field, but have altered their relationships to one another and adopted different cultural models. Indeed, Professor Streeck assumes that organization has been replaced with disorganization and that there is nothing but the chaos of markets governing labour relations, firm ownership and control, and the changes in the welfare state. This manifests itself in the empirical sections of the book where one is struck by the fact that the capitalists who are supposedly doing all of this dismantling


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remain conspicuously absent from the story. He never shows actual capitalists within each part of the German system who are locked into global competition having actually worked to dismantle it. He has a few stories, but what they exactly mean and the degree to which those stories generalize and characterize the behaviour of all firms is never shown. So, for example, he is clear that one indicator of the decline of German’s organized capitalism is the decrease in unionization rates. But, we are never presented with employers working to change laws or hire non-union workers or undertake any actions to lessen the role of unions in Germany in order to keep their competitiveness. These were all actions, incidentally, that were directly taken by firms and the Republican Reagan Administration to undermine the power of unions in the USA during the 1980s. Moreover, the data he provides on unionization are not sectoral specific. So, it could be the case that unionization remains strong in manufacturing (as a percentage of all workers in manufacturing), but the overall percentage of workers who are unionized could be decreasing as nonmanufacturing employment has expanded. If this is true, then his whole argument about how capitalists involved in world markets are constantly trying to undermine the cages built for them is wrong. His evidence on the dissolution of Germany, Inc. is hard to interpret. The main evidence he has is that cross-shareholding patterns among German firms have declined. But, what are the important consequences of that change? Are there more hostile takeovers in Germany as a result? Are German managers now finance CEOs who manage only for the share price (note: Saskia Freye’s work, which Professor Streeck cites, has shown that finance CEOs rose in prominence in the early 1990s, but managers with engineering backgrounds have resurged to dominate as CEOs in Germany after 2000)? Have they successfully tied their compensation to share prices? Even more important, has this affected corporate strategy? Have German managers disinvested in manufacturing to enter into more profitable service businesses? Is the core of large German firms stable or unstable? What has happened to the ‘Mittelstand’, the small and medium firms that dominate Germany’s export economy? While some of the post-war patterns of German capitalism have changed, Professor Streeck presents little direct evidence about the actual role of the owners and managers of firms in pushing forward this process. He is even less clear about what the actual effects are as a result of this new corporate agenda. Looming in all of this is a possible benign explanation of what has happened. Many of these changes could simply be the result of Germany shifting from a manufacturing economy to a service economy.

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The moral edge of the book

The last part of the book is a rumination on capitalism. He argues that capitalism seeks to be unbridled, to destroy communal relations, to push people into work, to reorganize the family and to pursue mindless consumerism. But, I find this argument unconvincing in explaining what is happening in Germany. So, let me tell the German story from a different perspective. Germany is one of the largest exporters of goods in the world. On a per capita basis, it exports about four times as much as the USA and 20 times as much as China. These trends have been stable for the past 30 years. Germany is and has been at the core of the global economy. Its largest export market is Europe where 70% of its exports end up. Germany is the engine of the European economy. German governments both left and right have supported the expansion of the EU’s Single Market because Germany is one of the principal beneficiaries of that market integration project. I note Professor Streeck does not like the EU either even though its market opening projects have benefited German workers by continuing to make their export-oriented high-wage jobs possible. Without the ability to massively export, German workers would simply not have the standard of living they currently enjoy. The German social market model could not work. This explains why German governments of the left and right have been free traders. The central economic problem in Germany is that the goods exporting sector is at a point where it can never grow fast enough or produce enough jobs to employ enough people to lower unemployment in Germany and support the generous welfare state. This has essentially been the justification for the German social market system and at this task it is certainly failing. After all, if you already lead the world in exporting manufactured goods and have done so for a long period, how much better can you do? Professor Streeck clearly loves production but dislikes consumption. But, he forgets that if no one consumes, then what is the point of production? One idea to help the German economy would be to increase German consumption to increase German employment. With high taxes, high unemployment and lack of disposable income, German workers cannot be expected to spend their money locally to create more jobs. German firms have recognized this and they do not invest in the German economy for local consumption because people cannot afford the goods and services such investment would provide. Indeed, one could make a good case that in order to create jobs, the German government should not relax work rules so firms can more easily fire workers or punish workers for not working as the last Social Democratic government did, but should provide a Keynesian style permanent tax cut. To prove my point, the government started a modest programme to get Germans to turn in old cars and receive a rebate on


