Socio-Economic Review. Special Issue on Commonalities of Capitalism. January 2011

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ISSN 1475-1461 (PRINT) ISSN 1475-147X (ONLINE)

Socio-Economic Review Volume 9

John L. Campbell An institutional analysis of the U.S. financial crisis: lessons for theories of complementarity Jared Peifer Morality in the financial market? A look at religiously affiliated mutual funds in the United States Jochen Hirschle The affluent society and its religious consequences: an empirical investigation of 20 European countries Daniel Oesch and Jorge Rodríquez Menés Upgrading or polarization? Occupational change in Britain, Spain, and Switzerland, 1990–2008

On Terence C. Halliday and Bruce G. Carruthers Bankrupt: Global Lawmaking and Systemic Crisis. Stanford, Standford University Press, 2010. Gregory Shaffer, John L. Campbell, Glenn Morgan, Terence C. Halliday, and Bruce G. Carruthers

Volume 9

Number 1

2011

SPECIAL ISSUE Commonalities of capitalism

2011

ARTICLES

DISCUSSION FORUM

Review

Number 1

IN FORTHCOMING ISSUES

Socio-Economic

ARTICLES

R E V I E W E S S AY

Bruno Amable Morals and politics in the ideology of neo-liberalism

Arndt Sorge Financial catastrophe and its implications for socioeconomics

Fred Block Crisis and renewal: the outlines of a twenty-first century new deal

PRESIDENTIAL ADDRESS

REVIEW SYMPOSIUM

Robert Boyer Are there laws of motion of capitalism?

On David Stark The Sense of Dissonance. Accounts of Worth in Economic Life (with Daniel Beunza, Monique Girard, and János Lukács). Princeton, Princeton University Press, 2009. Jens Beckert, Akos Rona-Tas, and David Dequech

Christoph Deutschmann A pragmatist theory of capitalism Uwe Schimank Against all odds: the ‘loyalty’ of small investors Wolfgang Streeck Taking capitalism seriously: towards an institutionalist approach to contemporary political economy

Rebecca Oliver Powerful remnants? The politics of egalitarian bargaining institutions in Italy and Sweden

Articles are published online in advance of publication in the Advance Access section of the Socio-Economic Review website at http://ser.oxfordjournals.org

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in association with The Society for the Advancement of Socio-Economics

SASE Annual Meeting 2010 Pragmatic transnationalism: governance across borders in the global economy Jonathan Zeitlin

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Socio-Economic Review EDITORS Wolfgang Streeck (Chief Editor) Max Planck Institute for the Study of Societies (MPIfG) Cologne, Germany www.mpifg.de/people/ws/ Email: [email protected] Bruno Amable (Editor) Université de Paris I Panthéon – Sorbonne Paris, France www.jourdan.ens.fr/~amable/ Email: [email protected] Nina Bandelj (Editor) University of California, Irvine Irvine, CA, USA www.faculty.uci.edu/profile.cfm? faculty_id=5053 Email: [email protected] Lane Kenworthy (Editor) University of Arizona Tucson, AR, USA www.u.arizona.edu/~lkenwor/ Email: [email protected] Marc Schneiberg (Editor) Reed College Portland, OR, USA //academic.reed.edu/sociology/ faculty/schneiberg/ Email: [email protected] Jürgen Feick (Managing Editor) MPIfG Cologne, Germany www.mpifg.de/people/jf/ Email: [email protected] ADVISORY COMMITTEE Robert Boyer France Bruce Carruthers USA Neil Fligstein USA Alex Hicks USA Rogers Hollingsworth USA Greta Krippner USA David Marsden UK Michael Piore USA Kathleen Thelen USA Jonathan Zeitlin The Netherlands EDITORIAL BOARD Jens Beckert Germany Jürgen Beyer Germany Fred Block USA John Campbell USA Colin Crouch UK Richard Deeg USA Gösta Esping-Andersen Spain Amitai Etzioni USA Marion Fourcade USA Peter Hall USA Kieran Healy USA Patrick Le Galès France Bruce E. Kaufman USA Christel Lane UK Patrick Le Galès France Richard M. Locke USA Leslie McCall USA Yoshitaka Okada Japan Jacqueline O’Reilly UK Mary O’Sullivan USA Bruno Palier France Monica Prasad USA Marino Regini Italy Margaret Ramsey Somers USA David Stark USA Robin Stryker USA Richard Swedberg USA Kathleen Thelen USA Bruce Western USA Joshua Whitford USA Erik Olin Wright USA

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SASE’s 23rd Annual Meeting Universidad Auto´noma de Madrid, June 23– 25, 2011 Transformations of Contemporary Capitalism: Actors, Institutions, Processes Contemporary capitalism appears anything but stable. From the micro to the macro, from the local to the global, almost every element of socio-economic organization and governance is in flux. The boundaries of firms and supply chains; the location of productive activity and the spatial division of labor; the regulation of markets and business transactions; skill formation and working careers; household and family structures; employment relations and welfare regimes: all these are in upheaval across developed and developing economies alike. Yet there is little consensus on how to characterize these transformations or where they are heading. If the answers to such questions remain uncertain and contested, so too do the causal processes and explanatory mechanisms producing these ongoing transformations themselves. There is widespread recognition that dominant approaches to institutional analysis—rationalist, sociological, historical—have difficulties in reconciling the complex and differentiated patterns of change with their theoretical assumptions. For one group of scholars, this problem has spurred a search for specific causal mechanisms capable of accounting for gradual but transformative institutional change. For a second group, it has produced instead a focus on the creativity of social actors: their capacity to reflect on their situation, envisage and evaluate alternatives, revise practices and routines, and recombine and recompose institutional resources. For a third group, explanations of institutional change are rooted in more fundamental socio-economic processes operating behind the backs of the actors themselves, such as capitalism’s relentless drive to open up new markets and circumvent old rules, or the migration of production under competitive conditions to lower-cost locations. This year’s conference aims to take stock of current debates on transformations of contemporary capitalism and competing approaches to the relationship between actors, institutions, and processes in explaining them. We welcome both theoretical and empirical contributions, covering a wide range of socio-economic issues, institutional fields, and governance domains, at multiple levels of analysis from the local to the global, across the developed and developing world. For the full text and more information see www.sase.org

Socio-Economic Review Volume 9 Number 1

January 2011

CONTENTS 1 Editorial SPECIAL ISSUE Commonalities of capitalism 3 Morals and politics in the ideology of neo-liberalism Bruno Amable 31 Crisis and renewal: the outlines of a twenty-first century new deal Fred Block 59 Are there laws of motion of capitalism? Robert Boyer 83 A pragmatist theory of capitalism Christoph Deutschmann 107 Against all odds: the ‘loyalty’ of small investors Uwe Schimank 137 Taking capitalism seriously: towards an institutionalist approach to contemporary political economy Wolfgang Streeck R E V I E W E S S AY 169 Financial catastrophe and its implications for socioeconomics Arndt Sorge PRESIDENTIAL ADDRESS SASE Annual Meeting 2010 187 Pragmatic transnationalism: governance across borders in the global economy Jonathan Zeitlin 207 Thanks to our reviewers in 2010

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Socio-Economic Review (2011) 9, 1–2

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Editorial

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As has now become custom, our first issue of the year is a Special Issue. This time the subject is the Commonalities of Capitalism, as distinguished from its ‘varieties’. (Last year the Special Issue was on transnational economic governance, with Sigrid Quack as Guest Editor.) The Special Issue was edited by Wolfgang Streeck, on the basis of papers presented in November 2009 at a workshop at Ringberg Castle in Bavaria, overlooking the Tegernsee. As a subject of work published in SER, capitalism has become increasingly prominent in recent years and now in fact leads the hit list of SER keywords by a large margin. The growing interest in capitalism and the rising number of submissions related to it have begun, with a time lag, to reflect the frightening experience of the crisis of 2008, or the ‘Great Recession’ as it has come to be called. That crisis and its consequences will be around for a while, and so will be the research on it by socio-economists—many of whom are wondering today why they should have overlooked the writing on the wall in the past two decades that seems all too legible with hindsight. In 2010, SER again published a total of four issues, with altogether 21 articles, 4 Discussion Forums, 3 Review Symposiums, 1 Review Essay and Kathleen Thelen’s Presidential Address. The number of submissions has continued to rise. Over the years it has steadily grown and in fact more than doubled between 2006 and 2010. Total circulation of the print version of SER also doubled between 2003 and 2009 and is projected to have risen once again in 2010. Simultaneously, SER’s homepage is becoming ever more important for our readers. For 2010, it is projected that about 100 000 visitors will have downloaded abstracts, and about 73 000 will have supplied themselves with full texts. All of this suggests that our journal has finally grown out of its childhood and youth, and has taken its rightful place among the world’s leading social science journals. It will be our job to keep it there. In 2009 the editorial team managed to provide authors with a first decision within 61 days after manuscript submission on average. Around four in five of the submissions we receive are processed for a first decision within 3 months. Our overall acceptance rate remains at roughly 20%, not counting submitted material that we ask authors to submit elsewhere as it would have little prospect getting published in SER. Papers that receive a ‘Revise and Resubmit’ as a first decision have a three in five chance of making it into print.

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Editorial

Wolfgang Streeck and Ju¨rgen Feick

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At SASE’s 2010 meeting in Philadelphia, SASE president Jonathan Zeitlin awarded the annual prize of 1,000 dollars for the best submitted article in 2009 to Fred Block and Mathew R. Keller. At the U.S. meeting the editors were impressed with the large number of potential authors who participated in a ‘Breakfast with the Editors’ session to learn about SER’s publication policy and submission and review procedure. To our great regret, Jens Beckert left the editorial team after four years, due to too many other commitments. With his sound judgment, Jens has made an enormous contribution to our journal for which we thank him. The remaining editors are pleased to welcome Nina Bandelj from the University of California-Irvine as new team member. SER has now a firmly established reputation for giving authors a fast turnaround and extensive and constructive reviews. This we owe above all to the excellent work of our reviewers whose invaluable contribution to SER’s doubleblind review procedure we gratefully acknowledge. Their names are listed at the end of this issue. We also acknowledge the support of our Advisory Committee and our Editorial Board. According to our policy statement, Editorial Board members ‘are expected to help maintain and improve the intellectual excellence of the journal. They should consider submitting their best work to SER . . . They should also actively solicit papers’. Our thanks go to both bodies whom we ask to continue to work with us, accompanying our journal and helping it remain as successful as in past years.

Socio-Economic Review (2011) 9, 3–30 Advance Access publication August 2, 2010

doi:10.1093/ser/mwq015

Morals and politics in the ideology of neo-liberalism Universite´ de Paris I Panthe´on—Sorbonne and CEPREMAP, Paris, France *Correspondence: [email protected]

The aim of this article is to analyse the links between the moral and political aspects of neo-liberal ideology and how appeals to certain ethics may legitimate the establishment of the institutions of neo-liberal capitalism through political action. It presents the original characteristics of neo-liberal ideology by emphasizing how it differs from classical liberalism. Although pressures and contradictions are inherent in neo-liberalism, it is possible to single out some of its most original characteristics which are far more vital to the analysis of capitalism than vague and commonplace notions such as “market fundamentalism”. It also describes those moral aspects of neo-liberalism which differ from traditional morals and place the ethos of competitiveness at the centre of social life. It shows how the morals of neo-liberalism are linked to neo-liberal politics and policies. Freed in part from public sovereignty, neo-liberal politics must be guided by a moral imperative linked to competition. This paper reveals the consequences of these morals and politics for the definition of social policy. A contract based on reciprocity between the individual and society is substituted for collective rights to social protection and redistribution. This change in perspective is particularly important for the social policy advocated by the “modern” left. Keywords: capitalism, ethics, ideology, neo-liberalism JEL classification: B52 institutional, evolutionary approaches

1.

Introduction

Although neo-liberalism can feature in many economic, political or sociological debates, its main characteristics are often wrongly perceived. If one is to believe the definition given in Wikipedia, used here to exemplify the popular (mis)understanding of the term, neo-liberalism is ‘a label for economic liberalism or [. . .] “laissez-faire”’.1 But even a distinguished scientist such as economics Nobel Prize 1

http://en.wikipedia.org/wiki/Neo-liberalism, definition of March 28, 2009.

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Bruno Amable *

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B. Amable

2

Dume´nil and Le´vy (2009), on the other hand, take into account the role of the state in their Marxist analysis of neo-liberalism. 3

The “modern” left is defined here as the left that relates to the Third Way of Giddens (1994).

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winner Joseph Stiglitz seems to think that neo-liberalism is a ‘grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well’. Stiglitz thus associates neoliberalism with the crude notion of ‘market fundamentalism’ (Stiglitz, 2008), which compounds eighteenth-century classical liberalism, nineteenth-century Manchester school laissez faire, twentieth-century neo-liberalism and libertarianism. The problem is that this lack of distinction disguises the most significant and original aspects of the neo-liberal ideology as well as the true nature of the political actions it inspires. In its popular representation, neo-liberalism is reduced to a fight against “state interventionism” and any public intervention in the economy is consequently held to be a victory by its most naı¨ve opponents, even when this intervention actually follows the neo-liberal precepts.2 The same applies to the issue of morals, particularly in the current debate on neo-liberalism and the financial crisis. It has become commonplace to bemoan the lack of moral values in modern capitalism and it is Stiglitz (2010) again who condemns the ‘moral depravity’ of an ‘ersatz capitalism’ that ‘socialise[s] losses and privatise[s] profits’ and a financial sector that exploits the poor and the middle classes. According to Stiglitz, this leads to ‘a society in which materialism overwhelms moral commitment’ because ‘[m]arket fundamentalism has eroded any sense of community’. Stiglitz (2010) must then inevitably ask: ‘Didn’t those engaged in these practices have any moral compunction?’ Well, probably not, because it is totally wrong to believe that neo-liberalism is devoid of any moral content to start with. On the contrary, one may say that morals play a central role in the establishment of a neo-liberal society. The aim of this article is to analyse the links between the moral and political aspects of the neo-liberal ideology and how appeals to certain ethics may legitimate the establishment of the institutions characteristic of neo-liberal capitalism through political action. Contrary to any conclusions drawn from simplistic notions such as “market fundamentalism”, public intervention could well be inspired by neo-liberal ideology and the influence of neo-liberalism is not limited to the politics of the conservative right but also permeates the ideology of the “modern” left.3 Indeed, the currently fashionable calls to put morals into the market and politics can be interpreted as another facet of the domination of neo-liberal ideology and as such contribute to reinforcing the legitimacy of capitalism. But we must be clear about which moral values we mean. In neoliberal capitalism, ideological pressures arise to delegitimate collective action when it is liable to lead to redistribution or protection from competition.

Morals, politics and neo-liberalism

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4

In order to ward off unnecessary accusations of “functionalism”, let us simply say that certain ethics may have a function at certain times in a given social configuration without having been created for this purpose. 5 ‘There is, of course, neither greater merit nor greater injustice involved in some people being born to wealthy parents as there is in others being born to kind or intelligent parents’ Hayek (1960, pp. 79–80).

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These pressures take the form of a moral duty to commodify labour power and respect the market competition outcomes as just. This leads not only to a challenging of social protection as economically inefficient and morally reprehensible, but also to a critique of democracy and sovereignty of the people. The idea that ethics is somehow functional4 to the development and stability of capitalism is far from new, and some of its highly respectable intellectual origins can readily be found in the works of Adam Smith (1759) and Max Weber (2000). In order to perform in an efficient and orderly way, the constraints of capitalism have to be internalized by individuals, who must then adhere to values that reinforce the social structures upon which capitalism is built. Such values and norms can be found in the various strands of economic liberalism. Neo-liberalism as an ideology possesses some original characteristics. It is based on the idea that the ideal world order should be a “free” and “fair” competition between individuals. This competition is always under threat by groups who try to protect themselves from its rigour and consequences and seek to obtain more than their due share. Public intervention is thus legitimated when it tries to restore the conditions of fair competition and “level the playing field”. Competition has, therefore, a dual economic and moral aspect: it enhances the global efficiency of the economic system by allowing the best individuals to contribute the most to prosperity; it rewards individuals according to their merits, brings out the best in them and allows them to better themselves. Of course, the question of the fairness of competition is complicated by the actual inequality among individuals. Equality of ex ante situations is impossible to attain in practice and there are some divergences even within the neo-liberal family as to what extent ex ante inequalities, at birth, for instance, should be compensated through public intervention; the more classically liberal of the neoliberals are inclined to non-intervention,5 whereas the most social neo-liberals, e.g. the “modern” left, would insist on the importance of “equality of opportunity”. If this leaves room for substantial political opposition between left and right neo-liberals, it nevertheless constrains the political choices within the boundaries of neo-liberalism by holding that society must be organized on the basis of individual competition. Competition plays a crucial role in neo-liberal ideology. First, it is a supreme principle, which should be placed above political influences. As a consequence,

6

B. Amable

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After the test of market competition. This should be distinguished from the question of ex ante distribution.

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the only public intervention conceivable is one which would preserve the laws of competition. Competition-enhancing decisions are justified in reference to moral considerations independent of partisan politics. This process of depoliticization by reducing political problems to their economic or moral dimension predates neo-liberalism and is characteristic of liberal thought in general (Schmitt, 1999). The consequence is an elitist critique of democracy promoting a mode of governance where an enlightened elite guided by ethical considerations would preserve the common good from the dangers of “populism”. Second, the ethic of self-reliance is a social norm in the neo-liberal society. Any organized interest is considered illegitimate and social questions should consequently be treated at the individual level. Public intervention is far from being prohibited but must be justified by reference to the promotion of individual competition, not as a way to alter the results of a supposedly free and fair process. As a consequence, redistribution, i.e. ex post change in income distribution,6 or social protection, i.e. an attempt to limit the rigour of competition, is considered illegitimate. The individual is left exposed to economic risks and should not expect any guarantee of unconditional support, nor, of course, be granted any collective rights, because this would be morally reprehensible, provided that public intervention ensures that competition is fair, which means that every individual is exposed to it and no protection against competition is granted by the state. The paper analyses the moral and political content of the neo-liberal ideology and is organized as follows. The next section depicts the original characteristics of neo-liberal ideology by emphasizing that it should be distinguished from both classical liberalism and laissez faire. Although pressures and contradictions are inherent in neo-liberalism, it is possible to single out those of its most original characteristics that are far more vital to the analysis of contemporary capitalism than vague and commonplace notions such as “market fundamentalism”. The following section describes those moral aspects of neo-liberalism, which differ from traditional morals and place the ethos of competitiveness at the centre of social life. Section 3 shows how the morals of neo-liberalism are linked to neo-liberal politics and policies. Freed in part from public sovereignty, neo-liberal politics must be guided by a moral imperative linked to competition. Section 4 reveals the consequences of these morals and politics for the definition of social policy. A contract based on reciprocity between the individual and society is substituted for collective rights to social protection and redistribution. This change in perspective is particularly important for the social policy advocated by the “modern” left. A brief conclusion follows.

Morals, politics and neo-liberalism

2.

7

Neo-liberalism

2.1

Classical liberalism and its decline

What recently published researches on neo-liberalism (Denord, 2001, 2007, 2009; Schui and Blankenburg, 2002; Foucault, 2004; Laval, 2007; Dardot and Laval, 2009) have shown is that neo-liberalism is distinct from classical liberalism and above all from the simple laissez faire vulgate which conceives self-regulating markets as a natural reality and consequently regards public intervention as a negative of the market. This vulgate propagates a discourse based on simplistic opposites such as state versus market, constraint versus freedom, closed versus open or flexible versus rigid (Bourdieu and Wacquandt, 2001). It may have occasional importance and effectiveness in the political discourse in some countries,7 but the crude categories on which it is based cannot serve as instruments for an analysis of the structural transformations of contemporary capitalism without coming up against pseudo-puzzles such as the presence of a strong regulatory state in the most neo-liberal varieties of capitalism8 or be stuck with sterile opposites like ‘liberalism versus interventionism’. Although neither classical liberalism nor neo-liberalism is free from pressures and internal contradictions,9 one may try to briefly summarize the original characteristics distinguishing one from the other. As Foucault (2004) and Dardot and Laval (2009) emphasize, classical liberalism aimed to provide an answer to the question of the limits to the power of government. The limits would impose themselves on government because of the complexity of economic mechanisms. It would be in 7

Mostly the USA.

8

Against this pseudo-puzzle, Bellon (1986), for instance, showed that US industrial policy could be defined as ‘liberal interventionism’. 9

Between the Ordoliberalismus of Ro¨pke and the Austrian variety of neo-liberalism of Hayek, for instance.

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Neo-liberalism can be defined from several points of view. It is an ideology which legitimates individual competition and questions collective structures; it is a political project of institutional transformation, against any attempt to institute “collectivism” and against the types of capitalism which had resulted from the various social-democratic compromises, in particular in the post-war period, such as redistributive social protection, workers’ collective rights or legal protection of employment and economic status; it can also be seen as a ‘form of existence’ (Dardot and Laval, 2009), as a norm of life characterized by a generalized competition with others, than being defined as the set of discourses, practices, devices which determine a new mode of governance of humans according to the general principle of competition.

8

B. Amable

10 The legacy of this tradition can be found in the economics of social choice and welfare (Arrow et al., 2002). 11 12

Foucault (2004, pp. 122– 125).

‘We can take the rewards from those who have done better and give them to those who have done worse. We shall thus lessen the inequalities. We shall favor the survival of the unfittest, and we shall

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the interest of a government, in order to have a prosperous country, to extend economic freedoms and to be cautious in any action affecting the economy. The motto of the liberal state is, therefore, according to Jeremy Bentham: ‘be quiet’. This does not mean that the state should do nothing but that it should be cautious and act indirectly because it is incapable of exerting a direct influence. Again, the differences between the various traditions within the liberal school should not be underestimated. For the French physiocrats, the state’s noninterfering with economic mechanisms assumes a constant intervention of a political power itself governed by the natural laws of the economy discovered by the economists. Laissez-faire is then absolute respect for natural rights (property and commerce). For the Scottish enlightenment, laissez-faire means respecting trends in human nature without bothering about the end result. For Bentham, on the other hand, there are no natural rights but effective rights created by an authority established in order to maximize utility. Rather than strengthening its control over individuals, a liberal government will maximize the control that individuals have over their own lives so as to maximize their happiness. A conflict between the logic of individual rights and the principle of utility, which could be used to justify social-reformist state interventions,10 is inherent in classical liberalism. To avoid those social reformist temptations, social Darwinism put forward the notions that will later be at the centre of neo-liberal thought: struggle and competition.11 Social Darwinism, as Foucault (2004) and Dardot and Laval (2009) show it, is instrumental in shifting the focus of liberal thought from exchange, and the related notion of the harmony of interests, to competition and struggle among individuals. An important difference is that if everybody is expected to win in exchange, some may lose in competition. Social Darwinism proposes a social theory in which the struggle for existence is a struggle against nature that makes human beings compete with each other, for scarce resources at the very least. For social Darwinists such as Spencer, competition between individuals is seen as an evolutionary principle leading to the improvement not only of society but also of the individual, an element which is alien to the classical liberal thought of the eighteenth century. In social Darwinism, competition between individuals is seen as law of nature (Sumner, 1914) sanctioning the survival of the fittest. As a consequence, any attempt to lessen inequalities would amount to fostering the ‘survival of the unfittest’, ‘carrying society downward’ and favouring its ‘worst members’.12 It follows that state

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2.2

An alternative to laissez-faire and collectivism

The need to have an alternative to both laissez-faire and central planning became widespread in liberal circles.14 French philosopher Louis Rougier (1938) proposed a ‘constructive liberalism’ or ‘neo-liberalism’ which does not share with Manchester School laissez-faire the belief that the market order is natural and that the state should consequently not intervene in the economy. A common characteristic of all varieties of neo-liberalism is to hold the market and capitalism as anything but given by nature. Those are artificial and historical constructions which exist only because a certain institutional framework makes their existence possible. Since the market order is a construction, a political agenda aiming to institute it can be elaborated. accomplish this by destroying liberty. Let it be understood that we cannot go outside of this alternative: liberty, inequality, survival of the fittest; not-liberty, equality, survival of the unfittest. The former carries society forward and favors all its best members; the latter carries society downwards and favors all its worst members’ (Sumner, 1914, p. 19). 13 14

A. Detoeuf cited in Denord (2007, p. 85).

Fisher (1907), Keynes (1926). Fisher sums up the dilemma in the following terms: ‘the menace of socialism can best be met if we understand and acknowledge the evils which it is intended to remedy. The preliminary to remedy is diagnosis, and an accurate diagnosis will save us from the error of both extremes—the extreme, on the one hand, of an overdose of socialism, and the extreme, on the other hand, of omitting all medication whatever’ (p. 27).

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intervention and regulation would water down inter-individual competition and should consequently be kept to a strict minimum, if not prohibited altogether. However, laissez-faire was in practice ‘a political and economic myth [. . .] a slogan or war cry employed by new forms of enterprise in their politicoeconomical war against the landed oligarchy’(Brebner, 1948, p. 60). If eighteenthcentury liberalism was a critique of despotism, nineteenth-century laissez-faire turned into a defence of the established order and its basic axioms had become increasingly contested: ‘Not only is it false that men, when let alone, will always follow their best interests, but it is false that when they do, they will always thereby best serve society’ (Fisher, 1907, p. 21). The failure of liberal doctrine to analyse the evolution of the economy and society became evident with the oligopolistic evolution of industrial market structures, denying the relevance of perfect competition; the First World War, shaking the belief in the harmony of interests; the Russian revolution, and its alternative of a planned economy; and the 1930s crisis, questioning the reality of markets’ self-regulation: ‘liberalism died, killed not by the will of men or because of a free action of governments, but because of an unavoidable internal evolution’.13

10

B. Amable

15 16

Hayek’s spontaneous order is not a natural order.

Denord (2007, p. 121) mentions what Ru¨stow thought of von Mises and Hayek: ‘their place is in a museum, in formaldehyde. People of their sort are responsible for the great crisis of the 20th century’.

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To illustrate the difference between neo-liberalism, laissez-faire and planning, Rougier uses the metaphor of traffic regulation: Manchester School laissez faire would leave cars free to travel as they want and in any direction, leading to traffic jams and accidents; central planning would tell every driver when to use their car and where to drive; neo-liberalism establishes a traffic regulation which leaves drivers free to choose where to go. Rougier also states that neoliberalism is a constant adaptation to changing environments or technologies; the traffic regulation cannot be the same in the age of motor vehicles as it was for horse-drawn carriages. Starting from the premise of a denial of the natural character of the market order,15 neo-liberal government intervention cannot be reduced to a question of separating the state from the market. The neo-liberal state has the duty to maintain the market order; it refrains from interfering in production and exchanges but sanctions attacks against competition. State intervention must constantly re-establish the conditions necessary for the triumph of the most able in fair competition and not protect established privileges or vested interests (Rougier, 1938). The birthplace of neo-liberalism was the Colloque Walter Lippmann (Denord, 2001, 2007; Foucault, 2004), organized by L. Rougier in Paris in 1938 to celebrate the publication of the French translation of Walter Lippmann’s The Good Society (1937). Participants in the Colloque included Austrian economists such as F. von Hayek or L. von Mises, the founders of Ordoliberalismus W. Ro¨pke and A. Ru¨stow, economists R. Marjolin, S. Possony and J. Rueff, but also intellectuals such as R. Aron, M. Polanyi, industrialists such as A. Detoeuf—and W. Lippmann himself. Although friction existed among participants, between partisans of old style liberalism and supporters of a more modern neo-liberalism,16 the Colloque led to an Agenda of Liberalism proposed by Lippmann and approved unanimously. The Agenda stipulates that the legal regime for economic activity must be decided according to pre-established procedures and involve a representative debate. It admits social ends other than the maximal utility of production and stipulates that the state can levy taxes to finance defence, social insurances, education and research. The institutional framework is emphasized through the importance of the regime of contracts and property for market prices. Last, maximal utility is not the ultimate objective of society, and the functioning costs of the price system may be left to society. The state in neo-liberalism is, therefore, not a weak and inactive state, the ‘night watchman’ of classical liberalism. On the contrary, it is a state that establishes and preserves, through its constant action (. . .), a competitive market order

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3.

The morals of neo-liberalism

The moral content of neo-liberalism should not be overlooked. It was strongly affirmed by its proponents, starting very early on with the participants in the Colloque Walter Lippmann. The crisis of liberalism and the economic crisis of the 1930s were also perceived as moral crises. Lippmann’s book, The Good Society, is rife with appeals to morals and opens with verses of J. Milton citing nations ‘grown corrupt’ and ‘by their vices brought to servitude’ loving ‘bondage more than liberty’.18 A participant in the Colloque Walter Lippmann, the industrialist and author of several books, A. Detoeuf, considered that the crisis could only be overcome through a moral transformation that would take several generations (Denord, 2007). In short, the neo-liberal society must be a moral society, an aspect that will become obvious in the Ordoliberalismus variety, where the competitive market order is conceived of as a coherent set of institutions in conformity with moral values (Nothelle-Wildfeuer, 2009).

3.1

Capitalism and morality

As in the 1930s, recent political discourses of heads of state or prime ministers have, since the financial crisis (. . .), been rife with appeals to ethics and morality. This crisis would partly be a moral crisis of capitalism, a capitalism that would 17

According to Hayek, the spontaneous order of the market is independent of human design but not of human action.

18

From Samson Agonistes. Lippmann is also the author of A Preface to Morals.

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which is an artificial human creation and not a product of nature.17 For Hayek, for instance, a neo-liberal society should be a society where the rules of private law apply to individuals and the state alike. The intervention of the state should be limited to cases where the rules of private law have been breached. Public services in education, health or public infrastructures are possible in the neo-liberal society and even accepted by Hayek (1960) if the state has no monopoly and competes with private providers. Hayek even justifies some degree of compulsory social security, which ‘would involve some coercion, but only coercion to forestall greater coercion of the individual in the interest of others’ (p. 249). This also means that ‘deregulation’, understood as a removal of rules, only makes sense from a liberal point of view of a natural market order. From a neo-liberal point of view, ‘deregulation’ means instituting new rules that would not be substitutes but supports to competition. ‘Deregulation’, a notion often linked to neo-liberalism, is, therefore, a misnomer; regulation may be undertaken following neo-liberal rules.

12

B. Amable

19 20

Gordon Brown, British PM, Address to the Labour Congress, Brighton, September 29, 2009.

‘We will save capitalism [. . .] by putting morals into it’ (French President N. Sarkozy, speech in Davos, January 27, 2010).

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have been ‘led astray’, to borrow the words of French Prime Minister Fillon, a capitalism which favours greed over patient investment. To cure this evil, former British Prime Minister Brown suggests: ‘Markets need what they cannot generate themselves; [. . .] markets need morals’.19 Interestingly enough, he adds ‘just as I have said that the market needs morals I also say that politics needs morals too’, underlining the fact that, according to him, a similar ethical requirement should be at the centre of both politics and the economy, a point which will be investigated further in the next section. The issue of the relationship between moral values and capitalism has a dimension that exceeds the limits of the debates that started with the recent financial crisis. It is, of course, a philosophical question as well as one for the history of economic thought or sociology; but it is foremost a political and ideological question: ‘The problem which the phrase “moralisation of capitalism” refers to cannot be treated in moral terms [. . .] it is far more in terms of a political analysis of the democratic construction of social norms than in ethical terms that one should treat [that] problem’ (Arnsperger, 2005, p. 480, our translation). Pharo (2005) points out that the question itself of whether it is possible to make capitalism more ethical has a political aspect because it is a denial of the radical contestation of capitalism. Instead of dealing with the problems posed by capitalism in a drastic way, i.e. by putting an end to capitalism, considering a moral improvement to capitalism implies accepting the political and moral confines of capitalism. Indeed, many contemporary comments about capitalism and moral values insist on the fact that capitalism is efficient and sound, provided individual behaviour satisfies some minimal ethical requirement.20 This is compatible with several types of relationships between moral values and capitalism (Fourcade and Healy, 2007). Capitalism in itself could be morally neutral, and be judged with respect to external ethical values. Therefore, possible morally reprehensible developments would not be the responsibility of capitalism as a system, but that of individuals operating within capitalism. Making capitalism more moral would make no sense; what is required is an increased ethical responsibility by individuals. A somewhat stronger proposition is that capitalism itself is sometimes the victim of its worst tendencies and that a “bad” capitalism can lead “good” capitalism astray. This interpretation is in line with many recent comments: for the French writer and publicist M. P. Virard, for instance, the excesses observed on markets and deficiencies in the governance of financial institutions are signs of

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3.2

The work ethic and the individualistic ideology of capitalism

A less black-and-white view of this issue could be looked at with the help of Max Weber. In his Protestant Ethic and the Spirit of Capitalism, Max Weber (2000), indeed, distinguishes between two types of capitalism. Rational capitalism is associated with rational economic action, the use and advancement of technology, the pursuit of the division of labour . . . , i.e. all the characteristics one associates with modern, industrial capitalism. Irrational capitalism, on the other hand, is that of the money dealers, slave traders and military adventurers. As I. Kalinowski (2005) stresses, the specificity of rational capitalism is that it associates a logic of accumulation of profits, found also in irrational capitalism, with the exploitation of a particular form of voluntary work, at least formally. It is well-known that Weber attributes the promotion of a particular work ethic to certain protestant sects. Work is no longer perceived as a malediction for mankind, which is compelled to work in order to survive, but as a way to achieve success and thereby the evidence of individual salvation. An important point is that the internalization of the necessity to work derives from the construction of an individualistic ideology according to which the maximum exploitation of a person’s own labour is an expression of individual freedom, not of subordination (Kalinowski, 2005). Capitalism cannot be fully rational as long as the worker perceives that this freedom is purely formal. Fully rational capitalism implies that the worker is the active and voluntary promoter of capitalism. 21

Virard’s text is part of a series of various contributions on the financial crisis written for a think tank of the French “modern” left, Terra Nova.

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a degenerate capitalism without moral values, dominated by greed and the race for short-term profit, sacrificing the future to the satisfaction of the present, engendering ‘excessive’ inequalities and a distribution of risks contrary to a supposed ethos of capitalism (Virard, 2008a)21: in good capitalism, profits reward risk taking; bad capitalism gives high profits and high security to the few, low wages and high risks to the many. The main fear would, therefore, be that ‘reckless’ capitalism would give a bad name and fuel the opposition to capitalism in general. See, for instance, Virard (2008a): ‘the worst would obviously be to throw out the baby with the bath water’ (p. 1, our italics and translation). Also: ‘There is no questioning of capitalism or liberalism here, but more modestly of the variety of capitalism which has become dominant over the last twenty years, which is called ‘financial’ capitalism’ (Virard, 2008b, p. 1). Hence the solution advocated is to revert to a “good” capitalism that would include moral values, self-moderation and economic efficiency.

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B. Amable

3.3

The ethic of competition

As mentioned before, the question of the compatibility of moral values and an economic system based on the pursuit of self-interest is not a new one. Liberal thinkers of the eighteenth century had found a solution in the consideration of the harmony of interests. Without the assumption of any teleology, the pursuit of self-interest by individuals is held to have beneficial consequences for society through market exchange. The play of interests will bring about improvement in society, but not in individuals, who, for Smith (1759), for instance, are 22 23

Contrary to what Virard (2008a), for instance, seems to think.

For Weber (1894), the aim of economic policy is to be a Machtmittel in the economic struggle. Any ethical content it may have is an unnecessary supplement.

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Rational capitalism is thus based on an individualistic ethic of intensive work. Individualism takes the form of an individualization of responsibilities and duties of the worker who must be accountable for each of his or her actions and submit them to the approval of the community, under the threat of exclusion. But the individualization process does not apply to behaviour; it is a matter of individual accountability, responsibility and duty—there is no question of a freedom to except oneself from group constraints without incurring the cost of such behaviour. Individualization thus takes place within the context of a constraining social structure, and individualization reinforces the social order. The individual belongs to social groups whose cohesion is based on the individualization of the work constraint, and is thus neither isolated nor able to fully personalize his or her life trajectory. Rational capitalism is, therefore, the coupling of an individual search for profit and a strict work ethic. This moralistic aspect is absent from irrational capitalism, where financial profit carries some social stigma. The introduction of an ethical aspect to the quest for profit makes capitalism socially acceptable. Any value judgement is, of course, absent from Weber’s thought.22 If the most brutal and revolting aspects of labour exploitation have receded, it is for efficiency and not ethical reasons. There is thus no question of progress or moral superiority of rational capitalism over its irrational counterpart, which, incidentally, has not vanished altogether to give way to a modern rational capitalism. Both irrational and rational capitalism coexist. In this perspective, the castigation of illegitimate (financial) profits or the denunciation of the immorality of a handful of hedgers or stock-brokers getting fat at the expense of honest hardworking citizens is another expression of the work ethic that underlies modern capitalism, and any endeavour to moralize the stock exchange23 is simply an attempt to give an ethical legitimacy to capitalism’s domination.

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4.

Ethics as a substitute for democracy

A common theme of neo-liberalism is that liberal values, ‘liberty’ according to Hayek (1960), should be placed above all others, including democratic values. What matters for neo-liberalism is the equality of everyone before the law, not equality in the determination of the law. Majority rule is acceptable to neoliberalism ‘as a method of deciding, but not as an authority for what the decision

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assumed to have an inborn moral sense. Human beings are considered to be endowed with a natural fellow-feeling, which Smith calls ‘sympathy’. The aspiration to improve one’s condition based on self-love and the desire to obtain the sympathy of other individuals ensure that humans can live together in a peaceful and orderly way. Self-interest is inseparable from the desire for the sympathy of others. In this sense, moral sentiments are a functional necessity of a capitalist society and are given by nature. In a sense, capitalism is made moral by the natural behaviour of individuals. This is somehow related to Buchanan’s view of the importance of moral values and the role of the state (Buchanan, 1986). Buchanan makes a distinction between moral community, moral order and moral anarchy. A moral community corresponds to a situation where individual members of a group identify with a collective unit rather than regarding themselves as independent. A moral order exists when participants treat each other as moral reciprocals. Moral anarchy exists when individuals do not consider others to belong to their moral community or do not accept the minimal requirements for a moral order. The role of government is inversely proportional to the strength of the moral order. If everybody behaved in accordance with the rules of moral order, the government’s role could be limited to the classical liberal ideal of a night-watchman. On the other hand, ‘[r]epressive governments may emerge as a necessary condition in a society with many moral anarchists’ (Buchanan, 1986, p. 111). In the neo-liberal perspective, competition matters more than exchange (Foucault, 2004). Inherited from social Darwinism is the notion that competition between individuals will improve not only society but also the individual. However, competition between individuals is, for social Darwinists, a law of nature (Sumner, 1914, p. 19) that cannot be abolished, any more than gravitation can (p. 38). Neo-liberals reject the natural character of the market order but adopt the ethos of individual responsibility, i.e. the responsibility to be competitive in a world where the economic conditions are permanently changing. The individual must become a self-entrepreneur, responsible for his or her own existence and integration into the market. But the moral imperative does not limit itself to the economic behaviour of the individual, it also pervades the political realm.

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B. Amable

4.1

Elitism and neo-liberalism

Whereas the classical liberalism non-interventionist stance is relatively easy to apprehend and—at least in principle—to implement, the strong but limited interventionism of neo-liberalism is a considerably more complex concept. The problem has some similarities with one already identified by Machiavelli. In its action towards the realization of general interest, political power must not be limited by moral considerations for fear of not being able to exploit the opportunities of the circumstances.25 Virtu` cannot be slave to fortuna.26 Yet, nothing guarantees that a Prince released from moral duties will act in a virtuous way. Counting on the Prince’s wisdom is hopeless since, for Machiavelli, the multitude is wiser and makes less and less serious mistakes than the Prince.27 The ‘solution’, if it exists and if it is possible to implement, which Machiavelli certainly did not consider certain or even probable, lies in the institutions. The history of Rome shows that the Republic can escape from ruin thanks to its ‘good’ institutions, its ‘good laws’. To a limited extent, some aspects of neo-liberal thought express views that could be seen as not so far removed from Machiavelli’s ‘solution’. The Public Choice school,28 for instance, does not count on the virtue of civil servants or 24

‘it is necessary for people to come to an agreement as to how necessary tasks are to be performed; but it is not obvious that this same majority must also be entitled to determine what is competent to do’ (Hayek, 1960, p. 93).

25

Macchiavelli, Le Prince XV, in Machiavelli (1952, pp. 335– 336).

26

Macchiavelli, Le Prince XVIII and XXV, in Machiavelli (1952, pp. 342– 343, 364– 365).

27

Macchiavelli, Discours sur la premie`re de´cade de Tite-Live, Livre premier, LVIII and LIX. In Machiavelli (1952, pp. 501 –508).

28

Public choice is diverse and some contributors, such as Buchanan, are sometimes closer to libertarianism than to neo-liberalism.

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ought to be’ (Hayek, 1960, pp. 90 – 91).24 Majority rule should be limited to determining ‘commonly held principles’. It should be clear from what was explained above that the neo-liberal ideology does not call for a weak non-interventionist state, but for a strong regulatory state whose duty is to ensure that liberty prevails over private collective interests. Without such a regulatory intervention, free markets would not stay free for long and fair competition would soon turn unfair. The role of the state is to ensure that profit-seeking activity remains a true competition among individuals, leading to the triumph of the most able, and not the result of protection granted to particular individuals or groups. But the preservation of ‘liberty’ demands that limits be put to the power of the state. The neo-liberal society must be a society ruled by private law (Hayek), and these laws must be out of democratic power’s reach.

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17

29

As Rosanvallon (2008, p. 80) points it out, Lippmann in his Preface to Politics (1913) was part of a larger US movement that aimed to bring expertise to public administration. 30

See Halimi (2004).

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politicians to implement a policy oriented towards the general interest. The reference anthropology of Public Choice is the self-interested individual, with narrowly defined interests, and politicians are as much rational economic individuals as anybody else in society (Downs, 1957). The only discipline that can guarantee that the general interest escapes the rent-creating activism of politicians is that of competition. To be preserved, the most fundamental rules of economic competition (and public finance orthodoxy) must be shielded from bureaucrats and politicians and acquire the status of constitutional rules, i.e. rules that cannot be changed easily and are beyond the reach of politicians or bureaucrats tempted to please the foolish masses. However, the similarities between neo-liberalism and Machiavelli must not be exaggerated. In the neo-liberal tradition, the people are viewed through elitist lenses: they are ignorant and capricious and by no means sovereign. The idea that a competent elite should decide and be spared the demands for protection that a population of losers is bound to express runs through the writings of the whole neo-liberal family: ‘The world consists of two classes—the educated and the ignorant—and it is essential for progress that the former should be allowed to dominate the latter’ (Fisher, 1907, p. 20). This elitist concept of political power was present in Rougier (1938), where constitutional reforms are advocated so as to protect the choice of a ruling elite dedicated to the defence of the common rules of individual competition from ‘acting minorities’ and ‘lunatic majorities’. It is considered the duty of the elite to teach the masses respect for competence. This neo-Platonist conception of government is also found in Lippmann’s works, where the contradiction between the necessity to preserve a system of fair rules of competition, on the one hand, and a principle of popular sovereignty over the rules of the game, on the other, is emphasized.29 The “solutions” proposed by the various neo-liberal schools of thought are based on a combination of enlightened elites and constitutional rules resulting in a limit to democracy. Following the elitism of Schumpeter, the masses could at most choose their rulers, but they should let them rule and not interfere in their decisions. One finds expressions of this fear of the masses dictating their will to the elite in neo-conservative literature too, in Crozier et al. (1975), for instance.30 The egalitarian demands and the active political participation of the poor would imply that “bad” decisions would be taken. In order for “good” decisions to prevail, a large number of decisions should be out of the reach of democratic control and left to experts (Mouffe, 1986). This limit to popular sovereignty is a major theme of neo-liberal thought.

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B. Amable

4.2

An elitist ‘democracy’

On the political right, the calls to limit popular sovereignty echo the traditional reactionary positions of the nineteenth century against democracy and the tyranny of the majority. As Canfora (2006) shows,31 the conservative right has constantly fought against the institution of universal suffrage in Europe and the liberal right has tried to limit its scope and consequences. Things are more subtle and more interesting when one considers the view of politics promoted by the “modern” left, i.e. to the left of neo-liberalism. A recent book by P. Rosanvallon (2008) describes the basic principles of what could be considered a new ethical mode of governance. Individualism is at the root of this ‘new’ conception of political legitimacy. Rosanvallon starts with the observation that democratic legitimacy is based on the consideration of the decisions approved by a majority. But according to Rosanvallon, the interest of the many differs from the interest of the majority. More precisely, the majoritarian approach is considered to be based on the idea that a homogeneous population exists, whereas the people are now ‘a succession of singular histories, a sum of specific situations’ (Rosanvallon, 2008, p. 14)32; the ‘modern’ approach he adopts, on the other hand, considers a population of individuals having specific characteristics and specific expectations. Based on this premise, majority rule can only be imperfect, since it will lead to the neglect of the minorities’ aspirations. It is worth noting that the ‘solution’ to this problem is never envisaged in terms of political institutions. Comparative political scientists, Lijphart (1999) for instance, distinguish between several types of democracy, according to the strictness of the majoritarian rule and the 31

See Canfora (2006), chapters V and VI, in particular.

32

Our translation, as for all quotes of Rosanvallon (2008).

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The role of elites is again at the centre of current preoccupations regarding the “re-foundation” of capitalism: ‘it is the duty of the ruling economic and political elite, to revive with the essence of capitalism, by betting on a collective re-foundation and a new ethic based not on the law of profit maximization but on sustainable growth and innovation’ (Virard, 2008a, p. 1). Indeed, the problem raised by Machiavelli remains present. Preventing the poor and rent-seekers from having access to decision-making processes will not be enough to ensure that the ruling elite can conform to the requirements of free and fair competition. If constitutional rules should suffice to insulate the elite from “populist” temptations, it remains the duty of the individual decision-taker to conform to a certain ethic. In the neo-liberal ideology, ethical requirements for elite members may act as a substitute to the people’s legitimacy.

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more or less encompassing character of the dominant political compromise. But this is not taken into consideration in the perspective drawn by Rosanvallon since even the most “consensual” type of democracy deals with organized interests and neglects the individual dimension. It is thus impossible for the traditional, i.e. vote-based, modes of democratic activity to take into consideration the diversity of individual aspirations and go beyond the opposition between organized group interests, i.e. partisan interests. According to Rosanvallon, majority rule must, therefore, be supplemented by other mechanisms and institutions which will distance themselves from partisan interests (what Rosanvallon calls the ‘legitimacy of impartiality’), take into account the diversity of expressions of the common good (‘legitimacy of reflexivity’) and acknowledge all expressions of singularity (‘legitimacy of proximity’). These extra legitimacies call for new institutions. The legitimacy of impartiality is to be found in so-called independent, i.e. not submitted to political control, regulatory and control authorities (for competition, financial markets. . .) whose number has increased tremendously in most developed economies over the past two decades, following the waves of privatization and public sector retrenchment of the 1980s. The legitimacy of reflexivity supports more traditional institutions such as constitutional courts, whose role would be to safeguard the fundamental rights and values. The legitimacy of proximity does not imply new institutions apparently; it is another expression of the ‘good’ and ‘compassion’ which ensures that individuals are treated with ‘care’ and ‘respect’. These propositions are based on the idea that democracy can and must go beyond the clash of interests and pursue a ‘general interest’ independent of and above partisan interests. Rosanvallon is conscious of the fact that it is impossible to think of politics as being totally independent from partisan opposition, but argues that it would be dangerous to transpose partisan opposition to every decision of public policy for the reasons mentioned above, i.e. the neglect of minorities. The ‘modern’ forms of democracy would have to make it impossible for a part of the population, even if it is a majority, to appropriate institutions. As a consequence, the pursuit of the general interest ‘naturally’ calls for institutions which are as independent from partisan oppositions as possible. Rosanvallon takes the example of public service as the incarnation of a technically competent and impartial body, but considers that it has lost its legitimacy following the attacks of the neo-liberals against the state since the 1980s. The new spaces for democracy would, therefore, be new bodies, accountable, independent and impartial authorities, staffed with competent individuals whose main preoccupation is the pursuit of the common good, the search of consensus, subject to tests and controls. This view of a ‘moral democracy’ as the government of competence and ethics differing from the domination of the majority or the conflict of organized

20

B. Amable

33

This importance of shared values and the necessity of a ‘common world’ is also characteristic of the approach of the ‘e´conomie des conventions’ (Eymard-Duvernay et al., 2003). See Amable and Palombarini (2005) for a critique.