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new ones in the spring of 2009. What was viewed as a modest programme proved immensely successful and this success caught policy-makers by surprise. Germany had seven people supporting one pensioner in 1980, three today, and in 2030 will have fewer than two employed persons supporting one pensioner. If my analysis is right, then it is not liberal capitalism trying to escape the bonds of their obligation to the German state and citizens that is the problem. Indeed, capitalists in Germany have continuously worked to improve their position in the world economy and produced a large amount of merchandise for export and helped maintain the highest positive current account balance in the world on a per capita basis. The real problem is finding a way to continue to fund a highly generous set of social benefits as the demand for those benefits inexorably increases. Essentially, Professor Streeck’s book tries to blame capitalism for not providing enough growth to do this. But it is hard to see what system of production could have provided more.

Reply Wolfgang Streeck Max Planck Institute for the Study of Societies, Cologne, Germany Correspondence: [email protected]

My book recounts and analyses a historical process: the liberalization of the political economy of West Germany (and later of Germany as a whole)—a country presented by a broad literature as a showcase of ‘coordinated’, ‘organized’ or ‘nonliberal’ capitalism. That process began in the 1970s and was part of the worldwide dismantling of what has been called the ‘post-war settlement’ of ‘embedded liberalism’. This is why the story the book tells in its first section starts in the 1970s and not in 1945 or earlier. The book describes liberalization as a long-drawn process of gradual but nevertheless transformative change (Streeck and Thelen 2005), a process that is fundamentally endogenous, i.e. the outgrowth of forces and pressures inherent in a capitalist political economy (R-FC, Chapter 9).1 It thereby discards commonplace explanations such as ‘globalization’, arguing that the internationalization of national capitalist systems, including those of a ‘coordinated’ nature, comes from the inside rather than being imposed on

1

R-FC refers to ‘Re-Forming Capitalism’

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them from the outside (R-FC, Chapter 14).2 Moreover, the book models the social process it describes as a dialectical one: one in which the transformation of the social order that is being observed is caused by its normal functioning and reproduction (R-FC, Chapter 14). While the book takes Germany as its empirical reference, its ambitions go beyond that of an in-depth country study. Roughly two-thirds of it undertake to explicate what one may learn from the story reconstructed in the first section for historical–institutionalist analysis and a theory of contemporary capitalism. I would like to emphasize three points in particular of which I became acutely aware when analysing my data and writing up what I believe to have found. First, there is a lot to be said for what social scientists refer to, somewhat contemptuously, as ‘story-telling’. Not only are stories fun, but they call attention to the essential uniqueness of historical events and their, as it were, dignity as, in the Weberian sense, ‘historical individuals’. Also, when told the right way stories— ‘narratives’—remind us of the crucial significance of time for social formations. Societies, I became ever more convinced when working on my material, must be conceived as processes, not as systems; they are not static but dynamic in time and over time; and it is not just chronological time that matters but also historical time: the location of social structures and events between a unique past and an unknown unique future, in a present that is irreversible as time spent can, by its very essence, not be recovered. Societies are, that is to say, always in flux, and any description of their condition at any point in time—and there is no description outside of time—must be aware that from an historical perspective, that condition can never be more than transitory: by the time we recognize it, it is likely to have already vanished. ‘Model Germany’, I show in the book, was a momentary construction, in fact very much for political purposes, of a temporarily coherent image out of a more or less continuous and orderly stream of societal, or capitalist, development (R-FC, Chapter 8). Presenting it as a static structure that one can count upon as a given is simply misrepresenting it. In the Heraclitian image of social formations that my research eventually suggested to me—‘You cannot step into the same river twice’—in which Being and Time, Sein und Zeit, become inseparable (Kay, 2006), nothing exists unless it is actively preserved against the dynamic forces that undermine it. A corollary is that what really matters for explaining a social structure is the trajectory on which it has moved and continues to move, rather than the differences between it and other structures at the same point in historical time. For example, that country A is less ‘market-liberal’ than country B is less important to know than the fact that both countries have

2

For a similar argument, see Reich (2007).