34

Macchiavelli, Discours sur la premie`re de´cade de Tite-Live, Livre premier, IV. In Machiavelli (1952, p. 390).

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interests is reminiscent of the neo-liberal view set out above, with less emphasis on the virtue of competition and a more moralistic content, as indicated by the focus on admirable qualities such as compassion. The elitist commitment is broadly similar: the masses are deemed incapable of going beyond simplistic oppositions, whereas enlightened elites could reach a consensus through deliberation. Rosanvallon opposes partisan opposition to the collegial character of independent authorities, where the non-public character of debates allows participants not to be ‘frozen in their role’. The limited size of these institutions in any case limits individuals to a ‘thoughtful expression’ characterized by the search for a common aim (Rosanvallon, 2008, p. 148). The contrast between partisan politics and reasoned discussion between impartial experts is at the core of Rosanvallon’s view of ‘democracy’, in which consensus is preferable to ‘division’: ‘On the one side the subjective partisan world of the electoral-representative sphere, on the other the objective world of the institutions of indirect democracy’ (Rosanvallon, 2008, p. 28; our emphasis). There are two logics in a democracy, that of the majority, where the immediately dominant opinion prevails, and the logic of reasoning which imposes a constraint of justification. The requisites for a “true” deliberation to take place are very high in terms of information processing and depth of thought. It is hence inconceivable that ‘unsophisticated’ partisan conflicts should be allowed to get in the way of a consensus, let alone the ‘cacophony of opinions’ entering such a forum (Rosanvallon, 2008, p. 232). Only small groups can lead to innovative deliberations. For Rosanvallon, democracy cannot exist without the formation of a ‘common world’, recognition of ‘shared values that make it possible for conflicts not to go to the extremes of civil war’.33 A long tradition of political thought, which has its roots in Machiavelli’s works and extends to the contributions of neo-pluralists, would, conversely, stress that it is precisely the political influence of contradictory interests which enables societies to escape from the dangers of tyranny. The play of heterogeneous political pressures resulting from social stratification is what permits democracy to be stabilized. For Machiavelli, freedom and prosperity of the Republic do not result from an impossible consensus between the multitude and the aristocracy but from a balance of power between the two opposing sides.34 The “good” constitutional laws are the product of conflict, not the quest for an improbable consensus. This idea could, of course, apply to

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5. 5.1

Neo-liberalism and the welfare state No rights without responsibilities

The consequences of the morals and politics of neo-liberalism are particularly clear in the area of social protection. However, considering the problem in the simplistic terms of the mainly North American debate about the consequences of the welfare state for the morality of individual behaviour judged according to conservative or traditional values would be misleading or limited. For instance, there is what looks like a “puzzle” as observed by Brown (2007) and Dardot and Laval (2009). Neo-conservatism has imposed itself as the reference ideology of the new right in the USA, although its high moralizing content seems incompatible with the amoral character of the neo-liberal rationality that underlies the economic doctrine of the new right. According to Brown, an individualistic and marketoriented ideal can be reconciled with neo-conservatism precisely because the latter channels and domesticates the individual freedom at the root of the former.

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democracies, and it is significant that Rosanvallon only briefly mentions the contributions of the pluralists in a footnote. If one drops the fiction of the existence of a general interest above particular interests (Amable and Palombarini, 2005), the basis upon which the moral consensus underlying democracy could be built appears even more elusive. Institutions are the temporary solution to a conflict that is irreducible to a difference of judgement on what the most moral or the most efficient solution is, unless one wants to deny the strictly political nature of this conflict, which is probably what is at stake in the debates mentioned above. By pretending that democracy must go beyond opposing interests, Rosanvallon reintroduces a consensual element that is incompatible with a serious consideration of the irreducibility of heterogeneous interests to a fictitious general interest. Like the e´conomie des conventions, Rosanvallon does not ignore the diversity of interests (and/or values) and proposes to have consensus emerge out of ‘deliberation’. The criticisms levelled at the ´economie des conventions on this precise point by Amable and Palombarini (2005, Ch. 3) could be repeated here: a neglect of the social structural context within which this deliberation is supposed to take place, the underestimation of the symbolic violence carried by a seemingly rational dialogue (Bourdieu, 1997) . . . . Rosanvallon, however, adds an elitist element which is notably absent from the e´conomie des conventions’s perspective, where, conversely, the capacity for moral judgement is deemed to apply to every agent. For Rosanvallon, deliberations are not supposed to be open to every individual (cf. the dangers of direct democracy), a position which has at least the merit of rendering the conditions of the application of symbolic violence far more explicit.

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35 See, for instance, Bernstein (2006) for the opposition between YOYO (you’re on your own) and WITT (we’re in this together)! 36

‘It is essential that we become clearly aware of the line that separates a state of affairs in which the community accepts the duty of preventing destitution and of providing a minimum level of welfare from that in which it assumes the power to determine the “just” position of everybody and allocates to each what it thinks it deserves. Freedom is critically threatened when the government is given exclusive powers to provide certain services—powers which, in order to achieve its purpose it must use for the discretionary coercion of individuals’ Hayek (1960, p. 252).

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For Dardot and Laval (2009), the convergence between conservative ethics and normative neo-liberalism is the articulation between the family as the ‘cellular form’ of the moralization of the child and the enterprise as the ‘cellular form’ of the moralization of the individual. But religious, family values-oriented neo-conservatism is a peculiarity of US society, which has almost no equivalent on the European continent, for instance, where expressions of morality are less focused on the family. Since the diffusion of neo-liberalism is a worldwide phenomenon, the articulation between a certain moral dimension and the expression of freedom through competition between individuals that characterizes neo-liberalism must be analysed beyond the traditional moral values of neo-conservatism and take into account more general expressions of morals. This is all the more necessary as principles of neoliberalism are not limited to the conservative right, but have been embraced by the so-called “modern left”, whose dominant characteristic is to have a nontraditional attitude towards some moral issues. Social policy is one of the most interesting fields of application of the moral values attached to neo-liberalism. The traditional neo-liberal critique of the welfare state is based on the affirmation of the primacy of individual responsibility. The responsibility of the individual vis-a`-vis society is to be able to find means of self-sustenance and not to be “assisted” by society. This does not imply an absence of the welfare state, since there will always be individuals who cannot by themselves provide for their own sustenance. Even Hayek (1960) considers that the state could play a role in social insurance under conditions of free competition with private insurance providers. A problem arises when a unified compulsory state-controlled organization takes care of social insurance. Therefore, contrary to naı¨ve views, neo-liberalism is not simply “you’re on your own”.35 However, redistribution is the main problem; it transforms what genuine social insurance should be, ‘a majority of givers who determine what should be given to the unfortunate few’ into ‘a majority of takers who decide what they will take from a wealthy minority’ (Hayek, 1960). This, according to Hayek, is merely a new method of ‘pursuing the old aims of socialism’. Neo-liberal social protection should not be redistributive36 and should be individualized in

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23

37

The opposition between terms such as ‘static’ and ‘dynamic’ or ‘mobile’ and ‘immobile’ is a classic of the construction of a dominant ideology (Boltanski and Bourdieu, 1976).

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the sense that aid should be granted in exchange for something. The idea of negative taxation (endorsed by Hayek and Friedman for instance) satisfies this quid pro quo condition and ensures that working is always more profitable than not working. This has led to the redefinition of welfare as workfare: putting welfare recipients to work. This theme of social assistance in exchange for something from the individual has been revisited by the so-called “modern left” and led to a critique of the “passive welfare state” as well as an attempt to “justify” a certain degree of inequality in society. The “Third Way” critique of the social democratic conception of welfare policy by the various strands of the “modern left” (Giddens, 1994) is not substantially different from the standard neo-liberal critique and insists on the moral content of the “active” welfare state. According to the neo-liberal view, the intervention of the bureaucratic state is detrimental to the virtue of the civil society. Applied to the welfare state, “assistance” is held to annihilate the poor’s self-esteem, maintain them in a dependent state and ultimately prevent them from escaping from poverty. Rather than trying to “correct” the market mechanisms, one should, of course, always prefer market solutions which are not only economically but also morally superior. By removing the individual’s sense of responsibility, the welfare state discourages welfare recipients from improving their own situation by looking for a job, investing in human capital. A traditional argument of the conservative right is that social benefits lessen the costs of “immoral” behaviour, e.g. the dissolution of family links (single mothers. . .). The “modern left” is far less conservative in its judgements and, in fact, more faithful to the individualistic nature of neo-liberalism. In accord with what various modernization theories express, it sees the individual as faced with an ever increasing set of choices and opportunities. The duty of the (welfare) state is to enable this individual to exploit these opportunities. This is akin to what Rosanvallon (2008) describes as the ‘society of particularity’. The “old” welfare state was simply a mechanism for distributing benefits to certain categories of the population according to their status (unemployed, retired, invalid, . . .). The objective of the new welfare state would be to give to each individual the means adapted to his or her own situation in order to solve specific problems. Rosanvallon takes the example of the long-term unemployed, considered by the “old” welfare state as a homogenous population to which standard types of benefits and training should be offered, whereas the new-style welfare state would see as many different situations as there are individuals concerned. The welfare state can no longer be a ‘static’ protection system but must help individuals to ‘dynamically’ manage their life.37 Yet this new role of the

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38

‘[. . .] in a global market there cannot be a rich and growing form of end state or status citizenship; that is to say, a bundle of goods which are due to a citizen as a right outside the market. Rather, supply side citizenship stresses that citizenship is an achievement, not a status, it is available through participating in the labour market and reaping the rewards that accrue from that, and investment in skills is part of equal opportunity as a right of citizenship in this new economic context’ (. . .), (Plant, 1998).

39

The situation of women is analysed in Streeck (2009).

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welfare state calls for a new type of relationship between the individual and the state and has as a ‘major consequence’ that the exercise of a right becomes inseparable from an appreciation of behaviour. The idea that there are no (social) rights without responsibilities is based on an external monitoring of the benefit recipients, with the necessary sanctions, as well as internalized constraints in the form of an ethic of reciprocity between the individual and the state or rather between the individual and the ‘community’ in the Third Way view (Giddens, 1994). At the centre of the representation system that structures this view is the notion of ‘supply-side citizenship’ (Plant, 1998),38 according to which citizenship is an achievement, not a status, and that participation in the labour market is the normal way to qualify as a citizen. The realization of the individual’s abilities can principally be achieved through paid employment; on a slightly more positive side, the labour market is also regarded as the place where individual freedom can express itself.39 An active status of the individual is necessary for self-actualization; this implies that one should not be a passive wage earner let alone a passive welfare benefit profiteur, but an active individual eager to optimally manage his or her portfolio of skills to find valuable employment, as in ‘the Britain that works not just by self-interest but by self-discipline, self-improvement and self-reliance’ (Gordon Brown, Address to the Labour Congress, Brighton, September 29, 2009). It is also the responsibility of the individual to assume the risks which he or she is exposed to: instead of ‘passively’ waiting for the welfare system to provide the individual with means of existence, an active attitude towards risk hedging is expected. The active individual will thus be responsible for investing in human and social capital as well as in health in order to improve his or her future chances of employability. Social policy thus envisaged is, therefore, a “fair deal”. It is up to the state to implement policies that are such that the individual can enter economic competition without handicaps. This implies removing a certain number of protections, those that establish a division between ‘insiders’ and ‘outsiders’, for instance. Having “levelled the playing field”, the state is not legitimized to redistribute in order to equalize the effective situations of individuals. The whole concept of “equality of opportunity” is thought of as a substitute for the equality of

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5.2

Neo-liberalism and left social policy: the RMI

The consideration of neo-liberalism in lieu of simplistic notions such as “market fundamentalism” makes it possible to analyse the neo-liberal content of the ideology behind some social welfare measures implemented by left governments. In 1988, a left-wing government led by Michel Rocard42 introduced a new form 40

However, individuals seem to see both types of equalities as complementary and not substitutable for one another. See Amable (2009) for an empirical analysis of individuals’ preferences for the welfare state.

41

Again, such an equality of opportunity is impossible to achieve in practice, but this is of secondary importance. As an objective, equality of opportunity is instrumental in redefining the aims of public policy away from redistribution and towards areas such as education or “active” labour market policies.

42

Michel Rocard is the figurehead of the so-called French “second left”, i.e. a non-Marxist left, opposed to state intervention and more favourable to social bargaining than to the institutions of formal laws regulating the economy and social relations. Interestingly enough, Rocard presented in 1984 his view of state intervention in a way identical to Louis Rougier’s metaphor for neo-liberalism: ‘the state has the responsibility to regulate the exchange and circulation of products, to determine the framework of competition as carefully as for the circulation of motor vehicles, which does not deprive the producer

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outcomes, not a complement.40 Inequalities of situations are under such conditions expected to reflect the differences in merit and thus be justified with reference to the objective of individual autonomy, a major value in this perspective. The loser in the economic competition has had a fair chance; he or she is expected to be a good sport and gracefully accept defeat.41 The ethical content of such a policy is, therefore, central: an ethos of merit, effort and self-discipline that justifies inequalities of situations. The political dimension of the reference to principles of justice and individual merit is self-evident. The reference to justice and ethics makes it possible to reduce the political struggle to a debate about what is fair and unfair. If the competition is fair, so are its outcomes. The delegitimating of collective action towards redistribution is a political resource to be used in the construction of the cognitive frame within which the political struggle will take place. The emphasis on the individual dimension of the social question is instrumental in making the emergence and recognition of a community of interests among the losers of the economic competition more difficult and contributes to keeping them in their position. Likewise, a social policy that only deals with individuals and not groups makes collective action more difficult. The situation is not symmetric for the “winners”. Similarly to what Max Weber analysed in the Protestant Ethic and the Spirit of Capitalism, the success of some individuals reinforces the stability of structures that value individual success and delegitimate aspirations to redistribution.

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6.

Conclusion

Neo-liberalism was invented as an attempt to provide answers to the contradictions and limits of capitalism as they became blatant between the end of the nineteenth century and the 1930s crisis: free competition becoming monopolistic, the of its basic liberty just as the motorist stays free to choose his itineraries and destinations. This is my socialism’ (Garnier and Janover, 1986, p. 44, cited in Denord, 2007, p. 329, our translation). 43

The RMI was suppressed by the right-wing government of F. Fillon in 2008 and replaced by a new form of welfare, the RSA, with somewhat strengthened workfare content.

44 In particular, rights to social protection and, after 1999, the CMU (Couverture Me´dicale Universelle), as voted for by the left-wing government led by L. Jospin, which extended the benefits of social protection to individuals who had no such rights (Palier, 2008).

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of social welfare for individuals over 25 without income and who had no rights to unemployment benefits: the Revenu Minimum d’Insertion (RMI).43 In addition to a minimum income, the RMI gave certain rights to the individuals concerned44 but also entailed some obligations. To this effect, the beneficiary of the RMI had to sign a “contract of insertion”. As noted by Rosanvallon (2000), the RMI and workfare have three aspects in common: ‘the relationship between the economic and the social’; ‘the nature of social rights’; ‘the definition of the “subjects” of the social’. In both cases, social rights are reinterpreted as a contract articulating rights and obligations, particularly obligations regarding the efforts of the beneficiary to find employment. As Rosanvallon (2000, p. 87) puts it, ‘work and the welfare state now overlap’. The contract between the RMI recipient and the ‘collective’ is that the former must promise to participate in activities of inclusion that the latter promises to offer. What Rosanvallon (2000) describes is workfare dressed up as social and moral improvement: ‘inclusion’ (in the labour market) would be recognized as an individual right and thus define the obligations of society towards the individual; the right to inclusion would be a social right ‘enriched’ with a moral imperative: the ‘social usefulness’ of an ‘active citizen’ who is not just someone who needs help. Social participation is understood here as participation in the labour market and economic aid is subordinated to this participation. On the other hand, society’s obligation towards the individual is to facilitate inclusion in the labour market, which may take the form of labour-market ‘deregulating’ policies or more accurately lowering employment protection and workers’ collective rights in order to abolish the distinction between ‘outsiders’ and ‘insiders’. The complementarity of this ideology with other aspects of neo-liberal capitalism is thus self-evident. The fact that RMI in practice was different from the idealized view presented by Rosanvallon is immaterial. The logic behind the implementation of the RMI, and even more that of its successor the RSA, is a quid pro quo logic that comes from a neo-liberal view of social protection.

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References Amable, B. (2009) ‘The Differentiation of Social Demands in Europe. The Social Basis of the European Models of Capitalism’, Social Indicators Research, 89, 391–426. Amable, B. and Palombarini, S. (2005) L‘e´conomie Politique n’est pas une Science Morale, Paris, Raisons d’Agir.

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“doux commerce” leading to imperialist confrontations, the Russian revolution and the “threat” of socialism. . . . The answer proposed by leading liberal intellectuals was not to revert to classical liberalism and even less to go back to laissezfaire but to develop an alternative to both laissez-faire and collectivism. These ideas have become influential to the point of becoming the new ideology of capitalism. Many contributions have emphasized the patient work undertaken by think tanks and neo-liberal societies to diffuse this ideology and gain influence among business and political circles (Halimi, 2004). A few words can be said on the social conditions for the success of such an ideology. There is a certain potential for liberation of the individual from existing “traditional” dependence in the neo-liberal ideology. This could appeal to members of certain social groups. The ethics of self-reliance can be used as a resource in a political struggle to fight discrimination or to gain economic independence. Therefore, the neoliberal ideology may, at least in part, be instrumental in opposing gender-based or ethnic discrimination, for instance, and thus gain some social support. Similarly, the logic of ‘fair’ competition and the delegitimation of protection and established positions is a legitimacy resource available to new entrants in a given field or market. Therefore, new entrants will be ‘naturally’ inclined to adopt a system of values that promotes competition and the constant questioning of established positions, whereas incumbents will be more prone to emphasize the dangers of ‘excessive’ competition. Individuals who expect upward social mobility will also find in the ideology of competition the values that legitimate their social trajectory, whereas those who expect to go down the social ladder will more likely oppose such values. In a similar fashion, net contributors to the social protection system or redistribution can be expected to adopt an ideology that underlines the merits of self-reliance. The idea that neo-liberal capitalism is amoral or even immoral and that it is adverse to regulation is erroneous. The current debates on the financial and economic crisis that focus on the dangers of “market fundamentalism” and the lack of morals in markets lead to the conclusion that market regulation and morals could save capitalism from its worst tendencies. Unknowingly, most participants in these discussions re-enact the debates of the 1930s that led to the invention of neo-liberalism. Are those who ignore the lessons of the history of economic thought condemned to reinvent neo-liberalism?

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Socio-Economic Review (2011) 9, 31–57 Advance Access publication August 19, 2010

doi:10.1093/ser/mwq017

Crisis and renewal: the outlines of a twenty-first century new deal† University of California, Davis, CA, USA *Correspondence: [email protected]

Most analyses of the US financial crisis of 2007– 2009 focus on the proximate causes. This article sees the crisis as a consequence of the decline of a longterm pattern of accumulation in the USA and seeks to outline the requirements for a new period of dynamic economic growth. Drawing on work done by the French Regulation theorists and the US analysts of Social Structures of Accumulation, the paper attempts to describe the types of institutional changes that would be needed to spark a new period of stable economic growth in the USA and in the rest of the world economy. The paper outlines what a green mass consumption economy might involve. Keywords: capitalism, crises, economic change, economic reform, institutional change, USA JEL classification: P1 capitalist systems, G01 financial crisis

1.

Introduction

Many words have already been written explaining the causes of the 2007 – 2009 ‘Great Recession’, and many more can be expected in the near future (Cassidy, 2009; Leopold, 2009; Skidelsky, 2009; Wessel, 2009; Lounsbury and Hirsch, 2010). Although many of these contributions are valuable in tracing out the history of credit default swaps and the policy failures of Alan Greenspan and other government regulators, attempts to place the crisis in the context of the ‘long duree’ have been less common. The present paper seeks to understand the crisis in relation to long-term economic growth patterns in the USA. †

An earlier version of this paper was presented at the Commonalities of Capitalism conference at Ringberg Castle in November of 2009 and at the American Sociological Association meetings in August 2009. I am grateful for comments received at those venues and for specific suggestions from Karl Klare, Greta Krippner, Michael Reich, Marc Schneiberg and Wolfgang Streeck.

# The Author 2010. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected]

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Fred Block *

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1.1

Theoretical premises

This paper is an attempt to synthesize arguments drawn from the Regulation and SSA schools. The fact that there is considerable common ground between these two approaches has already been noted in the literature (Kotz, 1994; Coban, 1995). Moreover, both of these schools are organized as ‘big tents’ rather than as tight orthodoxies; there are considerable differences in emphasis and argument by different writers within each of these traditions (Kotz et al., 1994; Boyer and

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This paper builds on bodies of works developed from the late 1970s by scholars on both sides of the Atlantic who sought to make sense of the cycles of growth and stagnation that have long characterized the major market economies. Much of this work was itself stimulated by Nicolai Kondratiev’s early analyses of ‘long waves’ of 50- or 60-year duration that are divided between a phase of expansion and a phase of contraction (Goldstein, 1988). However, researchers in the tradition of the French Regulation School and the US Social Structures of Accumulation (SSA) approach have worked to move beyond a mechanistic approach to long waves (Kotz et al., 1994; Boyer and Saillard, 1995; McDonough et al., 2010). They argue that a new period of economic expansion depends on creating new supportive structures that could undergird high levels of productive investment. This paper attempts to combine the insights in these bodies of scholarship to situate the 2007 – 2009 crisis in relation to long-term development patterns. It also seeks to outline what kind of new ‘regime of accumulation’ could be constructed in the aftermath of the crisis. While the usage here diverges somewhat from the Regulation theorists, it encompasses the institutional reforms necessary to undergird a new period of sustained economic growth. Such an exercise is inherently speculative because the period when a regime of accumulation enters into crisis can be quite extended, and when it coincides with a crisis of global hegemony (Arrighi and Silver, 1999), it can produce periods of hot or cold war that have unpredictable consequences. Furthermore, the construction of a new regime of accumulation is not a deterministic process; there are always multiple possible paths that a society could move down. However, despite these serious problems, it is still useful to engage in this type of analysis. Each new regime of accumulation is pre-figured by earlier historical developments and by the particular strains that brought established patterns into crisis. Asking ‘what is next’ forces us to refine our understanding of these historical shifts and can serve to highlight issues that require more research effort. This body of research and theory also has the potential to guide political actors as they struggle to develop new institutional structures and fight for certain political and economic reforms in the face of a future that is uncertain and unknowable.

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(1) A system of production relations for the dominant sectors of the economy incorporating both the technologies and the social relations of production. (2) A way of organizing and stabilizing the structure of demand so that firms will be willing to sustain high levels of investment.

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Saillard, 1995; McDonough et al., 2010). Hence, it is consistent with the spirit of both schools to elaborate a mashup or combination of some of their key arguments. (For other work that moves in a similar direction, see O’Hara, 2006.) The particular synthesis that I will propose also builds on a particular reading of Karl Polanyi’s analysis in The Great Transformation (Block, 2003, 2007). This reading insists that markets are always and everywhere embedded in certain political, legal and ideational elements. It follows that there is no unchanging essence of ‘capitalist’ societies. On the contrary, market societies are always hybrids that combine market and non-market institutions. At any given historical moment, there are multiple ways to organize effective and efficient market economies. Combining Regulation Theory and SSA Theory with this Polanyian foundation requires some adjustments because both of these theoretical schools still bear some traces of the view that capitalist societies have some unchanging core. It tends to be assumed, for example, in the Regulation School that relations at the point of production have a privileged role in shaping the larger social order (Boyer and Saillard, 1995, p. 39). From a Polanyian perspective, this is an unwarranted assumption since production relations can be reshaped through political initiatives designed to reduce the power imbalance between workers and managers. Different analysts in these two schools have compiled somewhat different catalogues of the critical elements of a regime of accumulation. Some of the classical statements identify three key elements (Reich, 1994), while others mention five (Boyer and Saillard, 1995). But one can get to the essence of the argument by examining the concept of ‘Fordism’—a term initially introduced by the French Regulation School to characterize the regime of accumulation that dominated in the USA and Western Europe from the end of World War II through the late 1960s (Aglietta, 1979). Henry Ford’s breakthroughs in mass production of cheap automobiles in the early years of the twentieth century pre-figured an economy organized around mass production and mass consumption. To get to this new regime required new institutions that supported mass consumption and that allowed the government to play a central role in stabilizing the business cycle and assuring a pattern of income distribution that supported mass consumption. Although the precise timing varied by country, these new institutions were constructed between 1933 and 1950. The example of Fordism suggests the four critical dimensions of a regime of accumulation for a hegemonic power:

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(3) Financial mechanisms that support both the system of domestic production relations and the structure of demand. (4) International arrangements that create complementaries in trade and financial flows in relation to the rest of the world.

1.2

What happens between successful regimes of accumulation?

Social science theories that posit the successive rise and fall of distinct social arrangements must establish criteria for periodization that allow one to distinguish periods of order from periods of disorder. Both of these schools define successful regimes of accumulation as times when economic growth is vigorous and periodic recessions are mild and short. The period in which an established regime goes through decline and dissolution is generally marked by longer and deeper recessions and even where there are economic expansions, the rate of growth tends to be slower. 1

In Europe, there was considerably less emphasis on consumer finance and more emphasis on state financing of housing and other services that were central to working class consumption.

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The Fordist regime of accumulation in the USA, in short, rested on mass production of automobiles and other consumer durables by unionized, semi-skilled workers whose income kept pace with productivity advances. The purchasing power of these production workers helped to sustain a pattern of demand based on suburban growth, automobiles and single family homes. These arrangements were supported by significant federal investments in building the highway system and in maintaining supplies of cheap petroleum. These sources of demand were supplemented by continuing high levels of military production, even during periods between hot wars. The large corporations who produced most of the consumer durables were able to finance expansion by reinvesting profits, so pools of available financial capital were directed elsewhere in the economy. A system of consumer-oriented finance, centring on home mortgages, supported the mass consumption economy.1 The strong global dimension is important because the infrastructure of the global economy has historically depended on a hegemonic power—England in the nineteenth century and the USA from World War II onward (Block, 1977; Polanyi, 2001 [1944]). Large US corporations exported capital in the form of foreign direct investment as a way to participate in overseas growth opportunities and the Bretton Woods system of ‘embedded liberalism’ provided an infrastructure in which strong US economic growth was reinforced by high growth rates overseas (Block, 1977; Ruggie, 1982).

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2.

Tracing the recent history of regimes of accumulation in the USA

Saez and Piketty (2007) have been studying long-term trends in the USA in income inequality, using data from the Internal Revenue Service. One of their graphs (Figure 1) shows a remarkable pattern. When they use a definition of income that includes realized capital gains, the share of the top 10% of households in the USA reached a peak of just under 50% in 1928.3 After a long period in which the top decile’s share stayed around 35%, income inequality began moving upward in the Reagan Administration and again reached the same peak of just under 50% in 2006. The symmetry here is startling. In the year after both peaks in 1928 and 2006, the US economy descended into crisis. In both eras, extremely unequal income distribution had two dramatic macroeconomic consequences. First, high-income households were heavily engaged in speculative activity that fuelled a spectacular 2 One of the reasons for the severity of the 2007– 2009 downturn in the USA was that the dramatic fall in housing prices was eroding the value of homes—one of the key buffers that usually protects households from the business cycle. 3

Defining household income to include realized capital gains is appropriate for these purposes. During periods of intense speculative activity, the very rich take a large portion of their income in the form of realized capital gains because such gains get preferential tax treatment. The widespread use of stock options for executive compensation is a recent example of this transformation of regular income into capital gains (Lazonick, 2009).

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But an historical dimension is important here. In the nineteenth century and through the Great Depression of the 1930s, the decay of an older regime of accumulation was usually marked by a prolonged and severe depression with continuing levels of very high unemployment. But this has not happened since World War II. In all developed market societies, government spending represents at least 30% of Gross Domestic Product (GDP) and serves as a stabilizing force that limits the severity of a downturn. Furthermore, as societies grow wealthier, the stock of financial and real assets owned by average households serves as a buffer against a continuing economic contraction. For example, some consumers are able to rely on savings to maintain consumption levels and some of the unemployed are able to use the car, the personal computer or the garage to launch a new business that generates some income.2 Since these two tendencies put a floor under the level of economic activity, the differences between periods of a well-functioning regime of accumulation and a dysfunctional or decayed one inevitably narrows. This is the context for increasing disagreements about the proper periodization of regimes of accumulation in the USA (McDonough, 2010).

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asset bubble. In the 1920s, this activity focused on the stock market; in the 2000s, it was evident in the housing market and in the markets for a variety of speculative financial instruments including collateralized mortgage obligations and credit default swaps. Secondly, the fact that the bottom 90% of households were left with only about a half of all income meant that consumer demand was heavily dependent on increased rates of borrowing. Once the downturn began, consumer credit dried up pushing the economy steadily downward. But, in both periods, the speculative boom and crash were the symptoms of deeper problems. We now understand that the crisis at the end of the 1920s was part of the transition to a mass production/mass consumption economy. The 1920s had been an era of major gains in manufacturing productivity that were both labour saving and capital saving (Block, 1987, ch. 6). The greatly expanded production of consumer goods was accompanied by the birth of modern advertising and the initial use of radio as a mass medium. However, there were significant obstacles to the emergence of a mass consumption economy. The growing factory labour force was not paid enough to purchase many consumer durables since unionization efforts had been effectively defeated after World War I. Even much of the middle class lacked access to credit, especially long-term housing loans. New Deal reforms in the period from 1933 to 1940 laid the foundation for the successful emergence of the Fordist regime in the three decades after World War II. To be sure, not all of the key changes occurred in Franklin D. Roosevelt’s

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Figure 1 Income share of top 10%.

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(1) (2) (3) (4)

4

Redistribute income away from the top 10% of households. Support new and durable structures of demand. Create regulatory obstacles to the speculative use of capital. Build new circuits that direct capital into the financing of productive activities such as home building.

Kotz (1994) points out that the core of a new ‘social structure of accumulation’ is usually built first and other peripheral but important elements are added later.

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(FDR’s) first two terms; institutionalizing that new economy depended on important further steps taken between 1945 and 1953, including the GI Bill, post-war labour accords, the Marshall Plan, and the resort to military Keynesianism starting in 1950. Nevertheless, it is reasonable to argue that choices made in FDR’s first two terms were absolutely critical in steering the society in this new direction.4 As reflected in the Saez and Piketty data, the New Deal put in place new rules and new institutions that helped redistribute income downward. The growth of organized labour was a major part of this, but so also were New Deal tax reforms and the creation of programmes such as Social Security and Unemployment Insurance that redistributed income to those outside of the labour force. The New Deal also put in place some of the key institutions required to translate this more equal distribution of income into the consistent demand needed for a period of sustained economic expansion. The newly created mortgage finance system made possible the significant expansion in home ownership that undergirded the post-World War II economic expansion (Mason, 2004). At the same time, New Deal reforms of the financial market discouraged some of the more speculative uses of capital. The Securities Exchange Act, GlassSteagall and other financial reforms closed down some of the casino-like practices that had helped to generate the bubble and the crash (Wolfson, 1994). High marginal taxes on short-term capital gains further dampened speculative activity. New Deal policies also helped to construct new circuits that directed available capital into productive channels such as the new mortgage credit system. The most significant of these mechanisms was the expansion of government itself. In 1929, receipts of federal, state and local government represented about 10% of GDP, but this had risen to 25% in 1946. Since some of this expanded government was financed by progressive taxation, the consequence was that highincome households had less extra income that they could risk in speculative investments. Moreover, a substantial share of government spending, particularly in the early post-World War II decades, went into education to improve the skills and capacity of the labour force. The New Deal template for launching a transition to Fordism can be summarized by four distinct tasks:

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2.1

The mass consumption economy and its limits

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The mass consumption economy that was consolidated after World War II was built around suburbanization, purchases of consumer durables, including automobiles, and cheap energy. While this was a powerful formula for sustained economic growth, it is important not to bathe it in nostalgia. There were periodic recessions, minorities and many women were excluded from desirable job opportunities, and high levels of military spending were still needed to push the economy towards full employment (Alic, 2007). Nevertheless, the period from 1945 to 1975 in the USA stands out in comparison with the rest of the century in providing sustained and broadly shared income gains. But as the post-World War II expansion matured in the 1960s, it ran into increasing headwinds and difficulties. The period of crisis from the late 1960s through 1975 overlapped with the intensification of the Vietnam War that placed severe strains on the US position within the global economy (Block 1977). And, in fact, the major symptom of economic difficulties was increasing inflationary pressure that began with Lyndon Johnson’s reluctance to raise taxes to finance the war and continued as domestic conflicts over resources and income shares intensified. The inflationary pressures suggested deeper problems with this regime of accumulation. Even in periods of vigorous demand, manufacturing’s ability to provide new job opportunities was limited because of rapid productivity advances. It became obvious that future employment growth would have to occur in the service sector but the inherited policy framework provided few tools to structure that growth. Moreover, fiscal strains were developing as government responsibilities—including financing of services—were expanding faster than the available revenue (O’Connor, 1973). Furthermore, minorities and women who had been significantly excluded from the gains of the earlier era began to make demands. Most significantly, the pattern of growth based on suburbanization, automobiles and cheap energy began to run up against geographical and environmental limits. As suburban development moved towards outer bands of suburbs, the costs of sprawl, long commutes and auto-based transit became more evident. The sudden rise in petroleum prices after the 1973 Middle Eastern War also indicated the limitations of reliance on cheap energy. These problems generated intense debate during the 1970s about the future of the US economy. Environmentalists and post-industrial analysts argued that the economy needed a radically different growth model and major shifts in government policy. These calls were mirrored on the political right as the increasingly influential followers of Milton Friedman called for a radical reduction in government’s role in the economy as a way to end inflationary pressures and stimulate a

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2.2

An ersatz regime of accumulation: 1981 – 2008

It is almost as if Reagan-era business and political elites had studied the regime of accumulation theory. They recognized that creating conditions for a new period of economic expansion required a sharp break from past social and economic practices. But they somehow imagined that a new period of growth could happen without the kind of Schumpeterian ‘creative destruction’ that undermines the position of long-established economic interest groups. The consequence is that they put in place an ersatz regime of accumulation that was doomed to fail. Entrenched business interests such as the auto companies, the petroleum industry, defence firms and big financial institutions worked hand-in-hand with conservative political leaders to construct a ‘free market’ regime of accumulation designed to bolster business profits at the expense of all other social groups. The strategy that they pursued was to reverse almost all of the key reforms of Roosevelt’s New Deal. The accord between business and labor was jettisoned, the social safety net was weakened, and the share of income going to the top 1% of households increased dramatically as a result of changes in tax law, changes in financial regulation, and new corporate compensation practices (Hacker and Pierson, 2010). However, this project lacked a way to generate significant new productive investments in the economy. This is what made it an ersatz regime; it relied for economic growth on almost all of the same sources of demand that had been dominant under Fordism—single family housing, automobiles and defence

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new period of economic expansion. The Friedmanites did not argue in terms of growth models; they claimed that if government would cut taxes and regulation, private sector investment would produce substantial job and income growth. As it happened, the election of Ronald Reagan in 1980 made the Friedmanites the dominant faction in shaping economic policy, and the US government embraced massive tax cuts, weakening of labour unions, reductions in public provision for the poor and a shift of regulation to allow business and finance to shift costs onto other groups. Analysts ever since have debated as to whether this ‘neoliberal’ or ‘market fundamentalist’ turn in policy represented a new regime of accumulation or simply a contradictory mix of different elements (McDonough, 2010; Wolfson and Kotz, 2010). The question is critically important because many of the policies implemented under Reagan remained in place through 2008. Since 1980, there have been three episodes of economic expansion (defined by employment growth) from 1982 to 1990, from 1992 to 2000 and from 2003 to 2007. Should these expansions be understood as examples of a new ‘free market’ regime of accumulation or as something else?

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5

When adjusted to population, automobile production continued to grow through two of these expansions. The same cannot be said for new housing starts. They are at roughly the same level in 1959 and 2000 despite population growth of 50%. This reflects the geographic and environmental limits to continued suburban growth. 6 Note that Figure 4 does not take account of the shift of income towards the top 10%. A chart of the interest burden on median income households would show a much steeper rise, especially in the 2000s.

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production. The only exception to this—new investments by business and households in computer-based technologies—was an accidental rather than an intrinsic part of a new regime of accumulation. These efforts were ultimately an exercise in policy nostalgia that worked only by squeezing some additional life out of the Fordist regime of accumulation. This exercise relied on a combination of domestic Keynesian measures and increased borrowing, including massive borrowing from abroad. The expansions in the 1980s and 1990s were surprisingly vigorous because of the contingent and unexpected growth in the computer industry that provided unusually strong support for employment, investment and demand. The computer boom in the 1980s centred on the rapid growth in the market for personal computers, while that in the 1990s was driven by the take off of web-based computer applications that kept personal computer sales strong and led to a new round of investment in software and web applications. To be sure, government innovation policies had been critical to the development of the computer industry in the 1960s and 1970s and had financed many of the key innovations that made possible an interconnected world of personal information devices (Fong, 2001; Block, 2008). Nevertheless, the growing centrality of computerization to the economy was unanticipated by policy-makers. Beyond the computer booms, the continuity with the pre-1980 economic expansions is evident when one looks at the trends in construction of new single family homes and production of motor vehicles (Figures 2 and 3).5 These symbols of the mass consumption model continued to be the dominant elements of consumer demand in these three expansions with new single-family housing construction reaching spectacularly high levels in 2006. Notably, US motor vehicle production failed to rise in the most recent expansion, which is another indication of the exhaustion of Fordism. Another continuity was the resort to domestic Keynesian stimulus as a means to bolster employment growth. Both Reagan and George W. Bush presided over quite substantial increases in defence spending, whereas the Clinton Administration used minimum wage increases and expansion in the Earned Income Tax Credit to expand purchasing power at the bottom of the income distribution. However, the most important factor was the more rapid growth of consumer borrowing in all three of these economic expansions (Figure 4).6 As the relentless

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Figure 3 Motor vehicle production (thousands of units).

shift of income towards the top 10% started in motion, the only way that most consumers could maintain their standard of living was by taking on increased debt. Since there was a strong upward trend in housing prices across these expansions, consumers were able to borrow against their increasing equity in housing—using their homes as automated teller machines. This dramatic expansion in consumer credit worked to breathe new life into the exhausted model of suburban-based mass consumption, but by the 2000s, the fragility of the strategy was increasingly apparent. To keep things going, there was an unprecedented expansion of credit—often on predatory terms—to urban minorities who had

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Figure 2 Single family housing starts (thousands of units).

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previously been excluded from access to mortgage finance. When this subprime lending boom suddenly halted, so, also did the whole economic expansion because of its dependence on ever-increasing debt levels (Leopold, 2009). All three of these economic expansions also depended on foreign borrowing. The pattern was set in the early 1980s when the Reagan Administration was trying to revive the economy after the 1981 – 1982 downturn. The combination of massive tax cuts and increased military spending assured that the federal budget deficit would increase and the US international payments were in chronic deficit because imports greatly exceeded exports and the US government was spending vast sums overseas on military and political initiatives. As Krippner (2011) documents, the Reagan officials were surprised to find that other nations, particularly in Asia, were willing to loan the USA the funds to cover both of these chronic deficits. This began a pattern that continued for the next quarter century. By all accepted theories of international economics, nations that run balance of payments deficits are supposed to carry out adjustments that move their accounts back towards balance. However, the US simply ignored this fundamental principle and foreigners continued to finance the US deficits. They did so because the obvious alternative—a sharp contraction in the US economy designed to adjust its payments balance—would have led to a global economic slowdown, resulting in heightened unemployment, particularly in the Asian nations that ran chronic trade surpluses with the USA. In short, the world colluded in pretending that the US deficit was not a serious problem (Schwartz, 2009). But this reinforces the point that these three economic expansions were built on unstable foundations. The shakiest of these foundations were oil imports that

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Figure 4 Interest payments as share of personal income.

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3.

Towards a new regime of accumulation

The outlines of a feasible alternative regime of accumulation can be discerned by looking at the key problems that have plagued the US economy in recent years. Foremost among these is growing income inequality. The unequal distribution of income makes the economy highly vulnerable to speculative bubbles, and it artificially restricts the purchasing power of the great mass of the population. Hence, a new regime of accumulation needs to be based on shifting the income and purchasing power to those lower in the income distribution. In this sense, a new growth model has to again be based on mass consumption where there is a positive synergy between rising real income levels and expanding output. Another key feature of the new growth model has to be a systematic effort to restore the US payments to balance. This involves a systematic effort to cut US petroleum imports through a combination of conservation and accelerated deployment of alternative energy technologies. The US also needs to cut back on overseas outlays by government and corporate entities. This involves winding down foreign wars and aggressively shrinking the expensive global network of US military bases. It also means shifting the tax incentives so that US-based firms place more emphasis on conquering foreign markets through

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were key to the chronic US trade deficit through this whole period. By the 2000s, the bill was running at between $300 and $400 billion per year—a very large share of the overall US payments deficit. The USA should have acted aggressively across this whole period to cut those petroleum imports and that would necessarily have meant a turn away from this exhausted growth model. In short, this ersatz regime of accumulation was deeply flawed and a new period of sustained economic expansion requires the conscious pursuit of a different growth model than what has been in place since the end of World War II. The old model is effectively dead for several reasons. Consumers now lack the purchasing power to buy homes or motor vehicles on the scale that the old model requires, and it seems highly unlikely that they will be willing in the immediate future to again engage in heavy borrowing to sustain demand. Moreover, it is difficult to imagine that the rest of the world would be willing to continue financing a continuation of past patterns. China, Japan and other nations hold vast dollar reserves, and they are now reluctant to see the US pursue a path that will inevitably lead to massive devaluations of the dollar. To gain their continuing cooperation, the US policy-makers have to persuade them that the USA is on a path that will bring its payments back towards balance and that cannot be done within the old growth model.

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exports rather than through off-shore production. In particular, some of the manufacturing capacity that has moved overseas has to be rebuilt in the USA. In short, the true post-Fordist regime would be a green mass consumption economy. If we use the same four categories that were derived from the Fordist regime, this green regime would involve:

While the idea of a green mass consumption economy might sound like an oxymoron, it does not have to be. An accelerated shift in the consumption from goods to services could diminish the negative environmental impacts of increased consumption since services tend to be less resource intensive than goods. By 2007, services—including housing and transportation other than owner-occupied vehicles—represented 60% of personal consumption expenditures when compared with 40% in 1960.7 However, new policies and new institutions are needed to consolidate and rationalize this shift towards the more efficient production of collectively consumed services such as health, education, transportation and urban amenities. What would be the mix of specific policies that are necessary to facilitate a transition to this new green consumption model? The next sections elaborate some specific ideas beginning with strategies to reverse the concentration of income gains at the top.

3.1

Income redistribution

While it is difficult to exaggerate the importance of a more egalitarian income distribution for establishing a new growth regime, it seems very unlikely that this objective could be met through an increased use of progressive taxation alone. Any US administration that seeks to ‘soak the rich’ is likely to solidify the 7

Moreover, this is the percentage of after tax income that is spent on services. It excludes the services that people pay for through taxation.

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(1) A production system for services, for energy, for transportation and for manufacturing that uses advanced technologies and employees with polyvalent skills to produce high-quality goods and services. (2) Sustained public and private investments in new energy technologies, new transportation systems and urban infrastructure that provide significant opportunities for employment and business growth. (3) Restructuring of the financial flows to support these investments in new energy technologies, transportation systems, urban infrastructure and a more skilled labour force. (4) A movement of the US trade account towards balance and an end to the period of sustained US borrowing in international markets.

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8

The USA should also create a separate capital budget for the government that could be financed by borrowing. However, even with this step, new sources of revenues would be needed because public sector investment categories such as infrastructure, research and development and also education are in need of significant expansion.

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opposition of a bloc of high-income taxpayers who would use their formidable financial resources to support candidates who will promise to reverse those tax increases. Since tax cut politics helped to solidify Republican political control for a generation (Martin, 2008; Block, 2009), this would be a very risky choice for any US administration. Moreover, the most advanced European welfare states constructed their more egalitarian arrangements on the basis of tax systems that were not particularly progressive. Sweden, for example, has funded wide-ranging social programmes on the basis of a tax system that placed much of the burden on the middle and working classes (Lindert, 2004). High-income individuals and major corporations were able to limit their exposure to tax increases while they also benefited from higher labour productivity that came as a result of Social Democratic social programmes. Since Sweden has been able to almost completely eliminate child poverty, it is important to understand how their process of equalization has occurred. Social programmes reduce income inequality by raising the floor for the bottom third to a half of the income distribution. The combination of income maintenance programmes, a strong job-training system and widespread unionization means that the kind of people who would be low-wage workers in the USA are able to achieve a decent standard of living in Sweden. This sets up a virtuous cycle where their children are no longer at an educational disadvantage and have the opportunity for mobility. This is essentially a human capital strategy in which income inequality is reduced by diminishing the human capital gap between high- and low-wage individuals. To sustain this also requires a regulatory strategy that works to block the growth of new pockets of low wage work. Learning from the Scandinavian experience does not mean abandoning all efforts to improve the fairness of the tax system. There is considerable room to increase revenues by reversing various loopholes, regulatory lapses and illconceived changes that were introduced into the tax system over recent decades. But even if serious tax reform were combined with significant reductions in defence budgets, the current rate structures of corporate and personal income taxes in the USA are unlikely to generate enough revenues to finance a human capital upgrading strategy.8 The problem is that the existing commitments including interest payments on the debt, Social Security, Medicare and programmes for veterans combined with outlays for infrastructure and for science and technology will absorb most of the revenues. Trying to overcome the shortfall

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9

A 5% VAT is estimated to raise $285 billion in 2008 (Pear and Calmes, 2009).

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by a significant increase in marginal tax rates is likely to fail politically. Since expanding payroll taxes is also undesirable, the logical strategy is to emulate Europe and introduce a value added tax (VAT) as an additional revenue stream. The VAT is assessed at every stage of the production process, but unlike a sales tax, it is incorporated into the final cost of the product and that makes it somewhat invisible to the consumer. Moreover, unlike most sales taxes in the USA, the VAT falls on services as well, and that greatly expands the revenue base. In Europe, VAT rates are often 20% or higher and they produce very substantial revenue streams. Moreover, the negative impact of a consumption tax on lower income households can be mitigated. The VAT can be rebated to consumers whose income falls below a certain level; this could easily be done in conjunction with the earned income tax credit. Revenues from the VAT could also be tied to programmes that are aimed at improving the human capital of people in the lower half of the income distribution. The VAT could initially be set at a rate well below the European levels. The annual yield from state and local sales taxes was about $412 billion in 2006. If the VAT produced $650 billion in total revenues,9 it would initially leave close to $200 billion per years after funds were rebated to state and local governments to make up for lost sales tax revenues and rebates were made to poor households. These resources could then be used to finance universal access to health services, subsidies to make quality pre-school available for many more children, a significant improvement in job training and skill development programmes as well as strong financial support for adult workers to pursue college and higher level degrees. Ideally, something on the scale of the GI Bill in the 1940s is needed to help a large portion of non-college educated young people between 18 and 35 to acquire new skills. There is also a need for significant regulatory measures to improve the bargaining power of low-wage workers. Legislation that would significantly improve the opportunities for unions to win representation contests is a priority. Other steps include indexed increases in the minimum wage, actual enforcement of wages and hours rules, as well as immigration reform measures that eliminate the incentives for employers to use undocumented employees to drive down wage levels. The effectiveness of income redistribution is ultimately dependent on strong demand that helps to tighten the labour market. The big decline in income inequality that occurred during World War II (Figure 1) was the result of unusually tight labour markets. While it is unrealistic to expect anything comparable with that occurring during peacetime, something like a decade of unemployment near the 4% level could produce significant gains. But as argued earlier, there is no

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way to return to such high levels of employment through the old pattern of growth; there needs to be a new structure of demand. 3.2

Consolidating a new structure of demand

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One of the most important features of this new model is consolidating the shift of consumer demand from goods to services. While consumers need certain services, there has been a significant lag in the society’s ability to produce them in sufficient quantities while meeting quality standards. So with health care, education and child care, there has been a bifurcation of the market—with poor and working class people having either no access or access to substandard services. And the cost of the services that meet quality standards has risen much more rapidly than other items in the consumer price index. The price increases effectively ration access to high-quality services pushing people in the middle into the substandard market. Universalizing access to health care and quality child care and eliminating financial barriers to higher education and job training is only half the battle. The other critical half involves reorganizing delivery systems to increase both the quality and the quantity of available services. US health care, in particular, has been plagued with perverse incentives where private actors profit by reducing access to service or by pushing services of dubious value. As the experience of a number of European countries suggest, the alternative can still be a mixture of public and private institutions, but systematic efforts have to be made to align incentives to produce higher standards of care. This also requires a coordinated effort by the medical profession and academic researchers to establish ‘best practices’ that are actually adopted by the broadly dispersed network of hospitals and providers. In education at all levels, the problem has been a combination of inadequate funding and a failure to diffuse best practices to upgrade the skills of practitioners and take better advantage of new technologies. These are largely organizational challenges that confront both public and private educational provisions, and they cannot be solved by imposing performance reviews that are administered largely through an increased use of standardized testing. As with health care, they require the broad diffusion of best practices rooted in a commitment to learning that is both life long and active. The second element of the demand story centres on housing, transportation and energy use. Over the next two decades, the USA needs to invest trillions of dollars in creating greener communities, non-carbon sources of energy and new forms of transportation. The initial phase of this process will centre on large investments in retrofitting the existing housing and building stock to be energy conserving, the rapid build out of alternative energy technologies such

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3.3

A new production regime based on polyvalent employees

For more than a generation, scholars have been documenting the existence of post-industrial workplaces organized around self-managing teams of skilled employees in both manufacturing and service settings (Hirschhorn, 1984; Milkman, 1997; Smith, 2001). Studies of Japanese lean production, in particular, have shown that raising employee skills and giving them more control over the production process yields significant advances over mass production techniques in efficiency, quality and the flexibility of the production system 10

These are biofuels made from agricultural waste, garbage or weeds, not the type that competes for land and other inputs with agricultural production.

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as solar, wind and biofuels,10 and the creation of new rail networks and vehicles powered by electricity or hydrogen. A subsequent phase will continue these initial investments and add two new emphases. The first is building millions of new green, higher density housing units with convenient mass transit access to employment. The second is a redesign of the existing manufacturing and agriculture processes to reduce energy use and other forms of waste. Since the USA has been spending upwards of $300 billion per year on imported oil, a large share of these investments can literally be financed out of future savings on the import bill. Since all of that demand is currently diverted overseas, shifting it back into the US domestic economy would produce job growth and economic dynamism. Moreover, since the efforts of the USA would be integrated with global efforts to avoid a climate change catastrophe, there would also be abundant export opportunities for new green technologies. To support this green transformation requires a significant strengthening of the US innovation economy, the set of institutions and expenditures designed to transform technological breakthroughs into useful products and services (Block, 2008; Block and Keller, 2009). Continuing and accelerating innovation is obviously critical for developing efficient new sources of energy, new energysaving products and for redesigning production processes to eliminate all forms of waste. The US innovation economy has been growing substantially, but it has struggled with insufficient funding. The government’s outlays for civilian R&D peaked in 2003 and have declined since then. Moreover, the tens of thousands of small, high-tech firms that are increasingly responsible for innovations in the economy (Block and Keller, 2009) face chronic difficulties in getting the financing that they need. A substantial increase in funding to both the public and the private sides of the innovation economy would go a long way towards accelerating innovation, strengthening demand and building new jobs and new industries.

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3.4

Reorganization of capital flows

During the three decades in which income inequality in the USA has worsened, the economy has experienced a series of financial bubbles in which inflows of new capital have driven asset prices to unsustainable levels. In the 1980s, there was substantial overbuilding of commercial real estate and a frenzy of mergers and acquisitions financed by junk bonds. In the 1990s, there was a huge rise in stock prices, particularly focusing on internet stocks. When that bubble burst in 2000, the housing bubble immediately accelerated with increases in prices and the huge expansion of dubious mortgage lending. These bubbles have been extremely costly for the economy. Their bursting generally produces a period of recession or slow growth, resulting in trillions of dollars of lost output and hundreds of billions of dollars are lost through write downs of asset values. Perhaps even more importantly, the diversion of investment flows into these speculative manias deprives the economy of the added output that would have come from more productive investments. Moreover, the bubble economy has been closely linked to the imposition of irrational financial discipline on corporate managers; they face unrelenting pressure to keep stock prices up which often means sacrificing spending that will strengthen firms over the long term (Bogle, 2005). New channels must be created to direct capital into more productive domestic uses. The USA must also restore its international trade to balance, so that it is no longer necessary to finance the deficit through international borrowing that helps

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(Womack et al., 1990). However, the overwhelming managerial pre-occupation with cutting employee costs in the USA in the period since 1981 has meant that these new employment strategies have been adopted in a very uneven way in the USA. In some cases, high levels of autonomy and skill are granted to just a small segment of the labour force while most other employees are managed through Fordist or pre-Fordist strategies. In others, efforts to create more participatory forms of work organization are defeated and the workplace regresses to earlier patterns (Milkman, 1997). But an analysis of some of the key economic sectors in a green mass production economy suggests the necessity of reorganizing many workplaces around polyvalent workers organized in semi-autonomous teams. With ongoing technological innovation, running high value added manufacturing plants, producing and installing solar panels (Knight, 2011) and batteries for electric cars or the building out of a ‘smart’ electrical grid or systematic improvements in the delivery of health care and education, there is a need for employees who are able to exercise judgment and discretion based on different types of expertise that exist within the work team.

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to fuel bubbles. Tax reforms that redistribute income away from the richest households and that increase tax rates on short-term capital gains can also dampen speculative activity. Regulatory reforms are also a necessary part of the solution. One of the central problems is the erroneous belief that a financial system can consist of one segment of highly regulated banks and insurance companies and another segment of completely unregulated hedge funds and private equity funds. Since unregulated firms have every incentive to gain greater rewards by pursuing more risky investment strategies, this structure is inevitably unstable. As long as these risky strategies are paying off, the unregulated firms will grow and prosper and expose the economy to high levels of systemic risk. Moreover, the regulated firms have no choice but to emulate the strategies of the unregulated or they will lose people, capital and customers to the unregulated sector. They will use all of their political capital to persuade regulators to allow them to copy the high-risk strategies, and that will further increase the system’s vulnerability. There has to be a framework in which all financial actors are subject to regulation. The regulations need to be graduated with depositary institutions and insurance companies subject to a stricter set of controls. It makes no sense for there to be any large and unregulated financial entities. In fact, the regulations need to be written so that whenever a pool of capital reaches a certain critical size, it will fall under a regulatory umbrella. Without this step, financial entrepreneurs will grow new categories of unregulated entities until they are large enough to jeopardize the entire financial system. Within this new regulatory framework, three provisions are critical. First, there needs to be strict limits on the amount of leverage that hedge funds or other entities can borrow as well as even stricter limits on what banks and other highly regulated institutions can lend to less regulated financial firms. Second, throughout the financial system, compensation mechanisms must be created that block institutions from rewarding their leaders or employees from short-term trading strategies that produce longer term liabilities. For example, the bonuses that are given to traders working at commercial or investment banks should take the form of equity in the firm that cannot be sold for a 3 – 5-year period. Third, when financial institutions sell loans they originated, they must retain a significant interest in these debts in their own portfolios. It would also be beneficial to impose a small transaction tax on trades in both domestic and global financial and foreign exchange markets. A major contributor to the bubble dynamic are the financial traders who bet the trend, driving rising markets even higher and falling markets even lower. Transaction taxes—if set at the proper level—would discourage a significant fraction of these entirely speculative trades, decreasing the likelihood that market prices would overshoot both

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3.5

The global dimension

Ultimately, any economic reorganization within the USA has to be coordinated with international efforts. Financial regulation, for example, has to be global or the US financial institutions will simply move their bad practices offshore. Similarly, efforts to combat climate change and create the institutional framework for a green transition have to be global or the US firms will quickly defect from the effort. Even moving the USA back to balanced international trade and ending the 25-year pattern of the USA borrowing from abroad to finance its surplus imports will require some international coordination since the global economy will need to replace the US consumer as the main engine of global demand.

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on the upside and the downside. A share of the revenue from the transaction tax could be devoted to the increasing costs of effective global financial regulations including reforming those jurisdictions that have ignored international regulatory standards. Even with the best regulatory structures, however, capital will continue to flow towards speculative investments if there are not sufficient channels for its productive use. According to one source, the USA needs more than $2 trillion of investment to repair the country’s decaying infrastructure. This is well beyond the capacity of the public sector, and there are a variety of ways to allow private capital investment to play a part in this process. One idea is an infrastructure investment bank that would initially be capitalized by the government and would then draw on private funds to finance a much larger portfolio of investment projects. Others have stressed the creation of public – private partnerships to build or repair needed infrastructure. Similarly, private capital flows are needed to finance the massive investments discussed earlier to green the economy, including retrofitting and ultimately rebuilding much of the residential and commercial building stock and developing alternative fuels and new generations of vehicles. Some of this can be accelerated with tax incentives for both individuals and firms to invest in energy saving or alternative energy. Moreover, the existing legislation has created a programme of loan guarantees by the government for private investors willing to make some of the critical investments needed to develop alternative energy and greener vehicles. Ultimately, the economy needs a network of green banks that develop expertise in evaluating and financing energy saving and other green projects by business, non-profits and local governments. While the huge financial supermarket banks that the government had to rescue in 2008 took savings from households and moved it into speculation in global financial instruments, these new green banks would take household savings and mobilize them for a green transition.

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4.

Conclusion

The election of Barack Obama in 2008 in the midst of a global economic crisis generated many comparisons to Franklin D. Roosevelt’s election in 1932. The new president’s success in passing a $780 billion Keynesian spending plan in his first months in office raised expectations that the USA might be on the cusp of a new reform era. But determined opposition by Republicans and entrenched interests and the lack of unity within the Democratic coalition has slowed the new administration’s reform agenda. The continuing influence of free market ideas and the huge government budget deficit inherited from the previous administration exert powerful pressure to follow the well-worn path of Jimmy Carter and Bill Clinton by turning to the centre and abandoning bold initiatives. But if the Obama Administration were to follow this expected trajectory, the likelihood is very high that the US economy will perform poorly over the next period. Without successful implementation of some key elements of a reform agenda, the recovery from recession is likely to be weak since consumer spending cannot be expected to quickly bounce back to pre-recession levels. With slow growth, conservatives will insist on further cutbacks in the non-military component of government spending, and the further belt-tightening will aggravate economic weakness. The predictable cutbacks in spending, particularly for education, will ultimately undermine the US innovation economy—the last remaining source of economic dynamism. In this scenario, the US economy will remain weak for years and the decline of the USA as a global economic power will accelerate. By the time another reform window were to open in 10 or 12 years, reversing the downward spiral might be impossible.

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Flows of capital from the rest of the world that have been going into US financial instruments have to be redirected towards the poorest areas in the world. Tens of billions of dollars per year in investments in poor countries in health, in education and in basic infrastructure, including clean water and sanitation, are needed. This could occur if investors in Asia, Europe and the USA working through regional development banks were able to earn 5% per year returns by purchasing 30-year international development bonds. Governments in the richer countries would subsidize the loans, so that the money could be loaned at 2% or 3% per year to finance projects that directly improve the quality of life of both the urban and the rural poor in the less developed nations. This would be a version of the long discussed ‘Global Marshall Plan’, in which these flows could both accelerate development and create expanded export opportunities for both older and newer industrial powers. Similar investment instruments could be created to accelerate environmental protection and the shift away from fossil fuels in the developing world.

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However, with the successful passage of healthcare reform and financial regulatory reform in 2010, there is still a scenario in which the construction of a new regime of accumulation could begin. If unemployment declines in the months leading up to the November 2010 elections, the Democrats might sustain only minimal losses of House and Senate seats. Since a new president’s party usually suffers a big defeat in the first midterm elections, even minor Republican gains (10 House seats and 3 Senate seats) in 2010 would look like the third consecutive defeat for the Republican Party. This could persuade some Republicans in the House and Senate to increase their cooperation with the administration. At the same time, the perceived weakening of the Republican coalition could finally unleash greater mobilization by groups who are part of the base of the Democratic Party. This combination could force Obama’s team to take more aggressive action in reducing inequality, regulating Wall Street, providing improved services and accelerating a green energy transition. This scenario resembles what happened in the 1930s. Despite the severity of the depression, Franklin D. Roosevelt’s presidential campaign in 1932 was fairly conventional, including a promise to balance the federal budget. While FDR pursued an aggressive agenda in the first 100 days of his administration, the trademark initiatives of the New Deal were not in evidence in the first year. On the contrary, the key initiative of the first year was the passage of the National Industrial Recovery Act which relied heavily on cooperative efforts by business groups to halt the decline in prices and demand. The measures that FDR implemented in 1933 and 1934 fell far short of even a down payment on a restructuring of the US economy. But FDR had two major achievements in those first 2 years. First, he successfully discredited the alternatives offered by the Republican Party that were based on greater reliance on selfregulating markets. Second, he restored people’s hopes and their belief in the efficacy of political action. One immediate result was an upsurge in labour mobilization, including general strikes that occurred in 1934 in Toledo, Minneapolis and San Francisco. In November of 1934, despite relatively weak signs of economic recovery, the Democrats were able to win decisively in the mid-term elections, gaining nine additional seats in the US Senate. The two most radical pieces of New Deal legislation were passed in 1935—the National Labor Relations Act (Wagner Act) and the Social Security Act. The Wagner Act, in turn, encouraged widespread unionization in heavy industry, and the growth of the Congress of Industrial Organizations exerted pressure on the administration for additional reforms. In short, FDR’s first 2 years in office can be understood as an era of transition which opened up political space for a deeper restructuring of the US economy. Nevertheless, the odds are still against the Obama Administration being able to match the broad initiatives of FDR’s New Deal. First, the reform agenda outlined

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Funding The Ford Foundation (grant number 1075-1307-1) and the UC Washington Center provided research support while I was working on this paper.

References Aglietta, M. (1979) A Theory of Capitalist Regulation: The U.S. Experience, Translated by David Fernbach, London, Verso Books. Alic, J. (2007) Trillions for Military Technology, New York, NY, Macmillan. Arrighi, G. and Silver, B. (1999) Chaos and Governance in the Modern World System, Minneapolis, MN, University of Minnesota Press. Block, F. (1977) The Origins of International Economic Disorder, Berkeley, CA, University of California Press. Block, F. (1987) Revising State Theory: Essays in Politics and Postindustrialism, Philadelphia, PA, Temple University Press.

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here threaten powerful business groups, but the US political system provides consistent advantages to entrenched groups who are trying to resist reforms (Hacker and Pierson, 2010). Moreover, interest groups have multiple veto points for defeating reform initiatives—two houses of Congress, the court system and the possibility of capturing or defunding the regulatory agencies that implement reform efforts. Second, there are still few signs of the kind of mass political mobilization that worked in the 1930s and the 1960s to overcome entrenched opposition to significant reforms. While such protest waves are notoriously difficult to predict, it appears that the political right, in the form of the Tea Party movement, has been more effective than progressives in generating activism at the grassroots level. Finally, significant progress on a reform agenda requires achieving synergy between domestic and global efforts. However, it is always difficult to progress on these two fronts simultaneously; any perceived weakness on either the domestic or the global front can undermine progress on the other. Moreover, unexpected global developments such as terrorist attacks, provocations by rogue states or escalation of the existing wars can derail global negotiations. Nevertheless, it is still useful to have a vigorous debate about a reform agenda that would restore the health of the US economy, address the pressing issue of global climate change, and make possible gains in reducing poverty in the developing world. The last 30 years of market fundamentalism have seriously depressed interest in ambitious reform visions. It is urgent that we increase both supply and demand in this particular market.

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Block, F. (2003) ‘Karl Polanyi and the Writing of The Great Transformation’, Theory and Society, 32, 275 –306. Block, F. (2007) ‘Understanding the Diverging Trajectories of the United States and Western Europe: a Neo-Polanyian Analysis’, Politics and Society, 35, 3–33. Block, F. (2008) ‘Swimming Against the Current: The Rise of a Hidden Developmental State in the U.S.’, Politics and Society, 36, 169 –206.

Block, F. and Keller, M. R. (2009) ‘Where Do Innovations Come From? Transformations in the U.S. Economy, 1970 –2006’, Socio-Economic Review, 7, 459–483. Bogle, J. (2005) The Battle for the Soul of Capitalism, New Haven, CT, Yale University Press. Boyer, R. and Saillard, Y. (eds) (1995) Regulation Theory: The State of the Art, London, Routledge. Cassidy, J. (2009) How Markets Fail: The Logic of Economic Calamities, New York, NY, Farrar, Straus and Giroux. Coban, A. (1995) ‘Regulation and the American Radical School’. In Boyer, R. and Saillard, Y. (eds) Regulation Theory: The State of the Art. London, Routledge, pp. 299–305. Fong, G. (2001) ‘ARPA Does Windows: The Defense Underpinnings of the PC Revolution’, Business and Politics, 3, 213 –237. Goldstein, J. (1988) Long Cycles: Prosperity and War in the Modern Age, New Haven, CT, Yale University Press. Hacker, J. and Pierson, P. (2010) ‘Winner-Take-All Politics: Public Policy, Political Organization, and the Precipitous Rise of Top Incomes in the United States’, Politics and Society, 38, 152 –204. Hirschhorn, L. (1984) Beyond Mechanization, Cambridge, MA, MIT Press. Knight, C. (2011) ‘Failure to Deploy: Solar Photovoltaic Policy in the U.S’. In Block, F. and Keller, M. R. (eds) State of Innovation: The U.S. Government’s Role in Technology Development, Chapter 9, Boulder, CO, Paradigm Publishers, pp. 173–195. Kotz, D. M. (1994) ‘Interpreting the Social Structure of Accumulation Theory’. In Kotz, D.M., McDonough, T. and Reich, M. (eds) Social Structures of Accumulation: The Political Economy of Growth and Crisis, Cambridge, Cambridge University Press, pp. 50 –71. Kotz, D. M., McDonough, T. and Reich, M. (eds) (1994) Social Structures of Accumulation: The Political Economy of Growth and Crisis. Cambridge, Cambridge University Press. Krippner, G. (2011) Capitalizing on Crisis: Political Origins of the Rise of Finance in the U.S. Economy. Cambridge, MA, Harvard University Press. Lazonick, W. (2009) ‘The Explosion of Executive Pay and the Erosion of American Prosperity’, Entreprises et Histoires. 57, 152 –204.

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Block, F. (2009) ‘Read Their Lips: Taxation and the Right-Wing Agenda’. In Martin, I. W., Mehrotra, A. K. and Prasad, M. (eds) The New Fiscal Sociology, New York, NY, Cambridge University Press.

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Leopold, L. (2009) The Looting of America, White River Junction, VT, Chelsea Green. Lindert, P. (2004) Growing Public, New York, NY, Cambridge University Press. Lounsbury, M. and Hirsch, P. (eds) (2010) Markets on Trial: The Economic Sociology of the U.S. Financial Crisis, Bingley, Emerald Publishing Group. Martin, I. W. (2008) The Permanent Tax Revolt, Stanford, CA, Stanford University Press. Mason, D. L. (2004) From Buildings and Loans to Bail-Outs: a History of the American Savings and Loan Industry, 1831 –1995, Cambridge, Cambridge University Press.

McDonough, T., Reich, M. and Kotz, D. M. (eds) (2010) Contemporary Capitalism and Its Crises: Social Structure of Accumulation Theory for the 21st Century, Cambridge, Cambridge University Press. Milkman, R. (1997) Farewell to the Factory, Berkeley, CA, University of California Press. O’Connor, J. (1973) The Fiscal Crisis of the State, New York, NY, St. Martin’s. O’Hara, P. A. (2006) Growth and Development in the Global Political Economy, New York, NY, Routledge. Pear, R. and Calmes, J. (2009, June 15) ‘Cost Concerns as Obama Pushes Health Issue’ New York Times, New York, NY, p. A1. Polanyi, K. (2001 [1944]) The Great Transformation. Boston, MA, Beacon Press. Reich, M. (1994) ‘How Social Structures of Accumulation Decline and Are Built’. In Kotz, D. M., McDonough, T. and Reich, M. (eds) Social Structures of Accumulation: The Political Economy of Growth and Crisis, Cambridge, Cambridge University Press, pp. 29– 49. Ruggie, J. (1982) ‘International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order’, International Organization, 36, 379–415. Saez, E. and Piketty, T. (2007) ‘Income Inequality in the United States, 1913–1998’. In Atkinson, A. B. and Piketty, T. (eds) Top Incomes over the Twentieth Century, New York, NY, Oxford University Press, (Data accessed: Tables and Figures Updated to 2006, in Excel format, July 2008). Schwartz, H. (2009) Subprime Nation: American Power, Global Capital, and the Housing Bubble, Ithaca, NY, Cornell University Press. Skidelsky, R. (2009) Keynes: The Return of the Master, New York, NY, Public Affairs. Smith, V. (2001) Crossing the Great Divide, Ithaca, NY, Cornell University Press. Wessel, D. (2009) In Fed We Trust, New York, NY, Crown. Wolfson, M. (1994) ‘The Financial System and the Social Structure of Accumulation’. In Kotz, D. M., McDonough, T. and Reich, M. (eds) Social Structures of Accumulation: The Political Economy of Growth and Crisis, Cambridge, Cambridge University Press, pp. 133 –145.

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McDonough, T. (2010) ‘The State of the Art of Social Structure of Accumulation Theory’. In McDonough, T., Reich, M. and Kotz, D. M. (eds) Contemporary Capitalism and Its Crises, Cambridge, Cambridge University Press, pp. 23–44.

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Wolfson, M. and Kotz, D. (2010) ‘A Reconceptualization of Social Structure of Accumulation Theory.’ In McDonough, T., Reich, M. and Kotz, D. (eds) Contemporary Capitalism and Its Crises. New York, NY, Cambridge University Press, pp. 72–92. Womack, J. P., Jones, D. T. and Roos, D. (1990) The Machine that Changed the World, New York, NY, HarperCollins.

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Socio-Economic Review (2011) 9, 59–81 Advance Access publication November 11, 2010

doi:10.1093/ser/mwq026

Are there laws of motion of capitalism? Robert Boyer *

*Correspondence: [email protected]

This article takes seriously the conflict of paradigms between a market economy approach and a capitalism approach. The first has recurrently shown its inability to explain the major stylized facts of the last two decades. The second now receives more attention as a possible alternative but the field has been so underexplored by so few people that the task is somehow promethean. Is it possible to explicitly state laws of motion of capitalism? Previous failed attempts justify some scepticism. A review of the multiplicity of meanings and conceptualizations of ‘economic laws’ suggests first that the existence of general quantitative regularities, which economists are fond of, is quite unlikely. Second, it is possible to identify explicit partial and temporary regularities that are indexed upon a given institutional configuration of capitalism. Third, mobilizing the results of past historical analyses and building upon the contributions of some key economists and social scientists—Marx, Polanyi, Schumpeter, Kaldor, Wallerstein and Kindleberger—the article proposes seven conjectures about possible ‘laws of motion of capitalism’. Keywords: capitalism, varieties of capitalism, markets, institutional political economy, regulation theory, financial crisis JEL classification: B51 current heterodox approaches: socialist, Marxian, Sraffian, B52 institutional, evolutionary, E02 institutions and the macroeconomy, O11 macroeconomic analysis of economic development, P16 political economy

1.

Introduction

The last decade has clearly shown the limits of mainstream economists’ approaches. The panorama of ideas and theories has been enlarged after the bursting out of the 2008 crisis and some key economists have been convinced to study capitalism as a system. Actually, the major stylized facts of the 2000s do not fit with the market economy doxa and seem to give a clear advantage to methodologies that recognize the relevance of the notion of capitalism. In order to enlighten this new intellectual environment, this article confronts four major approaches. # The Author 2010. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected]

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CEPREMAP, Paris; GREDEG, Sophia-Antipolis, France

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2.

Does a scientific approach need explicit economic laws?

A French economist who specializes in the history of economic thought has recently proposed a very illuminating survey of the concepts of law (Berthoud et al., 2008). It is possible to extract from his analysis at least seven proposals and conjectures and to extend them to the purpose of the present paper: can one identify economic laws? P1. First the duality of the concept of law in sciences is to be underlined: this term either indicates a constant relationship between variable terms or it states a causality which is exerted under well-defined conditions. One seems to perceive in the evolution of the doctrines and economic theories a shift from

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Since the Second World War, economists have benchmarked their discipline against the natural sciences and mathematics. Implicitly, they were looking at the equivalent of the laws of physics. In retrospect, this grand project has been disappointing. This is an invitation to investigate the various meanings of laws in economics and by extension in social, political and historical disciplines (Section 2). The term capitalism seemed to belong to a remote past of uncertain foundations for the economic discipline and of hot ideological debates. Had not the Marxist project of discovering the laws of motion of capitalism failed? Therefore, the concept of market economy permeated the whole economic profession as a more decent and useful concept. Contemporary research does observe an opposite shift towards the relevance of capitalism, as a multidisciplinary social sciences concept. Does it help in diagnosing regularities and the equivalent of laws (Section 3)? One then encounters a striking paradox. Some heterodox economic approaches had pursued an investigation of capitalism as a dynamic and evolving socioeconomic system. One of their basic findings has been to point out the persistent variety/diversity of contemporary capitalisms but with few concerns about locating the features common to all of these varieties. Quite on the contrary, each configuration seemed to exhibit specific macroeconomic quantitative regularities. This is the joint conclusion of the so-called re´gulation theory and the Varieties of Capitalism approach (Section 4). Is it nevertheless possible to pinpoint other types of regularities? It is probably the case if one adopts a more modest conception of regularities as qualitative dynamical patterns. In order to do so, it is crucial to revisit the main contributors to a political approach of capitalism and to test their conjectures against the stylized facts that emerge from the bulk of economic and financial history researches. Seven broad conjectures emerge out of this very preliminary survey (Section 5).

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the first to the second definition. If the classical economists sought to determine the laws and principles that govern the creation of wealth, the majority of the contemporary economists seem to be satisfied if they can exhibit any causality between economic variables or between other variables and some economic variables. P2. It would seem that another dividing line is relevant to understanding the different concepts adopted, respectively, by the macroeconomists who refer to law as causes and the microeconomists who construct a law as a norm of rational behaviour. The first group seeks causal mechanisms (for example that happens if the Central bank raises its interest rate). The second one rather clarifies what should be the rational behaviour of an individual under the assumption that only resource allocation problems matter. P3. The standard theory which puts forward a positive approach—implicitly research into the laws governing the economy—is in fact mainly a normative theory: how resources should be allocated in an economy that would function according to the principle of full rationality at the individual level and efficiency of markets. The permanent reference to the concept of optimality illustrates this typical primacy of the professional economist habitus. Some have even advanced that the standard economist was in fact a preacher of the market (Marglin, 2008). The misadventures of the Washington Consensus are there to show the pervasiveness of this conception of economics as a discipline. Today researchers in economic sociology and political economy are following a different and more promising strategy, basically a positive approach. P4. Economic history does not have to refer to the concept of law since it is essentially a matter of interpretation: it would be a form of hermeneutics. Similarly, the French ‘economics of convention’ (‘l’e´conomie des conventions’) brings into play the plurality of justifications which the individuals may give of their actions according to the context and the place (‘une cite´’ in French) and has coined the concept of test (e´preuves), whereby conflicting logics are struggling to impose an outcome that will depend upon the idiosyncrasies of place and time. Thus one is far from the ‘mechanicist’ concept of a causal link restricted to the economic sphere. Since its inception, ‘re´gulation theory’ has pointed out how the historical time of structural change was orthogonal to the time of expectations that is implicit to neoclassical theory which assumes a stable institutional, technological and political environment. P5. Consequently, what is the status of the pure economy? It aims to sustain a rigorous analytical judgement. Thus the Walrasian model attempts to capture the essence of a market economy via a thought experiment. The idea of causality tends to dissolve into that of interdependence of individual behaviours coordinated by the price system. Whereas the Hayekian conception assumes that the economic system functions as much with ignorance as with

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This brief survey suggests a quite cautious approach in the search of regularities and causal relations in a social science such as economics. 3. Does the shift from a market economy to a capitalism approach help? Yesterday, economists were studying market economies, now all of them propose to analyse the merits and limits of capitalism. Nevertheless, this does not mean the emergence of an alternative and coherent paradigm. Even the definitions of capitalism are quite diverse, because capitalism is a complex entity. Thus, capitalism is still challenging social scientists. Implicitly, at least, economists,

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informed action, standard theory sticks to the postulate that models are designed like experiments of thought, for lack of a possibility of experimentation at the required level, especially for macroeconomic issues. In a sense, one could oppose the project of mathematization and of axiomatization of the economy to that of the constitution of a social physics that would study how configurations are reproduced and change sequentially under the effect of a series of causalities. P6. From a strict epistemological point of view, it is extremely difficult to make compatible the laws conceived like causal mechanisms and the laws emanating from humanly constructed norms and regulations. Via specialization, the economist asserts a causal approach (what are the explanatory factors of inflation, of unemployment?) but the normative approach is never very faraway insofar as he is tempted to see in the social norms, legal or ethical, the sources of the prejudicial discrepancies from a model in which, for example, unemployment would not exist and where price flexibility would be guaranteed by principle. Other currents of research attempt to show that it is rational to satisfy certain ethical standards because they may improve economic efficiency. However, in any case, ethics and economics belong to quite distinct domains. This tension between economic efficiency and social values is very present in contemporary research and it brings many ambiguities, or worse, major misunderstandings. P7. Finally, Arnaud Berthoud advances the idea that economics should belong to the field of art or technique, because it should be located at an intermediate level between a pragmatic approach and pure science. This meso-level is familiar to re´gulationist research which attempted to show that intermediate categories are necessary to diagnose the existence of regularities, even if they change through time and across space. Whereas the concept of law seems to postulate invariants which cross the diversity of economic systems, would not the task of the economist be rather to delimit with precision the conditions under which certain regularities are reproduced transitorily?

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sociologists and historians do not treat ‘market economy’ and ‘capitalism’ as synonymous. What are the key features that distinguish these two ‘visions’ of economies and societies?

First, the market is only one component of a capitalist economy that does not exclude other coordinating mechanisms and actors than markets and firms. Second, capitalism is not by nature only an economic system, since it requires legal rules and a precise type of political power that respects and defends

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† The adoption of the notion of a market economy implies that markets are the dominant, if not totally exclusive, mechanisms for coordinating economic activity. States, communities and civil society are a priori excluded and this might be perceived as evidence of the limited ambition of the economist. But as soon as actual observations contradict the hypothesis of selfequilibrating markets, the neoclassical economists are prone to attribute the related malfunction to an imperfection with respect to the ideal of a ‘pure’ market. Are such imperfections so widely present, for example for labour and credit and why do they persist? Because these markets are embedded into social, political relations that distort the mere pursuit of self (economic)interest and the convergence towards an equilibrium. Hence general equilibrium theory is the implicit—and frequently explicit—benchmark in many empirical analyses by conventional economists. Contrary to frequent statements, a market economy approach is not necessarily devoid of any value judgement, since it assumes that efficiency is the key performance criteria and that the markets are the less imperfect mechanisms of coordination between free and independent individuals pursuing their own interests. Indeed, for some fundamentalists, markets are the only perfect mechanism. The normative content of the notion of market economy should never be underestimated. Last but not least, since Smith (1776 [1976]), the market is perceived by economists as an abstraction for the price mechanism itself. The power of the metaphor called ‘the market’ is quite strong since its use has been extended to some domains of sociology (the marriage market, the family, etc.) and subdisciplines of political sciences (the market for ideas, voting as a market, the median voter, etc.). † The notion of capitalism unfortunately evokes an ideological construction that is supposed to be sustained by the doctrine of liberalism, to follow feudalism and to be opposed to socialism and communism. Actually, it can also be an analytical tool. A synthetic definition would state that capitalism is a legal regime, an economic system and a social formation that unfolds in history and that is built upon two basic social relations: market competition and the capital/labour nexus. The differences with respect to a market economy are not purely semantic (Table 1).

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Table 1 From market economy to capitalism: a major paradigm shift

Concept of markets

Market economy

Capitalism

Pure economic abstraction of supply and demand adjustments Horizontal coordination among equals

A nexus of social relations

Links between various spheres Nature of evolution

Uniqueness/ diversity

Ideal of a total disconnection of the economic sphere (pure economy) Implicit conception of a ‘natural equilibrium’

At best, kinematical time Ideal of Pareto optimality . . . and . . . benchmarking and competition reduced variety

property. Empirical observations exhibit more diverse social, economic and political configurations than would a mere economic system. This explains why the literature on capitalism stresses so much the existence of stages of capitalism (commercial, industrial, financial, cognitive) as well as the variety of its brands in the contemporary world. Third, the interplay of market competition with the conflicting nature of the capital/labour nexus promotes the accumulation of capital as a systemic constraint. This is a process full of disequilibria, contradictions and crises, at odds with the smooth equilibrium typical of the static world captured by the notion of a market economy. Capitalist economies are dynamic systems, putting into motion structural change and innovation, i.e. history. The authors working along these lines—Marx, Sombart, Veblen, Schumpeter, in a sense Keynes, Braudel and Galbraith among others—do recognize the historical nature of capitalist configurations and the interdependence between the various spheres (economy, polity, society) that are kept disconnected by ‘market economy’ approaches. Finally, these two different research programmes should be distinguished, even if the reference to capitalism is not, by far, a sufficient condition for capturing the essence of contemporary economies. It might explain why a significant fraction of former orthodox economists have adopted a dynamic approach to capitalism

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Ideally self-equilibrating

Both horizontal (competition among firms) and vertical relations (capital/labour nexus) Propagation of an unbalanced capital accumulation The interdependence of economy, society and polity is intrinsic to capitalism Accumulation is the norm, and changing social and economic relations prevent any static equilibrium Sense of historical time Succession of historical stages and coexistence of various brands of capitalism

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instead of refining models of ‘pure’ and static economies. Can one find laws of motion of capitalism or are they the naı¨ve illusion of Marxism?

4. How to overcome the legacy of two decades of studies about the persistent diversity of capitalisms?

4.1

The search for time- and space-specific regularities: ‘re´gulation’ theory

Two assumptions were at the core of the seminal analyses about the emergence, maturation and crisis of Fordist growth that was the starting point of re´gulation theory. † On the one hand, it is necessary to specify the precise configuration of basic social relations prevailing in a capitalist economy in order to understand the nature of the growth process, its stability or fragility, the prevalence of inflation or deflation, under-employment or over-employment. The nature of the capital– labour relations and the form of competition shape the accumulation regime that is propelling long-term growth. These two institutional forms along with the monetary regime also define various re´gulation modes, which shape the dynamic pattern according to which actors adjust to their environment (Figure 1). † On the other hand, capitalism features a relentless transformation of technologies, products, organizations and institutions. Therefore, the concept of equilibrium is devoid of meaning since the accumulation process generates endogenously recurring imbalances that can be either self-correcting—periodic recessions are the methods for re-equilibrating accumulation—or the source of the break down of the past architecture of institutional forms: this then is a major or structural crisis. In such circumstances, the previous regularities vanish and the apparent economic determinism is replaced by an open process of social and political conflicts, trials and errors, in order to build new institutional forms and possibly restore the viability of an emerging accumulation regime.

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This was precisely the aim of seminal research upon the long-run transformations of American capitalism (Aglietta, 1982). This was the starting point of re´gulation theory and the related large research programme based on the multiplication of long-run historical analysis of various national economies. This was complemented by a series of contemporary international comparisons of institutional architectures (Jessop, 2001; Boyer and Saillard, 2002; Amable, 2003). Their results converge with those of similar institutional analyses (Aoki, 2002; Fligstein, 2001; Hall and Soskice, 2001; Yamamura and Streeck, 2003; Streeck, 2009a).

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Thus, traditionally, re´gulation theory explores an intermediate space between general laws that could be derived from the basic features of a capitalist mode of production and the simple observation of empirical regularities. Between grand theory and pure description, the formalization of models and the test of the related modes of accumulation and modes of re´gulation seek to build this mesolevel analysis. Possible regularities are to be observed at this level. The development of this research programme has more and more downplayed the possibility of precise quantitative economic laws. Here are some examples. † Contrary to the early works on the United States and France, the Fordist accumulation regime has appeared much less general than expected. This is the central result of systematic international comparisons concerning various European countries, Japan and Korea (Boyer and Saillard, 2002). The diversity is still more pronounced when the sample of countries is extended to Latin America (Quemia, 2001). † The modes of re´gulation themselves are far from having converged towards a canonical model even if national economies became increasingly interdependent. When they are facing identical shocks, they react differently because their institutional configurations are not interchangeable. When these economies finally enter into a structural crisis, the objectives of the economic policy and the recombining of the institutional forms continue to differ. Long-run historical analyses confirm that possible economic regularities are restricted to a period of a few decades. This is the case for productivity regimes or for wage formation because the potentialities of a re´gulation mode

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Figure 1 Starting from Marxian theory in order to understand the institutions of capitalism: re´gulation theory in a nutshell.

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tend to become exhausted because of its maturation and very success. Essentially, the crisis of a configuration is, in its initial stages, in the repetition of the business cycles which lead to a slow deterioration of the structural parameters of the accumulation regime out of its stability zone (Lordon, 1997).

4.2

The economist: a modern Sisyphus?

† The first points out that economists end up understanding the features of a growth regime or the success of an economic policy at the time when they enter into crisis and erode the effectiveness of the public interventions that were so effective yesterday. † The second paradox builds upon the opposition between the kinematic time of the dynamic models of the economist and the historical time of the transformation of the techniques, institutions, laws and political coalitions. By methodological convenience, the economist postulates the equivalent of a stationary state, for example a static macro-economic equilibrium or a steady growth path. In such a configuration, representations, expectations and behaviours coalesce into a smooth economic equilibrium that makes them mutually compatible. In such a case, the knowledge of the economist is not fundamental since the economic agents themselves seem to have discovered the economic characteristics of the prevailing model. It is the charm and evident limit of the rational expectations assumption. But then crises come as totally unexpected and wildly surprising events, in any case caused by exogenous factors. But it is precisely that a capitalist economy is never stuck in a stationary state since it is affected by the process of accumulation, the recurrence of social conflicts, major crises and the impact of radical innovations. In such a context, the economist cruelly lacks the tools needed in order to determine the consequences of a radical innovation: will it, or not, end up generating an unprecedented configuration? The errors of the profession in assessing the consequences of the Euro, the temporal horizon of the New Economy or the Great Transformation of the Soviettype societies, are there to show the difficulty of the task. When it is important to analyse an emergent potential regime, the economist is far from being adequately equipped. The profession does not have a list of the laws supposed to govern great economic transformations. At most, the neo-Schumpeterians imagine the recurrence of episodes in which a bunch of innovations, primarily technological, transforms the economic system and feeds a new process of accumulation. But they are not so relevant for analysing institutional, financial and political innovations without which technological innovations would not be viable.

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If one acknowledges these premises, a double-paradox threatens economic analysis.

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4.3 Contrasted national trajectories and diversity of contemporary capitalisms: where is the theory?

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At this stage of the presentation, the logical conclusion seems to be that the search for general laws for capitalisms is pointless. It is especially so for the re´gulationist research agenda: ‘Can one find laws of capitalism? It is probably an impossible mission!’ Nevertheless, it might be time to come back to the status of this theory and try to capitalize upon a cumulative research programme and, incidentally, to reply to frequent criticisms. If economic regularities are indexed upon accumulation regimes, then this is not at all a theory but a mere post hoc description. Actually until now, no quantitative regularity could be derived from the comparison of the five accumulation regimes that have been observed in US capitalism (Table 2). Similarly, if these accumulation regimes are self-defeating, the related regularities are time-dependent and it is another limitation of the theory. Can one clever observer diagnose, in real time, a given accumulation regime’s entry into structural crisis? This would be necessary to cope with the determinist criteria typical of a large part of the natural sciences. Similarly, at a given historical period, various forms of capitalism may coexist. It was recurrently shown for OECD countries: their Social Systems of Innovation differ drastically (Amable et al., 1997), as do their wage labour nexus (Boyer and Saillard, 2002). When the sample of countries is extended, the number of key configurations of capitalism is enriched, for instance from four to five (Amable, 2003) and unprecedented configurations are pointed out in Latin America (Quemia, 2001) and Asia (Inoue and Yamada, 2002). It is important to stress that the brands of capitalism are far less numerous than the size of the sample of the countries. The related taxonomy is the starting point for building relatively simple models with a multiplicity of regimes—this is done according to key parameters directly related to the nature of the institutional architecture. This is a first necessary step in order to get away from the implicit conception of conventional neoclassical theory according to which only one canonical form of capitalism exists (‘one size for all’) . . . with only marginal national variations. But unfortunately, the re´gulationist analysis is more complex and no general policy recommendation can be derived from this body of research. Thus, the economic profession usually prefers a united and simple, but inherently false, theory to an eclectic and much more complete construction, one less prone to inaccuracies! It could then be interesting to try to explore the founding blocks of a general theory. Two strategies are available: the first reviews all the findings obtained within the re´gulationist research agenda itself; the second makes advancements to the past literature on the theorizing of capitalism, as well as the contemporary research that treats the dynamics of capitalism as the central issue.

Table 2 The American capitalism: the succession of five different accumulation regimes over 150 years Regime Extensive with limited insertion of labour

Intensive without mass consumption

Organization of production

Large manufacture

Wage– labour nexus population

Fragmented and competitive

Taylorism, then Fordist assembly line Still competitive but growth of wage-earner

Income distribution

Strong ‘reserve army’ impact

Shift in favour of profits

Nature of demand

From farming community, middleclass, public civil servants Second half of the nineteenth century

Increasing share of wage-earner consumption

Leading role of consumption of wage-earners

More and more differentiated according to level of income

More flexibility in employment and remuneration, privatization and financialization of welfare systems Stabilization of a high rate of return on capital for shareholders Credit boom as a substitute for real income of wage-earners

Inter-war period

After Second World War

1980 to mid-1990s

Mid-1990s to 2007

Extensive with widening inequalities

Large increasing returns to scale

Exhaustion of the productivity gains and shift towards services Decentralization, individualization and decline of collective agreements Decline of the wage share and then stabilization

Institutionalization of productivity sharing and constitution of welfare systems Stabilization ex ante of the wage share

Finance-led Delocalization in search for shareholder value

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Intensive with mass consumption

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Components

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5.

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What could be the general and common features of capitalisms?

5.1 Marx’s conjecture: capitalism implies a dynamic accumulation process and the succession of booms and crises Even if the term of capitalism was not invented by him, it is quite logical to start with the author of Das Capital. As soon as goods become commodities, i.e. produced for their exchange value and no longer for their specific use, the very process of economic activity is transformed. Each economic entity has to create more value than is consumed in the commercialization or productive process and the competition triggers a built-in constraint and incentive to generate more value in order to accumulate capital. Modern theorizing suggests that it is not necessary to adopt labour value theory to generate such a dynamic pattern. The institution of a monetary/credit regime generates the autonomy of economic entities and their search for exchange values, hence competition of all against all (Benetti and Cartelier, 1980; Aglietta and Orlean, 1998). On top of the polarization of the successful accumulation by some firms at the detriment of others incurring deficits and finally bankruptcy, the opposition between capital and labour sets into motion a permanent change. With the transformation of labour force into a commodity, the process of accumulation experiences a new dynamism, which is precisely described by Karl Marx in Das Capital. Capital accumulation becomes the engine of growth and the vector of society-wide transformation, since anything can then become a commodity. If one follows this argument, it is erroneous to try to build a static theory of capitalism because essentially this socioeconomic regime puts human history into

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Informed by the present survey, one should follow two principles. On the one side, it would be erroneous to look for static properties of capitalism, since it is by nature a constantly evolving regime. The possible laws of motion should be at most ‘dynamic patterns’. On the other side, the possible regularities are quite unlikely to imply quantitative variables because until now the search for them has been quite unsuccessful. Thus the properties of dynamic patterns should be essentially qualitative. This strategy delivers the following conjectures. Just to help the reader to capture the essence of each of them, they have been attributed to past economists or present social scientists . . . but of course, only the author is responsible for such a labelling. Fortunately, some conjectures are common with other recent contributions in the search for general features of capitalism (Streeck, 2009b, c). A distinctive feature of this article is to stress the ‘dialectical’ nature of these conjectures: few permanent trends but on the contrary a succession of contrasted evolutions caused by the expression of the same ‘contradiction’.

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5.2 Schumpeter’s conjecture: capitalism means the permanent search for innovations that once again trigger accumulation and its crises The previous mechanisms are sufficient to explain the succession of boom and crises, more or less severe, according to the precise institutional setting of the related capitalism regimes. But Marx adds that capitalism brings about permanent innovation in terms of work organization, products, techniques, legal forms, contracts and social values. Actually, this method of creating new opportunities for accumulation simultaneously increases the degree of uncertainty that is typical of capitalism, since it is by definition impossible to forecast the success or failure of any radical innovation. Endogenous innovations thus reinforce the Marxist conjecture about the unbalanced nature of the process of accumulation. Observing a very specific phase of manufacturing capitalism, Marx thought to have proved that the tendency of the rate of profit to fall was a basic and permanent dynamic pattern of capitalism. Unfortunately, the demonstration of volume III of Das Capital (Marx, [1867] 2008) was not correct: contemporary economists have shown that innovations, instead of implying a deepening of the relation between constant capital and variable capital, actually tend to increase the average rate of profit as soon as capitalists only introduce profitable innovations (Okishio, 1961; Bowles, 1981). Therefore, the second stylized dynamic pattern has to be attributed to Joseph Schumpeter: by pointing out that accumulation needs to be restarted periodically by bunches of innovation, he identified a basic feature of capitalism.

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motion, thus paraphrasing Marx. This might be the main weakness of JohnMaynard Keynes’ General Theory: in order to win the battle against Pigou, he restricted his analysis to the stability of a purely static equilibrium with involuntary employment. In contrast, Michal Kalecki was more in line with a realist theory of investment as a dynamical process. Imagining that capitalism would converge towards a steady state is a contradiction in terms. A second consequence of the domination of ‘commoditization’ under pressure from the profit motive is to introduce a radical uncertainty about the reproduction of the economy. Say’s law is basically false since each commodity has to find its way to the market. Sectoral crises are thus inherent to capitalism. Furthermore, the iron law of accumulation implied by competition leads periodically to overproduction, which is a typical new feature of this mode of production in contrast to the previous ones (Braudel and Labrousse, 1976). Thus, macroeconomic crises are inherent to the process of capital accumulation within capitalism. Until now, any time when overconfident economists have reached conclusions about the end of the business cycle and the impossibility of a major structural crisis, this very belief has generated the seeds of a new crisis. Quite a surprise for them but not for any one acquainted with Marxist theory!

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5.3 Polanyi’s conjecture: capitalism displays a built-in tendency to extend market relations to the whole society . . . and to destroy its implicit permissive conditions Marx had already pointed out the pervasiveness of the process that can transform any good or service into a commodity even if it has no contribution to value creation and accumulation. In a sense, Karl Polanyi extended this feature from the economy to the whole society. In other words, any market economy tends to push towards a market society where any relation is finally monetized and then organized according to a market. This conjecture was derived from the observation of the long-run evolution of the English economy and it pointed out the shift from typical commodities to fictitious commodities and the related danger of a collapse of the entire society under the pressure of pure economic forces. Thus, when, for instance, labour is transformed into a typical commodity, capitalism runs into the danger of destroying one of the very conditions of its viability, i.e. the long-run reproduction of the workers who are the bearers of labour

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An innovator takes the risk of a new product, a new technique, a new market. If initially successful, he is imitated by followers who progressively erode his innovation rents. The economic system is progressively transformed until it reaches the full maturity of the innovation and sees the levelling off of the innovator’s extra profit (Schumpeter, 1911 [1983]). The sequence may start again with a new cluster of innovations. Consequently, Joseph Schumpeter argued that economic development cannot be disentangled from the sequence of long booms followed by more or less severe depressions. Paradoxically, his argument is also converging towards the same conclusion as Karl Marx concerning the long-run erosion of the virtues of capitalism as caused by its own success. When the heroic individual entrepreneur is replaced by a more collective process of innovation and with the rise of middle classes, the dynamism of economic development is bound to slowdown (Schumpeter, 1954). This long-term prognosis has been invalidated by the dynamism of innovation after the Second World War . . . this shows again how difficult it is to point out general trends that would transcend the succession of historical epochs, i.e. accumulation regimes in the re´gulationist taxonomy. Nevertheless, the Schumpeterian conjecture about one of the mechanisms governing capitalist development is still relevant: the surge of information and communication technologies (ICT) has given a new example of such a sequence. After the subprime crisis, financial markets themselves are screening all emerging innovations in order to try to detect which could be the next engine of accumulation and growth. It is important to note that if the turning point from boom to depression is endogenous and largely determinist, this is not the case for the emergence of innovations powerful enough to restart accumulation.