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been becoming more market-liberal over several decades, with A following B in roughly identical distance (R-FC, p. 169). Second, in trying to make sense of my material, I became convinced that the evolution and transformation of a political economy like Germany can only be accounted for if its capitalist nature is taken seriously. By this I do not mean that we require a return to historical materialism. What we need, however, is an institutionalist theory in which both the expansion and the containment of market relations are assigned a central place. In my book I drew on a core concept of Rosa Luxemburg, to me a much underrated social theorist, who described capitalist development as a process of Landnahme, or land-grabbing (Luxemburg, 1913). Land here is not just territory but also the social relations through which people engage with one another and that make societies hang together. In modern parlance, capitalist Landnahme is a self-driven process of commodification, or monetarization of values and of the transactions through which they are exchanged. I maintain that it is inherent pressures for a continuous widening and deepening of market relations that is the main dynamic force in capitalism as an evolving social order. I also think that a theory of political economy that fails to recognize this falls into the trap of an ahistorical static functionalism that abstracts from the real world that which is essential for it. Third, market expansion must not be modelled as linear and consensual– contractual. To the contrary, it is a contentious, conflicted and contradictory process that moves forward typically in fits and spurts. Here Karl Polanyi’s theory of the transformation of the historical capitalism of the nineteenth and twentieth century serves as an indispensible road map (Polanyi, 1957 [1944]). One must read him right, however. The ‘always embedded’ reception of his work, as represented in our discussion by Neil Fligstein, is a travesty if it denies the profound tension between the needs of social communities and the creative, or less creative, destruction of social relations through the ‘vagaries’, as Polanyi has it, of self-regulating markets, with their unpredictably fluctuating relative prices not just for goods but also for land (remember subprime mortgages?) as well as labour and capital (R-FC, pp. 246 ff.). No society, according to Polanyi, in which markets have free rein can develop the sort of stable social fabric that human beings need to live satisfying lives.3 This is why market expansion calls forth counter-movements that resist it, and it is why capitalist development is not simply a linear progress to ever more efficient markets, but a ‘double movement’ of marketization followed by efforts to domesticate the commodified social relations that it brings into being.

3

What form of social stability a society and its members need and how it combines with freedom is a question worth exploring? For a discussion that departs from the present context, see Streeck (2009a).

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Unlike what Neil Fligstein seems to believe, Polanyi was not a business consultant advising capitalist firms of the value of soft production factors like a common culture and mutual trust. He understood that capitalist development was not just about more competitive automobiles but entailed a deep dialectic of, as it has recently been called, greed and fear (Bohle and Greskovits, 2009), or of a desire for opportunity and a need for security. It is its staunch opposition to social relations and social lifeworlds (Habermas, 1987) being put at the mercy of relentlessly dynamic free markets that makes Polanyi’s thinking revolutionary as well as of lasting importance. Where markets no longer allow social relations and human beings to ‘settle down’, Polanyi thought of the economy as ‘disembedded’. In this sort of condition, it is the mission of politics to re-embed the economy, not in the sense of somehow making market relations more efficient, but by containing them in a framework of social institutions capable of protecting social life from the destructive potential of market expansion. In this sense, my book takes issue with a range of theoretical premises in the mainstream of more recent writings on ‘varieties of capitalism’ (Hall and Soskice, 2001) that I find not only normatively disturbing but also fundamentally flawed when it comes to accounting for a case as central to the theory as the German one. My core contention in the book is that institutions and social orders, including those that deal with ‘the economy’, are not appropriately described as rationally constructed devices to provide for the comparative advantage or the profitability of national firms. This I call economism, or economistic functionalism, and I argue strongly against it on the basis of my empirical evidence (R-FC, Chapter 13). Social systems harbour a multiplicity of goals, and interests within them differ and must be continuously adjudicated through politics. I found no designing hand able to subject the social order of the country whose economic institutions I studied to a need or desire for international competitiveness: not the government, not organized business, not labour. The processes of change that I document cannot, if one looks closely enough at them, by any stretch of the imagination be narrated as progress, continuous or not, towards ever higher efficiency, in the traditional Northian way (North and Thomas, 1973). Nor can the economic system that I observed and the social welfare state that involves it be described as ‘firm-centred’ (Hall and Soskice, 2001). What I found and what I document is, rather, a long-drawn process of decay, or decomposition, of an institutional regime that for a while quite successfully contained the forces of the market that worked in the direction of greater inequality, less security, higher rewards for the winners, stronger pressures on the losers—a process that was and continues to be contested, conflicted, confused, sometimes moving two steps forward and one step back, but undoubtedly moving towards rising inequality and social division and exclusion (R-FC, p. 41 f.), and certainly and clearly not even resembling a collective search for ever higher economic rationality.