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5.4 Wallerstein’s conjecture: the capitalist accumulation process tends to spill over across political frontiers . . . and thus progressively builds a world economy Clearly, the viability of capitalism requires some basic conditions that it cannot produce within its own logic. A credible monetary and credit system, legal settlements concerning property rights, contracts and capital labour relations are usually set by political powers that, by definition, are local. But the inner logic of market relations and the incentive to permanently innovate challenge these domestic institutions. Historical evidence suggests that early commercial capitalism started by organizing long-distance trade, which in turn has required different legal rules and institutions. For instance, merchants created their own private money quite independently from the fiat money created by the prince or political local authorities. Thus, this very first form of capitalism structurally organized trade between different political spaces (Wallerstein, 1979, 1980, 1989). Capitalism is transnational by essence . . . and contemporary globalization is part of a long-term process. This trend towards the crossing of political boundaries by entrepreneurs, commodities and financial assets takes a new form with the rise of industrial capitalism, especially in England and continental Europe. The conventional contemporary vision imagines that development takes place first at the domestic level and then the economy is progressively opened up to world trade, productive capital and finance. At odds with this vision, the British trajectory shows that the first industrial revolution required a surge of exports for quite structural reasons: the internal imbalance in income distribution between wage and profit called for an extraversion of the process of

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that is not a pure commodity. Similarly, when the monetary regime is no longer the foundation of market relations but is itself invaded by the profit motive and intense competition among banks, this second pillar of a capitalist economy might collapse. Finally, when nature is exploited and destroyed without any consideration for ecological reproduction, the dynamism of accumulation might be halted by the exhaustion of the natural resources that feed the production of commodities. The evolution of capitalism since the publication of The Great Transformation (Polanyi, 1946 [1983]) has provided another example of a new wave of the commoditization of labour relations, the privatization of the credit and the monetary regimes and the predatory and destructive impact of the diffusion of capitalism on global public goods such as financial stability and climate. These are evidence of a major crisis in the Polanyian sense, since the logic of the market destroys its implicit permissive conditions: decent work and wage for labour, monetary stability and long-term sustainability of the interactions between the economy and the ecological system.

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5.5 Kaldor’s first conjecture: the long-run dynamics of the world economy are derived from the interactions between the industrial and the primary commodities sectors Can the analysis make one step further and characterize how such an interdependent international economy evolves in the long run? Maybe, if one takes into account the fact that typical capitalist economies interact with rentier States that deliver the raw materials necessary to the manufacturing industries. The dynamic of the world economy may result from the interaction of two contrasted but interdependent logics (Kaldor, 1963, 1967). † On one side, the evolution of manufacturing production is the outcome of the mobilization of significant dynamically increasing returns to scale. Thus, only two factors limit such a growth engine: an insufficient demand, or the scarcity of labour and natural resources. The first factor is crucial in the reversal from boom to recession, thus sustaining the viability of the accumulation regime via an adequate regulation mode. Concerning the second one, given the large pool of labour at the global level, the main hindrance to an unlimited growth of

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accumulation (Sternberg, 1950 [1956]). Therefore, the dynamics of the traditional textile industry in India became dependent on the drastic competition exerted by the modern methods of production implemented in England. Similarly, the erosion of Fordism that—quite exceptionally basically relied upon the domestic market—comes from the strategy of firms that struggle for new markets abroad in order to adjust the dynamism of production capacities to a domestic market that progressively becomes too narrow or less profitable due to labour conflicts implying a profit squeeze. Contemporary financial deregulation was initiated back in the sixties when large American firms created xeno-dollar markets abroad and it culminated with the emergence of numerous fiscal paradises. Not to mention the delocalization of mature unprofitable industries to attractive new industrializing countries (NICs). Finally, two decades later, these NICs are themselves closely dependent on world trade and flow of productive and financial capital. To sum up, the unbalanced nature of accumulation regimes triggers a recurring trend towards the disconnection between the domestic political arena and the process of accumulation that is operating more and more at the international level. But since the constitutive institutions equivalent to the one constructed at the national level are non-existing or weak, frictions and conflicts among firms and States, and between States, challenge the viability of the internationalization process. After 2008, the diffusion of the subprime crisis to the rest of the world and the subsequent difficulties in finding a global solution to the systemic and structural crisis are still further examples of the plausibility of Wallerstein’s conjecture.

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In a sense, this is the reinterpretation of the old prognosis of classical economists, such as Ricardo. He was anticipating the long-run convergence of economies towards a steady state, where the rentiers would finally appropriate the totality of the surplus to the detriment of the rate of profit of manufacturers. Kaldor provides a dynamic model that takes into account the structural differences between the two sectors in terms of productive techniques and time lags. However abstract and simplified this model might seem, it provides some intelligibility to the recurrence of this very specific dynamic pattern of the world economy. Therefore the successive oil shocks that are supposed to be exogenous by conventional national macroeconomic approaches are largely endogenous. Similarly, it explains why it is not realistic to extrapolate a cumulative and permanent rise of oil and other natural resources, since this would induce a drastic recession in the short term, and renewed efforts in order to find new locations of natural resources. Two recent macroeconomic episodes seem to confirm Kaldor’s model. At the end of the speculative Internet boom, one of the limits encountered by the Silicon Valley start-ups was the spectacular rise of house and land prices. What was one of the early warnings about the tensions created by the subprime bubble and the spectacular Chinese accumulation regime? The acceleration of prices of oil and of most natural resources required by manufacturing was the primary factor that caused the American down-turn in 2007. But this does not capture the totality of the mechanisms that shape contemporary international relations. Actually, the wide diffusion of finance all over the world introduces another set of interdependencies: the rentier economies come to play a major role in financial intermediation. 5.6 Kindleberger’s conjecture: major economic crises derive from a weak and lagging collective control over powerful private financial innovations In the capitalist mode of production, finance tends to evolve faster than the economy and periodically it tends to become autonomous with respect to the

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manufactured goods production is the limitation of natural resources that have no capacity to grow at the same pace. † On the other side, at a given period of time, declining marginal productivity is typical of the production of natural resources. The time lag between any surge of demand and the ability to satisfy it is usually much larger in natural resources production than for manufacturing. Therefore, an industrial boom encounters the limit of rapidly rising prices of natural resources that hurts profitability, hence the investment and productive capacities. The industrial slow-down that follows induces a reduction of the demand addressed to rentier sectors and/or countries, and therefore the relative price of manufactured goods and raw materials stops deteriorating . . . and a new cycle may take place.

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5.7 Kaldor’s second conjecture: structural crises exhibit a generational shift in the conceptions about the relations between State and the economy, from ‘laisser-faire’ to interventionism and vice versa This last dynamic pattern builds on the conjunction of Polanyi’s and Kindleberger’s conjectures. The dynamism of innovation may trigger a rapid and finally unstable accumulation that unfolds into a structural crisis. Then, the restoration of the viability of the credit system calls for public intervention. When the deployment of the strategy of individual capitalists leads to the collapse of the pillars of

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slow process that governs the formation of the rate of profit. The related speculation ineluctably runs against the macroeconomic constraints of the real economy and this generates a financial crisis. It is more or less severe according to the nature of the accumulation regime and its degree of dependence on financialization. There is a long-lasting tradition in standard economic theory to attribute these recurring crises to the irrationality of individuals, the greed and corruption of some financiers or even the adverse impact of public regulations. It can be argued, quite on the contrary, that the occurrence of crisis is a permanent and structural feature of financial markets facing radical uncertainty (Orlean, 1990). A review of all the major financial crises since the seventeenth century confirms the generality of the mechanisms that are mixing the Schumpeterian general hypothesis with the specificities of financial innovations intensively studied by Kindleberger (1978). The sequences from the innovator to economic crisis can be easily summarized. The next step aims at understanding why economic actors and especially public authorities cannot learn from this impressive succession of financial crises. One apparent reason relates to the fact that each precise financial innovation is by definition without precedent and its proponents can argue that it is so new that previous regularities are no longer valid. Remember the belief in the financial community about ICT and the related end of the business cycles or the self-confidence of Wall Street about the absolute security provided by securitization. De facto, beneath the absolute novelty, Kindleberger’s dynamic pattern still applies. Either the innovation miserably fails and is forgotten—the Law’s system—or public authorities design regulations and new rules of the game in order to make the benefits of the innovation compatible with financial stability—the modern commercial banks (Boyer et al., 2004). The history of bank runs shows that they disappeared after a trial and error process of financial regulations (Figure 2). The contemporary crisis is a new example of the relevance of Kindleberger’s conjecture: the financial ‘laisser-faire’ strategy adopted by the American public authorities has definitely contributed to the severity of the ongoing crisis.

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capitalism, it is up to collective actors such as States to introduce countervailing forces in order to curb their opportunism. Rhetorically, political discourse then legitimizes State interventions by the fact that financial stability and social peace are public goods (Rajan and Zingales, 2003). This is the beginning of a search process aimed at realizing a redesign of the institutional configuration, acceptable politically and viable economically in terms of the resilience of the accumulation regime. Generally, the previous sources of financial and economic instability are thus removed, but the maturing of this new regime ineluctably triggers new opportunist strategies that finally destroy the coherence of the new accumulation regime and the mode of re´gulation. The legacy of the previous structural crisis is only embedded into the institutions and the legal system but no more in the memory of economic actors. It is then tempting to attribute the blocking of accumulation to the excessive constraints imposed by regulations and public controls: deregulation becomes quite a tempting strategy since it fulfils the objectives of the most powerful actors. The previous regulations are interpreted as arbitrary devices that were only generated via ideological and political struggles: economic actors as well as politicians forget that they emerged out of the collapse of a laisser-faire approach to capitalism. Actually, one observes the succession of laisser-faire periods, followed by a structural crisis; new regulations are then enforced and they generate a relatively stable accumulation pattern until it itself enters into a genuine form of crisis. The frequency of crisis follows the same pattern (Bordo et al., 2001; Boucher, 2003). This looks like a Kondratieff wave but the mechanisms are quite different from the ones contemplated by the Russian economist. According to Nicholas Kaldor, one of the rare convincing explanations of these long cycles is to be found in the succession of intellectual conceptions about the functioning of a capitalist economy.

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Figure 2 Financial crises: the outcome of private innovations’ dynamism versus lagging collective control.

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6.

Conclusions

This article proposed to take a serious look at the comeback of the concept of capitalism but also to reassess the notion of laws in the social sciences. It delivers the following provisional conclusions. C1. Two decades ago, the term capitalism was perceived as quite ideological indeed. Nowadays, a wider fraction of the economic profession refers again to this notion/concept. Is the change real or cosmetic and simply transitory? In any case, it seems to mean that the concerns of economists have shifted. First from static to dynamic analyses, second from more and more micro-studies to tentative analyses of the interdependences typical of an entire economic system. Clearly, technological, organizational and institutional innovations are more and more recognized as key factors in the long-run dynamism of capitalism. C2. Nevertheless, the failure of orthodox Marxism in identifying general laws of motion of capitalism should be acknowledged. Re´gulation theory has emerged

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One generation experiences the large social, political and economic costs of a major crisis, a consequence of liberalization. Remember the trauma associated with the American Great Depression that legitimized new political compromises and a totally different vision of the relations between State and market, the polity and the economy. Extensive regulations had, in the end, been quite favourable to the stability and dynamism of the Golden Age. When the dynamism of this configuration eroded, the inefficiency of the Keynesian policy mix called for searching for alternative forms of organization, and the relations between the State and the economy were reassessed. The generation exerting the power in the political and economic spheres had no direct experience of the interwar crisis: they implicitly assumed that if John-Maynard Keynes is wrong then Milton Friedman is necessarily right! Deregulation became quite attractive, at least, within all societies that cannot manufacture new social pacts. For instance, the Glass – Steagal Act that organized the separation of commercial and investment banks was abandoned in 1999. Most people had forgotten that this Act was passed after the 1929 – 1932 collapse for quite serious reasons: preventing catastrophic financial collapses due to speculation. Quite soon, the fragilities of this form of accumulation manifested themselves in various initially limited crises (October 1987 stock market crash, LTCM collapse, ENRON bankruptcy, etc.) but all the disequilibria kept piling up until the collapse of Lehman Brothers. The melting down of the American financial system is the direct consequence of this obliviousness towards history. ‘Can it happen again?’ was what Hyman Minsky (1982) was asking about the Great Depression. The response is ‘yes!’ in conformity with Nicholas Kaldor’s second conjecture (Kaldor, 1987).

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References Aglietta, M. (1982) Re´gulation and Crisis of Capitalism, New York, NY, Monthly Review Press. Aglietta, M. and Orle´an, A. (eds) (1998) La monnaie souveraine, Paris, Odile Jacob. Amable, B. (2003) The Diversity of Modern Capitalisms, Oxford, Oxford University Press.

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as a critical appraisal of this Marxist legacy. It has proposed to define precise configurations for the five basic institutional forms that make accumulation possible according to different regulation modes. It has shown that quantitative economic regularities themselves are transformed via a complex process of structural crises and collective reconfigurations of these institutional forms. For instance, productivity regimes are specific to a given productive paradigm, wage formation reflects the nature of social compromises and the interest rate is closely related to the nature of the monetary and credit regimes, and so on. C3. This central finding of re´gulation theory meets the conclusions of recent advances in economic methodology and the history of economic theories. Economic laws have many different meanings in the social and natural sciences. For the former, they are basically the unintended outcome of human and collective actions in the design and redesign of economic institutions. Any regularity has to be related to a broad type of accumulation regime. These regimes vary in time and space and do not have any long-term stability since they trigger adverse trends that unfold into a series of cyclical and structural crises. C4. Thus, it seems far too ambitious to look for generic quantitative laws governing all types of capitalism. But it might be interesting to check whether capitalisms may share some common qualitative dynamic patterns that would not be invalidated by the stylized facts gathered by economic historians and contemporary comparative analyses about the diversity/variety of capitalisms. C5. This article proposes such possible qualitative dynamic patterns inspired by some key contributors to the understanding of the logic and dynamic of the capitalist mode of production. These are, respectively, the conjectures made by (or attributed to) Marx, Polanyi, Schumpeter, Kaldor, Wallerstein and Kindleberger. C6. These conjectures are calling for a renewed interest in the social sciences for capitalisms as complex and dynamic social systems. Not only an updating of concepts, methods and hopefully results is required from the economic profession, but this should also be a typical interdisciplinary project that could mobilize the expertise of economic history, political economy, economic sociology . . . and many other disciplines.

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Amable, B., Barre´, R. and Boyer, R. (1997) Les syste`mes d’innovation a` l’e`re de la globalisation, Paris, Economica. Aoki, M. (2002) Toward a Comparative Institutional Analysis, Cambridge, MA, MIT Press. Benetti, C. and Cartelier, J. (1980) Marchands et salariat, Paris, Maspe´ro. Berthoud, A., Delmas, B. and Delmas, T. (2008) Y a-t-il des lois en e´conomie?, Villeneuve d’Ascq, Presses Universitaires du Septentrion.

Boucher, C. (2003) Identification des crises boursie`res, Document de travail, Paris, Universite´ Paris XIII. Bowles, S. (1981) ‘Technical Change and the Profit Rate: A Simple Proof of the Okishio Theorem’, Cambridge Journal of Economics, 5, 183 –186. Boyer, R. and Saillard, Y. (eds) (2002) Re´gulation Theory: The State of The Art, London, Routledge. Boyer, R., Dehove, M. and Dominique, P. (2004) ‘Les crises financie`res’, Rapport du Conseil d’analyse Economique, No. 50, Paris, La documentation franc¸aise. Braudel, F. and Labrousse, E. (eds) (1976) Histoire E´conomique et Sociale de la France: des ˆ ge Seigneural aux Pre´ludes de l’A ˆ ge Industriel 1660 –1789, vol. II, Derniers Temps de l’A Paris, Presses Universitaires de France. Fligstein, N. (2001) The Architecture of Markets. An Economic Sociology of Twenty-first Century Capitalist Societies, Princeton, NJ, Princeton University Press. Hall, P. and Soskice, D. (eds) (2001) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford, Oxford University Press. Inoue, Y. and Yamada, T. (2002) ‘Japan: Demythologising Re´gulation’. In Boyer, R. and Saillard, Y. (eds) Regulation Theory: The State of Art, London, Routledge, pp. 260 –266. Jessop, B. (ed.) (2001) Regulation Theory and the Crisis of Capitalism, Cheltenham, Edward Elgar, 5 vols. Kaldor, N. (1963) Essays on Economic Stability and Growth, London, Gerald Duckworth and Co. Kaldor, N. (1967) Strategic Factor in Economic Development, Ithaca, NY, Cornell University Press. Kaldor, N. (1987) E´conomie et Instabilite´, Paris, E´ditions Economica. Kindleberger, C. P. (1978) Manias, Panics, and Crashes: A History of Financial Crises, New York, Basic Books. Lordon, F. (1997) ‘Endogenous Structural Change and Crisis in a Multiple Time-scales Growth Model’, Journal of Evolutionary Economics, 7, 1–21.

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Bordo, M., Eichengreen, B., Klingebiel, D. and Martinez-Peria, M. S. (2001) ‘Is the Crisis Problem Growing More Severe?’, Economic Policy: A European Forum, 16, 51–82, accessed at http://econweb.rutgers.edu/bordo/Crisis_Problem_text.pdf on March 11, 2010.

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Marglin, S. (2008) Dismal Science: How Thinking Like an Economist Undermines Community, Cambridge, MA, Harvard University Press. Marx, K. ([1867] 2008) Le Capital, reprint, Folio Essais, Paris, Editions Gallimard. Minsky, H. (1982) ‘The Financial Instability Hypothesis: Capitalism Processes and the Behavior of the Economy’. In Kindleberger, C. and Laffargue, J.-P. (eds) Financial Crises: Theory, History and Policy, New York, NY, Cambridge University Press, pp. 13 –39.

Orle´an, A. (1990) ‘Le roˆle des influences interpersonnelles dans la de´termination des cours boursiers’, Revue e´conomique, 41, 839 –868. Polanyi, K. (1946 [1983]) The Great Transformation, French trans., Paris, Gallimard. Quemia, M. (2001) ‘The´orie de la Re´gulation et de´veloppement: trajectoires latino-ame´ricaines’, Anne´e de la re´gulation 5, 57 –103. Rajan, R. and Zingales, L. (2003) Saving Capitalism from the Capitalists, London, Random House. Schumpeter, J. (1911 [1983]) The´orie de l’Evolution Economique. Recherche sur le profit, le cre´dit, l’inte´reˆt et le cycle de la conjoncture, French trans., Paris, Dalloz. Schumpeter, J. (1954) Capitalism, Socialism and Democracy, 4th edn, London, Allen & Unwin. Smith, A. (1776 [1976]) ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, Cambell, R. H., Skinner, A. S. and Todd, W. B. (eds), London, Croom Helm. Sternberg, F. (1950 [1956]) Le conflit du sie`cle, French trans., Paris, Le Seuil. Streeck, W. (2009a) ‘Four Books on Capitalism’, Socio-Economic Review, 7, 741–754. Streeck, W. (2009b) ‘Toward an Historical-Institutionalist Analysis of Contemporary Capitalism’, paper prepared for the Rinberg Conference The Commonalities of Capitalism, November 18– 21. Streeck, W. (2009c) Institutions in History: Bringing Capitalism back in, MPIfG Discussion Paper 09/8, Cologne, Max Planck Institute for the Study of Societies. Wallerstein, I. (1979) The Capitalist World-Economy, Cambridge, Cambridge University Press. Wallerstein, I. (1980) The Modern World System: Mercantilism and the Consolidation of the European World Economy, 1600 –1750, vol. II, New York, NY, Academic Press. Wallerstein, I. (1989) The Modern World System: The Second Great Expansion of the Capitalist World Economy, 1730 –1840, vol. III, San Diego, CA, Academic Press. Yamamura, K. and Streeck, W. (eds) (2003) The End of Diversity? Prospects for German and Japanese Capitalism, Ithaca, NY, Cornell University Press, pp. 147–182.

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Okishio, N. (1961) ‘Technical Change and the Rate of Profit’, Kobe University Economic Review, 7, 85 –99.

Socio-Economic Review (2011) 9, 83–106 Advance Access publication June 5, 2010

doi:10.1093/ser/mwq014

A pragmatist theory of capitalism Christoph Deutschmann *

*Correspondence: [email protected]

This article explores the potential of pragmatist social theory (Dewey and Mead) for elaborating and clarifying the classical analyses of capitalism by Marx, Schumpeter, Sombart and Weber. It shows how a reinterpretation in the context of pragmatist discourse can overcome the rationalist shortcomings of Weber’s theory of capitalism and formulate key Marxist concepts like ‘capital’ or ‘reification’ more convincingly. It also outlines a multi-level approach for analysing the dynamics of capitalism, focusing on the interaction between class structures, individual creativity and the communication of innovative paradigms. Keywords: capitalism, practice, creativity, economic growth, money, capital, class, multi-level analysis, institutions, innovation, crises JEL classification: Z1 economic sociology

1.

Introduction

After an extended period of research and discussion on the ‘varieties of capitalism’, a more concise distinction between the general and the specific appears to be required. It does not suffice to view ‘capitalism’ as an aggregation of national economies, each institutionally framed in a particular way, as the ‘varieties of capitalism’ literature has done. Rather, capitalism must be understood as a distinct global entity. Nationally and institutionally divergent paths of economic development can only be fully explained in the context of this larger system. What are the characteristics of capitalism as a totality beyond liberal and coordinated variants of national economies? A renewed and sharpened focus on the ‘commonalities’ (Streeck, 2009, p. 1) of capitalism is needed, as this special issue suggests. Theories of capitalism, of course, are a vast theme with a long history. Most authors do seem to agree, though, that in spite of the central role of markets in capitalism, a capitalist system is not simply a ‘market economy’. Capitalism is not only an economic term, but a sociological one as well. In order to clarify it, we need a theory of the constitution of society and of the historic changes # The Author 2010. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected]

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Department of Sociology, University of Tuebingen, Germany

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2.

Marx, Dewey and Weber

I will proceed under the assumption that Marx did not propose a simple ‘base – superstructure’ theory of society with apparently ‘objective’ economic laws as an independent variable, and the institutional and cultural superstructure as a dependent variable. While he did use the terms ‘base’ and ‘superstructure’ in his introduction to ‘A Contribution to the Critique of Political Economy’ (1859), he used them only as a metaphor for the popular reader. Actually, there is no systematic place to put the base – superstructure terminology in Marx’s theory. Under the influence of Engels and later political Marxism, it did lead, however, to reductionist misinterpretations that are imputed to Marx to this day. My point here is that Marx’s historical materialism contains pragmatic elements, as Hans Joas has noted (Joas, 1992a, pp. 128 f.). The core categories of Marx’s social theory are ‘production’ and ‘practice’, which in the original texts do not have the narrow economic meaning Marx is often criticized for. I contend that Marx’s interpretation of these concepts shows remarkable similarities with Dewey’s pragmatist analysis of experience and nature (Dewey, 1958 [1925]). Both authors meet in their critique of the nature– spirit dualism of traditional philosophy, and both emphasize the creative nature of human action and the processual and dynamic nature of human experience. In his early writings, Marx (1964, pp. 339 f.) develops his concept of production from a double critique of Hegel and Feuerbach: concurring with

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in the constitution of society that have occurred in the modern age. I aim here to explore the potential of pragmatist social philosophy, in particular of the work of John Dewey and George Herbert Mead, for developing such a social theory of capitalism. The significance of Dewey and Mead for sociology and economic sociology has been recently rediscovered by Hans Joas (1989, 1992a, b) and Jens Beckert (2002, 2003). Of course, a fruitful conceptualization of the commonalities of capitalism is impossible without referring to the classical writers in this field, in particular Marx, Sombart, Schumpeter and Weber. Nevertheless, I want to show that a critical review of these authors’ interpretations of capitalism in the light of the pragmatist discourse can help to correct the deficiencies of the classical approaches and bring the present-day debate a step forward. I will focus especially on the critical difference between rational and ‘creative’ action (in the pragmatist sense) and the societal implications of the capitalist nexus between money and labour as a ‘creative’ resource. I develop my argument by comparing action – theoretical concepts in Marx, Dewey and Weber, discussing the paradoxes of the money – labour nexus and the transformation of money into capital, and presenting a multi-level analysis of the relationship between institutional and social structures and individual creativity in capitalism.

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Feuerbach and in contrast to Hegel, he points to the natural foundations of human existence. Concurring with Hegel and in contrast to Feuerbach, he emphasizes the reflective and transformative character of human action, which is rooted in the social nature of man. Both the material and communicative elements of the human condition converge in the process of ‘practice’, as Marx emphasizes in his eighth ‘Thesis on Feuerbach’: ‘Social life is essentially practical. All mysteries which mislead theory into mysticism find their rational solution in human practice and in the comprehension of this practice’ (Marx, 1978b, p. 145; see also the original German, Marx, 1964, p. 341). ‘Practice’, or ‘production’, as Marx calls it later, implies material life and the social relations it is intertwined with, including politics, ideology and religion. It always develops in a tripartite relation between at least two social actors and nature as a third object. Languagebased communication and nature are relationally rather than hierarchically linked with each other. The coexistence of both can be conceptualized only in an open and dynamic way, which Marx also circumscribes with the concept ‘society’. Thus, ‘society’, ‘production’ and ‘practice’ are largely equivalent concepts. On the one hand, collective productive activity results in objectified technical and social structures (‘relations of production’ in Marx’s terminology); on the other hand, given structures are transcended by the creative forces of human work (‘productive forces’). For some time, a given social structure of production may be stabilized and thus give rise to the illusion of an ontological primacy of spirit over nature. But such an order cannot last forever, since people can change it and create a new one. Human practice is ‘revolutionary’ (Marx, 1964, p. 340) because it does not just implement existing social norms and structures, but is able to invent and realize new ones as well. The similarity of this exposition to Dewey’s (1958) approach can hardly be denied. Marx’s formulae of ‘naturalist humanism’ and ‘humanized nature’ are almost literally echoed by Dewey, who, without referring explicitly to Marx, characterizes his own approach as one of ‘naturalistic humanism’(Dewey, 1958, p. 1a). According to Dewey, there is no such thing as ‘nature as such’ outside human experience. Nature occurs only within experience; experience, however, becomes possible only via communication. It is communication which transforms things from brute and isolated facts into meaningful objects. The differentiation between mind and nature is not given a priori, but develops in a process of controlled practical experience that Dewey calls ‘inquiry’ (Dewey, 1938). Meaning, on the other hand, is not based on an independent, supra-natural world of ideas, but on language, which functions as a ‘natural bridge that joins the gap between existence and essence’ (Dewey, 1958, p. 167). Owing to their command of language, human individuals can participate in a common symbolic universe, take the perspectives of others and think reflectively about themselves; here, Dewey argues similarly to George Herbert Mead (1934). Symbolic orders

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are not autonomous realities, however, but have an existential dimension, as they are materially anchored in the location of individual actors in historic time and space. They do not exist apart from the practice of individual actors but have to be incorporated and reproduced continuously by the latter. Here, the ‘reproduction’ of symbolic orders does not mean simply copying them one to one. Rather, it is based on active interpretations by individuals, which often imply elements of re-creation and change and may result, at the very least, in a partial negation of the given order (see also Streeck and Thelen, 2005). In order to explain the historical change of symbolic and institutional orders, it is essential to understand the dialectical relationship between institutions and individuality. As Dewey (1958, pp. 212 f.) points out, individual action is the basis for the reproduction of institutions and for their change and transformation. If something new happens in society, this always goes back to the action of an individual. Even in ancient and pre-modern cultures, where individuality seems to be confined to the mere reproduction of given cultural patterns, creative variations of these reproductive actions occur (Dewey, 1958, p. 212). In modern societies, individuality is no longer considered a source of mere ‘deviations’, but is recognized as a potential for innovation and change. Similarly, G. H. Mead emphasizes the crucial role of the ‘I’ in contrast to the ‘me’ in the generation of innovations (Mead, 1934, pp. 192 f.). It is only individuals who can be genuinely creative—not collectives. Creativity is based on practical experience, and only the individual has a body that allows him or her to experience both the symbolic and the natural world simultaneously. Human action can be called ‘creative’, as it is capable not only of performing roles within given social structures but also of producing and changing these structures themselves—this is the common position of Marx, Dewey and Mead. Moreover, creativity is not confined to the generation of new, more universal social norms and rules, as Habermas argues in line with Mead in his theory of ‘communicative action’. It also extends to the physical dimension, where new tools, physical artefacts and material infrastructures are invented. ‘An engineer who is constructing a bridge is talking to nature in the same sense that we talk to an engineer’, says Mead (1934, p. 185)—the difference between magic and modern science lying only in science’s awareness that nature cannot respond in kind. Moreover, creativity is related to the expressive dimension, where new aesthetic objects are created. Creativity never occurs in a pure form as a ‘creatio ex nihilo’. It is always based on existing structures, changing or rearranging them in an intentional or unintentional way. Thus, creativity cannot be observed as a totality, but only on a case-to-case basis within specific historical contexts. Creativity is closely associated with historicity; both always involve a mixture of continuity and change, never just change alone (Koselleck, 2003). An overall abstract theory of creative acts is impossible, as is an overall

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theory of historicity. To develop such a theory, we would have to know not only all the past and present inventions but all the future ones as well, which would be self-contradictory. In comparison with this pragmatic view, Weber’s concept of rational action appears to be much narrower. For Weber, the core principle of rational action is assessing or ‘weighing’ (abwa¨gen) various means and possible ends: ‘Action is instrumentally rational (zweckrational) when the end, the means, and the secondary results are all rationally taken into account and weighed. This involves rational consideration of alternative means to the end, of the relations of the end to the secondary consequences, and finally of the relative importance of different possible ends’ (Weber, 1978, p. 26; see also the original German version, Weber, 1972, p. 13). In order to assess the ends, means and side effects, the expected outcomes of action must be principally knowable, at least in the form of an estimate of the odds. Thus, Weber’s concept of rationality is applicable only to situations with a relatively high degree of social and material structuration. This is not incompatible with the pragmatist theory of action. However, Weber’s concept should not be taken as an ideal type for action in general, but refers only to particular constellations of action in which a stable definition of the situation already has been achieved as a result of prior experimentation. It cannot be applied to the process of experimentation itself. If actors are confronted with conflict and uncertainty, rational action is impossible by definition, and experimental strategies of trial and error (and sometimes imagination) are more helpful to cope with the situation. Upon close examination, Marx’s theory is inconsistent in this point, too, and partially subject to similar objections. In his early writings, he developed a concept of production with strong romantic overtones which indeed shows a close affinity to the pragmatist position, as I already have noted. The mature Marx, however, tries to combine his original concept of production (which he takes up again in the introduction to ‘The Grundrisse’, Marx, 1978a, pp. 222 –246; see also the ¨ konomie’, Marx, German original, ‘Grundrisse der Kritik der Politischen O 1953, pp. 5– 31) with the labour theory of value he has borrowed from the classical political economy of Smith and Ricardo. Marx never thoroughly reflects on the compatibility of these two approaches. The labour theory of value asserts that the values of commodities are basically calculable on the basis of the amount of ‘socially necessary’ (not actual) labour embodied in them, which in turn depends on the state of technology, the level of work skills and intensity of work and, finally, the pattern of market demand (Marx, 1988, pp. 49 f.). This presupposes that technology, skills, work intensity and market demand are factors that can be treated as given and known. In other words, the common point in Weber’s concept of rational action and Marx’s labour theory of value is that both are applicable only to a highly structured economic system that operates

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3.

Labour, money and capital

Where does the quest for innovation in capitalism, which has recently been emphasized again by Baumol (2002), come from? An explanation necessarily will be complex and must operate on different sociological levels. In this section, I will outline a possible macro-level explanation. However, this alone is not sufficient, since, as I emphasized earlier, innovation and creativity are genuinely individual capacities. An additional analysis is needed which shows how the transformations in the macro-structure of modern societies underlying the genesis of modern capitalism changed the institutional and structural framing of society by stimulating ‘creative’ and ‘innovative’ modes of individual adaptation. This will be the subject of the Section 4.

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according to a given set of technical and economic parameters. It is only on the basis of this assumption that the determination of values can be reduced to the dimension of time. While such a steady-state model might have been appropriate for the economy of Adam Smith’s times, it cannot be applied to the industrial capitalism that began in the nineteenth century, with its continuous stream of innovations and technological revolutions. The labour theory of value cannot be used to understand an innovative process in which technological and economic parameters themselves are being created and changed. This does not negate Marx’s assumption that labour plays a key role in the economic process. However, labour derives its significance from its creativity, not from its alleged quality as a quasi-measurable ‘substance’. Likewise, one may agree with Marx that labour values are determined ‘somehow’ within a capitalist system. However, due to the unobservability of creative actions, the system is a black box. How labour values are determined within the system can never be transparent for any external observer, because such an observer would have to be more intelligent than the very sum of creative social intelligence present within the system itself. It is the social preponderance of innovation combined with the intransparency of creative action—‘I cannot turn around quick enough to catch myself ’, says Mead (Mead, 1934, p. 174)—which makes the capitalist system incalculable as a whole, not simply the ‘anarchy of the market’ stemming from the fact that production in capitalism is a private activity, as Marx contended. Friedrich A. von Hayek, who described markets as a process of ‘discovery’ (Hayek, 1948, 1969), was undoubtedly much clearer on this point than Marx. Marx uses the concept of production in an ambiguous way, on the one hand in the sense of creative social activity; on the other, in that of a calculable ‘substance’ of value. He did not clarify how these two meanings of production are related to each other; rather, in his mature work, he postulated a problematic ‘law of value’ based exclusively on objectified labour.

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In his often-cited empirical analysis of economic growth in the world economy, Angus Maddison (2001) identified a secular turning point in the longterm trend of growth in the early nineteenth century, around 1820. Although the statistical basis of Maddison’s data is necessarily often shaky, the point appears reasonably clear: while the world economy remained in a more or less stationary state before 1820—only in Western Europe can a slight growth trend be observed between 1500 and 1820—economic growth in absolute and per capita terms became a normality after 1820, first in Western Europe and in the USA, then gradually in the rest of the world, too. How can this sudden shift of the economy from a static into a dynamic mode of operation be explained? The theories of the development of capitalism, of course, attribute the genesis of modern industrial capitalism to a large variety of factors ranging from advancements in modern science and technology, and the democratic revolutions to Weber’s Protestant ethic and Sombart’s capitalist spirit. However, there is widespread consensus about the crucial importance of one aspect of the transformation for triggering the growth dynamics: the liberation of agrarian and urban markets and the extension of the money nexus from markets for consumer goods and services (which have existed at almost all times in history) to markets for free labour, land and other means of production (which were historically a largely new phenomenon). Owing to these changes, the market system became pervasive and universal, involving the total process of social reproduction—primary production, distribution and consumption—and making the large majority of the population dependent on earning their living at the market. Karl Polanyi (1977) spoke of the ‘Great Transformation’ that put an end to the earlier state of ‘social embeddedness’ of the economy; conversely, society became a ‘mere annex’ of the market system, according to Polanyi. For Polanyi, as well as for Marx, it makes a crucial difference for an economic system whether the nexus of markets and money includes only the realm of finished commodities or is larger, extending to the process of production itself. In the first case, we have an ‘embedded’ economy of the traditional type; in the second, a capitalist economy emerges. To explain the significance of this difference, it is helpful to return to the theoretical distinctions made earlier. In an embedded market economy, the counterpart of money at the market is a finite and observable set of goods and services. The property claim which money embodies is basically limited and fixed. In a capitalist economy, by contrast, the purchasing power of money extends not only to a set of observable commodities, but also to the potential of free labour, which cannot be observed as a totality because of the creative capacities of workers, as described earlier. Whereas money is always given in a fixed sum, the counterpart of money in the market now is an open-ended entity of non-definable magnitude. Under these conditions, ‘equilibrium’ is unthinkable. The relentless drive of capitalism for

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(a) As capital, money is no longer a harmless ‘medium of exchange’, but becomes a dynamic entity destined not only to facilitate the circulation of commodities, but also to return and accumulate: ‘M-C-M’ in Marx’s terms. Money that can summon the creative potentials of labour becomes a potential itself, as it is expressed precisely by the German word ‘Vermoegen’ (which means ‘wealth’ or ‘fortune’ in English, but literally translated means ‘being able to’). Since money as capital represents the most fundamental of all human capacities—creative social labour—it can have its destination only in itself, i.e. it must be self-perpetuating. Its purpose is to develop the underlying potential of labour, rather than any external ‘utility’ or ‘material satisfaction’, which would be casting pearls before swine. The capitalization of money therefore sets the stage for a relentless process of economic ‘growth’—not only in the sense of increasing ‘productivity’, as is often said. Capitalist growth is not confined to the quantitative increase of the output of a given set of products and services per unit of time. It is characterized instead by the continuous invention of new products, services and technologies and the corresponding elimination of conventional ones— ‘creative destruction’, as Schumpeter called it. Capitalist growth has a quantitative and a qualitative dimension that manifests itself in incessant ‘revolutions’ of technologies, systems of organization and logistics and patterns of consumption. The core aspect is not the increasingly efficient satisfaction of a given set of wants, but the continuous creation of new wants, technologies and forms of social coordination. Finally, since money as capital is bound to grow, the need for a continuous increase in the supply of money itself and monetarily based demand arises. This is the point of departure

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growth and acceleration (Koselleck, 2003; Rosa, 2006) must be distinguished clearly from the gradual and incremental mode of social change prevalent in earlier times in history. It stems from the fact that what money can buy is no longer limited to only a given quantity of objectified commodities—which was already vast in the eighteenth century, but nevertheless limited—but now extends to the inexhaustible creative potentials of free labour. Now, money can buy anything humans can invent and produce, not just what they actually have produced. More than at any other time in history, the desire for money has become insatiable. The value of money can never be redeemed definitively, but only in a continuous, dynamic process of exploiting the potentials of labour. This has led to a profound change in the nature of money itself that Marx recognized much more clearly than Dewey and Mead: the transformation of money into ‘capital’. Three aspects of this transformation are important to note: (a) the dynamic nature of capital, (b) the social value of money and (c) the enigmatic character of the representation of society by capitalized money.

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of the modern system of politically guaranteed private credit (Ingham, 2004; Deutschmann, 2008b). (b) The transformation of money into capital enhances its social value. Quite contrary to the common system-theoretic interpretations of money (Parsons, 1967; Luhmann, 1988), it can no longer be considered to be merely a functionally specialized medium of the economic system. Money that can mobilize the creative capacities of social labour takes the character of an ‘absolute means’ (according to Simmel’s formula; Simmel, 1989, p. 298), mediating and representing the total process of social reproduction. For the individual owner, money represents not just material purchasing power, but individual freedom and utopian promises of absolute wealth as well (Deutschmann, 2001). Even non-economic subsystems of society such as politics, science, art and education become dependent on the money nexus, since they always need to be financed in spite of the relative autonomy of their specific codes (Paul, 2004). The commodification of land and free labour completes the detachment of society from its natural basis and opens the process of social reproduction as a whole to the disposition of individual actors. Now, almost everything can be done differently than it has in the past, depending only on the ratio of costs and returns. Marx recognized more clearly than Dewey that the modern concept of society as a ‘product’ of socialized human actors itself became possible only against this particular historical background. As a general societal medium, money enters into competition with religion, since it undermines traditional religious faith in a divine creator. The latent or manifest competition between money and religion results from an inner affinity between them since each claims to represent the unity of society. (c) In connection with the inner affinity between money and religion, the question of how money represents the unity of society becomes relevant. Dewey (1958, p. 173) compares the functions of money with those of language: just like language gives things a symbolic meaning and changes their character by putting them into a relational perspective with other objects, money changes the character of goods by integrating them into the context of exchange. Money thus symbolizes goods and their exchange relations. However, Dewey does not discuss the point that money is not only a symbol of goods, but embodies the buyer’s private right to appropriate them. Nor does he discuss what happens when money is related not only to a set of already real goods and services but also to humans’ creative capacities. In the latter case, it becomes the representation of and a claim on something unobservable. Then, money does not only relate visible things to each other, but points to an invisible potential, i.e. the total reproduction process of society, including not only its objectified elements but also its

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Thus, money does not represent the social reproduction process in the same way language does. Since the object of signification is basically unobservable, it is represented in the particularly enigmatic form of a ‘cipher’ (Luhmann, 1992), which signifies and obscures the object at the same time. In contrast to Dewey, Marx was well aware of the enigmatic character of money and capital. He tried to conceptualize it in his concept of ‘commodity fetishism’, which later was elaborated by Georg Lukacs (1970 [1923]) into a general theory of capitalist ‘reification’. According to Lukacs and other orthodox Marxists, capitalism could be overcome if workers became conscious of their factual key role in the organization of production and overthrew the system of private control of the means of production. They believed that this opportunity was opened by the bureaucratizing and centralizing dynamics of the capitalist economy itself. What actually happened in planned economies in the twentieth century showed that the orthodox Marxist theoreticians grossly underestimated the problems of planning and organizing modern economies. As I noted already in the preceding paragraphs, their analyses fell short because they located the source of the problems only in the ‘anarchy of the market’ due to the contradiction between private property and the social character of labour. From this background, Postone (1993 [2003]) criticizes the ‘traditional’ Marxist idea that the difference between capitalism and socialism coincides with the distinction between market and plan, and he tries to elaborate the nature of capitalism as a ‘historically specific form of social interdependence with an impersonal and seemingly objective character’ (Postone, (1993 [2003]) p. 3). However, where does the objectivity of capitalist dynamics come from if capitalism is not simply a ‘market economy’? My argument here is that it has to do with the paradoxes of both the money – labour nexus and money as a social representation of the creativity of labour. The creative capacities of

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underlying subjective capacities. Following Castoriadis (1987, pp. 115 f.), one could speak of an ‘imaginary’ origin of signification. As a consequence, the sign and the object of signification merge and can no longer be clearly distinguished from each other: the sign seems to be what it represents. It is easy to distinguish the ‘beware of the dog’ sign from the dog himself: the sign does not bite. In the case of money, however, things are not so easy: money does not only ‘represent’ wealth, but it is wealth which can be stored in bank accounts and transferred in precisely defined quantities from one account to another. Meanings are communicated and shared between ego and alter, whereas money is transferred in a zero-sum game where ego loses exactly what he gives to alter. In spite of its nature as a symbolic construction, money is treated as a natural, quasi-physical fact; similarly, the dynamism of the money as capital is being experienced as a ‘natural law’ beyond human control.

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4.

Capitalist institutions and individual creativity

My argument so far has been that the dynamic nature of capitalism stems from the transformation of money into a claim on the creative potentials of labour that can never be redeemed in a definitive way. The work contract is ‘open’, as March and Simon have shown in their well-known analysis. While machines and computers have a limited and finite set of programs, workers can develop their skills and perform more or better; moreover, they can invent genuinely new problem solutions, technologies and products. The organization of these skills by the capitalist employer can multiply these creative potentials further, although even he can never take full ‘command’ of them. This is only the first step, however, towards explaining and understanding the capitalist quest for growth. The institution of the free work contract, which transforms money into capital, constitutes a necessary condition for the growth dynamics of capitalism, but not a sufficient one. Capitalist development is based on the creativity of work; creativity, however, is a genuinely individual capacity, as I have noted earlier. Neither capital is creative, nor are organizations or workers as an abstract collectivity. Rather, the primary impulse for developing something new can only come from individuals, as I have emphasized with Dewey and Mead. The historical success of capitalism would have been unthinkable without the personal creative commitment of millions of entrepreneurs, engineers and employees inventing and implementing new products, technologies, logistics and organizational concepts. Such commitment cannot be derived from any objective economic or social ‘laws’; it can only be ‘understood’ by an interpretative reconstruction of the historical context of action (‘Verstehen’ in terms of Weber and Schu¨tz). Thus, the macro-analysis of the money – labour nexus I have outlined so far needs to be deepened by a micro- and meso-analysis

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labour can never be symbolically represented and politically organized as a totality, since creative individual experience always transcends given symbolic and institutional orders, as Dewey showed. Therefore, the problem of economic planning is rooted not only in the anarchic form of the capitalist economy, but also in its substance: creativity. An organized economy—here, Polanyi’s argument remains central—could only be an ‘embedded’ economy, where land and labour are exempt from the market nexus and whose basic law is not growth but reproduction within a given set of collectively defined economic parameters. An organized socialist economy therefore could never be superior to capitalism in developing the potentials of labour, but rather would curb the process of ‘creative destruction’ and have to restrict itself to a given, collectively agreed-upon path of social reproduction. Socialism would mean the return of a steady-state economy which—if Maddison’s data are correct—was the norm throughout history.

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of the concrete conditions of individual and collective actions. Technically speaking, a ‘multilevel analysis’ of capitalist dynamics is required in order to show how the transformation of markets and institutions at the macro-level changes the social framing of situations in a way that stimulates (rather than ‘causes’) innovative action (Deutschmann, 2009). The universalization of the money – labour nexus means that workers and means of production (including land) become separated from each other. Society divides itself into two classes, one of them owning the means of production, which now becomes capital, and the other owning nothing except personal labour power. Beyond the traditional markets for goods and services, markets for capital and land arise, on the one hand, and markets for free labour, on the other. These markets are basically global and constitute the ultimate macro-context for economic and social action in capitalism—in contrast to the locally, regionally or nationally bounded character of political and legal institutions. The polarization of classes is the core phenomenon of the social structure of capitalism—so far, there is not much to add to Marx’s theory. However, how does the polarization of classes become transformed into capitalist dynamics? My point is that, for class conflict to become dynamic, the structural polarization of classes must be institutionally framed in a way that makes it appear individually surmountable. In contrast to traditional class societies, individual affiliation to a class in capitalist society is not ascriptively fixed. Social advancement from the unpropertied to the propertied classes is possible—at least in principle, even though the actual opportunities for advancement may be small. Capitalism opens a historically new channel of upward social mobility: ‘entrepreneurial’ rise, based not on vested privileges, educational certificates or bureaucratic rules, but on individual success in the market. In my view, it is important here not to make a sharp distinction between self-employed ‘entrepreneurs’ in the formal, legal sense, and employees, who may develop a desire for market success and social advancement, too, and in some cases actually change to a self-employed position. In spite of the high level of social self-recruitment, entrepreneurs often have a petty-bourgeois background and start from small origins, as Sombart noted for his time (Sombart, 1955 [1902], pp. 19 f.; Bendix and Howton, 1978; Kaelble, 1978; Berghoff, 2004). Moreover, not only self-employed entrepreneurs, but also employees may seek upward mobility in vocational or internal labour markets. Even workers who have abandoned the goal of upward mobility for themselves may pin their hopes on the success of their children. The ‘embourgeoisement’ of the working class, which manifests itself in the individual quest for social advancement, was a key theme of industrial sociology after the Second World War (e.g. Goldthorpe et al., 1968). In the recent literature, Voß and Pongratz have coined the term ‘labour-power entrepreneur’ (‘Arbeitskraft-Unternehmer’; Voß and Pongratz, 1998) in order to characterize

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the entrepreneurial aspirations of modern employees. In a capitalist society, where money is the ‘absolute means’ and the key to individual freedom and social status, the aspirations of the unpropertied must focus on the opportunities for financial gain. The dynamics of capitalism depends on the individual quest of the unpropertied—as illusory as ever—to climb socially and cross the class dichotomy. Lisa Keister describes this as the core of the ‘American dream’: ‘Those who have wealth have every incentive to maintain that wealth, while those who own little are motivated to acquire wealth. Moreover the notion of the American dream suggests that such upward mobility is possible’ (Keister, 2000, p. 3). The paradise of financial wealth is located not in heaven but on earth. To enter it, praying and singing alone are no longer sufficient; one has to work. However, just as the religious believer on his way to salvation cannot depend solely on his personal intuition but seeks guidance in sacred writings, rituals and priests, the entrepreneur striving for success in the market needs support from institutions and experts who spark hopes, provide credit and suggest viable roadmaps. Nevertheless, as in the case of religious expertise, these institutions do not imply that success is guaranteed, but send inconsistent and contradictory messages. It is this inconsistency of the institutional framing of situations which—here, I am following Merton’s (1968) classic theory of ‘anomie’—gives rise to ‘innovative’ and ‘entrepreneurial’ modes of individual adaption. The creative achievements of entrepreneurs and workers, in turn, nourish the profitability of capital and the growth of the economy at the macro-level. The profit of capital does not come simply from the quantitative amount of surplus labour, as Marx contended. Rather, as I argue with Schumpeter and Sombart, it comes from new products and technical or logistic combinations based on the innovations of entrepreneurs. Profit is a premium on the temporary monopoly the successful innovative entrepreneur enjoys. Moreover, I would expand on Schumpeter and Sombart and contend that the creative commitment of employees and their thousands of ‘small’ ideas in implementing innovations is vital for profitability and growth too—here, Marx is right, indeed. Capitalist growth, in other words, is the aggregate effect of the quest of entrepreneurs and workers to cope creatively with the institutional and structural inconsistencies of their situation. For a more thorough analysis of the conditions of capitalist dynamics, four steps are required according to the textbooks of multi-level analysis (Esser, 1993, 1999): first, an analysis of the objective characteristics of the actors’ situation, consisting of the structure of markets, social networks and institutions and the corresponding availability of resources; second, a reconstruction of the subjective framing of action, including both the actors’ preferences and their subjective assessment of opportunities for action; third, an analysis of the specific action strategies chosen; fourth, a consideration of the aggregate

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effects of action. Though I cannot address these steps extensively here, I will outline them briefly. 4.1

Characteristics of the situation

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The basic condition of the situation is given, as I have already emphasized with Marx, by the polarization of classes; the ‘basic’ character of the latter resulting from the global character of markets for capital and labour. The dichotomy of classes, however, is overlapped by political power structures, institutional orders, social networks like the welfare state, the occupational and educational system, the segmentation of labour markets and personal and family networks, all of whose scope is—as a rule—confined to the national, regional or local level. The signals sent from the sum of all these frames to the actors regarding their opportunities for market-based social advancement are anything but consistent and vary according to cultural, national and regional traditions, as the ‘varieties of capitalism’ literature has shown. On the one hand, overcoming the class dichotomy, which is evident in all developed industrial countries today in the fact that the bulk of private financial and real assets is owned by a small minority of the population, appears impossible for those depending on their labour power alone. On the other hand, there are institutional structures like the welfare state or the educational system that may give positive signals to the underprivileged and encourage them to invest in improving their qualifications and, thus, their position in the market. Contrarily, the same structures, such as a socially closed and conservative welfare and/or educational system, may cement the class dichotomy further. A second example for the ambivalent messages emanating from institutional frames with regard to the opportunities for entrepreneurial advancement are gender norms which, in the case of the traditional malebreadwinner model, for example, enable and promote market-based careers for the male half of the population just by discriminating against the female half. A third factor is private, family or ethnic networks and the resources they generate. As the literature on ‘ethnic entrepreneurship’ (e.g. Portes and Zhou 1992; Granovetter, 2005) has shown, the individual availability of network-based social capital can compensate negative market conditions to a certain degree and encourage entrepreneurial careers. It can be assumed that the conditions are all the more negative for those enjoying little or no network support. Even at the national level, the inconsistencies of institutional and social framing provide ample leeway for powerful actors to reinterpret, hollow out or transform existing rules, as Wolfgang Streeck (2009) has shown in his analysis of the post-war development of German capitalism. As transnational mobility and the ‘globalization’ of societies increase, these inconsistencies become more pronounced.

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Framing the situation

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Since the institutional and social framework of economic action is complex and contradictory in capitalist societies, individuals can only develop a consistent attitude towards their situation if they have a minimum amount of personal autonomy. The scientific reconstruction of these subjective framings therefore requires a second, independent analytical step which cannot be ‘derived’ immediately from the objective situational conditions no matter how relevant they might be. This applies even to the basic variable itself: attitude towards financial success. Workers’ and capitalists’ individual attitudes towards financial success do not necessarily reflect the objective class structure of society; they depend on partially autonomous factors that are influenced by the cultural context. In his seminal work on the rise of capitalism, Werner Sombart has shown how the ‘capitalist spirit’ of the early merchant classes developed historically under the conditions of the urban culture in Western European cities long before the ‘Great Transformation’ of the early nineteenth century, and that this had relatively little to do with the emergence of a class dichotomy in modern capitalism. Religious beliefs like those contributing to the Weberian ‘Protestant ethic’ were just one element of this cultural context among many others. Another important question is how the commitment to financial gain spread within the working class. Again, there is certainly no automatic connection between the ‘proletarian’ condition of wage dependency and the individual pursuit of financial success. As E.P. Thompson (1967) has shown in his historical studies, it took a long time for British workers to become aware of their market interests and develop a conscious and calculative attitude towards their own working time and labour power. Up to the present day, the degree of subjective commitment to market rationality and success is very different among the diverse subgroups of the working class. Beyond the basic attitude towards financial success, an individuals’ subjective perception of his or her chances of being successful in a given situation is a key variable. Similar situational conditions can be perceived by different individuals as challenging, or contrarily as discouraging or even paralysing. This can be exemplified again using the case of ethnic networks. It is not the affiliation to ethnic networks per se that gives rise to entrepreneurial aspirations. Rather, in many cases, ethnic communities tend to isolate themselves from the context of the majority society and develop a self-sufficient lifestyle. In order to perceive their own affiliation to family or ethnic communities as ‘social capital’ that can be mobilized for economic success, individuals need to develop a particular capacity to maintain a ‘balance between coupling and decoupling’, as Granovetter (2005, p. 174) puts it. While remaining committed to the essential norms and expectations of their community, they must be able to distance themselves from excessive claims of their peers on their resources and to build up their own business

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networks according to universalist criteria. Where this ability comes from cannot be explained exclusively by the social and cultural context, but different moral and religious value systems seem to play a role (McCleary, 2007). 4.3

Logic of action

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How do individuals actually react to situational conditions in capitalist class societies? The answer will vary, of course, depending on whether the conditions are defined by an outside party or by the individuals themselves. Taking into account the uncertain and contradictory nature of objective and perceived conditions of action, attempts to explain individual frame selection and action based on a nomological rule like the ‘RREEMM’ model (resourceful, restricted, expecting, evaluating, maximizing man) proposed by Lindenberg (1990, pp. 739 f.; see also Esser, 1993, p. 237) do not appear very promising. In order to be able to act according to the RREEMM model, individuals need to have a consistent perception of their situation. However, individuals who are confronted with existential uncertainity and contradictory expectations often cannot postpone action until they have arrived at a consistent definition of their situation. Rather—and this is the key point in Dewey’s concept of ‘inquiry’ (Dewey, 1938, pp. 101 f.)— the determination of the situation becomes a part of the action process itself. ‘Inquiry’, as Dewey characterizes it, is ‘the direct or controlled transformation of an indeterminate situation into a determinate one’ (Dewey, 1938, p. 117). The determination of the situation develops in an experimental process of formulating and practically testing hypothetical problem definitions and problem solutions. What is changing in this process is not only the symbolic framing of the situation by the actor, but also the existential characteristics of the situation itself. ‘Rational’ action becomes possible only after a given hypothesis on the problem and its solution has been repeatedly confirmed and can now be taken for granted (until new irregularities occur). The pattern of inquiry, as Dewey describes it, applies both to scientific work and common sense and functions similarly in both spheres. My point here is that Dewey’s concept of inquiry could thus be a more promising guideline for conceptualizing the conditions and paradoxes of action in capitalism than concepts based on rational choice. In capitalism, actors strive for financial success under conditions of uncertainty. In his classic theory of deviant behaviour, Merton has shown that individuals may opt for ‘innovative’ patterns of action when being confronted with inconsistencies in institutionalized means and ends. However, while ‘innovation’ is only one possible pattern of action among others (ritualism, isolation or rebellion according to Merton) in society at large, innovation is clearly the dominant pattern in the economic system. In order to be successful in the market, entrepreneurs need to act ‘creatively’, not only ‘adaptively’, as Schumpeter (1991 [1947],

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p. 411) emphasizes. Success in the market is not something one can only strive for by systematically perfecting one’s own capabilities, like an athlete preparing for a sports contest. Of course, money is the ultimate end. However, financial success is an emergent phenomenon resulting not from sheer willpower, but rather from a prior process of ‘inquiry’ as described by Dewey. In contrast to the speculator, the entrepreneur is not interested in accidental profit but in building an opportunity structure for the continuous generation of profits. In order to have a chance for success, the entrepreneur first has to create his ‘niche’ (White, 2005, p. 31) in the market, define his individual ‘model’ of business and build a corresponding local order. Whether he is ultimately successful or not does not depend solely on his own efforts, but also on the feedback he gets in the market. Only in special cases can he compete based on prices alone. In order to generate a positive response, the entrepreneur needs ‘social skill’ (Fligstein, 2001) in communicating his definition of the market situation and his business model. He has to compete with the business models of other actors and must try to gain supremacy over them. As he manages to establish his model on the market, the situation becomes determinable for him. Not restricted to individual business models, the communication of innovative initiatives follows larger streams of inventions at the sectoral and meso-levels. Inventions occur in all fields of economic activity, including technology, organization and consumption. The communication of inventions is structured by innovative ‘paradigms’ (Dosi, 1983). A paradigm is an innovative artefact which is symbolically framed by visions of promising lines of further elaboration and application of the invention. The function of innovative paradigms in capitalist dynamics has been a prominent theme in socio-technical research and evolutionary economics, which both show a close affinity with the pragmatist view. Evolutionary approaches combine the concept of path dependence with an analysis of innovative processes (for an overview: Garud and Karnoe, 2001). Innovations are considered ‘path creating’ events that pave the way for a structured process of social and economic change (Schreyo¨gg and Sydow (eds), 2003). Rather than developing in a homogenous space with uniform temporal and social coordinates, economic action—according to these approaches—is characterized by ‘historicity’ in three ways. Earlier events predetermine the range of possible later events, which in turn can be ‘bifurcations’ for subsequent developments. Neither rational decision-making nor the generation of economic ‘optima’ or ‘equilibria’ is governed by uniform rules; solutions that may be efficient at one time can be inefficient at others. Theories themselves are influenced by the historical circumstances of their formulation and therefore must be marked by a historical index; a theory of the Internet, formulated in the 1980s, for example, will be completely different from a contemporary theory on the same subject.

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The career of an innovation is typically made up of three phases. The first is usually called the phase of ‘path creation’ (Windeler, 2003), where a ‘basic’ discovery or invention, predetermining later technological or economic developments, is generated. ‘Making’ an invention is a social process. Based on a rearrangement of the structures of social relevance, it gives new attention to originally ‘accidental’ observations and incidents. The starting point is a ‘mindful deviation’ (Garud and Karnoe, 2001) from routinized practices. In this phase, not only the invention itself is important, but ideas, utopias and visions as well, which give ‘meaning’ to the invention and create a horizon of promising future developments and applications. The individual creativity of inventors and entrepreneurs plays a key role as does their capacity to persuade, convince and mobilize others (Fligstein’s ‘social skill’ as mentioned earlier). Risks are high in this phase, but so are possible profits. The availability of risk capital and the willingness of investors to stick to the project are critical factors from a financial standpoint. If the pioneers are successful at attracting a critical mass of other key actors to cooperate and invest in the paradigm, which usually starts out being rather vague, the second phase of ‘path consolidation’ begins. Now, the success of the paradigm nourishes itself. A win – win game emerges: more and more actors change from the role of the neutral observer to that of the engaged participant, investing fresh ideas and capital into the paradigm and thus creating opportunities for other actors. What began as a vague utopia now becomes a realistic undertaking. This may lead to an extended period of credit expansion and economic growth. In the third phase, the paradigm moves on to ‘institutionalization’. The technology has now reached a high level of maturity and sophistication; it represents the ‘state of the art’ and is taught in schools and universities. Its potential appears to have been explored and elaborated upon to a large degree, leaving room only for minor cosmetic improvements. As competition now becomes reduced largely to the level of price and costs, the market becomes highly calculable; on the other hand, profit margins dwindle. Institutionalization may finally lead to a stage of ‘lock in’, where the original paradigm has reached its highest degree of crystallization and any further improvement seems to be blocked. Credit lines will freeze up, and the economic system will move into a recession. However, paradoxically, lock-in is the point that can pave the way for new groundbreaking inventions, because it makes the structural limitations of the old paradigm manifest and can stimulate the emergence of fundamentally new ideas. What constitutes a dead end for the majority of actors can be an opportunity for creative minorities—with the possible result of a new cycle beginning. Path creation is a process observed not only in the field of technology, where a broad research literature already exists, but in other fields of the economy as well. The historical career of organizational paradigms—‘myths’ of organizational

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4.4

Logic of aggregation

Whether a new innovative myth cycle will develop or not cannot be fully anticipated. If an innovation is successful, it can develop self-reinforcing dynamics that promote capitalist growth. Capitalist growth, in other words, emerges as the aggregate effect of the processes of construction, institutionalization and deconstruction of innovative paradigms I have described. As I have tried to show, these processes have a motivational basis in the quest of individuals to achieve upward mobility by being successful on the market, and a cognitive and social basis in innovative paradigms. The motivational basis, in turn, depends on the polarization of classes at the macro-level of society. Only the collective dichotomy of classes can generate tension strong enough to motivate the unpropertied to aspire individually to move upwards via the creation and diffusion of innovative paradigms. It would be naı¨ve to suppose that there is something like an ‘equilibrium’ principle governing these processes. Nevertheless, it follows from my model that capitalist dynamics can be interpreted as a balancing act between two horns of a basic dilemma: on the one hand, the class dichotomy should not be socially closed, or so extreme as to make it insurmountable. This would discourage the aspirations of the unpropertied, with probably negative effects on capitalist growth. On the other hand, not too many people should be successful in moving upwards. This would mean a collective upward shift of the social structure and an expansion of the saturated middle classes; structural tension would diminish and individual entrepreneurial motivation would decline. The financial ‘rentier’ would gradually begin to dominate over the ‘entrepreneur’. Financial assets are always based on debts as their necessary counterpart. When middle and upper-middle classes grow, the relative share of rent-seeking owners of private assets rises, while the share of solvent, ‘entrepreneurial’ debtors declines. The intergenerational

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rationality, according to the well-known terminology of Meyer/Rowan—shows a similar pattern of path creation, consolidation, institutionalization and decline; a prominent example is the rise and fall of Taylorism and Fordism (Piore and Sabel, 1984), and their present-day counterparts such as ‘lean production’ and ‘total quality control’. Entrepreneurs are active not only in developing new technologies, but also in inventing and promoting new paradigms of logistics and organization. Business consultants often play a key role in selecting, formalizing and diffusing these paradigms (Alvarez, 1998; Kipping and Engwall, 2002). The same pattern of dynamics applies—last, but not least—to the field of consumption, where the creation of new symbolisms and lifestyles and the continuous rise and fall of ‘fashions’ are obvious phenomena (Deutschmann 2008a, pp. 72 f., 2009).

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5.

Summary

This article aimed to explore the potential of pragmatist social theory, especially as represented by John Dewey and George Herbert Mead, in order to analyse the commonalities of capitalism as a global entity. I began by arguing that the pragmatist approach is compatible, to a large degree, with the classic theory of Marx. It can help to both identify and correct some inconsistencies of the Marxian approach, in particular the incompatibility of Marx’s early concept of production with the labour theory of value that he borrowed from Smith and Ricardo. The pragmatist approach can also be considered a remedy against the rationalist shortcomings of Weber’s theory. I then discussed the paradoxes of the capital – labour nexus as the core element of the structure of capitalism. Here, Marx’s analysis is clearly superior to Dewey’s. Once again, however, the pragmatist perspective can contribute to clarifying the meaning of the concept of capital and the dynamic nature of capital; and, as I tried to show, it can help the Marxian concepts of ‘fetishism’ and ‘reification’ become more transparent than they are in the Marxist literature. Finally, I tried to demonstrate that a multi-level analysis is the only adequate way to explain the actual dynamics of capitalism. Starting from the polarization of classes at the macro-level, I outlined how the inconsistent and contradictory nature of institutions and social networks in capitalism stimulates creative and innovative modes of individual adaptation, and how individual creativity becomes socially structured by the dynamics of innovative paradigms. Capitalist growth can thus be interpreted as the aggregate effect of the social construction and deconstruction of economic paradigms. The model I

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transmission of wealth and educational privileges further exacerbates this effect, as it tends to close the channels of upward mobility. The descendants of the successful may still be career-orientated, but they no longer have a strong motive for taking the personal risks of an entrepreneurial career. At the same time, individuals in the lower classes and the lower-middle classes feel blocked and discouraged from incurring debt for entrepreneurial projects. Thus, a mismatch emerges between the growing volume of financial assets, on the one hand, and declining real investment opportunities, on the other. The financial industry may try to fill this gap by constructing ‘creative’ products like derivatives, securitized credits and other fictitious investment opportunities—a solution that obviously is not a remedy for the underlying disequilibrium and can work only temporarily. The latter scenario could be applied to the situation that developed in the advanced capitalist economies (North America, Western Europe and Japan) in the second half of the twentieth century and may help to explain the present financial crisis (Deutschmann, 2009). Thus, the key problem of capitalism may lie in its own success.

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have outlined shows how capitalist development oscillates between the dilemmas of too little and too much upward entrepreneurial mobility. The latter type of dilemma seems to have contributed to the present problems of mature capitalist economies. The conclusion is that the biggest problem of capitalism could be its own success and its inability to fulfil the hopes it kindles in the unpropertied majority of society.

I would like to thank Fred Block, Heiner Ganssmann and Cynthia Lehmann for helpful comments and linguistic advice.

References Alvarez, J. L. (ed.) (1998) The Diffusion and Consumption of Business Knowledge, London, Macmillan. Baumol, W. J. (2002) The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism, Princeton, Princeton University Press. Beckert, J. (2002) Beyond the Market. The Social Foundations of Economic Efficiency, Princeton, Princeton University Press (first published as Die Grenzen des Marktes. Soziale Voraussetzungen wirtschaftlicher Effizienz, 1997, Frankfurt/M, Campus). Beckert, J. (2003) ‘Economic Action and Embeddedness. How Shall We Conceptualize Economic Action?’, Journal of Economic Issues, 37, 769–787. Bendix, R. and Howton, F. W. (1978) ‘Soziale Mobilita¨t und die amerikanische Wirtschaftselite’. In Kaelble, H. (ed.) Geschichte der sozialen Mobilita¨t seit der industriellen Revolution, Ko¨nigstein/Ts, Athena¨um, pp. 221 –247. Berghoff, H. (2004) Moderne Unternehmensgeschichte, Paderborn, UTB. Castoriadis, C. (1987) The Imaginary Institution of Society, Cambridge, Polity Press (first published as L’ institution imaginaire de la societe´, 1975, Paris, Editions du Seuil). Deutschmann, C. (2001) ‘The Promise of Absolute Wealth: Capitalism as a Religion’, Thesis Eleven, 66, 32 –56. Deutschmann, C. (2008a) Kapitalistische Dynamik. Eine gesellschaftstheoretische Perspektive, Wiesbaden, VS. Deutschmann, C. (2008b) Money and Capitalist Dynamics, manuscript (forthcoming). Deutschmann, C. (2009) Soziologie kapitalistischer Dynamik, MPIfG Working Paper 09/5, Ko¨ln, Max Planck Institute for the Study of Societies. Dewey, J. (1938) Logic. The Theory of Inquiry, New York: Holt, Rinehart and Winston. Dewey, J. (1958) Experience and Nature, New York, Dover Publications, Inc. (first publication New York, 1925).

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Dosi, G. (1983) ‘Technological Paradigms and Technological Trajectories. The Determinants and Directions of Technological Change and the Transformation of the Economy’. In Freeman, C. (ed.) Long Waves in the World Economy, London, Pinter, pp. 78 –101. Esser, H. (1993) Soziologie. Allgemeine Grundlagen, Frankfurt/M, Campus. Esser, H. (1999) Soziologie. Spezielle Grundlagen, Bd. 1: Situationslogik und Handeln, Frankfurt/M, Campus. Fligstein, N. (2001) ‘Social Skill and the Theory of Fields’, Sociological Theory, 19, 105– 125.

Goldthorpe, J. H., Lockwood, D., Bechhofer, F. and Platt, J. (1968) The Affluent Worker. Industrial Attitudes and Behaviour, Cambridge, Cambridge University Press. Granovetter, M. (2005) ‘The Economic Sociology of Firms and Entrepreneurs’. In Swedberg, R. (ed.) New Developments in Economic Sociology, Vol. II, Cheltenham, Elgar, pp. 160 –197. Ingham, G. (2004) The Nature of Money, Cambridge, Polity Press. Joas, H. (1989) Die Kreativita¨t des Handelns und die Intersubjektivita¨t der Vernunft. Meads Pragmatismus und die Gesellschaftstheorie, Frankfurt/M, Suhrkamp. Joas, H. (1992a) Die Kreativita¨t des Handelns, Frankfurt/M, Suhrkamp (English version: The Creativity of Action, 1996, Chicago, Chicago University Press). Joas, H. (1992b) Pragmatismus und Gesellschaftstheorie, Frankfurt/M, Suhrkamp. Kaelble, H. (1978) ‘Soziale Mobilita¨t in Deutschland und den USA 1900–1960: Ein vergleichender Forschungsbericht’. In Kaelble, H. (ed.) Geschichte der sozialen Mobilita¨t seit der industriellen Revolution, Ko¨nigstein/Ts, Athena¨um, pp. 109–126. Keister, L. A. (2000) Wealth in America: Trends in Wealth Inequality, Cambridge, Cambridge University Press. Kipping, M. and Engwall, L. (eds) (2002) Management Consulting. Emergence and Dynamics of a Knowledge Industry, Oxford, Oxford University Press. Koselleck, R. (2003) Zeitschichten. Studien zur Historik, Frankfurt/M, Suhrkamp. Lindenberg, S. (1990) ‘Homo Socio-oeconomicus: The Emergence of a General Model of Man in the Social Sciences’, Journal of Institutional and Theoretical Economics, 146, 727–748. Luhmann, N. (1988) Die Wirtschaft der Gesellschaft, Frankfurt/M, Suhrkamp. Luhmann, N. (1992) Funktionen der Religion, 3rd edn, Frankfurt/M, Suhrkamp. Lukacs, G. (1970) Geschichte und Klassenbewusstsein. Studien zur marxistischen Dialektik, Darmstadt, Luchterhand (first publication: 1923, Berlin, Malik). Maddison, A. (2001) The World Economy. A Millenial Perspective, Paris, OECD. ¨ konomie (Rohentwurf 1857–58), Marx, K. (1953) Grundrisse der Kritik der Politischen O Berlin, Dietz.

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Mead, G. H. (1934) Mind, Self and Society from the Standpoint of a Social Behaviourist, Chicago, The University of Chicago Press. Merton, R. K. (1968) Social Theory and Social Structure, Enlarged Edition, New York, Free Press. Parsons, T. (1967) Sociological Theory and Modern Society, New York, Free Press. Paul, A. T. (2004) Die Gesellschaft des Geldes. Entwurf einer moneta¨ren Theorie der Moderne, Wiesbaden, VS. Piore, M. and Sabel, C. F. (1984) The Second Industrial Divide. Possibilities for Prosperity, New York, Basic Books. Polanyi, K. (1977) The Great Transformation. Politische und o¨konomische Urspru¨nge von Gesellschaften und Wirtschaftssystemen, Frankfurt/M, Suhrkamp. Portes, A. and Zhou, M. (1992) ‘Gaining the Upper Hand: Economic Mobility among Immigrant and Domestic Minorities’, Ethnic and Racial Studies, 15, 491– 522. Postone, M. (1993 [2003]) Time, Labor and Social Domination. A Reinterpretation of Marx’s Critical Theory, Cambridge, Cambridge University Press. Rosa, H. (2006) Beschleunigung: die Vera¨nderung der Zeitstrukturen in der Moderne, Frankfurt/M, Suhrkamp. Schreyo¨gg, G. and Sydow, J. (eds) (2003) Strategische Prozesse und Pfade. Managementforschung 13, Wiesbaden, Gabler. Schumpeter, J. A. (1991 [1947]) ‘Comments on a Plan for the Study of Entrepreneurship’. In Swedberg, R. (ed.) The Economics and Sociology of Capitalism, Princeton, Princeton University Press, pp. 406 –428. Simmel, G. (1989) ‘Philosophie des Geldes’. In Rammstedt, O. and Frisby, D. (eds) Georg Simmel, Gesamtausgabe, Vol. 6, Frankfurt/M, Suhrkamp. Sombart, W. (1955 [1902]) Der moderne Kapitalismus. Historisch-systematische Darstellung des gesamteuropa¨ischen Wirtschaftslebens von seinen Anfa¨ngen bis zur Gegenwart, Dritter Band, Erster Halbband, Das Wirtschaftsleben im Zeitalter des Hochkapitalismus, Berlin, Duncker & Humblot. Streeck, W. (2009) Re-forming Capitalism. Institutional Change in the German Political Economy, Oxford, Oxford University Press.

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Socio-Economic Review (2011) 9, 107–135 Advance Access publication October 5, 2010

doi:10.1093/ser/mwq023

Against all odds: the ‘loyalty’ of small investors† Uwe Schimank *

*Correspondence: [email protected]

The share of small investors leaving the financial market in autumn 2008 was no greater than in previous, smaller crises. Why is there no mass exodus at such junctures? Why do most small investors practice ‘loyalty’ instead of ‘exit’ (Hirschman)? Even more importantly, why do they enter the financial market at all since its ‘hypercomplexity’ exposes them to an experience of confusion and helplessness? Behavioural economics provides some partial answers, but they remain too abstract and ahistorical and give a very reductionist picture of decision-making. In reaction to this incomplete understanding of the ‘loyalty’ puzzle, I will present two important explanatory factors from sociological reasoning: collectively shared stories as reducers of ‘hypercomplexity’ in which small investors’ decision-making is embedded, and the rebuilding of the welfare state, which forces more and more people to become small investors and stay in the market despite serious losses. Keywords: capitalism, economic man, financial crisis, financial market, investment banking JEL classification: G2 financial institutions and services, P1 capitalist systems, Z1 economic sociology

At the end of the 1990s, Nadler (1999) spoke of ‘the rise of worker capitalism’ in the USA, thus emphasizing the inclusion not only of the middle class but also of parts of the working class among stockholders.1 At that time, 43% of American households owned stocks or stock mutual funds, compared with only 19% in †

A first draft of this article was presented at the conference on ‘Commonalities of Capitalism’ organized by Wolfgang Streeck at Ringberg Castle in November 2009. I received many useful suggestions from other conference participants; in particular, I would like to thank Helen Callahan, who commented on my paper on that occasion.

1

However, as Zola’s (1976 [1891]) novel L’Argent graphically illustrates, investments from the lower class and the lower middle class were no quantite´ ne´gligable on the financial market more than a hundred years ago. Accounts of historical financial market crises since the seventeenth century also show that the middle class was always considerably involved (Kindleberger and Aliber, 2005).

# The Author 2010. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected]

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Institut fu¨r Soziologie, Universita¨t Bremen, Germany

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1983 (Nadler, 1999, pp. 1, 3). In 2001, this rose to almost 52%, with the median value of investments being $34 300 (Preda, 2009, p. 4). The ‘new investor class’— as Brooke Harrington (2008, pp. 2– 3, emphasis omitted) puts it—‘collectively poured hundreds of billions of dollars into the stock market’. More recent data for Germany show that, in the year 2000, about 20% of the population owned stocks, whereas in January 2009, after several months of great turbulence on the financial market, only about 13% remained stockholders (Leven, 2009). These data illustrate different national levels of inclusion in the financial market as well as the partial and temporary reversibility of the inclusion dynamics. However, a significant level of inclusion of small investors still exists today in all developed countries. Yet the assertion that ‘amateur investors are not marginal’ on the financial market any longer (Harrington, 2008, p. 5) is debatable. Preda (2009, pp. 4– 5) reminds us that ‘the rise in the number of individuals participating in financial investments’ does not mean ‘that contemporary financial markets are dominated by individuals and/or families’. On the contrary, ‘since the late 1950s, the role of institutional investors has continuously increased.’ On the one hand, these institutional investors use the money they collect from individuals, more and more of whom belong to the lower middle class and working class. On the other hand, what the investment and pension funds decide to do with this money is their decision alone, even though they work under a high level of collective pressure to earn a substantial return on investment; otherwise, small investors will turn to another fund (Windolf, 2005, p. 23). However, small investors know that they are not a coordinated collective actor but only an aggregate of millions of individual decision-makers whose decisions may and actually often do counteract each other. So, they are aware that, with each person acting on his or her own, their individual investment decisions make no difference at all. They are nothing but pawns in the game of finance. Their money is used, but how much control do they have over what each one of them gets out of it? This awareness develops into an acute feeling of helplessness during periods of financial crisis, such as the one that started in autumn 2008. Would not it be an understandable, if not to say a natural reaction of small investors to withdraw their money immediately from this highly insecure place? In other words, why was there no mass exodus of small investors from the financial market on this occasion, no more than in smaller crises before? To be sure, the abovementioned data for Germany show that some small investors did indeed choose to leave the financial market quickly in favour of more traditional investment options such as a savings account, and the same applies to other countries as well. However, why did not many more or even all of them leave? To restate the question in Albert Hirschman’s (1970) well-known typology, why do most small investors practise ‘loyalty’ instead of ‘exit’ even during financial market crises?

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2

For a spectrum of unorthodox views, however, see Minsky (1986), Mandelbrot and Hudson (2004), Kindleberger and Aliber (2005) or Frank (2009).

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Of course, financial market professionals—investment bankers or financial advisers—would claim that this widespread ‘loyalty’ of small investors is quite rational, that it is the best thing they can do. Admittedly, there is sometimes great turbulence on the financial market, but it has to be endured patiently because better times will definitely come again. However, such reasoning by professionals did not at all convince small investors in the autumn of 2008 or on similar occasions before. On the contrary, their ‘loyalty’ was accompanied by rather noisy ‘voice’ directed against—in their view—totally incompetent and greedy professionals who were now also perceived as downright liars. Thus, even if the professionals’ assessment of the situation is right—as is still reflected by the hegemonic view of mainstream economics2—it cannot explain the small investors’ behaviour. To refer to another possible explanation, we could say that ‘loyalty’ is a result of one’s hands being tied by formal rules. Yet this explanation is also not very convincing with respect to small investors. Only a small amount of their money is invested on a long-term basis, most kinds of investment are flexible within days, even hours, if necessary. Even in cases where investors as well as banks or funds agree explicitly that the invested money is consigned for several years, it is implicitly understood that such an agreement holds only when the usual circumstances govern the market. But the circumstances of a deep financial crisis are certainly unusual; the penalty fee for cashing in an investment prematurely is much less than the potential losses of doing nothing. Therefore, in a rational calculation, the considerable losses that most small investors have suffered already from the deep financial market crisis and have to fear for the near future outweigh by far the losses of a sudden exit. As in other areas of economic decision-making where rationalist microeconomic explanations fail, behavioural economics is introduced to offer answers that rely mainly on cognitive and personality psychology. In the following, I will only briefly discuss the explanatory factors offered by this perspective for the widespread ‘loyalty’ among small investors, because most of them are rather well known by now. Even taken together, they provide insufficient explanations of the ‘loyalty’ puzzle. Their two main shortcomings are their ahistorical character and their subject-centred conceptualization of decision-making. Both shortcomings can be overcome by the introduction of relevant sociological factors. The theoretical exposition of such sociological factors is the main subject of this article. Thus, without denying the worth of economic and psychological perspectives, I want to show that sociology makes an essential contribution to an adequate understanding of the small investors’ ‘loyalty’.

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3

This is in contrast to the highly stylized concepts of the microeconomic rational-choice approach. For an overview, see March (1994) and Schimank (2005).

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I will start with a clarification of the situation of small investors from the analytical perspective of empirical and theoretical studies of ‘real life’ decisionmaking.3 It can be shown that the financial market exhibits ‘hypercomplexity’, which is a permanent source of confusion for those who have to make rational decisions. One would expect actors to leave such a highly uncomfortable place; however, most small investors stay. The first set of explanatory variables I will discuss are mental factors. After having given behavioural economics its due, I will turn to two explanatory variables suggested by sociological reflections of a small investor’s situation. One variable—collectively shared stories—emphasizes the embeddedness of the small investor in intersubjective sense-making. The other—the rebuilding of the welfare state—positions the small investor in recent societal dynamics. Whereas the first sociological variable corrects a onesided view of actors as socially disembedded decision-makers, the second one brings society back in as a historically specific entity. Our empirical sociological knowledge about ‘the world as seen by a small investor’ is still very insufficient. We have, on the one hand, some rather superficial sociodemographic and attitudinal data from standardized questionnaires and statistics (for example, Wa¨rneryd, 2001). They give a few interesting hints but, as is usually the case with this type of data, point out no causal mechanisms that underlie observed correlations. On the other hand, there are only very few sociological studies that dig deeper into the social context of small investors’ decision-making. Aldo Legnaro, Almut Birenheide and Michael Fischer made qualitative interviews with small investors in Germany at the beginning of the new century, after the ‘new economy’ boom had busted (Legnaro et al., 2005). Harrington (2008) made participant observations and conducted interviews in investment clubs in the USA during the 1990s and revisited them in 2004. As far as I am aware, these are the only studies that feature a carefully designed and executed, qualitative empirical approach and achieve an in-depth understanding of certain motives and practices of small investors. Legnaro et al. (2005) interpret their data from the perspective of recent ‘governmentality studies’. Thus, becoming and being a small investor is seen as an important component of a new mode of subjectivity in post-Fordist capitalism. I will reconsider this view when I turn to the rebuilding of the welfare state. Harrington is mainly interested in collective decision-making in investment clubs, and in this context she becomes aware of the relevance of storytelling among small investors. I also use bits of empirical material from both studies to illustrate some of my theoretical arguments. Both studies, however, focus on active small investors. Thus, they deliver no empirical data about the majority of passive small investors who make

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The ‘hypercomplexity’ of the financial market

Seen from the perspective of studies of real life decision-making, investment decisions exhibit—just as any other decision—three dimensions of complexity with which a decision-maker has to come to terms (Schimank, 2005, pp. 121 – 171). First, there is the information dimension. A decision-maker has to do with more or less incomplete and more or less insecure information, both with respect to facts as well as causalities. Second, in the time dimension, a decision-maker is aware of the fact that there is little time for making a decision, and what time there is is marked by deadlines, windows of opportunities about to close or problems that are becoming worse by the minute. Third, in the social dimension, a decision-maker realizes interdependencies between one’s own decision and the activities of others. The success of what the decision-maker does depends on what the others are doing, or not doing. While these three dimensions of complexity are universal features of any decision, the relative weight of each of these dimensions varies with different kinds of decision. In emergency decisions—for instance, of aeroplane pilots or surgeons—the scarcity of time has top priority, whereas in decisions involving technical constructions, such as the building of an atomic reactor, the information dimension is the most relevant. In contrast to these two kinds of decision, investment decisions on the financial market confront the decisionmaker, above all, with social complexity. At first glance, this view does not fit the subjective experience of many investors, be they professional or small investors.4 After all, they permanently lament about how fast they have to make their decisions on a financial market which has become a 24-hour, worldwide, high-speed decision arena. Not hours, but 4

For small investors, see many vivid empirical illustrations in Legnaro et al. (2005, pp. 72–149, 168– 220).

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investment decisions only rarely and do not bother at all about their investments most of the time. However, this group is obviously very important if I am to explain the ‘loyalty’ puzzle; so it becomes imperative to include them in my reflections. I should make clear from the beginning that this article is a theoretical exploration which—because of an enormous lack of sufficiently detailed empirical knowledge—tries to conceive an analytical perspective that is designed precisely for the purpose of inspiring further empirical research to provide this needed knowledge. Even if this research should revise or totally reject the perspective I propose, my efforts would have served the purpose of being fruitful stimulation for cumulative empirical research.

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5

By now, about half of the total trade on the German financial market is executed by computers that buy huge amounts of stocks only for seconds to sell them again at a little higher price—the so-called algo-traders (Mohr, 2009). 6

Not even the bosses of the big banks, as they had to confess recently! See Frank (2009, pp. 152– 185) for an overview of some of these instruments.

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minutes, sometimes only seconds, count,5 and if a brilliant decision is made too late, this may be worse than an uninspired decision made in time. Investors also complain about the poor information base on which they must make their decisions. This applies to every single type of investment, such as a particular stock. Even if an investor carefully collects all the publicly available facts about a potential investment, he cannot be sure that there are no hidden yet decisive facts; and who causally understands the technical intricacies of many of the new financial instruments?6 Moreover, each object of investment has to be seen in comparison with alternatives, which may be more profitable (Harrington, 2008, pp. 36 – 40). This aspect of investment decision-making opens up an overwhelming horizon of facts and causalities that no one can master. Literally, thousands of possibilities appear on the screen, even if an investor restricts him- or herself to certain regions, certain branches of industry or certain financial instruments: a ‘negative infinity’, as Harrington (2008, p. 38) calls it, thereby evoking a term used by Georg Wilhelm Friedrich Hegel. In addition to traditional information systems connected to the financial market, from informal gossip to specialized newsletters, the new information technologies provide each investor with a degree of worldwide market transparency that in reality amounts to nothing but paralysing intransparency. Thus, investors in general attribute the complexity of the decisions they have to make primarily to the time dimension and the information dimension. However, this is not just a superficial view of their situation but a delusion that hides the real kind of complexity with which they have to cope. The conventional view of the financial market supports this delusion. According to this view, the financial market is nothing but an instrument of the ‘real economy’ through which loans needed to increase the capital of a firm are acquired; in return, loan-givers get stocks of the firm (Lu¨tz, 2008). Therefore, the value of a stock depends on the firm’s standing in the ‘real economy’, and this, in turn, is determined by the relation of the supply of the goods the firm produces, on the one hand, and the demand for these goods, on the other. Seen in this way, there is an intrinsic value of a stock, which is based ultimately on the relative utility of the respective goods. What the so-called ‘fundamental analysis’ of investment alternatives does is nothing but to uncover this intrinsic value with the use of manifold data on the global, national, branch and firm levels and to derive from the difference between this intrinsic value of a

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7 For the sake of argument, it can be supposed that they also are well informed and have plenty of time for their decisions. 8

This specific kind of social complexity exists not only on the financial market. The same general pattern of ‘self-organization’ (Mu¨ller-Benedict, 2000) can also be seen in a much more trivial

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stock and its current price decisions about buying, keeping or selling it (Schmidt, 2001). Of course, the supply of and demand for a firm’s goods depend critically upon its competitors and its customers—in this sense the social dimension of complexity is present in ‘fundamental analysis’, and every investor on the financial market is aware of it. However, this is only the social complexity of the observed ‘real economy’, not of the financial market in which the investor—as an observer— participates. ‘Fundamental analysis’ treats the social complexity of the ‘real economy’ as an important part of the information dimension of complexity, as facts an investor must take into account when making decisions. With respect to the financial market in which an investor acts, ‘fundamental analysis’ operates as if no other investor exists. This fiction works as long as stock prices do not deviate much from their intrinsic value—a state of affairs which ‘fundamental analysis’ postulates as the normal state of the financial market. Whenever a larger and longer lasting deviation occurs, this indicates, in the conventional view, either exogenous interventions into the ‘real economy’ or the financial market, for instance by the state, or temporary phenomena of ‘herding’ among investors. Only for such an exceptional ‘irrational’ state of affairs is it admitted that social complexity has an impact on the financial market and must be taken into account in investment decisions. Yet there is a case to be made against this conventional view. Even if an investor on the financial market had plenty of time to collect information and make the necessary calculations, and even if this information base was as complete as possible in terms of facts and causalities, the complexity of the investor’s decision would not be significantly reduced, because this complexity has a totally different origin. It evolves from the fact that not only Ego acts on the financial market but so do other investors7 who are making the same kind of decisions, and that all these decisions—including Ego’s—interact. To put it in the extreme, this priority of the social dimension of complexity means that Ego’s information level is ultimately irrelevant. The investor might be able to predict future price fluctuations of stocks perfectly on the basis of ‘fundamental data’, but this means nothing for the investor’s investment decision because the overriding determinant of the dynamics of prices is other investors’ predictions of these dynamics and their decisions based on these predictions. So what Ego really has to do to arrive at a good decision is to predict the effects of the predictions made by the others (Harrington, 2008, p. 42).8 To quote John Maynard Keynes’s (1973 [1936],

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phenomenon such as an early morning traffic jam caused by many people going to work by car. When you are stuck on a certain road at 7 a.m. day after day, you may reckon that you should perhaps start half an hour earlier or take a different route. But you are aware of the fact that many others are considering the same alternatives—so are these alternatives worth trying at all? 9 Maital et al. (1986, p. 281, emphasis omitted) call the same phenomenon ‘superrational’, as seen from the perspective of the actor. 10

Lindemann (2009, pp. 226 –253) works on a general theory of social life that goes beyond the usual Ego-Alter dyads to emphasize the ‘constitutive function of the third party’ for all social phenomena.

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p. 156) well-known characterization of investment decisions: ‘We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.’ Unlike the anticipation of tomorrow’s weather, this task is not a ‘game against nature’ but a strategic game in the sense that the objects of Ego’s anticipation are themselves anticipating subjects, too. In a ‘game against nature’, it is helpful to have more information and more time to reflect upon this information. But the social complexity confronting the investor on the financial market cannot be reduced by more information or more time because such situations in which actors mutually observe each other exhibit what Ekaterina Svetlova (2009, p. 187, my translation) calls ‘hypercomplexity’,9 in reference to Niklas Luhmann. This is not just the famous problem of double contingency in a dyad, which Talcott Parsons analyses as point zero of social life from which somehow social order must emerge (Parsons et al., 1951), but—as Keynes’s formulation clearly expresses—a problem of mutual contingency of expectations within a triad.10 Ego observes others—Alteri and Tertii—observing each other, including Ego itself. Because these observations are the basis for decisions on all three sides, no one is able to make a rational decision. Ego’s ability to decide rationally what to do depends on its ability to anticipate what the others will be doing; but the Alteri’s ability to decide depends on its ability to anticipate the Tertii’s decisions, and vice versa. So the double contingency among Alteri and Tertii produces an unsolvable problem of rational decisionmaking for Ego. Added to this is a crucial problem of timing. To put it simply: if Ego considers buying the stocks of a particular firm and—no matter how it assesses the firm’s future itself—anticipates that, in the near future, many others will predict a bright future for the firm, Ego can conclude that many people will want to buy the firm’s stocks; so they will become more scarce and, consequently, more expensive; accordingly, Ego should buy them now to sell them later for a higher price. The other way round, if Ego owns stocks of a firm and anticipates that the common view of the firm’s future will soon become negative, it would be better to sell its stocks before many others do because then buyers of these

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2.

‘Loyalty’ despite ‘hypercomplexity’

Portraying an investor’s situation on the financial market as ‘hypercomplex’ refers to the objective constellation of actors in which the investor is involved. Although this objective situation may be characterized as highly unpleasant, the intersubjective and, shaped by this to an important degree, the subjective definition of the situation may differ. Supposing that an actor cannot endure a highly unpleasant situation for a long time and certainly will not linger if exit options exist, it must be asked how the actor, both alone and together with the other actors involved, can experience the situation as one which is at least tolerable. When we start to look for answers to this question, it is important to realize that ‘loyalty’ could, on the one hand, be the result of a deliberate decision. Based on some kind and degree of rational calculation, this would be a 11

Even doing nothing counts as an activity because he could have acted; so the—positive or negative— consequences of doing nothing are attributed to him.

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stocks will become scarce and prices will fall. In both situations, Ego’s profit on the financial market depends on it being faster than many others in correctly anticipating the prevailing assessment and the decisions based on it. Thus, the competitive nature of investment decisions implies a race in which each investor wants to be among the first to reach a decision. An actor who is expected to make a rational decision in a situation that poses a rationally unsolvable problem to him, which he nevertheless has to solve as soon as possible, has all reason to feel rather uncomfortable. He cannot avoid doing something11—but he is totally confused about what to do. This is embarrassing even if the consequences of his actions are fine or at least not too bad because the actor remains uneasy about how long his decision will ‘work’. Thus, although the actor is presently not in a high-cost situation, the risk that this could change in this direction is omnipresent. The ‘hypercomplexity’ becomes acutely painful when things then do indeed go wrong and the high-cost situation is actually present the extreme case being an investor who loses a lot of money during a long general decline of the financial market. This explication of the ‘hypercomplexity’ of small investors’ decision-making situations shows that their widespread ‘loyalty’ to the financial market is by no means self-evident even in good times. The first question in the puzzle about ‘loyalty’ is to ask why small investors are exposing themselves at all to this overall unpleasant cognitive ‘bad opening’ (Klapp, 1978)? Only after having found an answer to this question should we then ask why, not even the real harm of a serious loss of money—experienced by many small investors during a financial market crisis—brings about a rapid decline of ‘loyalty’.

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2.1

Mental factors

Behavioural economics depicts financial market actors in general and small investors in particular as actors driven by a limited set of very simple cognitive heuristics and psychological needs,12 with the latest fad being ‘animal spirits’ (Akerlof and Shiller, 2009). Through a number of studies of this kind, we have been introduced to some mental factors that can explain small investors’ ‘loyalty’ to a certain extent.13 I will briefly consider the four most relevant ones here. First, there is the ‘disposition effect’ as a special case of the ‘sunk cost effect’ (Goldberg and von Nitsch, 2004 [1999], pp. 92– 98). With respect to a situation where an investor loses money in a particular investment, this factor amounts to an inclination not to cancel this investment. A cancellation would mean to write off the losses and give up the hope that this investment could develop positively in the future to an extent that would not only make up for the losses but ultimately yield a substantial return. Only if the latter is the case, if this investment eventually earns a handsome return, is it worthwhile to pursue this option compared with other options, including that of spending the money for immediate satisfaction. The ‘disposition effect’ usually plays a larger role, the greater the share of the investment is of the investor’s total capital. Writing off E100 is easier than writing off E10 000, if this is half of 12

A still highly useful overview of behavioural economics in general is given by Rabin (1998); for a recent review, see DellaVigna (2009). Goldberg and von Nitsch (2004 [1999]) apply the findings of behavioural economics to investment decisions, especially those of small investors. For a critical assessment of the achievements of behavioural economics, see Etzioni et al. (2010). 13

Since these factors are part of the mental constitution of human beings, they shape professional investors’ decision-making as well, but perhaps, due to training, to a somewhat lesser degree.

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meta-decision to stay in the decision arena of the financial market instead of totally giving up this involvement. On the other hand, ‘loyalty’ could just as well be the result of a small investor’s ongoing practice of making investment decisions. From other areas of decision-making, we know that meta-decisions are rare events that usually only occur when the first-order decision-making is in big trouble. Therefore, I suspect that the small investors’ ‘loyalty’ is also not the result of some troubleshooting meta-decision but just the opposite of it. They do not perceive their investment decisions as sufficiently troublesome to provoke a meta-decision. If this is true, we should look for factors which reduce the subjective complexity of the financial market for them. I begin with mental factors emphasized by behavioural economics and then turn to the two social factors that are my major concern here.

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14 15

For a general psychological model, see Frey (1988).

It is important to keep in mind that their de facto risk-aversion may differ from their articulated inclination to bear risks.