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In the light of some of the comments, I feel a need to say also what the book is not.4 First, I do not see how it could possibly be read as a nostalgic celebration of a golden past. I go to great lengths to show that the past bore in it the seeds of its own destruction, in line with my general contention that all social orders are subject to endogenous and often dialectical transformation. But it is true, and in saying this I am really far from alone, that we have not yet found a good replacement for the post-war institutional containment of the capitalist change machine.5 The pressures for liberalization that I describe have overwhelmed the governing capacity of the nation-state of the twentieth century, certainly in Germany, but clearly in other countries as well: witness the progressive loss of social cohesion and the growing risks emanating from the economy for the lives of normal people.6 The book states what we have lost and emphasizes what we have not yet been able to devise. Who in the midst of the post-2008 crisis would call an approach like this an expression of personal nostalgia or idiosyncratic pessimism? Nor, as far as I can see, does the book complain about the German economy being for some reason in bad shape. As a matter of fact, I avoid speaking of ‘the economy’, and speak of capitalism instead, precisely to allow for the fact that while those at the lower end of the labour market or of society are indeed in increasingly bad shape, the firms that employ them, or others, are mostly not. My theme is that the dissolution of the post-war system of socially controlled capitalism, with quite catastrophic consequences for a growing number of citizens, is entirely compatible with German capitalism being ‘among the most successful in the world’ (Fligstein)—with the fact that it was Daimler that bought and then got rid of Chrysler, and not vice versa. My point is that even where German firms are doing fine, less and less of what they gain is recycled into the society at large to help keep it together and attain as a collectivity the level 4

The following is necessarily selective and I trust that those who are intrigued by what I feel are quite astonishing misrepresentations of my argument in the comments of Neil Fligstein will look at the book themselves.

5

And I clearly do agree with the remark of the historian Tony Judt that, ‘Rather than seeking to restore a language of optimistic progress, we should begin by reacquainting ourselves with the recent past. The first task of radical dissenters today is to remind their audience of the achievements of the twentieth century, along with the likely consequences of our heedless rush to dismantle them’ (Judt, 2009, p. 96).

6

Unlike what Werner Eichhorst and Neil Fligstein seem to believe, these risks cannot be reduced to the rise of the so-called service economy. There is no reason a priori to assume that a deindustrialized economy must by its nature like the USA have weak social protection, bad jobs, a marginalized low-wage sector and winner-takes-all inequality (Hacker and Pierson, 2010). There is more than one way to run a service economy, just as there was for running an industrial economy (Iversen and Wren, 1998). The question whether increasing marketization can come only at the price of declining conditions of marketization is a version of the general Polanyian problem of the relationship between capitalist development and the quality of social life.

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of civilization that it could attain if it was still able to oblige its capital to serve public in addition to private purposes. Furthermore, and third, unlike Neil Fligstein and Bruno Amable, I refrain from macro-economic policy advice such as ‘cut taxes (or raise taxes) and consume more and everything will be alright’. I prefer to explain why unions were unable to get higher wages, or wise enough not to get them, and what the dilemmas are that are caused by the exhaustion of public finance in a high-tax economy like Germany. I note in passing that our debate took place at a time when even in the USA doubts were increasing about the wisdom and the sustainability of debtfinanced economic growth. In any case, my concern was not about prosperity as such but about the type of society that liberal capitalism seems to require and to be creating for itself, and the question the book asks is simply whether it would not be better if the line of causation was the other way around, with society adjusting the economy to its needs rather than vice versa. Fourth, nowhere do I suggest that the re-formed capitalism of today (NOT: reformed; I thought the hyphen was impossible to overlook) was not a social order. What I do suggest is that it is a different order, not chaos and certainly not devoid of law. The difference between ‘organized’ and ‘disorganized’, or ‘liberal’, capitalism I try to capture with the distinction between Durkheimian and Williamsonian institutions, the former emphasizing social obligations and public accountability, preventing the strong from dictating to the weak the terms of exchange, the latter responding to private interests and economic expediency; the former imposed by tradition or democratic politics, the latter created voluntarily by contract, equal or unequal; the former restraining voluntarism, especially that of the stronger party in the market, the latter facilitating it (R-FC, pp. 154–158). The conceptual construction behind this is not really original; nor is it, I think, excessively complex. It was first developed in Durkheim’s classical critique of Spencerian liberalism (Durkheim, 1964 [1893], Chapter VII) and has since been drawn upon in different forms by a wide variety of political economists, not least Polanyi. One slight difficulty may be that, as of course Durkheim was keenly aware, even a liberal order requires an obligatory normative frame (see R-FC, p. 156 f.), although liberalism as ideology and political practice tends to downplay or deny this, not least because the weaker the public obligations imposed on the strong, the greater their advantage in the ‘free play of market forces’. While it is true that in the long run a purely voluntary, in my terms: Williamsonian, social order cannot exist, this does not mean that those who stand to benefit from it in the short run will not do their best to bring it about. (Already Marx knew that capitalism needs to be saved from itself by society resisting its full implementation; see the famous chapter in Capital on the working day.) Another complication, which Bruno Amable seems to have in mind, is perhaps the paradoxical fact that for a liberal order to remain liberal, i.e. voluntaristic, a powerful state is required to prevent the weak in the market from using politics to redistribute from the


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strong; in other words, that the ‘frivolous experiment’ of a ‘self-regulating market’ requires a good deal of coercion for its success. None of this, I am still convinced, can invalidate the analysis of liberalization in terms of a shift in the mix of socioeconomic institutions and in the nature of the social order from what I call the Durkheimian to the Williamsonian type. Fifth and finally, did I blame, as Bruno Amable suggests, ‘unreasonable’ union demands? That would be far from me. What I undertake to show is that even in prosperous Germany a point was eventually reached when the political economy ceased to be able to deliver on the promises of equality and security that had once underpinned the corporatist social compact. I explain this in part by post-war capitalism having learned over time how to do without an institutional regime that imposed costly obligations on it. Moreover, I show, not that citizen demands that had been entirely ‘reasonable’ in the past had suddenly become ‘unreasonable’, but that the political means to satisfy them within the limits of the capitalist relations of production as institutionalized in Germany had with time been exhausted. Above all, these means involved bridging the gap between the demands of capital and strongly organized labour by spending future resources to secure present cooperation inside a capitalist, i.e. inherently unstable and conflict-ridden political economy (R-FC, Chapter 5). Fiscal exhaustion, I am afraid, will be exacerbated and cemented by the current crisis which has forced the German state, like most other democratic states, into a quantum leap forward in the build-up of public debt. A last comment on where the book was obviously wrong. I wrote it before the Great Recession and it was sent to the printer in the fall of 2008. While its dust cover shows a hurricane gathering over the Caribbean and the USA, I admit I did not expect the crunch to come that fast. The book singles out progressively deteriorating public finances as a major cause of the gradual liberalization of the prototypically non-liberal, ‘coordinated’ political economy of Germany (R-FC, Chapters 5 and 7). It also describes the contribution of the transformation of the German financial system in the 1980s to the dissolution of the German company network, Deutschland AG (R-FC, Chapter 6). But it completely fails to anticipate the financial crisis that unfolded in the fall of 2008. Having spent my professional efforts on studying labour rather than finance, I saw the crisis coming in the intersection between work and life, especially family life, where I expected a growing gap between the demands of ever more flexible labour markets on the one hand and the conditions necessary for the physical reproduction of society on the other. (This, too, I regard as a sustainability issue, one that is perhaps even more important than climate change.)7 But I believed this would need more time to mature (R-FC, pp. 266 – 268). Nothing did I know about what was brewing in the world financial system while I was writing, and how 7