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the money you possess. On the contrary, the ‘sunk cost effect’ even urges the investor to throw good money after bad, to use the other half of his capital to try to save this loss-making investment, with the probable result that he loses all his money (Goldberg and von Nitsch, 2004 [1999], pp. 128– 129). This is not just simple ‘loyalty’ but can amount to ‘loyalty’ on a ruinous scale. Writing off losses would also mean, second, that the investor admits to himself and to others that he made a mistake or at least that he is not successful. This confession is a threat to very basic components of one’s identity. The person realizes in this high-cost situation that his ability to master his life is seriously limited; his ‘locus of control’ shifts from internal to external (Rotter, 1966; Fiske and Taylor, 1991, pp. 86 – 88). In addition, he may also feel guilty if the money he loses is not just his own but belongs at least symbolically to others who put their trust in him, such as his wife or his children. As long as the actor sticks to his loss-incurring investment, he can avoid these highly negative feelings about himself and maintain a selfperception of having things under control (Goldberg and von Nitsch, 2004 [1999], pp. 140– 142). The mental factors discussed up to this point are reinforced, third, by the powerful general tendency of ‘self-enhancement’ exhibited by most people (Fiske and Taylor, 1991, pp. 212– 216). In addition to the very positive assessment people have of themselves, which is markedly above-average in the most important respects, they overestimate their own competence compared with the average competence level.14 For instance, a great majority of us claim to be much better drivers than the average person. Yet logically this can only be true if the distribution of car-driving competencies was very strongly skewed, which is certainly not the case. This mental predisposition decreases a person’s de facto risk aversion.15 Thus, many drivers secretly believe that speed limits are needed because of the other drivers but are unnecessary restrictions of their own superior driving competence. The translation to the financial market is obvious: the average small investor simply thinks that she is at least a little bit smarter than the rest. This self-delusion facilitates an otherwise self-contradictory co-existence of two conflicting assessments in many small investors’ minds: on the one hand, they admit that the financial market in general repeatedly experiences great turbulence and is therefore dangerous terrain. On the other hand, investors each consider themselves capable of maintaining sufficient control over their own investment decisions because they are convinced of their superior experience and special sources of information. In this way, self-enhancement easily produces

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16

Interestingly, psychological research shows that ‘mildly and severely depressed individuals appear to be less vulnerable to this illusion of control’ (Fiske and Taylor 1991, p. 214). The question is whether suffering from depression has the positive effect that one assesses oneself more realistically, or the other way round, one becomes depressed as a consequence of gaining a realistic view of oneself.

17

Accordingly, small investors would very probably deny this comparison. See some of the statements in Legnaro et al. (2005, pp. 138–142).

18

To quote the title of a revealing song by Camper van Beethoven on the album ‘Key Lime Pie’ (1989).

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an illusion of control that underlines ‘loyalty’ even in highly dangerous times (Goldberg and von Nitsch, 2004 [1999], pp. 153 –156).16 By this point, at the latest, the similarity becomes noticeable between small investors and persons gambling in a lottery. Beyond a superficial resemblance that common knowledge often uses to criticize small investors,17 there is, indeed, a deeper mental factor common to both activities. This fourth mental factor has not been discussed until now in behavioural economics but could easily be included in its analytical framework. The empirically proven fact is that a substantial number of those who are gambling in a lottery on a regular basis act on ‘markets for dreams’, as Mark Lutter (2010, forthcoming) concisely expresses it (Beckert and Lutter, 2007). Most of them are aware of the probabilities of winning—but these gamblers reverse the burden of proof against all odds: in their minds, nothing and nobody can rule out the possibility that they are the very special ‘chosen’ person who will one day win the jackpot. It is this attitude that offers them time and again an opportunity for daydreaming about how it will be ‘when I win the lottery’.18 What is true about consumption in the modern economy in general (Campbell, 1987; Beckert, 2010) and about gambling in particular is also a mental driving force of small investors. With their investments, they buy a place in a base camp for daydreaming. Instead of speculating and worrying about the ups and downs of some stock or fund, they use their ownership of it as a starting point for colourfully detailed fantasies about better days to come after they have made a good profit. In a sense, investment losses are even better for such daydreaming because this downturn postpones the moment when this profit is realized; and what Campbell (1987, p. 90) notes pertaining to goods in general applies also to the purchases small investors might finally buy with their profits: ‘reality can never provide the perfected pleasures encountered in day-dreams’. The joy of anticipation always outdoes the reality. So ‘this sweet sickness’—as Patricia Highsmith calls daydreaming with regard to one of her fictional heroes—may cost small investors a lot of money in terms of losses instead of returns; but the psychic gains with respect to their own identity, in particular with their plans and ideas for a better future life, often outweigh these losses. In this way, daydreaming is another mental factor that can explain why small investors show ‘loyalty’ to the financial market.

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2.2

Social factors

In the following, my focus will be on two very different kinds of social factors, both of which seem to be rather important frames for the definition small investors have of their decision-making situation: for one, collectively shared stories about particular investments or the investment market in general, and for another, an individual small investor’s economic situation as it is shaped by the contemporary rebuilding of the welfare state. Whereas stories are part of the cultural orientations of a small investor’s decision-making, the rebuilding 19

What should be mentioned but cannot be discussed here is that all of these mental boundaries are in certain respects ‘simple heuristics that make us smart’ (Gigerenzer et al., 1999). They not only bring about a decision where otherwise the actor would be totally paralysed, the decision reached also entails at least some minimum level of rationality that has to be specified for each of these factors.

20

An additional explanatory role of social factors is to account for the variance of the mental factors among different small investors. To give an obvious example, the use of investments for daydreaming should be more prominent among the not-so-well-off members of society; thus, social inequality appears to be a determinant of the relevance of this mental factor.

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As this brief description shows, these factors are built-in mental boundaries of rational decision-making. They all distort the perception of gains and losses with respect to amounts and probabilities in the direction of ‘loyalty’; moreover, in the same direction, they satisfy very basic psychological needs of people with respect to their self-perception. The other side of the coin is that, as boundaries, these mental factors reduce the ‘hypercomplexity’ of the financial market and enable small investors to make decisions in the first place.19 For instance, the overestimation of one’s own abilities may be the decisive impulse to start dealing with a very difficult investment decision, instead of trying to avoid it altogether as a consequence of a realistic assessment of one’s chances to come to a satisfactory solution. This proof of one’s ability to make a decision, in turn, postpones the meta-decision and brings about ‘loyalty’ instead. Behavioural economics convincingly shows the explanatory relevance of these mental factors. Yet, even taken together, they remain a highly incomplete explanation of the ‘loyalty’ puzzle for at least two reasons, to which I turn here. First, these mental factors are highly abstract, ahistorical variables. The disposition effect, for instance, existed among Stone Age people as well, and it applies not only to investment decisions but to all areas of decision-making. Thus, these mental factors gain explanatory power only when they are properly specified by contextual factors. Second, behavioural economics gives us a very reductionist picture of decision-making. It neglects the intersubjective embeddedness of decision-making. In both respects, a sociological perspective points out additional essential answers to the ‘loyalty’ puzzle.20

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of the welfare state refers to financial pressures and restrictions of his decision-making.

21

See Abolafia (1996) and Preda (2009) for many relevant observations.

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2.2.1 Collectively shared stories To Parsons and other social theorists, the task of dealing with double contingency is mainly a thought experiment that serves to clarify the functions of those familiar and ubiquitous social mechanisms that produce and reproduce social order, such as institutionalized norms, hierarchical power or path dependency. In most social situations, the complexity of double contingency is already reduced by such mechanisms so that actors have no particular problem to coordinate their own actions with the actions of others, including rational decision-making. When we examine investment decisions, most of the time professional financial market actors are not paralysed by ‘hypercomplexity’. What the ‘new economic sociology’ has demonstrated in many studies to be true for actors in ‘real-economy’ markets (Beckert, 2007, pp. 9– 13) is also true for professional financial market actors. To a significant degree, they are embedded: first, in institutional regulations that are enforced hierarchically by the state or by professional communities, second, in social networks, and third, in shared cultural orientations. Taken together, these embedding structures considerably reduce the social complexity. It is true that, for some decades now, legal norms have been deliberately reduced as the most obliging social structures of embeddedness during a long period of political deregulation to give professional financial market actors more room to manoeuvre in their global investment decisions; and this increased scope of action has been used for a ceaseless invention of new financial instruments, a development which has had the aggregate effect of a sustained loss of market transparency (Frank, 2009) or, in other words, a marked increase of complexity confronting the actors. However, ‘soft’ but effective social structures of embeddedness function among professional investors.21 These investors have common cultural orientations originating from extended professional training and frequent interaction with each other. In addition, professional investors maintain decentralized but still close social networks with each other as well as with many actors of the ‘real economy’. Thus, professional financial market actors are part of a community of practice that has established for itself a shared knowledge base through dense, direct and indirect communication. By no means does this imply that the intersubjective reduction of the ‘hypercomplexity’ of the financial market among professional investors always depicts the objective situation correctly. However, professional investors feel more self-confident and trust their shared views. Furthermore, it is well known that, to a considerable degree, financial markets work according

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22

An exception is the case of small investors who are members of investment clubs (Harrington 2008, pp. 73–142). 23

Such stories are also part of the professional investors’ communities and networks. But to them, stories are just one among several mechanisms that reduce the financial market’s ‘hypercomplexity’, whereas small investors rely critically upon stories.

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to ‘self-fulfilling prophecies’ (Merton, 1948). If a critical mass of investors believes in a certain investment, this can help to bring about its success. Thus, even if professional investors are initially wrong with regard to the objective situation, their joint willpower may prove them right in the end. Small investors, in contrast, usually have no professional training for the financial market; most of them, at best, read some popular books or articles on the subject. Small investors get most of their information from the general news media, additionally sometimes from special journals and the Internet (Goldberg and von Nitsch, 2004 [1999], p. 205). The large majority of them are not members of a community of practice in which an exchange of experiences and information occurs regularly from which everybody learns, gets tips for lucrative investments and, most importantly, builds up trust in their own ability to make rational investment decisions.22 The very limited amount of time small investors have to devote to the financial market is far from the least important factor preventing their involvement in relevant communities and networks. Therefore, typical small investors are much less embedded in those kinds of social structures that buffer professional investors against the financial market’s ‘hypercomplexity’. However, what often sufficiently compensates for this lack of professional communities and networks are collectively shared stories.23 Let us begin with the largest group of small investors, namely, those who do not decide for themselves whether, when and how much to trade in certain stocks or bonds, but delegate such decisions more or less to professional advisers, often at their home banks. Formally, such advisers recommend what these passive small investors should do about their investments—in fact, very often small investors simply follow this advice without much consideration of their own, not the least because they have no idea what their options are or what they could do instead. Basically, these small investors have one meta-decision to make: which adviser shall they trust? This question of trustworthiness is the variant of social complexity most prominent in principal– agent relations: how can a principal, such as a small investor, be sure that his agent—the adviser—is able and willing to act in the principal’s best interest (Ebers and Gotsch, 1998, pp. 209– 225)? Without systematic empirical evidence, I suspect that rather superficial signals of the agent’s trustworthiness suffice to reassure the principal in the relationship between small investors and advisers. Such signals are, on the one hand, the general reputation of the

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24

Compared with this rather precise formal conceptualization of stories by phenomenological philosophy, the use of the term by White (1992) and others in economic sociology (Mu¨tzel, 2009) is quite sloppy. They tend to label any kind of account involving relevant information as ‘stories’, especially knowledge gathered from mutual observation among economic actors.

25

However, a ‘happy end’ may mean nothing more than an actor being able to prevent the worst from happening.

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respective bank or investment company, including the image it presents in its advertisements and public relations, and the individual adviser’s personal image and reputation. In these respects, common practices of ‘impression management’ are relevant (Goffman, 1956). On the other hand, the story an adviser uses to present a particular decision probably ends up being the most important factor (Akerlof and Shiller, 2009, pp. 51 – 56). Stories are narrative accounts of something happening. They present these occurrences as a whole, which in temporal terms has a beginning and an end; both are connected by an account of how the specific state of the world at the beginning is transformed into a different—sometimes, however, into the same—state of the world at the end (Schapp, 1953; Lu¨bbe, 1960/61, pp. 98 – 114).24 Comparable with a scientific explanation by a mechanism (Mayntz, 2005) but not necessarily with a claim of generalization, stories explicate a dynamic from an initial state to an end state by pointing out the sometimes rather intricate interplay of causes resulting in this dynamic. With respect to decision-making under conditions of high complexity, Harrington (2008, p. 48) notes that ‘stories can thus be seen as cognitive “glue”, allowing humans to engage in complex judgment tasks by imposing a narrative structure on fragmented segments.’ Thus, first, stories provide actors, such as small investors, with overall coherence. They are given an understanding of the decision matter they have to deal with. Second, a story that guides decision-making has to have an ‘entrance’ that opens the door of participation to the respective decision-maker and, in order to generate the motivation to participate, must offer prospects of a ‘happy end’ for the small investor (Harrington, 2008, p. 70).25 Sometimes, the decision-maker is required to take on a specifically designated role in the story’s script. At the least, she must be given a handle in the complex mechanism presented to her that helps her to bring about the happy end for herself. A convincing story of this kind—best backed by some evidence from the media (Clark et al., 2004)—explains with suggestive plausibility why a particular stock, or the stock market in general, is going to rise; if the prognosis can be backed by some data that appear to prove the start of such a promising development, the small investor’s initial sceptical questions are easily turned into a more or less enthusiastic motivation to invest. She becomes content with and actually grateful for stories such as the one about the technological innovation potential

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26

This example is taken from a series of interviews a student of mine (Silke Stopper) conducted for her Magister thesis. I use some material from two of her interviews. All the quotations have been translated by me.

27

In Zola’s (1976 [1891]) novel, these diverse aspects of stories with respect to the persuasion of investors in general and small investors in particular were already pointed out very graphically.

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that gave rise to the ‘new market’ of the late 1990s, or the story that has been circulating for some time now about the unparalleled opportunities for growth in the Chinese and Indian economies. Finally, effective story lines and modes of presentation are those that heed or, even better, strategically apply the simple cognitive heuristics that greatly influence decision-making—such as the framing effects that every professional investor is well acquainted with by now (Goldberg and von Nitsch, 2004 [1999]). In addition, many stories relevant for decision-making on the financial market, as elsewhere, are anchored in the personal identity of the decision-maker. As Harrington (2008, pp. 48, 70) points out, ‘when individuals buy a stock, they are not only buying a financial instrument that they hope will make them a profit; they are also buying a story. And in buying the story of the company, they are buying a story about themselves . . . the stocks investors own become part of the story they tell the world about themselves.’ This is most evident if investors buy the stocks of companies whose products and corporate identity fit to their personal identities, be it in religious, political, ecological, health care or other lifestyle matters (Harrington, 2008, pp. 64 – 69; Sa¨ve-So¨derbergh, 2010). For example, a German small investor asserts: ‘Well, Siemens, that’s again somewhat questionable because they have branches such as atomic energy, arms . . . ’ (Stopper, Interview 2).26 But the same use of investment decisions for the construction, presentation and maintenance of one’s identity can be found if something like a ‘love affair’ takes place over time between an investor and stocks initially bought only for reasons of short-term profitability but then held onto through thick and thin over the years. In these ways, stories produce an embeddedness of the small investor by means of cultural orientations; in the case of a passive investor, these are brought home to him through a professional adviser.27 However, small investors do not believe every story they are told by their advisers; the latter are, on the contrary, subjected to a subtle pressure to adjust to the small investors’ perception of the financial market. As Robert Shiller (2002, p. 24) observes: ‘Clients often expect the professionals to invest in accordance with certain fads.’ To a decision-maker with little information about the subject and no time to study the choices, the most credible choice is the one that other investors in a comparable situation have made. Accordingly, passive small investors are strongly inclined to be what Elster (1989, pp. 203 – 204), in his reflections

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28

To put it more drastically: the small investor is such an easy prey for charlatans—see again Zola.

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about the mobilization for collective action, calls ‘mass participationists’. They simply imitate what many others do. Of course, that a small investor’s trust can be so easily won by storytelling28 is a phenomenon that correlates with the degree to which the investor inherently finds investment decisions to be a burden. Although he knows that these are highcost decisions with regard to his personal future, he does not understand much about them and feels nothing but bewilderment when someone attempts to explain the financial market to him. So it is anything but entertaining for him to spend leisure time interpreting what stock market news mean for his own investments. He even has difficulties in assessing post hoc the relative success of those decisions based on the recommendations of his adviser. After all, even considerable losses can be interpreted as the successful avoidance of much worse; indeed, this may be true. Therefore, this kind of small investor simply lacks any realistic standards that he himself perceives as convincing. As a consequence of all this confusion, he wants to spend as little time as possible with these tiresome decisions. Turning now to the smaller group of active small investors, we find that the picture essentially does not change but shows some interesting additional facets. Active small investors are engaged in a continual observation of the financial market and their own portfolio, collect relevant information on a more systematic basis and decide basically on their own what to buy and sell. Since active investors make an extra effort, compared with passive small investors, especially in terms of time spent, why do they not just remain passive and rely on professional advisers instead? It is because they are confident that they do better by deciding on their own—more precisely, better to such a degree that their considerable effort pays off. Most active small investors seem to have started as passive ones, and a frequent motivation to become active apparently is a loss of trust in professional advisers. After a while, their advice does not produce the returns to which the small investors aspire or may even incur losses. A typical example is someone who gets a proposal from his savings bank one day to invest part of his money in one of the bank’s funds instead of earning only the low interest from his savings account. He accepts, but after a time comes to the conclusion: ‘Nothing went really wrong. But it was not really good, either. Anyhow, was it a loss? I forgot about it. It just wasn’t good enough.’ And his reaction becomes: ‘Well, I said these funds have no value. I better take selected stocks which you yourself like better. I mean, then you yourself can decide quicker.’ (Stopper, Interview 1). Note that this change from ‘I’ to the generalized ‘you’ signifies this small investor’s effort to categorize his decision-making as reasonable although the mentioned criterion

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to make investments ‘which you yourself like better’ sounds at first quite idiosyncratic and not very rational. What it really expresses is that the loss of trust in professional advisers has turned into an attitude of ‘trust yourself!’ Other examples from the study of Legnaro et al. (2005, pp. 126– 148) are more explicit with regard to active small investors’ self-confidence. Small investors all frankly admit that, in contrast—as they perceive it—to big banks or investment companies, they are unable to influence either the firms whose stocks they hold or the dynamics of the financial market as a whole. In addition, they see clearly that professional investors have much more inside information and can react much faster to sudden market turbulences than they. Thus, as decision-makers, they consider themselves to be in a rather disadvantaged position on the financial market. Still, these small investors are convinced that they exercise at least ‘predictive secondary control’ in the sense that they adapt to a world they cannot change, a world whose causal regularities they can learn and anticipate over time so that they are able to take advantage of its course (Fiske and Taylor, 1991, p. 202). As they see it, they are able to predict the story line of what will happen very early, just as an experienced reader of a detective novel knows after a few pages who the murderer is. They view information as the crucial ingredient in their decision-making, the ingredient that they think makes their success the result of more than just luck: ‘It is still very hard work to acquire knowledge, to inform yourself, to develop your strategy, again, it is damn hard work, it’s not just luck.’ This is a firm conviction: ‘I do believe that if you study it, it’s more predictable how a rate of exchange develops.’ Then they can profit from this knowledge: ‘So you can easily, with a little skill, generate above-average returns on capital. . . . Not much luck involved; it’s sufficient to take a look at the chart . . . .’ A minute later the same person admits: ‘Well, you have to examine some stocks a little more carefully and for a longer period of time’ (all quotations from Legnaro et al., 2005, pp. 142, 143, 145, 146, my translation). Another small investor felt, ‘as a mechanical engineer’, he was able to ‘assess companies that are well positioned’. Later on he repeats: ‘Well, I know these companies, certainly sympathy has some part in it’ (Stopper, Interview 2). In the same vein, someone else states: ‘Well, real estate funds and such things where you never know what is behind it. I never took that into consideration. . . . But, for example, there are solar-cell producers, you can take a look what are they producing, where are they based . . . You always have to know who is behind it’ (Stopper, Interview 1). In other words, unconnected bits of information, such as statistical figures alone, are not sufficient— you need to have a convincing story to feel comfortable with a decision for a particular investment. What many of these active small investors assume they can accomplish in this way is to ‘swim with the stream’ and to hitch a ‘free ride’ with the trend: ‘I can’t

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2.2.2 Rebuilding the welfare state Paradoxically, the second social factor that accounts for the ‘loyalty’ of more and more small investors today is an important restriction of their ‘actorhood’ with regard to investment decisions. Although they are not formally tied to their investments, they cannot afford leaving the financial market because the profits they hope to earn there are funds they urgently need. In this sense, they are in a high-cost situation without exit options. There is a crucial difference between such small investors for whom the financial market is a place where they may earn some extra money and those whose future life chances depend critically on profits from their investments. Many of

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change or influence anything, but if I manage to jump on the right running board at the right moment, then I can earn something.’ Which ‘running boards’ are the right ones is revealed to active small investors, in contrast to passive ones, in stories that they assume are not known to everybody. Active small investors believe they belong to small circles with exclusive knowledge. Some claim that they are early discoverers of emerging stories. Against this insistence on having an early feeling for an incipient majority move—to know the majority before it has formed—other small investors explicitly point out that one must have ‘a good nose’ for the directions the stocks will really take, no matter what the majority thinks: ‘Of course, the only thing that I do, can do, is arrive at my opinion contrary to all the TV analysts, newspaper analysts . . . ’. Another investor emphasizes, with reference to one of his decisions, that ‘many people I knew didn’t do that, they bought quite differently’ (all quotations from Legnaro et al., 2005, pp. 130, 140, 142, 146, my translation). Still another small investor reflects about one of his decisions: ‘Well, then I think, they weren’t right last time’ so it’s alright’ for him to decide against the trend (Stopper, Interview 1). Such small investors are co-producers of the stories that inspire their investment decisions (Harrington, 2008, pp. 51 – 60). In fact, an active small investor may go with the majority sometimes and do the opposite at others, and whenever this person fails, she can always tell herself that she could have done otherwise— as she had successfully in the past. In this way she is able to maintain a selfperception in which, in principle, she is able to control the fate of her money. Single instances of failure do not negate her perceived general capacity for control; they just point out to her that control is not total but limited. Oscillating between purposive optimism and low-key rationality in the various aspects described, these active small investors, as well as the passive ones discussed before, are able to maintain their sense of ‘actorhood’ (Meyer and Jepperson, 2000) as rational decision-makers; this is the result of collectively shared stories reducing the ‘hypercomplexity’ of the financial market. As long as this sense of ‘actorhood’ prevails, it contributes decisively to the small investors’ ‘loyalty’.

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those who bought stocks in the decades before the 1990s were in a low-cost situation with good exit options. They invested money that they did not need at the moment and—even more importantly—could do without in their future life plans. They chose stocks because the return on capital was higher than that from alternative investments, such as a savings account or government bonds, but only if this higher return was not too risky. For instance, a German small investor who bought his first stocks in 1961 remembered that his motive was ‘the simple discovery that you don’t get wealthy with eight hours—with an eight hour job’. Asked whether he had harboured the hope of becoming rich, he said: ‘No. I never had this idea. I just wanted, in the sixties, to learn how the whole thing works’ (quoted in Legnaro et al., 2005, pp. 81– 82, my translation). This statement of modest aspirations combined with a certain curiosity seems to be quite typical for that time. Besides members of the upper class who always were active on the stock market, some middle-class people took a chance there, as one strategy among others to become a little better off. If they failed, they did not have a problem but just accepted a loss they could afford. After such incidents, some turned to other ways of investing their money, not the least by returning to the traditional savings account, while others tried stocks yet again. Then, in the 1990s, a ‘stock market populism’ (Harrington, 2008, pp. 11 – 14) started in the USA and in many other Western countries. It was triggered by the favourable opportunity structure of the so-called new market consisting of the technologically innovative IT and media industries. In some Western countries, such as Germany, the boom of these stocks coincided with the crest of the wave of capital formation among the middle classes after World War II. Because no war or deep global economic crisis had interrupted steady income growth across the board, people were looking for opportunities to invest considerable amounts of money profitably (Deutschmann, 2005, p. 80, 2008). Whereas in the 1960s, as noted above, members of the middle class who became small investors saw themselves as a clever minority, in the 1990s the opposite public perception emerged: only fools stayed away from the financial market. Someone who started investing in the financial market during those boom years stated: ‘Well, everyone, including me, got infected by the boom at the time. By all the profits colleagues earned . . .’. Another one said: ‘It was a real joy, I calculated in a half-year, three-quarters of a year rhythm how much money I possessed then and how much I had owned before. And it’s simply a great feeling. When you don’t do anything and the money simply grows.’ A third person expressed even higher hopes: ‘Well, like a virgin who finds herself pregnant, I found myself with all this sudden profit, starting in ’97, ’98, ’99, and for a short time that was really . . . , well, you thought if it goes on like this I’ll stop working with 30. . . . so you joked a bit about it and said if it goes on

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See Harrington (2008, pp. 19–21, 180– 182) for the USA. Bulmahn (2003) shows for Germany that many persons are prepared now to invest in their old-age pension; see also Legnaro et al. (2005, pp. 58– 71). However, they are not prepared to run the risk of losing their money in this investment. See Tigges (2009) for the situation of American middle-class elderly people after the crash of autumn 2008, and Zola’s (1976 [1891]) novel for the desperate situation of retired persons from the lower class who lost the little money they had in the described financial market crisis.

30 31

See Knop’s (2009) journalistic report about the German middle class in the current crisis.

For empirical overviews and divergent theoretical and political interpretations, see Luhmann (1981), Bourdieu and Accardo (1993), Bourdieu (1998), Kaufmann (1997), Lessenich (2003, 2008), Butterwegge et al. (2007) and Mu¨nch (2009).

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like this I will stop working with 40, or with 30. But seriously, I never thought about it or believed in it’. Finally, when asked if he had really believed he would become rich, one person who made substantial profits at that time answered: ‘No, it was more to fulfil nice wishes. . . . Went to London, and we went into a fancy clothing store . . . If you have it, who cares? You can afford it’ (quoted in Legnaro et al., 2005, pp. 83, 85, 89, my translation). Just as the money earned by the avant-garde small investors of the 1960s, these returns earned on the new market were still just additional income, certainly nice to have but of no existential importance. If the returns declined or became too risky, these small investors could turn away from the financial market and were able to suffer their losses without critical harm done to their future life plans. However, in many Western countries, the number of investors with such exit options has declined substantially since the 1990s. For the USA, Harrington (2008, p. 19, emphasis omitted) notes ‘that the surge of new investors . . . during the 1990s was due in large part to the changing social contract between labor and management, which made investing an increasingly necessary source of income.’ Since then, more and more individuals have been forced to try their luck as small investors, in Germany and other countries as well; the pressure to be successful on the financial market, in the sense of earning high returns, has increased for many people, too. First, they are told that their own pensions are not safe, so that whatever they receive will not be enough for a decent living in their old age. This is an existential threat.29 Second, they are told that they will have to invest a lot of money in the education of their children—not only university tuition, as was recently introduced in Germany, but fees for the attendance of private schools or for private coaching, not to mention pre-school preparation: all this to make sure that one’s own sons and daughters will not be predestined losers on the future job market. This threat also becomes a mighty impulse to act.30 Behind these threats, which pressure individuals to become and remain small investors, is a massive rebuilding of the welfare state in all Western countries along a so-called neo-liberal line.31 To make a long but well-known story

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short: by the time the general public finally realized that the ‘short dream of everlasting prosperity’ (Lutz, 1984, my translation), which lasted from the mid-1950s until the mid-1970s, had crumbled, ongoing macroeconomic problems had brought about a chronic and increasing fiscal crisis of public finances (Streeck and Mertens, 2010). The result has been an economizing of welfare production from basic services of social security, such as unemployment benefits and old-age insurance, to health care, education or public housing. What had formerly been standard provision has turned into a luxury that one cannot afford any longer—and as a compensation for the lack of money coming from the state, individual provision is now being called for. Even more, if one is to take charge of one’s own fate, then it becomes necessary to develop what Ulrich Bro¨ckling (2007, my translation) calls an ‘entrepreneurial self ’. Instead of counting on solidarity within the family, the trade unions or the welfare state, a person must rely on self-help and take responsibility for one’s own destiny, including personal failures such as job loss, chronical illness or a criminal conviction. Whereas the ‘providential state’ (Thibaud 1985, p. 136) had once helped in cases of individual hardship and had compensated, more or less, for disadvantages caused by birth or bad luck, now the spirit of entrepreneurship has become predominant. For the welfare state, this means that its ultimate goal, towards which all services are supposed to be reorganized, is the ‘activation’ of its clients’ potential for self-help. Accordingly, the term ‘social’ has been redefined: no longer referring to the state taking care of its citizens, it now means that citizens are required to take care of themselves. Being ‘social’ now means not living at the state’s—i.e. the taxpayers’—expense (Lessenich, 2008). Using Michel Foucault’s concept of ‘governmentality’, Legnaro et al. (2005, pp. 25– 58) see the involvement of more and more individuals in the financial market as a logical extension of this ‘entrepreneurial self ’. To become a small investor in order to earn—if you are lucky—the money you need for a decent pension and a good education for your children is, for a growing number of individuals, the natural way of life or ‘how these things are done’, to adopt Berger and Luckmann’s (1966, p. 77) telling expression for a reified institutional order. For more and more small investors, the impulses to defend their own future living standard and that of their children already dominate other motives and will become even more pressing in the future in the face of the probable ongoing reduction of corresponding welfare state services. The depiction of small investors as people who want to get rich quickly and effortlessly is outdated. Thus, their entrepreneurial spirit is not at all heroic but, on the contrary, almost fatalistic. On the one hand, an increasing number of small investors seem to be quite modest in the sense that they do not aspire for riches but would be highly satisfied if they could secure a certain standard of living for their own future and that of their children. On the other hand, this modesty nevertheless implies a demand for

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Conclusion

I choose to stop at this point to avoid any theoretical reflections that are too speculative. As I said at the beginning, the aim of this article was to elaborate, as far as is possible without a solid empirical foundation, important sociological contributions to the ‘loyalty’ puzzle of small investors. These theoretical ideas do not directly compete with what we have already known from behavioural

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steadily growing returns as long as the actual, perceived or anticipated decline of the welfare state, accompanied by an unstable economy and an insecure job market, continues. For quite some time now, small investors have been part of the real-world ‘people’s capitalism’: for them, investment in the financial market is not an opportunity for everybody to benefit from the wealth production of capitalism but is an enforced inclusion in the financial market driven by the need to avoid future financial hardship. As Harrington (2008, p. 149) observed when, in 2004, she revisited her empirical sample of small investors from the 1990s, ‘the most surprising finding was that all of them were still investing.’ Asked why they had not left the financial market after the ‘new economy’ bubble burst, ‘many said they had no choice but to keep buying stocks’. One respondent put it this way: ‘Where else are we going to put our money? In the mattress?’ Harrington (2008, p. 152) concludes: ‘They invest by default—out of a sense that they lack good alternatives.’ When a massive financial loss occurs, as it did for many in autumn 2008, the impulse to take flight becomes irresistible—but that is exactly what has become impossible! The high-cost situation of many small investors forbids any thought of exit. So their ‘loyalty’ is compulsory. To endure this, it is often accompanied by a mental functionalist fallacy that Deutschmann (2006, p. 190, my translation) aptly calls the small investor’s faith in a ‘“natural right” of return on capital’. Of course, this perceived material need predisposes them also to believe the promises made by banks and investment companies that these expectations can be reached. The compulsory ‘loyalty’ makes them gullible believers in the stories told to them about particular investments and the future chances on the financial market in general. Whenever such promises fail, many small investors do not adapt their aspiration level to more realistic expectations; on the contrary, they exhibit a desperate courage, which is actually the final psychological reason for the highly resilient persistence in unrealistic beliefs about the return on capital they can achieve. Because they have lost money and time, they are forced to earn even more money in even less time. Just as persons with critical diseases often fall prey to quacks, these sorely afflicted small investors are liable to trust the most dubious promises of getting rich in six years, 30 days or even 24 hours.

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Socio-Economic Review (2011) 9, 137–167 Advance Access publication November 21, 2010

doi:10.1093/ser/mwq028

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

This paper outlines an institutionalist political economy approach to capitalism as a specific type of social order. Social science institutionalism considers social systems to be structured by sanctioned rules of obligatory behaviour. Its perspective is one of collective ordering, or governance, through regularization and normalization of social action, either by public authority or by private contract. Political economy looks at the interrelations between collective action in general, and collective rule-making in particular, and the economy; it extends from economic and social policy-making to the way in which economic interests and constraints influence policy, politics and social life as a whole. The approach proposed in this article looks at society and economy as densely intertwined and closely interdependent, which is exactly what traditional concepts of capitalism stood for. Proceeding from an institutionalist perspective, it elaborates a concept of capitalism not as a self-driven mechanism of surplus extraction and accumulation governed by objective laws, but as a set of interrelated social institutions, and as a historically specific system of structured as well as structuring social interaction within and in relation to an institutionalized social order. Keywords: capitalism, political economy, institutions, institutional change, economic systems, social order JEL classification: P1 capitalist systems, P16 political economy, B52 institutional approaches

1. In this paper I will outline an institutionalist political economy approach to capitalism as a specific type of social order. Social science institutionalism considers social systems to be structured by sanctioned rules of obligatory behaviour. Its perspective is one of collective ordering, or governance, through regularization # The Author 2010. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected]

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Taking capitalism seriously: towards an institutionalist approach to contemporary political economy

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1

Conventionally one distinguishes, with Hall and Taylor (1996), three versions of institutionalism: rational choice institutionalism, which accounts for social order in terms of economic efficiency; sociological institutionalism, which emphasizes legitimacy as the main force regulating social action and historical institutionalism, which focuses on the interplay between historical legacies of social order and political and economic interests, and on the resulting politics of rule-making and rule-enforcing. For more on this, see below.

2

Or, in the words of Polanyi (1992 [1957]), as an ‘instituted process’.

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and normalization of social action, either by public authority or by private contract.1 Political economy looks at the interrelations between collective action in general, and collective rule-making in particular, and ‘the economy’, extending from economic and social policy-making to the way in which economic interests and constraints influence policy, politics and social life as a whole. However, while much of contemporary political economy, not to mention contemporary institutionalism, treats the economy as a black box, relying at best on standard economics to account for the constraints and opportunities it poses for politics and society, the approach that I am suggesting is in line with a general programmatic conviction that economic action is but a subtype of social action and must therefore be analysed in basically the same way (Beckert and Streeck, 2008). This is why the kind of institutionalist political economy that I am proposing looks at society and economy together as densely intertwined and closely interdependent, which is exactly what traditional concepts of capitalism stood for. More precisely, proceeding from an institutionalist perspective, I will elaborate a concept of capitalism not as a self-driven mechanism of surplus extraction and accumulation governed by objective laws, but as a set of interrelated social institutions, and as a historically specific system of structured as well as structuring (Giddens, 1984) social interaction within and in relation to an institutionalized social order.2 In this way, I hope to exploit the strengths of institutionalist analysis (Hall and Taylor, 1996)—and in particular of its ‘historical’ (Thelen, 1999) and ‘actor-centered’ (Mayntz and Scharpf, 1995) versions—for a better understanding of capitalism, and especially of the problems of governing capitalism through socio-economic institutions. At the same time, by ‘bringing capitalism back in’ (Streeck, 2009b), I expect to make institutionalism, and institutionalist political economy in particular, substantively richer in the sense of closer to the real world. The way I will do this is by specifying what are, in my view, overly abstract categories of institutionalist political economy—i.e. the general properties and dispositions it attributes to political and economic actors, actions and institutions—in such a way that they better match the particular properties of the capitalist social configuration. In the process I hope to replace what I believe to be misplaced generality with desirable concreteness, and indeed historical concreteness, following the insight of the Marxist tradition that different

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socio-economic formations require different theories, or at least different specifications of general theories. The approach I will suggest should be particularly relevant to the analysis of political – economic institutional change—which is, incidentally, a central theme of classical theories of capitalism, from Marx to Schumpeter. Significant progress has recently been made towards an institutionalist account of change in social or economic orders, associated in particular with concepts like ‘path dependence’ and ‘increasing returns’ (Pierson, 2000), with the notion of ‘punctuated equilibrium’ and the distinction between disruptive and gradual change (Krasner, 1988), the development of various typologies of gradual but nevertheless transformative change (Thelen, 2002; Streeck and Thelen, 2005a), and the discovery, or re-discovery, of self-undermining institutions and dialectical change (Greif and Laitin, 2004; Greif, 2006; Streeck, 2009b). Some of the most interesting new insights into the dynamics of contemporary political economies originated in the context of research on the gradual worldwide transformation of modern capitalism in the 1980s following the dissolution of the post-war economic order (Glyn, 2006)—a process of market expansion and intensified commodification that came to be described as one of ‘liberalization’, or ‘disorganization’, of capitalism (Offe, 1985; Lash and Urry, 1987; Streeck and Thelen, 2005b). However, while the new conceptual toolkit offered a rich language with which to catalogue processes of continuous, nondisruptive change, what it failed (and in fact never intended) to do was to account for the historical emergence and the pervasiveness of the sort of change that it had been developed to capture—its location in time and space as well as its direction and driving forces. In other words, while recent analyses of institutional change had made progress in classifying certain formal properties of the processes found to be at work in the real world of contemporary capitalism in general terms, they were unable to speak to the underlying causes of such processes. They also remained unconnected to a growing literature that had become dissatisfied with universalistic representations of ‘the economy’ as nature, or as a black box, returning for remedy to the concept of capitalism as a historically specific socio-economic order (for many others McMurtry, 1999; Peck and Theodore, 2007; Ingham, 2008; Sewell, 2008; Bohle and Greskovits, 2009). I suggest that this was because the decline of post-war organized capitalism and its neo-liberal re-formation were treated by institutionalists, including historical institutionalists, as essentially no more than coincidental research material for what was ultimately to be a theory of the general properties of institutions, or of political economies conceived as institutionalized social orders, and the way they change, sidelining historical context and the historical forces that condition when and how and for what purpose particular institutional processes may emerge (Streeck, 2010).

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2.

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Before I begin, I should like to point out that I do not consider what I am about to present to be a theory in any deterministic or predictive sense—if only because in my view, the social sciences are, for fundamental ontological reasons, incapable of producing such theories. Nor, as indicated, do I intend to offer a conceptual framework for institutional analysis in general. I rather prefer to think more modestly of what will follow as a heuristic checklist, hopefully drawing attention to empirical phenomena that might be a worthwhile explanandum or a promising explanans in dealing with contemporary, i.e. capitalist, political economy. In other words, I regard what I am undertaking to develop as basically a set of suggestions as to where to look and what to look for when doing political economy today: as informed conjectures as to what would be a good question to ask, or a worthwhile problem to address, and where to search for particularly satisfactory answers. Note that a heuristic is not necessarily ‘falsified’ if what it recommends looking for is not found. In fact, the absence of something it offers reasons to expect may be a particularly interesting observation. Of course, if a heuristic keeps failing to produce instructive cues as to relevant observations and convincing conclusions, it should rightly be abandoned as useless. Another way to think of my list is as a collection of parametric specifications of the conceptual framework of institutionalist political economy, for dealing with its capitalist version in particular. Perhaps at some stage that collection may develop into something like a stylized representation of capitalism as a complex and dynamic configuration of actions and actors—i.e. as an institutionalized social order, much like the Weberian ‘ideal type’. An ideal type presents a simplified, abstracted image of the world that is not necessarily disproven by the fact that it does not include everything that exists in it. What matters is that it captures what is essential, and that the differences between it and the real world are peripheral for the latter or from the point of view of the investigation. As I have indicated, roughly the same logic applies to a heuristic. Finally, I note that the list of parametric specifications that I will suggest for institutionalist political economy to better capture the essence of capitalism as a social order is mostly derived from classical theories, as associated with the names of Marx, Luxemburg, Weber, Schumpeter and Polanyi. Obviously my list is incomplete, sketchy, eclectic and syncretistic, and no more than a first try. Also, unlike, for example, Commons (1924) or, in a different way, Williamson (1985), I am not dealing with individual capitalist institutions such as wage labour or the credit system. Instead, as I have pointed out, my concern is with the specific problems of institutionalizing social order or governance as such in capitalism as a social and economic system. It is from this perspective that my list directs attention, for example, to the central distinction for capitalism

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3. Recent progress in institutionalist political economy has involved a conception of institutions as Weberian Herrschaftsverba¨nde linking rule makers and rule takers inside a surrounding society of ‘third parties’ (Streeck and Thelen, 2005b). Rule makers govern the behaviour of rule takers—the distinction being an analytical one, as the two may be identical3—by creating and enforcing a normative order that is sanctioned by the society at large. The concept distinguishes not just between makers and takers of rules, but also between institutions as social structures and the actors they constrain and enable, as well as between norms of behaviour and actors’ compliance with them. The basic model resembles that of the ‘actor-centered institutionalism’ defined by Mayntz and Scharpf (1995), with which it shares its emphasis on the strategic, or agentic, capacities of actors in relation to institutions. Where it differs is in the special attention it pays to the enactment of institutions or, in other words, to what it means to follow a rule. Briefly, the argument runs as follows: Institutions impose rules on the behaviour of social actors—or they are supposed to do so. However, it cannot be assumed that those whose behaviour is to be ruled, or governed, have always internalized the rule in question (i.e. adopted it as a ‘script’) or will follow it voluntarily out of self-interest. Rule takers can and do rebel against the rule they are expected to follow—or they may follow it in bad faith, like workers fighting management by ‘working to rule’. The important point is that the opportunity for actors to take a strategic posture in relation to the institutions that are supposed to govern them arises from the very nature of the ‘application’ of a general rule to what always is a specific, unique situation. Any such application requires a creative interpretation of what the rule is supposed to mean and how it might fit the inevitably 3

In a democracy, identity between the makers and the takers of policy is presumed as the former are supposed to be the agents of the latter. To the extent that principal-agent problems obtain, identity is fictional. For another, simultaneously important variant of identity between rule-makers and rule-takers see below, where I discuss the case of contracted institutions.

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between traditionalist, subsistence-oriented and modern, maximizing action dispositions; the role of competition in destabilizing institutions and social relationships; the differential resource endowment and agentic capacities of actors from different classes; the inherent dynamism of the capitalist social and economic order and the specifically capitalist mechanisms of economic and social innovation; the fundamental tension between social cohesion and market expansion, and between ‘embedding’ and ‘disembedding’ institutions and politics; the directionality and systemic nature of institutional change in capitalist political economies, and the ways in which it tends to be politically contested etc.

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4. In the following I will introduce into this model a number of parametric specifications that characterize the functioning of institutions in a capitalist political economy in particular. My—incomplete and preliminary—list of what I suggest are empirical characteristics of capitalism as an institutionalized socio-economic

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unique circumstances of the individual case. Applying, or following, a rule involves bridging the ontological gaps between the general and the specific as well as between the normative and the factual; none of this is straightforward or fully predictable in its event, even if the rule is applied entirely in good faith. This makes the ‘spirit’, or ethos, of action in relation to an institution crucially important, and with it the institutionally expected ethos of the actors in question, and the effect such expectations have on actors’ perceptions and definitions of self. As time passes, precedents accumulate which help with the interpretation of the rule while also, more or less perceptibly, changing its ‘meaning’. Normally, the environment of the institution will change as well, thereby continuously upsetting its emergent interpretation and evolving re-interpretation. The rule taker versus rule maker model is particularly relevant for the analysis of institutional change. The fact that in principle, any rule-following, even if intended to be fully conforming, must call forth what Hans Joas has called the ‘creativity of action’ (Joas, 2005), implies that no social order can ever be perfectly reproduced in its enactment. What an institution ‘really means’ must and therefore can be continuously re-invented by actors in the light of both specific situations and changing general circumstances. As rule takers creatively apply a rule that is supposed to govern them, they inevitably produce outcomes that rule makers could not have expected when making the rule, since they could not possibly anticipate the variety of future conditions under which the rule would have to be followed. Nor could they know in advance the innovative ways rule takers would invent either to follow or to circumvent the rule. Since rule takers are always both at liberty and compelled to find out the situational meaning of a rule for themselves, they can and will, in following a rule, impart a bias on it. As a result, rule makers may, in the light of what with time and ‘in practice’ has become ‘the rule’, feel a need to revise it in order to restore its originally intended meaning. Thus, not only rule-breaking, but also rule-following tends to set in motion interactive processes between rule makers and rule takers which make the institution and its meaning evolve over time. At this level of generality, no particular direction of the continuous revision of institutionalized rules in the interplay between governors and governed is assumed, apart from the general principles that the reproduction of any social order can only be an imperfect one; that all social–institutional orders are always in flux; and that slow and gradual change is an ever-present condition in institutional structures.

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order begins at the micro level of social action from where it gradually proceeds, in a clearly less than systemic fashion, to institutional structures at the macro level of society as a whole. 4.1

Legitimate greed

4.2

Institutionalized cynicism

The expected action disposition of rule takers under capitalism is rational-egoistic. This is to say that rule makers cannot expect rule takers to interpret their rules in 4 While Marx reserved Plusmacherei to the owners of industrial capital, and in particular of money capital, modern self-descriptions of capitalism treat workers, too, as utility-maximizing capitalists, in their capacity of owners of ‘human capital’. Alternatively utility maximization among workers is represented in labour economics as ‘shirking’, which may be seen as the illegitimate counterpart, or the travesty, of legitimate surplus extraction by capitalists proper. 5 This being the difference between Spencer’s two types of society, ‘militant’ (meaning feudal) and ‘industrial’ (meaning capitalist, Spencer, 2003 [1882]). 6

As famously expressed by Franc¸ois Guizot, Minister in the reactionary French government of the 1840s, when he urged his supporters, ‘Gentlemen, enrich yourselves!’ (‘Messieurs, enrichissez-vous!’).

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Capitalist markets are as institutions based on civil rights of private agents to engage in contractual exchange with other private agents in pursuit of material gain (Marshall, 1965 [1949]). Capitalist societies are self-described as societies of traders relentlessly striving to improve their material position, with ‘sweet commerce’ (Hirschman, 1982) having taken the place of violence on the one hand and of reciprocity and redistribution (Polanyi, 1992 [1957]) on the other. Free market exchange is guaranteed by a non-predatory state which respects private property and safeguards freedom of contract. Participants in market exchange—in other words, all members of market society—are entitled to, and stylized as enthusiastically engaged in, the pursuit of, in principle, unlimited material wealth: what Marx contemptuously called Plusmacherei, represented by his famous formula ‘M  C  M’4. Open-ended maximization of material possessions was considered morally inferior in pre-capitalist times, remained socially marginal, and was at best tolerated as unfortunately irrepressible. Under capitalism, by comparison, where material greed is satisfied through voluntary agreement instead of force5, it figures as normal and is considered legitimate6. Where voluntarism ends and force begins (where contracts cease to be voluntary and begin to be concluded under duress) is a matter of definition and regulation, and it is for the state to ensure that the borderline between voluntary exchange and forcible extortion is properly drawn and observed. The same applies to the equally crucial distinction between trade and fraud.

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other ways than in studied bad faith. There is no language available in a capitalist social order to dissuade agents from dealing with rules in a purely instrumental way, i.e. from the perspective of how they may be applied, avoided or circumvented for individual benefit. Ultimately this is because the free market, being the core institution of capitalism, promises to produce the common good as an unintended by-product of the self-interested pursuit of private goods, all by itself and unmotivated. ‘It is not’, writes Adam Smith famously,

Sentimentality7 is not envisaged and is in fact frowned upon, not only as individual stupidity but also a source of a distorted allocation of resources. Where common interests are best taken care of by the unrestrained pursuit of individual interests, there is no way to demand individual sacrifice in their name. Regulatory institutions must therefore be designed to fit actors who can only be expected to read rules, as it were, like tax lawyers, i.e. not as normative principles to be adhered to and applied in good will, so that their intended meaning is realized as much as possible, but as potential obstacles to the maximization of individual utility, and as a test of an actor’s ability to find innovative ways of overcoming them. I suggest considering this to be the typical—or better: normal, in the sense of both institutionally expected and empirically prevailing—kind of compliance in a capitalist social order. Avoidance of social obligations is not of course confined to capitalism. The difference is that here, the inventive pursuit of self-interest is in the spirit of the social order itself, so that the blame for a rule being circumvented lies importantly with its makers: Those avoiding a rule ‘only do what is in their interest’, while not having made the rule watertight is considered its makers’ ‘own fault’.8 Put otherwise, whereas there is always high legitimacy in a capitalist 7

Of course Adam Smith is the author, not just of The Wealth of Nations, but also of The Theory of Moral Sentiments (Smith, 1979 [1759]), where he explores the moral and communal underpinnings of the emerging modern society of his time. But how the two books relate is far from clear. In any case, the ‘other’ book is never mentioned when the true spirit of modern capitalism is being celebrated, and those who have made Wealth their Bible consider Moral Sentiments with embarrassment as something like a youthful sin. In capitalist practice and in the worldview that comes with it Smith reduces to Mandeville and his idea of public benefits being the product of private vices (Mandeville, 1988 [1714]). 8

This holds true even for the capitalist welfare state where recipients of benefits who exploit loopholes in the law often defend themselves, and are defended by others, in these terms.