I have, in the meantime, begun to discuss these issues in several papers (Streeck 2008a, b, 2009a).

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imminent its collapse was. I learned only later that others, who had wisely chosen to study capital rather than labour (Streeck, 2009b), knew much better what capitalism was really about: namely, that money moves a lot faster than people, and so do, apparently, the contradictions to which its marketization gives rise. References Bohle, D. and Greskovits, B. (2009) ‘Varieties of Capitalism and Capitalism “tout court”’ Archives Europe´ennes de Sociologie, 50, 355 –368. Durkheim, E. (1964 [1893]) The Division of Labor in Societ, New York, NY, The Free Press. Habermas, J. (1987) Lifeworld and System: A Critique of Functionalist Reason, Boston, MA, Beacon Press. Hacker, J. and Pierson, P. (2010, forthcoming) ‘Winner-Take-All Politics: Public Policy, Political Organization, and the Precipitous Rise of Top Incomes in the United States’, Politics and Society, 38. Hall, P. A. and Soskice, D. (2001) ‘An Introduction to Varieties of Capitalism’. In Hall, P. A. and Soskice, D. (eds) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford, Oxford University Press, pp. 1 –68. Iversen, T. and Wren, A. (1998) ‘Equality, Employment, and Budgetary Restraint: The Trilemma of the Service Economy’, World Politic, 50, 507– 546. Judt, T. (2009) What Is Living and What Is Dead in Social Democracy?, The New York Review of Books, pp. 86 –96. Kay, A. (2006) The Dynamics of Public Policy: Theory and Evidence, Cheltenham, Edward Elgar. Luxemburg, R. (1913) Die Akkumulation des Kapitals: Ein Beitrag zur o¨konomischen Erkla¨rung des Imperialismus, Berlin, Buchhandlung Vorwa¨rts Paul Singer GmbH. North, D. C. and Thomas, R. P. (1973) The Rise of the Western World: A New Economic History, Cambridge, Cambridge University Press. Polanyi, K. (1957 [1944]) The Great Transformation: The Political and Economic Origins of Our Time, Boston, MA, Beacon Press. Reich, R. B. (2007) Supercapitalism, New York, NY, Alfred A. Knopf. Streeck, W. (2008a) Flexible Markets, Stable Societies?, MPIfG Working Paper 08/6, Cologne, Max Planck Institute for the Study of Societies. Streeck, W. (2008b) Industrial Relations Today: Reining in Flexibility, MPIfG Working Paper 08/3, Cologne, Max Planck Institute for the Study of Societies. Streeck, W. (2009a) Flexible Employment, Flexible Families, and the Socialization of Reproduction, MPIfG Working Paper 09/13, Cologne, Max Planck Institute for the Study of Societies. Streeck, W. (2009b) ’Four Books on Capitalism’, Socio-Economic Review, 7, 741– 754. Streeck, W. and Thelen, K. (2005) ’Introduction: Institutional Change in Advanced Political Economies’. In Streeck, W. and Thelen, K. (eds) Beyond Continuity: Institutional Change in Advanced Political Economies, Oxford, Oxford University Press, pp. 1 –39.