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from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages. (Smith, 1993 [1776], p. 22)

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By ‘marginal ethics’ I mean the ethics of those least restrained in the competitive struggle by moral inhibitions, that is of those who because of their minimal ethics have under otherwise equal conditions the best chances of success and who on this account force competing groups, at the penalty of elimination from competition, gradually to adapt in their trading to the respectively lowest level of social ethics (i.e. to the ‘marginal ethics’)11. 9

‘Guile’ is later explained by Williamson to mean ‘lying, stealing, cheating, and calculated efforts to mislead, distort, disguise, obfuscate, or otherwise confuse’ (1985, p. 47). The logic behind the normalization of this behavioural syndrome in institutional design is the military one of Si vis pacem para bellum (If you want peace prepare for war). 10

According to Wikipedia, cynicism in its contemporary usage means ‘a disposition to disbelieve in the sincerity or goodness of human motives and actions’. It shares with its ancient meaning the implication that people are, or must be expected to be, like dogs (Greek: ky noi)—or today one would probably say: pigs.

11

My translation from the German original: ‘Unter “Grenzmoral” verstehe ich die Moral der am wenigsten durch moralische Hemmungen im Konkurrenzkampf behinderten Sozialschicht, die aufgrund ihrer Mindestmoral unter u¨brigens gleichen Umsta¨nden die sta¨rksten Erfolgsaussichten

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regime for being creative in maximizing one’s utility, normative resources for voluntary self-restraint would have to be generated outside the market and imported into a capitalist social order that continuously generates good reasons for actors not to restrain themselves. Since institutions always require a modicum of good faith on the part of their constituents, the high social legitimacy under capitalism of creative cleverness in relation to social obligations must give rise to a typical conflict between rule makers and rule takers in which the latter permanently test the vigilance of the former. The result is a particular direction in the evolution of capitalist institutions, in the course of which these are continuously redesigned to anticipate and adapt to a systemic bad faith of interest-seeking rule takers. Note that by referring to the bad faith of the stylized typical actor under capitalism, I refer to the normalized intentions informing the design of capitalist political-economic institutions. Just as military strategists feel obliged to attribute the worst possible motives to the potential enemy, even though they may not be empirically observed, capitalist institutions in order to be on the safe side assume that those supposed to be governed by them are nothing but self-seeking opportunists ‘with guile’ (Williamson, 1975).9 That the cynicism10 of this attribution is not, however, entirely unrealistic is due, for one thing, to the dynamic effects of what the conservative German institutional economist Go¨tz Briefs once called the ‘marginal ethics’ (Grenzmoral) of a pluralist-competitive society:

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4.3

A moral deficit

As convincingly argued by economic sociology, even a capitalist economy cannot function in an exclusively Williamsonian mode, i.e. without some shared normative, i.e. non-rational principles of reciprocity, solidarity, fairness, good will, kindness to strangers, mutual trust and the like. Adherence to such principles, however, cannot be assumed since it may detract from actors’ individual utility and because its rewards are likely to be diffuse and uncertain. Moreover, in the marginal case, which for the dynamic of the system is the critical one (Briefs, 1983), what one could call the market excuse trumps any rhetoric of moral restraint12 and makes such rhetoric vulnerable to being denounced as an expression of the resentment of losers, or as outdated, unsophisticated, and indeed irrational and ‘unscientific’. As a consequence, institutions that assume actors to be sentimental, or less than fully rational-egoistic, would therefore risk being subverted, as they would be exposed to relentless attacks from the hat und sohin die u¨brigen konkurrierenden Gruppen bei Strafe der Ausschaltung vom Wettbewerb zwingt, allma¨hlich in Kauf und Verkauf sich dem jeweiligen tiefsten Stand der Sozialmoral (der “Grenzmoral”) anzugleichen’ (Briefs, 1957). 12

In particular where it is reinforced, as it commonly is, by an organization excuse. Since most major economic transactions in a modern capitalist economy are conducted on behalf of organizations, they are doubly protected against a ‘moral economy’ that can appeal to the conscience only of individuals. Organizations, as impersonal social constructions, have no conscience (which is, among other things, why they are not liable to criminal prosecution). Although moral argument may manage to touch the hearts or minds of a firm’s executive officers, this does not mean that it will affect the firm’s behaviour. See Friedman (1983 [1973]) on why whatever moral sentiments business managers may develop must not make them forget the one and only ‘social responsibility’ of their firms, which is to maximize their profits.

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Moreover, as we also learn from military planning, and in a different way from ‘labeling theories’ of criminal behaviour, policies and institutions that expect actors to have a certain intention may thereby make them develop it, causing a downward spiral in which expectations of undesirable behaviour call forth such behaviour, which subsequently confirms the expectations. Actors under capitalism, summing up so far, are socially constructed as constitutively devious by the institutions designed to govern them. The typical rule taker that capitalist institutions must reckon with as the normal case is a rule bender: She reads rules entrepreneurially, untiringly looking for ways of twisting them in her favour. Capitalist institutions cannot but stylize capitalist actors as rational-utilitarian exploiters of gaps in rules. This is because of a dominant ethos that cannot condemn egoistically rational innovation in rule following, if not in rule breaking, and a culture that lacks the normative means by which to enforce and reward behaviour in good faith.

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4.4

A non-traditionalist super-norm

Actors in a modern-capitalist context, as they confront institutionalized expectations, find themselves encouraged and enabled to proceed on the premise that everything that is not explicitly forbidden is allowed. In traditionalist settings, by comparison, the governing premise is the opposite: Everything that is not allowed is forbidden. Obviously the capitalist version of what is—one’s— ‘right’ is more favourable to innovation, or imperfect reproduction, with respect to the way interests are pursued in the context of, and perhaps in conflict with, the social order. Such pursuit includes the deliberate stretching and testing of the law as it stands, in an effort to determine and push outward the borderline between fraud and, in principle welcome and indispensible, innovation (Balleisen and McKenna, 2009)14. 4.5

Differential endowment of social classes with agentic capacities

In a capitalist setting the functioning of social order is typically biased by a differential endowment of classes with resources enabling actors to calculate their interests and challenge or circumvent received interpretations of institutionalized social obligations. Not everybody can hire a tax lawyer or a financial adviser, not to mention a lobbyist, and the services of the best of them are available only to those who can pay the most. A promising working hypothesis for institutionalist 13

The answer of standard economic theory, as well as, incidentally, of rational choice sociology, is of course to ground social order conceptually in an equilibrium of individual interests enlightened by the experience of opposing counter-interests. Greed is to be restrained, and social stability procured, not by morality—which is in any case no longer available—but by self-interest, that is, by greed itself. On the position of classical sociology concerning the theoretical and practical utopia of an amoral social order rooted in a balance of particularistic self-interests, see below.

14

How thin that borderline is was forcefully demonstrated recently by the ‘innovative’ financial ‘products’ sold to the public by a deregulated banking industry.

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margins eating into the core by cunning opportunists foregoing being virtuous in favour of being smart. One may well subscribe to Etzioni’s observation at the end of his seminal book, The Moral Dimension, that ‘the more people accept the neoclassical paradigm as a guide for their behavior, the more their ability to sustain a market economy is undermined’ (Etzioni, 1988, p. 257). But this does not mean that one could rely on capitalist utility-maximizers exercising self-restraint in the name of a collective interest in the long-term sustainability of capitalist utility maximization. Indeed the fact that capitalist actors may be willing to destroy the commons on which they depend and deplete moral resources without which they cannot exist even though they cannot restore them, is a point that has often been made, from Karl Marx to Fred Hirsch (Hirsch, 1976)13.

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4.6

Unlimited rewards

Capitalism as a social order may be defined by the absence of any culturalnormative ceiling on the amount of economic gain individuals can aspire to or imagine achieving. This is what Durkheim, in Suicide, described as anomy, resulting from open-ended possibilities for achievement combined with competitive pressures, as it affects businessmen but also artists and scientists (Durkheim, 1966 [1897]). While even in the most capitalist of societies there may be, and normally are, traditionalist informal folk norms of decency that condemn those ‘who cannot get enough’, the core capitalist institutions of market and money do not set place a ceiling on the material rewards individuals can legitimately hope for; in this sense, they entail a promise of unlimited wealth (Deutschmann, 2001). The absence of institutionalized limits to economic gain can account for several other distinctive characteristics of capitalism. One is the dynamic growth of capitalist economies through relentless innovation, including the permanent revision of institutional arrangements in order to ‘economize’ on transaction costs. Limitless rewards drive limitless growth, which in turn underwrites limitless rewards. The fact that under capitalism, the premium for a creative discharge of social obligations, or for circumventing traditional norms or legal regulations, can be very high is bound to sharpen the innovative intelligence of rule

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accounts of capitalist political economy would therefore be that the capacity creatively to evade institutions or transform them in the course of their enactment, including the capacity to ‘capture’ regulatory agencies, is not randomly distributed but rather correlated with the class structure. The same would apply to the ability to act in line with the modern as distinguished from the traditionalist super-norm, or indeed to participate in the pursuit of the general promise of unlimited wealth. Rather than talking about the general ability of actors as such and in general to use the gap between the normative and the factual to bend social rules in line with their rationally calculated self-interest, theories of a capitalist social order may become more realistic by assuming a superior agentic capacity of the capitalist class. In a capitalist democracy with freedom of association, members of the underresourced non-capitalist classes do have the possibility of pooling resources to hire their own experts in rule production, avoidance or enforcement. To do this, however, they need to organize collectively or capture the government of the state, each of which is difficult, and success is uncertain. Normally, business has an organizational advantage over labour, if only because individual members of the business class and their private organizations, or firms, are often sufficiently well-endowed not to require the support of other members or the government for getting their view of their institutional obligations validated (Offe and Wiesenthal, 1980).

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takers powerful and well-positioned enough to pursue capitalism’s unlimited opportunities for personal enrichment. It also helps suppress moral scruples as may interfere with the rational-egoistic maximization of self-interest: The higher the prize, the more virtue is needed for actors to refrain from going for it by less than virtuous means15.

Maximization of gain instead of minimization of effort

Capitalist rational-egoistic action is institutionally expected and licenced to be oriented towards maximization of economic gain. The normalized actor under capitalism is someone who does not relent in his effort to get richer regardless of what he has already achieved; for him ‘the sky is the limit’, and there is no preestablished point where he ‘has enough’, or is institutionally expected to have enough. This holds true not just for capitalists or for capitalist firms, but also for consumers, whose desires are ideal-typically assumed, and more often than not empirically prove to be, open-ended. Maximizing is the hallmark of the capitalist economic ethos whereas limiting effort to what is ‘necessary’ for meeting one’s ‘needs’ is the essence of economic traditionalism and the motivational basis of a subsistence economy.16 At the actor level and empirically, both dispositions co-exist even in the most capitalist of societies. What matters is their distribution, by individuals and by class,17 and their specific legitimacy or non-legitimacy. While not everybody maximizes in a capitalist economy, as a motivation of economic action maximizing is not considered monstrous, and indeed is almost by definition regarded as rational, and in this sense as natural and normal, and therefore to be expected. 15

See Freeman (2011), with convincing examples and an illustration from a Marx Brothers movie: ‘Groucho (to pretty lady at dinner): Would you sleep with me for $52 million? Pretty lady (laughing): Of course! Groucho (leering wildly): How about for 10? Pretty lady: Mr. Marx, what do you take me for? Groucho: We’ve already established what you are. Now we’re just haggling over price’. 16

I consider this distinction a parametric specification of the rational actor model. That model, which is intended to be general and universal, is ambivalent, and in fact empty, in that it includes both the maximization of output and the minimization of input. Only the former, however, is compatible with the dynamic economy of capitalism and culturally and institutionally enforced on investors, consumers and workers.

17

In fact, modern and traditionalist dispositions for economic action are institutionally ascribed under capitalism to different classes as normalized, or expected, motivations of individuals. Capitalists, stylized as willing to accept risk, are rewarded by what is interestingly called a ‘residual’ income, namely profits. Workers, stylized as ‘risk-averse’, receive and are assumed to prefer a fixed income (a wage). While owners of capital maximize their ‘residual’ (in the sense of a priori unlimited) rewards, with capital accumulation as Selbstzweck (an end in itself), workers work for a ‘living wage’ to provide for their and their family’s subsistence.

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4.7

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4.8

Elite interests divorced from interest in system survival

Unregulated rewards for which there is no ceiling are a source of steadily growing inequality, especially as they can be re-invested for cumulative advantage, not least in agentic rule bending capacity. Because of the inherent inegalitarian tendency in a capitalist political economy that arises from the open-endedness of potential material gain, the perennial question of redistributive countermeasures aimed at protecting or restoring social cohesion will always be on the political agenda. Open-ended inequality at the same time gives rise to a characteristic disjuncture between the interests of economic elites in their and their family’s personal fortune and in the stability of the economic system as a whole. The greater the gains an individual has managed to appropriate under capitalism’s wide-open skies, the more irresponsible he can afford to be with respect to the capitalist system’s long-term survival: Whatever happens, his accumulated riches, safely stashed away, will be enough to carry him and his family very comfortably through. In fact, in contemporary capitalism, unchallenged by any radical political alternative, it is the masses—who of 18

In any case, today those who aspire to being very rich are well-advised to remember Brecht’s ironic question in his Threepenny Opera: What is robbing a bank compared to founding one? (Was ist ein Einbruch in eine Bank gegen die Gru¨ndung einer Bank?).

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Economically maximizing behaviour, or greed, also exists outside of capitalism, but it is only inside it that it is not regarded as strange, or criminal. Non-capitalist economic maximizers like the Mobutus or the Marcoses of this world who rely on public violence to become unendingly rich are outcasts under capitalism, while the Swiss or American banks that invest their booty for them, in pursuit of equally open-ended ‘residual income’, only do what banks do. Goals that are morally dubious outside capitalism may be fully legitimate inside it, capitalism being the only system where they ever were.18 In abstract terms, capitalism’s institutionally normalized maximizing ethos is represented in standard economic theory by the psychology ascribed to homo oeconomicus. In capitalist self-description, that psychology is both an anthropological constant and a differentially distributed individual capacity required for and rewarded by economic success. The implication is that capitalism both fits human nature and makes humans behave in line with it, with the ‘realism’ of the market as an antidote against moral ‘illusions’. Capitalism offers rich material rewards to those in whom human nature happens to be particularly strong, and punishes others who, for whatever reason, have failed fully to develop it—thereby reinforcing the habitus (Bourdieu, 2005) that the system both assumes and produces.

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4.9

Competition privileged over solidarity

The inherent dynamism of capitalism as a social order is reinforced by the omnipresence of competitive pressures in its free markets. Competition forces actors continuously to monitor their position and strategic behaviour in relation to that of competitors and potential competitors, and instills in them an attitude of permanent vigilance. Competition exists where there is a social licence for actors to try to improve their position at the expense of others. A licence to compete implies a licence to behave in a way that is the opposite of solidarity. Capitalist political economies are characterized by the fact that they hold out very high rewards to actors who skillfully and innovatively breach norms of solidarity in order to enrich themselves, even if this means impoverishing others who are less successful. Although in principle governed by competitive markets, all capitalist political economies have seen efforts to contain competition through private agreement 19

The chief of Goldman Sachs, Henry Paulson, estimated his personal fortune to be about 700 million dollars when he acceded to the post of Secretary of the Treasury under George W. Bush. Paulson took the risk of forcing the bankruptcy of Lehman Brothers (which, of course, was Goldman’s main competitor). Even if his gamble had resulted in a crisis worse and longer-lasting than the Great Depression, Paulson and his family would clearly not have had to make changes in their lifestyle.

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course have little to no control over the system’s fate—who depend on its stability much more than the elites do. The way in which rising inequality separates the private interests of the winners from collective interests in system survival, effectively doing away with traditional ideas of elite ‘stewardship’, is reflected in the notion of ‘plutonomy’, which was coined by the personal finance department of Citibank during the Bush years, in a circular to its wealthiest clients (Citigroup Research, 2005, 2006). The concept refers to an economic situation in which the very rich have become so rich that their consumption can sustain economic growth, and the profits that depend on it, even in the face of advancing impoverishment of mass consumers. Another facet of the same condition is the ruthlessness with which banks took on ever higher risks in the years leading to the Great Recession of 2008 and beyond. While banking executives may have counted on a government bailout early on as their firms had become ‘too big to fail’, they must also have been aware that even in case of a return of the 1930s or worse, they and their families could never become destitute after they have ‘earned’ tens or hundreds of millions of dollars per year for several years in a row.19 Perhaps advanced capitalism is the first society in history whose peasants cannot expect their lords to exercise self-restraint for the sake of the survival of their regime, given that they no longer need to fear decapitation after its collapse.

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Nobody knew this better than Adam Smith: ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices’ (1993 [1776], p. 129).

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or public regulation. In fact, initiatives to ‘stabilize’ markets tend to be as omnipresent in capitalism as competition.20 Not only workers, but also capitalists have tried again and again to forge social compacts protecting them from market entry by outsiders and from the attacks of insiders. Especially among capitalists, however, where the potential rewards of undercutting public or private market-stabilizing institutions are high, success always remained precarious. Government regulation must ultimately prove as fragile as private cartels in an institutional environment in which competitive behaviour is a priori assumed to be legal whereas ‘conspiracy against trade’ is a priori under suspicion of being illegal, unless it is explicitly legalized. (If it is, however, it is exposed to creative subversion just like any other rule.) Moreover, the establishment and defence of an anti-competitive economic regime requires some sort of collective action organizing and controlling an entire class of potential competitors; whereas for competition to start, no more than one break-away is required. Given the potentially unlimited rewards a successful predator can reap, competition is more probable than solidarity and its containment will never be more than temporary. Foreclosing competition creates a traditionalist, sta¨ndische, live-and-let-live political economy, with profits limited to what is necessary to provide for subsistence at a level deemed socially appropriate. While that level can be high, especially for upper classes that turn from entrepreneur to rentier, any economic traditionalism is profoundly incompatible with the spirit of maximization that is at the heart of the capitalist mode of production and is idealized in its ethos (not to mention its organizations). A static, non-competitive economic order is not only hard to establish but also ultimately unsustainable in a capitalist system where the premium on defection is potentially unlimited, and undercutting the market position of others is a fundamental civil right rooted in the elementary principle of freedom of contract. Therefore, even in the most ‘coordinated’ capitalist society, one can expect a general climate of nervous tension among potential competitors, of mutual distrust and permanent awareness of the possibility of competitors appearing on the scene to upset the peace. Even while arrangements to suspend competition still hold, each actor will be constantly tempted to defect, if only because he cannot trust his fellow actors not to defect before him. This cannot be otherwise in a culture in which rational-egoistic advantage-seeking at the expense of others cannot be morally condemned and, if successful, is in fact entitled to the admiration even of those who find themselves left behind.

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Table 1 Two types of political-economic institutions Williamsonian

Public order Obligational Exogenously imposed Authoritative organization Creation of obligations Government Status

Private ordering Voluntaristic Endogenously contracted Voluntary coordination Reduction of transaction costs Governance Contract

4.10

Two types of institutions

Capitalist political economies are governed by two types of institutions, which complement as well as oppose one another. The general tendency in capitalist development is for the older, traditional type to be subverted and partially replaced by the modern one. In the institutionalist literature, the two types of institutions, or social order, that precariously co-exist in capitalism tend to appear as alternative conceptualizations of institutions as such—the former being put forward by what is called historical and sociological institutionalism, the latter by rational choice institutionalism (Hall and Taylor, 1996). Treating them as different types resolves much of the confusion in the ongoing debate on ‘what institutions really are’. Institutions in the more traditional sense may be conceived of as normative social structures which precede actors and regulate their behaviour with the force of legitimate authority, even though actors may have internalized the norms enforced on them (and even though all institutions depend on being creatively enacted). Rule makers and rule takers are not identical, the former perhaps—as in the case of a political constitution—being long dead. Institutions are authoritatively imposed, and the norms they represent are enforced by third parties—‘society as a whole’—whose readiness to support them constitutes their legitimacy. Elsewhere (Streeck, 2009b, 2010) I have called this type of institution ‘Durkheimian’, distinguishing it from ‘Williamsonian’ institutions that are based on voluntary agreement between present partners and constructed to fit the present interests of their creators in making their transactions optimally efficient (Table 1). Whereas Durkheimian institutions are moral in nature in that they limit or regulate the rational-egoistic pursuit of material interests, Williamsonian institutions are economic in that they are designed by interested parties to increase the returns on their mutual transactions. Since in the latter case, rule takers and rule makers are identical, rules can at any time, if necessary or profitable, be revised by agreement among the consenting adults who have put them in place.

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Durkheimian

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4.11

Capitalist development as market expansion

Capitalist development, then, may be conceived of as a process of gradual or periodic expansion of the system of contracts—or, in other words, of market 21

The distinction is, of course, reminiscent of Spencer’s evolutionary continuum from feudal-traditional to industrial-modern society, or from a status-based social order to one based on contract (Spencer, 2003 [1882]). 22

The same idea is summarized in Joseph Schumpeter’s famous dictum, ‘No social system can work which is based exclusively upon a network of free contracts between (legally) equal contracting parties and in which everyone is supposed to be guided by nothing except his own (short-run) utilitarian ends’ (Schumpeter, 1975 [1942], p. 417).

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In a simplified way, one can say that Williamsonian institutions arise out of private market relations and compete with each other in a market for institutions, while Durkheimian institutions are based in public authority in a broad sense and, among other things, serve to circumscribe markets. Whereas Williamsonian institutions are a product of the rational choices of self-interested individuals under freedom of contract, representing a type of social order that is essentially voluntaristic, Durkheimian institutions arise from collective action, however it may be organized, on behalf of society as a whole, however it is represented.21 In a rational choice theory of the world—or better: a rational choice utopia— all institutions and the entire social order ultimately are, or should, can and will be, of the Williamsonian sort. In fact, liberal progressivism up to this day describes the expansion of markets as a long historical process replacing obligatory institutions with contractual ones—as an escape from traditionalism and as simultaneous progress towards political liberty and economic rationality. On the other hand, as Durkheim (1964 [1893]) never tired of pointing out, a regime of free contracts governing the growing division of labour could unfold only inside an already existing society. For functional reasons alone, the order of freedom must remain ‘embedded’, to use the key concept of contemporary economic sociology, in an order of obligation, whether inherited from tradition or reconstructed with modern means. Even under capitalism—contrary to the various Robinsonian founding myths of modernity—society is not a product of competitive contracting but its precondition. A world constituted by contract is to Durkheim, in Polanyian language, no more than a ‘frivolous experiment’ that is doomed to fail.22 Markets, or market economies, cannot function without being encased in a shell of obligatory, non-voluntary rules determining, among other things, who is entitled to engage in contractual relations and what may and may not be subject to contractual agreement, and generally safeguarding the ‘non-contractual conditions of contract’ (Durkheim, 1964 [1893]) without which contracts could be neither made nor enforced.

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relations—as the privileged mode of social and economic intercourse: of competitive contracting at prices that fluctuate with changes in supply and demand. The driving forces behind this are the potentially unlimited and highly unequal rewards to be gained in an economic regime that knows no profit ceilings, together with the pressures and attractions of competition and the incentive-cum-opportunity inherent in it to maximize the returns on invested resources. Capitalist advancement entails the progressive commercialization, or commodification, of social relations, with Polanyian regimes, or Durkheimian institutions, of reciprocity and redistribution being gradually replaced by markets for contractual exchange governed, increasingly, by cost-cutting Williamsonian arrangements. The widening, or spatial spread, of markets is accompanied by their deepening or intensification, as more and more social spheres and an increasing range of ‘necessaries of life’ (Adam Smith) become commodified—i.e. subsumed under a ‘self-regulating’ price mechanism driven by actors’ self-interest and made available in exchange for ‘bare Zahlung’ (cash payment) (Marx and Engels, 1972 [1848]). In a capitalist society, the system of contractual market exchange that inhabits it like an incubus constantly pushes outward against the limits set for it by its social containment, expanding the range of commercial activities to extend not just to traded goods, but also to the ‘fictive’ commodities of labour, nature and money. This process, whereby freedom of contract fuels expansion of contractual relations, is what is meant by the concept of ‘self-sustaining economic growth’. Capitalist market expansion, propelled by the restless inventiveness of interestmaximizing capitalist actors and their creatively biased enactment of marketcontaining institutions, has been metaphorically characterized as Landnahme, or land-grabbing (Luxemburg, 1913). Landnahme is conceived of as a process of social evolution linking previously parochial, or particularistic, social relations into ever more encompassing, increasingly universal economic contexts. While Luxemburg emphasized the spatial extension of markets, reflecting the age of imperialism in the late nineteenth century, the concept may also be used to denote an increase in the intensity or depth of commodification: for example, the ongoing reorganization of private lives, including the commercialization of household services, to accommodate an ever more ‘flexible’ organization of work and of labour markets (Hochschild, 2003). Capitalist market expansion, or economic growth, is fuelled by innovation, both in technology and in the organization of social and commercial relations. Innovation upsets social structures and ways of life in that it unpredictably changes the relative prices of goods and services, causing fundamental uncertainty among groups and individuals whose life chances depend on their market position. Given the enormous flexibility of contracts and their capacity easily to extend beyond the reach of authoritative institutions, one can expect the progress of

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4.12

Commodification of the future

Capitalist expansion depends to an important extent on credit, which is an institutionalized social relationship that serves to pull the proceeds from future economic activities into the present, making future production and future income available for present investment and consumption. Credit is based on an enforceable promise on the part of credit takers to engage for an extended period of time in productive activities profitable enough for them to repay their debt at a set rate of interest. The institutional machinery for pulling the future into the present is the financial system; it makes capitalism a society in which time is an added dimension. Private ordering in capitalism, especially with respect to credit and banking, is to ensure, as much as at all possible, that debtors live up to their promises and creditors can feel safe when they rely on this. Capitalism, in other words, is more dynamic than other economic systems because it has found ways to turn promises and expectations into presently available resources, enabling the economy at any point in time to invest and consume more than it has already produced.23 By creating binding obligations for individuals to devote long stretches of their future lives to working towards paying off their debts, the economy redeems the advances it continuously draws on its future production.24 While profit is the carrot of capitalist growth, debt is the stick. Public policy, particularly monetary and fiscal policy and the regulation of banking and finance, must ensure that privately created entitlements to repayment with interest do not exceed the economy’s future production capacities—that the banking system as a whole does not overdraw the society’s account with the real economy’s future 23

The locus classicus on the relationship between credit and capitalist development is Schumpeter (2006 [1912]). 24

The same situation holds for public debt, which forces governments to ensure that future generations maintain or increase the existing level of labour market participation, so that governments can deliver on their promises to their creditors (including future beneficiaries of social security).

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market relations typically to outpace that of their social regulation. Moreover, while one should expect that under capitalism public regulation will lag behind private contracts, one may also expect public authorities in charge of Durkheimian institutions to try and catch up with the evolution of markets. Nota bene, however, that it is only in a functionalist worldview that the success of such efforts is guaranteed, and this holds true even where the long-run viability of the economic system as such depends on its eventual reregulation. Failure to re-regulate, in other words, is as much a possibility as success, as vividly illustrated by the recent financial crisis and its aftermath.

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4.13

Freely fluctuating relative prices destabilizing social structures

Fluctuating relative prices in self-regulating markets impose instability and uncertainty on social structures and social life, clashing with the needs of human beings for social integration in stable communities. While the extent of flexibility in social structures that is humanly acceptable is not fixed once and for all, and is obviously subject to cultural and historical variation (Streeck, 2009a), it is likely always to be exceeded by the flexibility of free markets. Societies, according to Polanyi (1957 [1944]), can therefore be expected to respond to increasing marketization and commodification with collective efforts to stabilize markets, and with them social life. Mobilization for protection from the socially destructive effects of a free market economy is the second stage of what Polanyi has described as a ‘double movement’ of capitalist 25

Note the crucial importance for economic policy of what its jargon calls ‘psychology’, which is essentially the spreading of good feelings about an unknowable future in the hope that optimistic forecasts will become self-fulfilling prophecies by stimulating the sort of behaviour on which economic growth depends.

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growth (or better: does not allow the suspicion to arise that it may be doing so). In particular, financial regulation is to prevent bubbles and the panics they may cause, as these would interrupt the stream of transfers from the future into the present and implode the complex web of mutual entitlements and obligations that makes up an advanced capitalist economy. Regulation may, however, err on the side of caution by underestimating the economy’s future production capacities, which results in lower growth than would be possible. Although capitalism unfetters and encourages the creative intelligence of rational-egoistic economic agents, it depends at the same time on their discipline as debtors, as much as on their prudence as creditors. It also requires that monetary policy and the banking system more or less correctly—or in any case credibly—assess a future that cannot be known with certainty. While statistical techniques and ever new methods of risk pooling promise to eliminate the uncertainty of the future, their main contribution may be that they make the future appear more knowable than it really is, and thereby help sustain the basic optimism of creditors and debtors, or investors and consumers, that is essential for the functioning of the complex and fragile system of social relations on which the capitalist mode of production is founded. Capitalist institutions of private ordering serve not least to produce an optimistic confidence in the face of an uncertain future. Even where it is at first unjustified, such confidence can become self-justifying by encouraging productive activities that a ‘realistic’ assessment of the world would have advised against.25

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4.14

A social space for rational egoism

A related concept of politics under capitalism is that of a struggle over the size and containment of the social space within which rational egoism is to be considered 26

From which the ‘always embedded’ reading of Polanyi draws the conclusion that capitalist development necessarily includes the development of market-stabilizing institutions (see Streeck, 2009b, pp. 246–253). A typical example is Caporaso and Tarrow (2009).

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modernization, when oppositional social forces emerge to impose on the political economy what may be called neo-Durkheimian, or post-Williamsonian, regulatory institutions. Re-embedding the market economy to make it compatible with a livable life is a dialectical response on the part of society, as organized by its politics, to the potentially disruptive dynamics of capitalist ‘creative destruction’. For Polanyi, this response is the essence of politics under capitalism. Political conflicts in a capitalist social order will in one way or another be concerned with who should be protected by society, and how, from being undercut in their social position by ‘market forces’. The general question this raises is to what extent politics in a capitalist society can reliably mobilize the motivational, material and coercive resources required for containing capitalist Landnahme, and how long regulatory institutions can do their job without being captured by those they are supposed to regulate. No general predictions are possible, and none is proposed, as to the eventual success of political countermovements against the marketization of social life. This holds true even where functionalist arguments can be made that without re-embedding in regulatory social institutions, a market economy will eventually be unable to function.26 Catastrophes cannot be precluded a priori. For example, as indicated above, elites who profit from disembedding the economy may profit from it so much that they can expect to comfortably survive even if the system as a whole were to crash; having, as the Germans say, ‘ihre Scha¨fchen im Trockenen’ (their sheep safe in the barn), they can continue individually to live the good life while the masses can survive only collectively with and within the society. Moreover, what will and will not suffice to stabilize ‘the system’ will always be uncertain and can typically be found out only ex post; the same holds true for how much social instability individuals and groups will be able or willing to absorb without rebelling. This keeps the event of the struggle between pressures for flexible markets and stable societies open, in theory as well as in real life. No end to the dialectics of the double movement can be deductively postulated, implying that reading politics under capitalism as a manifestation of the tension between its two wings should be a promising and perhaps a privileged approach to contemporary political economy.

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4.15

Politics turned around

Finally, an important complication in the politics of capitalism—as shaped by the tension between economic pressures for flexible adjustment of social relations and human needs for stable communities—is that politics may become subservient not just to the latter, but also to the former. This is another dynamic to which Polanyi (1957 [1944]) has drawn attention. While countermovements to marketization may get hold of the machinery of the state to protect society from being creatively destroyed by the dynamics of capitalist progress, the older configuration is one in which states create and enforce markets, first inside and then, as in imperialism, outside their territorial jurisdictions (Polanyi’s ‘frivolous experiment’ of early liberalism). Moreover, the social-democratic version of the politics of re-embedding the capitalist market economy is typically one of mediation between the conflicting demands of markets and social structures, by helping 27

‘Der Eigentu¨mer einer Sache kann, soweit nicht das Gesetz oder Rechte Dritter entgegenstehen, mit der Sache nach Belieben verfahren und andere von jeder Einwirkung ausschließen’ (§ 903 BGB).

28

‘Eigentum verpflichtet. Sein Gebrauch soll zugleich dem Wohle der Allgemeinheit dienen’ (Art. 14 GG).

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legitimate. Metaphorically, one could speak of a ‘free trade zone’ enclosed in and defined, or circumscribed, by the normative order of society. In the liberal utopia of economic theory, all of society can and should be arranged as a regime of free trade under full freedom of contract, with rational egoism generally being legitimized by the foundational premise of a market economy: that by looking after their own interests, individuals contribute to a socially optimal allocation of resources. If everybody takes care of himself, everybody will be taken care of. Egoism is the real altruism, or the altruism of those enlightened by economic theory. In real life, of course, moral norms have more to say about rational egoism, although what they do say is contested and constantly subject to revision in public discourse and political struggle. The somewhat paradoxical problem capitalist societies must come to terms with is demarcating a space where egoistic—i.e. strictly speaking, amoral—action is to be considered morally acceptable. Here, two broad principles compete, each of which represents a cornerstone of the social order: the one being that, in the language of the German civil code, ‘The owner of a thing . . . may proceed with it at will’,27 and the other that, as stated in the German constitution of 1949, ‘Property entails obligations. Its use should also serve the community’.28 Capitalist Landnahme shifts the balance between these two principles in favour of the former, while social countermovements undertake to defend or restore the primacy of the latter.

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5. In this essay, I have sketched out elements of an account of contemporary capitalism as an institutionalized social order, with characteristic rules and mechanisms for their enforcement, and with actors institutionally expected to be endowed with typical values, interests, preferences and strategies. Starting from some general categories of an institutionalist theory of social order, I have arrived at a provisional catalogue of traits of a capitalist political economy through a process of parametric specification. Rather than speaking of actors in general, I have tried to capture, if not ‘model’, the particularities of actors under capitalism as they respond, and are empirically if not normatively expected to respond, to the constraints and opportunities provided by capitalist institutions. For example, instead of describing actors simply and generally as driven by rational egoism, I have attempted to specify the sort of rational 29

There is also the danger that political attempts to de-liberate markets may be catastrophically misconceived. The most important example of this in Polanyi’s work and personal experience was, of course, fascism.

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citizens to reorganize their lives so as to be able to live with ever-increasing market flexibility. Moreover, that politics may turn into a vehicle for disembedding the economy seems all the more likely given that those interested in free markets have command of superior economic resources that can, in principle, easily be converted into political ones.29 Furthermore, marketization can be an attractive political strategy for governments overburdened by demands for political protection and the reconstruction of social relations. In democratic capitalism, the responsibilities ascribed to governments by a demanding citizenry may easily outgrow the resources available for public purposes in a society in which property is essentially private (Goldscheid, 1976 [1917]). As governments face problems of ‘ungovernability’ due to a disparity between growing political demands and limited public resources, marketization—or liberalization—may suggest itself to them as a last resort, as it did to quite a few European governments, including socialdemocratic ones, in the final quarter of the twentieth century (Streeck, 2009b). For an institutionalist approach to capitalism, this would suggest exploring political processes as reflecting ambivalent pressures on the state to protect society from markets on the one hand and promote them on the other. While the politics of capitalism would entail struggles for power as much as any other politics, the substantive background of such struggles that would account for their specific content and direction would be a basic conflict between the two wings of the double movement over the proper use of politics in relation to the market.

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egoism one must reckon with in a world characterized by institutionally unlimited economic opportunity, legitimate maximization, omnipresent competitive threats, unequal endowment with strategic resources by class, asymmetric economic dependence, and the like. Similarly, rather than speaking of institutions as such, and of what all institutions have in common, I have emphasized the specificity of markets as institutions in particular, as well as suggesting a dialectical distinction between two kinds of institutions, authoritative and contractual, or public and private, thereby drawing attention to what I believe is a central dynamic in capitalist development and a fundamental tension in social life under capitalism. Very importantly, the institutionalized order of capitalism, as I conceive it, is a historical order, i.e. one that is continuously changing because it is inherently unstable and precarious. Indeed, capitalism as a social formation would appear to be torn by a fundamental contradiction between a ‘need’, functional as well as social, for stability on the one hand and, on the other hand, an internal restlessness that makes stability impossible to achieve for more than short breathing periods. Time, I have suggested, is of the essence in capitalism, not just as historical time, but also systematically as the capitalist political economy extends into and commodifies its own future, continuously developing through expansion of markets causing economic growth as well as institutional transformation. An institutionalist theory of capitalism thus cannot but be a theory of institutional change, just as any theory of institutional change in contemporary political economy must, I believe, inevitably be linked to a theory of capitalist development. The list of traits of a capitalist social order that I have proposed may be read as a heuristic, as an ideal type, or as a model, depending on how one wants to use it. In the first capacity, it would simply suggest a number of potential empirical conditions that one might want to be attentive to when studying the political economy of contemporary modern societies. To the extent that such conditions are in fact found, they would identify a social order as capitalist, pointing to potential explanations for observed properties and problems that could be tested in empirical research. Taken, on the other hand, as an ideal type, and in particular as a model, the list would imply that its elements form a cluster: Where one appears, the others should appear as well. Whether this was actually the case would, again, have to be established empirically. Note, however, that even if the list is treated as a model, there is no assumption of static coherence or stability, as the contradiction between social life and capitalist economic organization is built into the ‘model’ as proposed, as inevitable and ineradicable. Capitalism as a social order, in other words, may be an ‘ideal type’, but it cannot be an ideal. Strictly speaking, it is a utopia, since it cannot exist outside of non-capitalist modes of social organization even though it continuously

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30 31

This was pointed out to me by Fred Block and Christoph Deutschmann.

‘For if interest relates men, it is never for more than some few moments . . . There is nothing less constant than interest. Today, it unites me to you; tomorrow it will make me your enemy’ (Durkheim, 1964 [1893], pp. 203– 204).

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strives to emancipate itself from them and in fact is destructive of them. While the reality of capitalism is always mixed, the mix is far from stable and indeed always explosive. Although its internal logic of growth makes capitalism attempt to reorganize all social relations in its image—‘subsume’ them under the ‘laws of capitalist accumulation’—it can do so only at its own peril. ‘Really existing capitalism’ depends on its being embedded in two kinds of non-capitalist social orders which it nevertheless permanently erodes: remnants of cultural traditionalism that are being undermined by institutionalized cynicism, and modern institutions of social regulation and reconstruction created by political countermovements against the marketization of society. In both cases, although capitalism ‘functionally requires’ some sort of non- and even anti-capitalist institutional containment, it must be kept in it by actors motivated by objectives other than the capitalist desire for maximization of material utility. This, in a nutshell, is the most general formulation of what used to be called the basic contradiction of capitalism. There are many interesting permutations to that contradiction as it appears today. For example, it is true that capitalists need to build cooperative alliances with other social groups in order to pursue their projects, and it is also true that social skills are as indispensable for capitalist entrepreneurs as technological or economic skills, today perhaps more than ever.30 Alliances, of course, require institutions that give a modicum of reassurance to those whose cooperation is being sought. But the problem is that those institutions are as exposed as any other to the corrosive effects of cynicism and competition and to the ever-present temptation to shift opportunistically into endgame mode and break away for maximum gain. Any alliance or leadership under capitalist auspices will therefore be inevitably fragile, and coordination will be precarious and fraught with suspicion, the reason being that a social order that can be constructed on capitalist terms—i.e. on the Mandevillean premise of general benefit deriving from private vice—can only be a rational order, i.e. one based on coinciding interests. However, as already Durkheim knew, and clearly Weber knew as well, an order of this kind is inevitably unstable, since interests can easily and unpredictably change at any time, especially in rapidly fluctuating self-regulating markets.31 The offshoot is that building the alliances necessary for an advanced industrial society to fully use its productive potential cannot be left to capitalist actors, or for that matter to actors with a capitalist mindset. Capitalist self-interest, not to speak of capitalist prudence, is simply not enough to keep a society

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32 33

Beyond Good and Evil; the title of one of Friedrich Nietzsche’s more provocative books.

‘To-day the spirit of religious asceticism . . . has escaped from the [iron] cage [of the modern economy]. But victorious capitalism, since it rests on mechanical foundations, needs its support no longer . . . In the field of its highest development, in the United States, the pursuit of wealth, stripped of its religious and ethical meaning [after the dissolution of worldly asceticism into pure utilitarianism], tends to become associated with purely mundane passions, which often actually give it the character of sport . . .’ (Weber, 1984 [1904/1905], pp. 181 –182).

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together and viable, even and precisely a capitalist one. In fact, capitalists cannot but strive to eliminate any remaining non-capitalist opposition, even though this would leave nothing to prevent them from consuming the essential social preconditions of their own continued profit-making. In this paper, I have paid particular attention to what sort of micro-foundation an institutionalist approach to capitalism might require. In this context I have identified ‘typical’ actor dispositions in a capitalist social order, not as an empirical central tendency in observed attitudes or actions, but as a stylized description of the habitus the institutions of a capitalist political economy—centered as they are around competitive markets and their Mandevillean promise of a blind commutation of private egoism into public interests—must be prepared to encounter among their constituents. While I have referred to a ‘spirit’ which guides actors under contemporary capitalism as they characteristically interact with the institutions that are supposed to regulate their behaviour, unlike Weber’s ‘Protestant spirit’ or the ‘new spirit of capitalism’ described by Boltanski and Chiapello (2005), my concept does not necessarily or primarily mean a particular historical – cultural mentality. Instead, it tries ideal-typically to reconstruct a social character that the institutions of contemporary capitalism expect and thereby propagate as natural, in the sense of indispensible for individual survival, and legitimate in the sense of Jenseits von Gut und Bo¨se. 32 Like theories of rational choice—or, for example, of the ‘survival of the fittest’—such institutionalized expectations, no matter how amoral and non-normative they may present themselves as being, function like moral rhetoric in practice, in that they offer those they address reasons for why a particular code of behaviour is (their) right—in the case of institutionalized cynicism, a code that ideally fits the conditions in the ‘iron cage’ of established capitalism in its post-Protestant period.33 In this sense, institutionalized expectations do have strong ‘performative’ effects. Are we not simply speaking of neo-liberal capitalism, and not of capitalism as such? Only of capitalism now, not of capitalism in the past? What about the domesticated capitalism of the post-war era: Was this not capitalism as well? Where are the self-correcting and stabilizing mechanisms of post-war society and economy that were at the centre of theories of ‘organized’ capitalism and neo-corporatism? Cannot ‘good governance’ also be part of capitalism? Rather than defining them

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Acknowledgements A first draft of this paper was written in the fall of 2009 when the author was a visiting scholar at the Russell Sage Foundation in New York. Thanks are due to Fred Block, Christoph Deutschmann, Renate Mayntz and Claus Offe for helpful comments. Of course, I am solely responsible for any remaining deficiencies, in both design and execution.

References Balleisen, E. and McKenna, C. (2009) White Collar Crime and Fraud in Historical Perspective, unpubslished manuscript.

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into it, I suggest that, following Polanyi, we treat the various institutional containments that have, over time, been invented for the capitalist political economy as additions to it that must be devised and maintained against its resistance: They do not actually come with the package but must be added to it in political struggles, and they fit into it only precariously and for a time until they are worn out by ever new, untiring attempts to push them aside. The post-war regime of ‘embedded liberalism’ may have looked for a while as though it had been and was to be there forever, especially for the generation that came of age only in the 1950s and 1960s. Now, after several decades of accelerated liberalization, financialization and commodification, it should be clear that this was no more than an illusion. With the benefit of hindsight we may today want to return to a more traditional concept of capitalism, one in which two fundamental motives of human action, greed and fear, loom large (Bohle and Greskovits, 2009). In a perspective like this, which allows us to distinguish between capitalism proper and its social containment, we can understand the past two or three decades as a period in which a wide range of institutions installed to protect society from the ‘vagaries of the market’ underwent more or less continuous erosion. In the process, capitalism became ‘unleashed’ (Glyn, 2006): As it extricated itself from the social-democratic regime imposed on it after 1945 (Streeck, 2009b, pp. 190–197, 231–236), it became more like itself, revealing in the course of its development its ‘true nature’, or its ‘essence’. Internationalization, of course, helped, as it provided an ideal opportunity to get out from under a post-war institutional regime that was heavily dependent on the nation-state. In the neo-liberal era, which was also one of ‘globalization’, capitalism became progressively more capitalist as its inherent tendency of development unfolded—its drive to break out of the social–institutional arrangements that both contain and sustain it—posing new and historically unique challenges for a politics of social reconstruction that is condemned to be always caught off guard by the cunning restlessness it is supposed to keep under control.

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Briefs, G. (1957) ‘Grenzmoral in der pluralistischen Gesellschaft’. In Beckerath, E.v., Meyer, F. and Mu¨ller-Armack, A. (eds) Wirtschaftsfragen der freien Welt. Zum 60. Geburtstag von Bundeswirtschaftsminister Ludwig Erhard, Frankfurt am Main, Knapp. Briefs, G. (1983) ‘Marginal Ethics in the Pluralistic Society’, Review of Social Economy, 41, 259 –270. Caporaso, J. and Tarrow, S. (2009) ‘Polanyi in Brussels: European Institutions and the Embedding of Markets in Society’, International Organization, 63, 593–620. Citigroup Research (2005) Plutonomy: Buying Luxury, Explaining Global Imbalances, Citigroup Industry Note, October 16, 2005. Citigroup Research (2006) Revisiting Plutonomy: The Rich Getting Richer, Citigroup Industry Note, March 5, 2006. Commons, J. R. (1924) Legal Foundations of Capitalism, New York, NY, Macmillan. Deutschmann, C. (2001) Die Verheißung des absoluten Reichtums: Zur religio¨sen Natur des Kapitalismus, Frankfurt am Main, Campus. Durkheim, E. (1964 [1893]) The Division of Labor in Society, New York, NY, The Free Press. Durkheim, E. (1966 [1897]) Suicide: A Study in Sociology, New York, NY, The Free Press. Etzioni, A. (1988) The Moral Dimension: Toward a New Economics, New York, NY, The Free Press. Freeman, R. (2011) ‘New Roles for Unions and Collective Bargaining Post the Implosion of Wall Street Capitalism’. In Hayter, S. (ed) The Role of Collective Bargaining in a Global Economy: Negotiating for Social Justice, London, International Labour Organization (ILO) and Edward Elgar. Friedman, M. (1983 [1973]) ‘The Social Responsibility of Business Is to Increase Its Profits’. In Snoeyenbos, M. H., Almeda, R. and Humber, J. (eds) Business Ethics: Corporate Values and Society, New York, NY, Prometheus Books, pp. 72–78. Giddens, A. (1984) The Constitution of Society, Cambridge, Polity Press. Glyn, A. (2006) Capitalism Unleashed: Finance Globalization and Welfare, Oxford, Oxford University Press. Goldscheid, R. (1976 [1917]) ‘Finanzwissenschaft und Soziologie’. In Hickel, R. (ed) Die ¨ konomie der Staatsfinanzen, FrankFinanzkrise des Steuerstaats. Beitra¨ge zur politischen O furt am Main, Campus, pp. 317 –328.

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Hochschild, A. R. (2003) The Commercialization of Intimate Life: Notes from Home and Work, Berkeley and Los Angeles, University of California Press. Ingham, G. (2008) Capitalism, Oxford, Polity. Joas, H. (2005) The Creativity of Action, Cambridge, Polity Press. Krasner, S. D. (1988) ‘Sovereignty: An Institutional Perspective’, Comparative Political Studies, 21, 66 –94. Lash, S. and Urry, J. (1987) The End of Organized Capitalism, Oxford, Polity Press. Luxemburg, R. (1913) Die Akkumulation des Kapitals: Ein Beitrag zur o¨konomischen Erkla¨rung des Imperialismus, Berlin, Buchhandlung Vorwa¨rts Paul Singer GmbH. Mandeville, B. (1988 [1714]) The Fable of The Bees: or, Private Vices, Publick Benefits, Indianapolis, IN, Liberty Fund. Marshall, T. H. (1965 [1949]) ‘Citizenship and Social Class’. In Marshall, T. H. (ed) Class, Citizenship and Social Development: Essays by T. H. Marshall, Garden City, NJ, Anchor Books, pp. 71 –134. Marx, K. and Engels, F. (1972 [1848]) ‘Manifest der Kommunistischen Partei’. In Marx, K. and Engels, F. (eds) Werke, Bd. 4, Berlin, Dietz, pp. 459–493. Mayntz, R. and Scharpf, F. W. (1995) ‘Der Ansatz des akteurzentrierten Institutionalismus’. In Mayntz, R. and Scharpf, F. W. (eds) Gesellschaftliche Selbstregulierung und politische Steuerung, Frankfurt am Main, Campus, pp. 39 –72. McMurtry, J. (1999) The Cancer Stage of Capitalism, London, Pluto. Offe, C. (1985) Disorganized Capitalism: Contemporary Transformations of Work and Politics, Cambridge, MA, The MIT Press. Offe, C. and Wiesenthal, H. (1980) ‘Two Logics of Collective Action: Theoretical Notes on Social Class and Organizational Form’. In Zeitlin, M. (ed) Political Power and Social Theory, Greenwich, CT, JAI Press, pp. 67 –115. Peck, J. and Theodore, N. (2007) ‘Variegated capitalism’, Progress in Human Geography, 31, 731 –772. Pierson, P. (2000) ‘Increasing Returns, Path Dependence, and the Study of Politics’, American Political Science Review, 94, 251 –268.

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Sewell, W. H., Jr. (2008) ‘The Temporalities of Capitalism’, Socio-Economic Review, 6, 517–537. Smith, A. (1979 [1759]) The Theory of Moral Sentiments, Oxford, Clarendon Press. Smith, A. (1993 [1776]) An Inquiry into the Nature and Causes of the Wealth of Nations, Oxford and New York, Oxford University Press. Spencer, H. (2003 [1882]) The Principles of Sociology. In Three Volumes. With a new introduction by Jonathan H. Turner, New Brunswick and London, Transaction Publishers. Streeck, W. (2009a) Flexible Employment, Flexible Families, and the Socialization of Reproduction, MPIfG Discussion Paper 09/13, Cologne, Max Planck Institute for the Study of Societies. Streeck, W. (2009b) Re-Forming Capitalism: Institutional Change in the German Political Economy, Oxford, Oxford University Press. Streeck, W. (2010) ‘Institutions in History: Bringing Capitalism Back In’. In Campbell, J., Crouch, C., Kristensen, P. H., Morgan, G., Pedersen, O. K. and Whitley, R. (eds) Handbook of Comparative Institutional Analysis, Oxford, Oxford University Press, pp. 659–686. Streeck, W. and Thelen, K. (eds) (2005a) Beyond Continuity: Institutional Change in Advanced Political Economies, Oxford, Oxford University Press. Streeck, W. and Thelen, K. (2005b) ‘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. Thelen, K. (1999) ‘Historical Institutionalism in Comparative Politics’, Annual Review of Political Science, 2, 369 – 404. Thelen, K. (2002) ‘How Institutions Evolve: Insights from Comparative-Historical Analysis’. In Mahoney, J. and Rueschemeyer, D. (eds) Comparative Historical Analysis in the Social Sciences, Cambridge, Cambridge University Press, pp. 208–240. Weber, M. (1984 [1904/1905]) The Protestant Ethic and the Spirit of Capitalism. Translated by Talcott Parsons. Introduction by Anthony Giddens, London, Unwin Paperbacks. Williamson, O. (1975) Markets and Hierarchies: Analysis and Antitrust Implications, New York, NY, The Free Press. Williamson, O. (1985) The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, New York, NY, Free Press.

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Socio-Economic Review (2011) 9, 169–186 Advance Access publication September 1, 2010

doi:10.1093/ser/mwq020

REVIEW ESSAY

Arndt Sorge Social Science Research Centre Berlin and University of Potsdam, Germany; University of Groningen, The Netherlands Correspondence: [email protected]

Cassidy J. (2009) How Markets Fail. The Logic of Economic Calamities, New York, NY, Farrar, Straus and Giroux Posner R. A. (2009) A Failure of Capitalism. The Crisis of ‘08 and the Descent into Depression. Cambridge, MA, Harvard University Press Reinhart C. M. and Rogoff K. S. (2009) This Time Is Different. Eight Centuries of Financial Folly. Princeton, NJ, Princeton University Press Sorkin A. R. (2009) Too Big To Fail. The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves, New York, NY, Viking Keywords: financial crisis, financial institutions, financial markets, capitalism, globalization JEL classification: E44 financial markets and the macroeconomy, F3 international finance, G01 financial crises

Three of the four books selected for this review article have ‘failure’ or ‘fail’ in the tile; the only one that does not cites a slogan that was invariably used to explain away imminent failure: ‘This time is different’. All four monographs are outstanding and meticulous accounts of the background, origin, process and attempts to control or alleviate, the 2007+ world financial and economic crisis, whereas Reinhart and Rogoff deal with its predecessors. These crises are associated with failure of markets, capitalism, governments, more specific institutions, and economic doctrines. Nothing appears to be fail-safe any more. The books are not mainly scholarly, except for that of Reinhart and Rogoff. But they are conceptually well informed and grounded. The authors were, rightly, too overwhelmed by what was going on to launch themselves into a streamlined and theoretically coherent attempt to explain the crisis with a particular theory. The crisis constituted a thundering refutation of main currents of economic thinking. All the authors, with the # The Author 2010. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected]

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exception of Sorkin, therefore also confront the dramatic stream of events with theories that have been dominant. One attraction of the books is the ‘muckraking’, i.e. informing a surprised and curious audience of a world that is close by but previously hidden or camouflaged by taboo or social demarcation, exposing scandalous, irritating or strangely unfamiliar empirical phenomena. This world of failures is what we have to come to grips with. Yet, it will take some time before we have conceptually organized what happened in a sound and reliable fashion. This is not the place to try to fault or criticize the books on facts. It would be difficult to find more reliable sources. Instead, I derive important lessons that these factually detailed accounts present for socioeconomic theory. I will first discuss the main contribution every book makes on its own, gradually building up the empirical and explanatory picture arising from all of them together. Sorkin provides the most journalistic and least theoretical contribution, covering the history of the bankruptcies, take-overs or mergers of the major US investment banks plus AIG, the insurance company, and Freddie Mac and Fanny Mae, the public mortgage credit guarantors and processors, in 2007 and 2008. Cassidy has a theoretically and historically grounded explanation of interrelated market and economic doctrine failure, which interweaves the socio-historical setting of doctrines and theorists with a detailed account of crisis, notably the most recent one. Posner offers a concise and precise account of the origins, process and attempts to manage the crisis, also referring a great deal to theory although not in an economically specialized way. Reinhart and Rogoff’s work is an impressive comparative analysis of economic and governmental financial crises across centuries. By following this sequence of discussion, we therefore move from concrete and historically more narrowly circumscribed events, to a more conceptual, scholarly and wide-ranging treatment. The authors come from a variety of backgrounds: Sorkin is a journalist with the New York Times who has covered Wall Street and financial firms and markets over the years; Cassidy is well educated in economic theory and has been a journalist with the New Yorker for many years; Posner is a federal appeal court judge in the USA and also an academic. He is economically well versed and one of the founders of ‘law and economics’ theories; Reinhart and Rogoff are economic researchers of great reputation, Reinhart mainly in international economics and public finance and Rogoff in macroeconomics. All these credentials are impeccable although in different ways, and all the authors combine hard-nosed fact-finding with a theoretical interest or grounding. Sorkin’s investigative account relies on ‘five hundred hours of interviews with more than two hundred individuals who participated directly in the events surrounding the financial crisis’ (p. xi). This reads like a detective story, full of scenic and circumstantial details. It also reveals the language of the higher worlds of finance to be the same as that of the Nixon White House or New York police precincts as depicted in American films. I hesitate to doubt

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the authenticity of the language reported. It is remarkable that in the memory of people, it is not the niceties of business and economic analysis that stands out, but rather crudely stylized typifications of firms, people and situations. The book lends itself to the scenario for a TV film series that might be called Wall Street Confidential. The book clearly has one central person: Henry Paulson, former executive of Goldman Sachs and subsequently Secretary of the Treasury under President George W. Bush. Attempts to rescue firms were coordinated or instigated by him, he launched the Troubled Assets Relief Program and engineered it to be rammed through a baffled and recalcitrant Congress in the most impressive, though democratically questionable, manner (pp. 488 – 489, 499 – 500), in close contact with Timothy Geithner, then at the Federal Reserve Bank of New York and now Paulson’s successor under President Obama. He also secured the necessary liaison with, or domination over, other governmental agencies and departments including the Federal Reserve Board and its chairman Ben Bernanke. Paulson was at the centre of everything. He left his mark in the background of the crisis, in the build-up of American foreign debt in China and in securing that flank during the crisis. He was previously a representative of Goldman Sachs in China (pp. 39, 212, 445, 470), not just an investment banker turned government minister who aimed at securing the interests of business and finance, but apparently also serving the interests of the US government when working for Goldman Sachs. Paulson and Goldman Sachs executed a central public – private role in foreign public finance, helping to sell government securities to counterbalance the build-up of a gigantic current account and balance of payments deficit. In the roles of Paulson, private and public responsibilities were very intimately intertwined. In the meantime, the focus has apparently increasingly shifted to securing American foreign debt abroad. As ‘troubled assets’ have been nationalized, the financial burden has moved from the private to the public domain, so that the economic viability of the nation has become even more of a public foreign policy responsibility. While Paulson’s work and visits in China were visible but not conspicuous, nowadays newsreaders and TV watchers can plainly see that when Hilary Clinton, the Secretary of State, pays a visit to China, she is prominently accompanied by Timothy Geithner, the successor to Paulson as Secretary of the Treasury. This exhibits continuity and the increasing centrality of this policy line. We also learn that Paulson was aware of the problems (p. 49): already in August 2006, he warned the President ‘that the economy was overdue for a crisis’, in view of ‘dry tinder’ in the form of risky securities and financial papers in the system, ‘the subprime securities mess’, was waiting to go up in flames. Cassidy similarly mentions other early warning signals from down-to-earth practitioners, in banks and the real estate business. Thus, there

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were plenty of warning signals. But Paulson was not someone to come out in open protest; he did what was conceivable under the political and ideological circumstances of the moment. The controlling political authorities were ignorant over the origins of the crisis, which comes out of the following passage relating to the events after the collapse of Lehman, when other investment banks including Goldman Sachs were patently threatened and protracted negotiations about their take-over or mergers with other banks were under way (p. 440):

Bush was struggling to wrap his mind around the precise course of events. ‘How’, he questioned, ‘did we get here?’ Paulson disregarded the question, knowing that the answer would be way too long and lay in a heady mix of nearly a decade of overly lax regulation—some of which he had pushed for himself—overzealous bankers, and home owners living beyond their means. Instead he pressed ahead and told the president that he planned to seek at least $500 billion from Congress to buy toxic assets, explaining that he hoped the program would stabilize the system. In other words, the President did not understand what had happened, and there appeared to be no point in explaining it to him; some members of the financial elite, however, did appreciate the causes and had also come to see that they had themselves helped to engineer the biggest economic crisis since 1929. The seeds of disaster had been planted years earlier with such measures as the deregulation of the banks in the late 1990s; the push to increase home ownership, which encouraged lax mortgage standards; historically low interest rates, which created a liquidity bubble; and the system of Wall Street compensation that rewarded short-term risktaking. They all came together to create the perfect storm (p. 534). They were now taking measures to control the damage; the rationale of which still was beyond the comprehension of political authorities. This also comes out of the political reactions in Congress that have been a mixture of dim awareness and ideology (pp. 499– 500). The ideology was an unbridled and unfounded faith in the continued appreciation of the values of all manner of assets, notably real estate property and the derivatives derived from mortgage obligations, given that this was supposed to be in line with ‘economic fundamentals’. On top of increasing public debt, there was excessive mortgage debt on real estate, and

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Paulson told Bush in no uncertain terms that the financial system was collapsing. ‘If we don’t act boldly, Mr. President’, he said, ‘we could be in a depression deeper than the Great Depression’, an assessment with which Bernanke concurred.

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While Keynes, characteristically, overstated his case, there can be no argument that, in this instance, the application of misguided ideas was largely responsible for setting the US economy on its disastrous trajectory. Individual homeowners, mortgage lenders and bankers reacted to the immediate financial incentives they faced, but the macroeconomic and regulatory framework in which they were operating

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highly leveraged investments that weighed down the gross domestic product, and the riskiness of this tendency was aggravated by banks’ deficiencies in equity and other core capital. Some authors, notably Posner, draw on the attack on Pearl Harbor to characterize the outbreak of the crisis. However, the metaphor is entirely misplaced. This attack did not come from the outside, it was engineered by what might be called the ‘enemy within’, and on top of that, the enemy within was an all-party coalition working towards excessive indebtedness on all fronts, reassured by a dominant economic ideology. The outside, in the form of sovereign wealth funds and central banks, particularly in China, is a culprit only to the extent that it bought into the ideology and supported the US indebtedness. This circle of supporters of the US financial capitalism thus includes such unlikely bedfellows as the Communist government of China and German publicly owned Landesbanken that avidly bought the debt obligations that later turned sour. In this cataclysm of developments, the anti-hero of Sorkin’s book is Richard Fuld, former CEO of Lehman, the only investment bank among the big ones that vanished completely after not having been taken over by someone else. Fuld, once a populist hero in the bank from the trading ‘front’, went down with his firm without understanding why, as did other ‘suckers’ who got involved with financial instruments they did not understand, such as European public or ‘normal’ banks. In this way the financial crisis spread around the world. The book by Cassidy is best in analysing the links between opportunistic economic action and the development of institutions on the one hand, and between them and ideologies and, to some extent, the personalities of their perpetrators on the other. Cassidy calls economic ideologies ‘utopian economics’, influenced more by an idealized picture of the world than realistic empirical results. But, implicitly, Cassidy’s main point is that an all-encompassing economic theory resting on a very parsimonious set of noncontradictory assumptions is impossible. Economic researchers generally understand that in their gut, even if they do not admit it. However, and this is the link between public or private economic actors and public policies, that the former tend to cherish stylized and simplified views of the world that purport to fit everything in a nutshell. Even people with a great amount of practical experience such as Alan Greenspan are guilty of this. He is another tragic anti-hero whose demise is covered by Cassidy in the opening to his book. Probably its best summarizing passage is this:

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reflected more than twenty years of free market idolatry. Between the collapse of communism and the outbreak of the subprime crisis, an understandable and justified respect for market forces mutated into a rigid and unquestioning devotion to a particular, and blatantly unrealistic, adaptation of Adam Smith’s invisible hand (p. 337).

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But communism did not collapse in China, whose government has proved to be the most important stabilizer of the ‘disastrous trajectory’; China bought US bonds, securities and dollars in return for having a large export market and a stable exchange rate against the dollar. A communist government holds the controlling share in financialism and shareholder value capitalism. One wonders if the future will show this to be a clever plot, true generosity, or a fatal mistake for capitalism and communism alike. My hunch is that for both the Chinese and the American governments, it is power and growth over the short term that counts. The book by Posner certainly exhibits an obsession with power, which leads him to a more favourable view of Keynes because it fits what are conceived to be the political and economic expediencies of the time. Let us come back to that later. Cassidy nicely interweaves his attention to the personal histories and characteristics of politicians and scholars, with the underlying forces of the economy and society. Marx, whom he refers to (p. 336), would have been happy with this creative application of his approach, which sees political action as intent on matching productive relations, i.e. socioeconomic institutions, with the productive forces that are manifest or latent. If the piecemeal political process cannot guarantee this match, then crises will lead to something more revolutionary. However, ‘securitization and the rise of the stock market’, plus other elements of financialism and shareholder value capitalism, were not quite a revolution in an Anglo-American context but piecemeal evolution. They did not simply respond to universal problems in capitalism or the world economy but specific institutional and economic problems. These were the legacies of empire-building and maintaining a fixed-value reserve currency in the empire or quasi-empire, which were older in Britain but recent and acute in the USA. Another legacy allied to this ‘crucification of industry on the altar of the value of the currency’, as it was called by some in Britain, was what Hayes and Abernathy in the US called ‘managing our way to economic decline’, i.e. business, human resource and organizational strategies leading to losses in international competitiveness. Marx would have said that the productive forces were being exhausted. However, the Reaganite and Thatcherite ‘revolutions’ that came from above, and which were to some extent already set in motion by Carter in the US and maintained later by Blair in the UK, did not lead away from capitalism but constituted its intensification, even if capitalism was also instrumentalized to help

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One of the first people to point this [uneconomical giganticism—AS] out was W. Brian Arthur . . . . Back in the mid-1980s, Arthur, who was then at Stanford, presented a paper at Harvard in which he argued that chance events and network effects can enable inferior technologies to beat out superior products and take over entire markets. A Harvard economist, Richard Zeckhauser, stood up afterwards and said, ‘If your are right, capitalism can’t work’. A few months later, Arthur presented the same paper in Moscow, where an eminent Russian economist said, ‘Your argument cannot be true!’ (p. 130) Cassidy (p. 131) then goes on to relate that the argument found surprising resonance in Silicon Valley, quoting Arthur: ‘People I talked to there just nodded wisely, grinned, and said, “This is how we see it, too, but we’ve never seen it written down and formalized”’. Are network effects and externalities, if translated into monopolies by public – private collusion or opportunistic management of property rights, also responsible for a crisis of capitalism? A cautious statement may be in order: the focus of the US economy on its export performance, where this is noteworthy and sustained rather than deficient, which it increasingly has become, emphasizes the mentioned ‘high technology’ and defence industries, where ‘the market’ is fairly restricted, difficult to contest and governed by emerging monopolies or public – private collusion. In my reading, the corollary of very open financial markets governed by short-termism is an industrial structure divided into a large number of mundane products and firms subject to severe competition, which are internationally uncompetitive, on the one hand, and more monopolistic large firms that are prominent but do not constitute the export performance success required to counterbalance increasingly massive imports, on the other. In this way, industrial structure and organization appear very much related to why financial capitalism became stronger and dominant in the USA: it is the most obvious way out of a competitiveness problem and it tallies with dominant institutions of liberal capitalism; it was related to the position of

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out the welfare state via taxation. The intensification of capitalism was conceived to rescue it. It did work, for a while, or approximately two decades. The economists that fare well in Cassidy’s account are: Robert Shiller, who had described and analyzed unrealistic appreciation of real estate asset values; Nouriel Roubini, who had foreseen a financial bubble inflating up to bursting point; and Hyman Minsky, who had provided an analysis of successive crises arising from the mechanics of financial markets. Consider also this discussion of ‘giganticism’ as a ‘basic fact of economic life’ and of the endemic monopoly power in the hightechnology sector:

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the dollar as a stable reserve currency, but after the introduction of flexible exchange rates it continued to grow; it was related to the better general institutionalization of capital generation rather than human resource generation and organization of work processes. The latter has been criticized many times without having had any decisive effect. Faced with a competitiveness and growth problem after the collapse of Bretton Woods and the oil shocks, the USA went for the whole hog and pressed for even more financial capitalism than was already in abundance, rather than going for generally institutionalized human resource development and flexibly innovative producers in industrial networks; it championed an intensification of labour at low wages, the ‘overworked American’ described and deplored by Juliet Schor and others; and it shifted production activities abroad by outsourcing. That did not solve the foreign exchange problems at all, but it was productivityenhancing and compatible with a political rhetoric extolling free markets and shareholder value as ultimately solving all the problems an economy may face, and was reconcilable with running into deep debt. This industrial side of the story is too often neglected in the books; writers apparently have difficulties relating financial capitalism to the deficiencies it was conceived to address. This is one major criticism of most of the books reviewed: they are not very aware of the world of normal work and America’s industrial problems beyond Wall Street, banks, financial instruments and statements. To that extent, they often fail to realize that what in economics are usually treated as technical constraints, are in business language unexplored business and engineering opportunities, neglected because of a lack of ordinary skills and cooperativeness, and through fascination with individualistic competition. America’s structural problems and a major part of its institutional bedrock thus help us to understand why financialism developed in the catastrophic way it did; for the USA, it was a useful expedient in which it could even claim to influence the rest of the world and export its financial institutions, claiming to solve the world’s problems. In reality, it was above all addressing its own deficiencies and—Cassidy rightly insists very much on the interaction of real world problems with political and scholarly rhetoric—promoted the economic concepts that fitted, starting from the neoliberal school, passing through rational expectationbased macroeconomics (Robert Lucas and others) and a great deal of agency theories and financial economics. Cassidly vividly describes that when a prizewinning and brilliant hopeful of the financial economics profession, Raghuram G. Rajan, dissented and pointed out the cyclical, risk and bubble-inducing character of financial markets, how he was demolished by economic theorists and the Federal Reserve in unison, including that great student of the Great Depression, Ben Bernanke (pp. 22 – 23). Reinhart and Rogoff point out that scholars and politicians fool themselves into believing that ‘this time is different’ because a theory

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says that the bubble is not a bubble but in line with ‘economic fundamentals’, in other words it reflects sustainable value. The dominant doctrine was that free and open markets had a self-correcting function superior to all other regulatory involvement of authorities and governments, these markets would do a better job of matching demand and supply, and of working towards a welfare optimum. Such neoliberal theories had a point in their criticism of the war economy, post and cold war monopolies and command structures that were heavy-handed, rigid and suboptimal. Cassidy is very balanced indeed, showing that any economic theory had a point related to problems at a certain time in a certain place, but that none should be taken as absolute truth. That is the point when they become what he calls utopian economics, embracing any theory which has restricted assumptions and, through debate in the profession, is singled out as dominant and fundamental. In Cassidy’s view, economists thus have a lot to answer for, notably leading macroeconomists, financial economists and market theorists, by supplying an ideology that led financiers, industrialists, the Federal Reserve Board and politicians up the garden path and straight into bubbles and crises. In part two and in the conclusions, Cassidy extols ‘reality-based economics’, which is a mixed bag of the theory of games, hidden information theory and behavioural decision theory. It is incontestable that the crises discussed do have to be explained by herd behaviour, distortion of information, ‘irrational’ behaviour and the animal spirits that Keynes had already highlighted. I would contend that the aim should not be to have another distinct brand of theory that again claims ultimate realism. Much of what passes as behavioural economics rests on experiments with people picked from the street or college students. The real economy, however, is made up not only of anonymous but also situated actors that have learned to absorb, heed and develop very specific institutions: company rules of the game, social norms in personal networks, industrial standards, tricks of the trade and all sorts of momentarily useful but functionally ambiguous norms. There is no general theory possible for explaining how this world works, and the least credible way of exploring it is by submitting college students to experiments. Behavioural economics thus also has its Achilles heel of deficient realism. To that extent, within the wider field of economics, straight econometrics confined to specific areas of applicability and straight industrial economics imbued with interdisciplinary orientations still have an important role. But I gladly join Cassidy in arguing against the utopian understanding of theory as having to be parsimonious in its assumptions, universalistic and decontextualized at the same time, and thereby free of contradictions and relieved from the necessity to build bridges into other academic fields. This is indeed the common denominator of all the conceptual and policy failures discussed by Cassidy. One might say that economists have tried to imitate physicists, while for the

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The costs of the present depression may include a swing to excessive regulation, a politically as well as economically unhealthy dependence of business on government largesse . . . , a huge loss of economic output, an immense increase in the national debt, a high inflation rate, a decline in US world economic power, a weakening of the

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realism of theory and research and for addressing real problems, they should have imitated heating and air conditioning engineers, tinkering on the basis of knowledge from different fields including architecture and civil engineering, meteorology, combustion technology, sensors and thermodynamics, amongst others. Maybe economics would not be ‘dismal’ if it could dispense with the Nobel Prize and the formally very elaborate contraptions that have been used to goad or browbeat other approaches and the general public into respect and submission. Posner writes about ‘a’ failure of capitalism, meaning that it has failed at a certain time but that this is not a generic failure. This author is an avowed conservative, who analyzes in great detail how capitalism failed. His criticism overlaps with what ‘liberals’ (according to the American political notion of the term) would say: blame rests with a lack in oversight (by the Securities and Exchange Commission that could not even detect plain and simple fraud such as in the case of Madoff); overgenerous creation of credit, notably mortgage credit; lack of regulation or excessive tolerance of dubious and risky assets; misleading incentives in banks and other firms that promoted the accumulation of risk rather than its control, among other deficiencies. But Posner is quite clear on one thing: there is no point in accusing managers of greed when the rules of the game and low central bank interest rates reward it. In his view, rational managers motivated by greed are the norm in capitalism, and this may turn out to either be constructive or destructive. Whether they are one way or the other is a question of incentives and regulatory frameworks. So, in the classical tradition going back to Adam Smith, capitalism should be constructed in a way to harness greed to serve the public welfare. At that point, Posner of course argues differently from many ‘liberals’. But one might be inclined to mention other conservative positions, found not only in Europe, that see entrepreneurial and managerial action as not single-mindedly focussed on profit outcomes but that also stress the social responsibility of managers and entrepreneurs due to the public consequences of economic action. Still, Posner is concerned with a sustainable sort of capitalism, one in which what is welfare-enhancing at one moment may not turn out to be destructive of welfare when a crisis strikes. The question is how he reconciles his political aspirations and his recent insights. The keynote diagnosis of the book is dramatic (p. 116):

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nation’s geopolitical power as the country turns inward to address its economic problems, and increased political instability in many parts of the world. It may turn out that if the asset-price bubbles of the last decade are subtracted from measures of economic growth, the US economy may be adjudged to have been stagnant—that rather than being productive during this period, Americans were living on borrowed money.

The depression is a failure of capitalism, or more precisely of a certain kind of capitalism (‘laissez-faire’ in a loose sense, ‘American’ versus ‘European’ capitalism in a popular sense), and of capitalism’s biggest boosters. One could hardly put it more strongly than that. Posner could have pointed out that national bubbles and crises had also been produced under the ‘Rhineland’ capitalism cherished by Michel Albert. Indeed, the evidence is that coordinated market economies can manoeuvre themselves into bubbles and severe crisis in a way that is not less spectacular. Posner chose not to use this evidence. He is generally overwhelmed with the failure of notably macroeconomic theory and neoliberal policy design, clearly because these are closer to his own convictions. In this, his account is very honest and truthful, and this makes the book a very good read. He takes the economics profession to task for being ‘asleep at the switch’ (pp. 252 – 253), and he is refreshingly impartial in blaming policy-makers and policy measures (pp. 270 – 271): The seeds of failure were sown in the movement to reduce the regulation of banking and credit, which began in the 1970s. They germinated during the Clinton Administration, when the housing bubble began and the deregulation of banking culminated in the repeal of the Glass-Steagall Act (which had separated commercial from investment banking) and it was decided not to bring the new financial

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This passage reflects a fundamental ambivalence: the worst thing about the recession or depression may be, next to annihilating the growth and dynamism experienced in the recent past, that it brings out the worst, namely excessive regulation, dependence on governments, and a reduction of American world power. On the other hand, Posner criticizes regulatory failures and does admit that some Keynesian macroeconomic policy appeared to be inevitable to stave off a recession much fiercer than the one that did take place. He also admits that next to the classical and liberal tradition in economics, Keynesian approaches do have a point which may be difficult to reconcile with those traditions, but which is instrumentally required to combat recession. On the one hand, Posner is as crystal clear as some liberal (again in the American political sense) opponents (p. 260):

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instruments, in particular credit-default swaps, under regulation even to the limited extent of moving trading in swaps to exchanges, which would have given the public information about the scope, risks, and value of the instruments. Greenspan, Rubin, and Summers, the dominant figures in US economic policy during the Clinton era, allowed the head of steam to build up that would eventually blow the housing and banking industries sky-high.

[W]hen the crash came, in mid-September, the government moved with alacrity to save the major financial firms. But besides having waited too long to intervene in the deteriorating finance market, it decided to allow Lehman Brothers to slip into bankruptcy—a decision, yet to be explained, that looms as the single biggest blunder to date in response to the gathering storm. Sorkin, however, is very specific on Lehman, and from his account emerges the fact that the Administration did try hard to arrange a take-over of Lehman, but a number of attempts failed, notably one to arrange a take-over by Barclays, a British bank. We also learn that ‘Jean-Claude Trichet, president of the European Central Bank, had been furious with them [the Federal Reserve Board – AS] for their decision “to let Lehman fail” and was lobbying Bernanke to go to Congress to implement a large government bail-out for the entire industry, to restore confidence’ (p. 413). Curiously, important conservatives and technocrats did believe that a general bailout guarantee would have worked to prevent a catastrophe. Given a colossal depreciation or loss of value of assets and the massive asset inflation that had taken place and was now exposed to be hollow for all to see, were governments supposed to restore world confidence by rescuing one bank, albeit one particularly exposed to problems? What Posner opines and Sorkin reports, to me shows that even those who later criticized the way the catastrophe had been prepared by conjoined errors of different actors over a long time, did not quite appreciate what had happened. They curiously neglect the dispersion

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Although the Bush Administration is credited with reacting swiftly, notably due to the concerted action of Paulson, Bernanke and a few others, Posner also says that ‘President Bush gave the impression, rightly or wrongly, of being AWOL whilst the economy was melting beneath his feet. And his Administration’s responses to the crisis were inept, despite all that had been learned since Hoover’s time about depressions—but perhaps not that much had been learned!’ (pp. 304 – 305). Being AWOL is American military parlance, meaning ‘absent without obtaining leave’, a grave indictment to be directed at a commander-in-chief. Posner clearly speaks with frustration. What then was the biggest blunder of the Administration? Posner is again very explicit (p. 274):

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of troubled assets in the world, the uncontrollable wildfire effect of loss of confidence, and the fundamental problems of selling bailouts for all to a Congress which had been lulled into complacency by the claims about the beneficial workings of free markets unfettered by governmental meddling, where bankruptcy was supposed to be normal and healthy. Other American banks, according to the detailed evidence in Sorkin’s book, avoided Lehman Brothers like the plague, and in the failed take-over by Barclays, we can also see that the British government was cautious about supporting a takeover by Barclays. Note also that the British (then Labour) government, which is credited with a rapid response to the crisis, had a tendency to provide bailouts that Posner, as an American conservative, criticises for their absence under the Bush Administration. In ideology, too, the world seems to have turned upsidedown. This is shown in the concluding chapters of Posner: he proposes very pragmatic policies on the one hand, but is doubtful about most of the measures taken so far; he is unconcerned with problems of democratic decision-making but most concerned with rescuing conservatism from the onslaught of the evil forces that the New Deal had unleashed on America earlier, and with the position of that country in the world. But there is no massive bailout without a massive increase of state debt, or things which were anathema in the past, such as the central bank taking on governmental debt or toxic financial papers. Whatever one does or had done will conflict with principles of conservatism or other doctrines. Conservatives find that they have to raise public debt sky-high, and both anti-big business conservatives and liberals find that they have to support the solvency of banks and large industry. This adds to Posner’s frustration and he cannot show us a conceptually sound way out of the conundrum. Management of the crisis thus rivals with other major historical attempts at establishing state control of the economy. The more tangible financial and material predicaments of the economy were lifted out of private hands and dropped onto the government’s patch: public debt to stimulate the economy and bail out firms, public guarantees to keep bank loans accessible for troubled firms or governments, central banks doing ‘quantitative easing’, Asian central banks and sovereign wealth funds playing a bigger part. All of this has, to some extent, shifted both the problems and the surrounding debate towards the link between private and public financial crises. This is the topic addressed by the fourth book, by Reinhart and Rogoff. It advertises itself as analysing ‘eight centuries of financial folly’ ‘covering sixtysix countries across five continents’—no less! The book is less clinically oriented, and less concerned with the specifics of cases of failure than the others, but is much more concerned with general patterns that emerge from a more standardizing comparative treatment. It nicely complements the other books in putting forward one pivotal finding: before catastrophe

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This strong connection between financial markets and real economic activity, particularly when financial markets cease to function, is what has made so many of the crises we consider in this book such spectacular historic events. Consider, in contrast, the collapse of the tech stock bubble in 2001. Although technology stocks soared and collapsed, the effect on the real economy was only the relatively mild recession of 2001. Bubbles are far more dangerous when they are fuelled by debt, as in the crises of the global housing price explosion in the early 2000s. Surely, the Second Great Contraction—as we term the financial crisis of the late 2000s, which has spread to nearly every region—will have a profound effect on economics, particularly the study of linkages between the financial markets and the real economy. We hope some of the facts laid out in this book will be helpful in framing the problems that the new theories need to explain, not just for the recent crisis but for the multitude of crises that have occurred in the past, not to mention the many that have yet to unfold. One cannot help but concur in general; even though, one should also ask to what extent any new theory, mutating inevitably into doctrine as theories do, will be good at addressing those crises ‘that have yet to unfold’. This recommends caution with reference to any general theory of crises ‘across eight centuries and five continents’. But the authors are very cautious to derive general theory themselves, not venturing far beyond detailed description and instructive typologies. In this manner, their study is one of the most impressive works in the comparison of economies, without neglecting social and political factors, which I have

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strikes, when Cassandras come forward to say it is imminent on the basis of observations and some straightforward theory, the standard response is: This time is different. That gave the book its title. Doctrines about why it is ‘different this time’ change through the ages, and from place to place, but they are always at hand in one way or another. Although it may seem anathema to us at the present time, toying with bankruptcy has been a probate recipe through the ages; it is still endemic in the building industry and governments have not necessarily hedged against it to the extent they proclaim. The bankrupt actor is suddenly relieved of all the financial burdens if bankruptcy is engineered in the right way, and sovereign governments are notoriously adept at this. In the 1860s, an Austro-Hungarian minister of finance said: ‘Now we need to win a war or to have a thorough state bankruptcy’. A central message of the book which puts historical analysis to topical use is this (p. xliv):

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come across. The authors had built a most impressive database to conduct the analysis, and this will certainly be invaluable for consecutive studies. To show the most striking proof in favour of a historical perspective for the analysis of topical events, consider the finding that Greece has been the world leader in years spent in governmental bankruptcy since its partial independence in 1829: the country has been bankrupt half of the time. However, the countries that do not declare bankruptcy may technically be in a similar state, but are bailed out by friendly governments or supranational bodies. A recent example is Iceland, and the phenomenon has a broader tradition in parts of the Third World, notably Africa: Over-indebtedness is built up, becomes unsustainable for creditors and debtors alike, the debt is cancelled by creditor countries, whereupon new debt may be incurred that is as dubious as the previous one, although the International Monetary Fund has politically and bureaucratically ordained ways of judging the debt status of a country. As Reinhart and Rogoff show, the occurrence of crisis and bankruptcy has a great deal to do with the size, political weight and level of economic development of a country. The USA has the same budget deficit as Greece, but is still considered viable by ‘markets’, while Greece has built up that debt over a longer time, is small and less influential and therefore ‘shorted’ by markets and not allowed to roll over debt that comes to maturity, except if propped up by a credible international arrangement. The USA, however, as mentioned above, carries debt held or guaranteed by fellow world powers in their own interest. If Greece is in misery, the effect on world trade and finance is minimal, but if the US dollar is devalued substantially, the world is on fire. The precarious interdependency of the USA and China also points to what might be another looming crisis, this is perfectly compatible with the logic that Reinhart and Rogoff present to us. Theirs is a logic of contingencies, rather than a deterministic one. Present relief over growth rates should not fool us into believing that the Great Contraction is on the way to definitive resolution. It is difficult to summarize Reinhart’s and Rogoff ’s book in its overwhelming descriptive richness of the types and processes of financial crises, bearing in mind the macroeconomic, political, financial and other factors involved, all of which are again divided into factors located in a domestic economy and beyond, in trade or financial relations with neighbours or across the world. The structures of an economy are important, such as its relative size and more or less entrenched institutions, but also the way institutions evolve in processes which are usually protracted and expose a visible path dependency. Socioeconomists and political economists should find it challenging to provide analyses of the structures and patterns of state and civil society formation in more detail than that achieved by the authors of the reviewed book. For example, Greece’s top position in the bankruptcy league can only be explained by referring to its historical roots in

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the Ottoman Empire, with the separation of state functions—dominated by that Empire—from a civil society composed of clientelistic networks and the Orthodox Church. Stemming from this tradition, the Greek state lacks the strength and legitimacy that is required for stable public finances. Similar circumstances can be suggested for many post-colonial countries. For the more topical purposes, the final passage of the book is crucial (p. 292):

This conclusion is sufficiently precise and open about the contingencies it lays out; it remains only to address the necessity to deepen the analysis by taking into account—in a more elaborate fashion—those factors in politics, social structure and institutions, which explain the likelihood and viability of the economic choices, of private and public actors, that aggravate, prevent or reduce a crisis. Social and economic actors cannot dispense with a sharp and reliable financial and economic analysis, but the obverse equally holds: the economics of the action is unreal if not founded in sociology and political science. Let me add a perspective that is downplayed against the evidence in most of the books. The origins of the Second Great Contraction lie in a neglect of financial prudence under a regime of low central-bank interest rates, combined with ideological exuberance that led actors, both public and private, away from a sustainable path of economic development. Everybody had a hand in this, politicians, leading economists, financiers, managers of enterprises, rating agencies and consultants who devised incentive systems. But the dominant actors became imprudent and were ideologically blinded because they presumably conceived of this as the only way out of a very practical and imminent problem. This is the rub. There was something much more fundamental at hand. Marx would have said: the American economy was exhausting its productive forces in the 1970s, which in a country without a generous welfare state tends to be more worrisome. An economy which is already more capitalist has a much greater need for sustained growth in order to satisfy social expectations that anyone can profit from it, and in order to assure democratic legitimacy. Politicians and business together had to

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All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked. This time may be different, but all too often a deeper look shows it is not. Encouragingly, history does point to warning signs that policy makers can look at to assess risk—if only they do not become too drunk with their credit bubble – fueled success and say, as their predecessors have for centuries, ‘This time is different’.

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devise changes in the social relations and institutions of production to bring back economic dynamics. Beginning under President Carter, deregulation and neoliberalization gained force and breadth, as did the build-up of public debt (under Reagan first, then again under G.W. Bush). As all the present authors show, the economy increasingly ran on debt and highly leveraged investments, increasingly subsidized by low central bank interest rates. This did provide an impetus for growth, but it was a policy which broke the back of many producers that had to take comfort in the promises of the service and information economy, or shift activities abroad. It was a Ponzi scheme because it relied on a highly risky or quasi-impossible future growth of earnings, income, shareholder value or asset price rises. As the scheme spreads, the likelihood of its collapse approximates certainty at some stage. This is what the conjoined economics of all the authors says. Posner disputes that there was a Ponzi scheme, but Cassidy says so. It is a matter of definition. Ponzi schemes are very unlikely to promote the cultivation of those assets, including human assets and relations, that drive quality value generation. That quality production sits uneasily with Anglo-American financialism had been stressed earlier. It is of course true that economic dynamics, whatever their nature and duration, will by and large also require quality production. But, when a national institutional system moves farther towards financialism, the temporary dynamics that this breeds will tend to segment production activities by economies and societies such that different types of production and market institutions, including financial intermediation, will concentrate on different institutional locations. In other words, when a Ponzi scheme collapses, this exacerbates the problems in those economies that have broken the back of the producers, and in others by the repercussions that are amplified on a world scale. Political economists and socioeconomists, along with students of work and organization, should have been quicker and more vociferous in pointing this out. The legitimate interest in corporate governance, finance, financial markets and the higher reaches of management has been increasingly disconnected from the internal value-generating side of an enterprise. The interest in the link should be the unwavering concern of socioeconomics. The extent to which the ascent of financialism was taken for granted, even by many socioeconomists, is surprising. The main challenge to socioeconomics is to bring back a stronger idea of the sustainable functioning of socioeconomic systems. Value has to be generated by some kind of work in the first place, and one cannot substitute value attribution by financial markets for that, or exchange value for use value, indefinitely. Financialism was too much of a high-risk expediency to provide temporary growth by locally congenial institutions in troubled liberal market economies. The US economy apparently had more faith in its capacity to obtain

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growth based on financial dynamics, rather than in the cultivation of broadly based domestic productive resources. The functioning of socioeconomic systems depends in addition on soft institutions, notably for the generation of trust. Credit is an indispensable force in economic dynamics and it literally means trust that the creditor places in the value of the debtor to pay back the loan and interest. Security is not an intelligent assurance for a creditor. It can lose value very quickly. Moreover, money is mainly created by banks through credit. Money creation without respect for sustainable productive potential is thus inflationary, and restrictive if it is too conservative. All this occurs in social processes of interaction, and such processes may be more technocratically controlled, by relying on formulae or fixed rules, or they may be embedded in social relations that match money and credit creation with productive potential. Moreover, greater concern for asset inflation is needed, a fact that had fatefully been disregarded. However, the social relations needed to build trust are, as we have seen, also ideal for breeding illusions. Markets absorb and transact illusions to the same extent that they absorb and transact reliable information. Trust is fundamentally ambivalent, and it is another challenge for socioeconomic research to unravel the dialectical relation between socially embedded trust and realism on the one hand, and the facile construction of collective illusions on the other.

Socio-Economic Review (2011) 9, 187–206 Advance Access publication November 11, 2010

doi:10.1093/ser/mwq027

PRESIDENTIAL ADDRESS

Jonathan Zeitlin * Department of Political Science and Amsterdam Institute for Social Science Research (AISSR), University of Amsterdam, The Netherlands *Correspondence: [email protected]

Keywords: governance, global economy, multinational firms, international economic order, markets, public policy, regulation JEL classification: F5 international relations and international political economy, P48 political economy, Q2 renewable resources and conservation

It is a commonplace that despite the advance of economic globalization there is no global government. Yet it is scarcely less common to observe that the global economy does not operate under conditions of anarchy nor through arms-length market exchange alone. Most cross-border trade, investment, and production are coordinated through multinational corporations and inter-firm supply chains. And these activities themselves are subject to an increasingly dense—if far from complete or coherent—web of transnational rules, standards, and norms. These rules in turn are generated, contested, and putatively enforced by varying combinations of public and private actors, including not only national states, whose own regulatory authority they circumscribe, but also international organizations, NGOs, firms, and business associations, among many others. But how, if at all, do these plural, fragmented processes of transnational economic coordination and regulation fit together? Can they be harnessed to serve social objectives such as public health and safety or environmental protection? And can they respond to—if not fully reconcile—the diverse interests and perspectives of multiple stakeholder groups from both developed and developing countries? I argue in this address that one promising answer to these questions lies in linking together emergent forms of economic coordination within and between firms with parallel developments in public rule-making, as is already occurring # The Author 2010. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected]

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SASE Annual Meeting 2010, Philadelphia, USA Pragmatic transnationalism: governance across borders in the global economy

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in many policy domains. These organizational forms, which we may jointly call ‘pragmatic’ or ‘experimentalist’ governance, share a set of common design principles, considered in abstract terms that will become progressively more concrete as the analysis proceeds.

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At the core of these new forms is a recursive process of provisional goal-setting and revision through feedback from the experiences of pursuing them in different contexts. Sub-units within and beyond the organization are given substantial responsibility for defining the best ways to achieve these goals, separately and in conjunction with one another. They are also responsible for monitoring their own operations to find and fix gaps in the ensuing plans as they occur. Their results are then compared against one another, to identify and diffuse opportunities for performance improvement. Finally the goals themselves are periodically revised in response to the problems and possibilities revealed by such reviews. Monitoring thus becomes a crucial source of learning, at the same time as a mechanism for ensuring mutual accountability between collaborating units, as Charles Sabel has emphasized in a series of seminal essays which I draw upon freely here, as well as on our joint work (Helper et al., 2000; Sabel, 1994, 2004a, 2005; Sabel and Zeitlin, 2004, 2008, 2010a). These new forms of coordination and governance may be considered pragmatic or experimentalist in the philosophical sense that they systematically provoke doubt about their own assumptions and practices; treat all solutions as incomplete and corrigible; and produce an ongoing, reciprocal readjustment of ends and means through learning from disciplined comparison of local efforts to advance general goals. The proliferation of these organizational forms across different sectoral and institutional settings can best be understood as a widespread response to a secular increase of environmental volatility and complexity in the global economy over the past three decades. The strategic uncertainty resulting from these developments has overwhelmed in many settings the capacities of conventional hierarchical management and principal-agent governance. The foundation of principal-agent governance is monitoring of conformity by subordinate agents to fixed rules and detailed instructions, incentivized through positive and negative sanctions. In a world where ‘principals’ are uncertain of what precisely their goals should be and how best to achieve them, they must be prepared to learn from the problem-solving activities of their ‘agents’. Hence the former can no longer hold the latter reliably accountable by comparing their performance against predetermined rules, since the more successful the agents are in

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Some new forms of ‘contracting for innovation’ do create explicit joint governance mechanisms, such as the establishment of a committee with equal representation from both parties to oversee the collaboration and determine which of the potential projects emerging from it should actually be pursued, with disputes bumped up to higher-level authorities on each side (Gilson et al., 2009). 2 For discussions of the need for such higher-level pragmatic governance mechanisms and the possible forms they might take, see Herrigel (2004), Whitford and Zeitlin (2004), Kristensen and Zeitlin (2005), Sabel (2004b, 2005, 2007).

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developing new solutions, the more the rules themselves will change (Sabel, 2004a, 2005; Sabel and Zeitlin, 2008, 2010a). In firms and supply chains, these new forms of coordination are based on the iterated co-design of products and production processes between collaborating units. In such iterated co-design, complex wholes are provisionally parsed into parts, whose subsequent development then suggests modifications of the overall design, which are then parsed again, and so on. Thus new design goals are established through benchmarking of existing products and processes against current and potential rivals; provisional designs are developed and refined through simultaneous engineering of component subsystems separately and in relation to one another; and disruptions in production operations are used to trigger searches for hitherto unnoticed weaknesses in product or process design through root-cause systems of error detection and correction. These ‘new pragmatic disciplines’ make tacit knowledge partially explicit and produce rich flows of information, which enable the collaborating units to monitor one other’s activities closely enough to assess their ongoing reliability and capabilities in comparison with other actual and potential partners, without constituting in themselves a full-blown system of joint governance (Helper et al., 2000; Sabel and Zeitlin, 2004; Sabel, 2005).1 Empirical studies, including ongoing research by Gary Herrigel and myself, show that in industries as diverse as motor vehicles, industrial machinery, computers, medical devices, and agri-foods, these pragmatic disciplines have led to significant upgrading of the capabilities of small and medium-sized supplier firms in both developed and developing economies. Crucial mechanisms in this process are certification, evaluation, and review systems. These systems assess suppliers’ initial capacity to participate in continuous improvement of products and processes, benchmark their performance against internal and external comparators, and provide diagnostic feedback and advice on areas where improvement is needed to meet customers’ quality, design, and delivery standards. They do not in themselves resolve all problems within inter-firm supply chains, including persistent deficiencies in supplier skills and opportunistic or inconsistent behaviour by customers, for which higher-level pragmatic governance mechanisms, both public and associational, may be required.2 But where

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suppliers are able to take advantage of such ‘training by monitoring’ (Lui, 2009), they typically progress to more demanding and rewarding work with existing customers, while enhancing their capacity to win new clients and exit unsatisfactory relationships (Perez-Aleman, 2003, 2005, 2010; McDermott, 2007, forthcoming; cf. also Sabel, 2007, 2009; Humphrey and Schmitz, 2008; Ivarsson and Alvstam, 2009; Herrigel, 2010; Herrigel and Zeitlin, 2010). In public rule-making, pragmatic governance in its most developed form involves a multi-level experimentalist architecture. Such a governance architecture comprises four interdependent elements, organized as an iterative cycle. First, framework goals (such as safe food, sustainable forests, an ‘adequate education’, or ‘reasonable accommodation’ for people with disabilities) and metrics for assessing their achievement are provisionally established by some combination of ‘central’ and ‘local’ units, in consultation with relevant outside stakeholders. Second, local units are then given broad discretion to pursue these goals in their own way. But, third, as a condition of this autonomy, these units must report regularly on their performance and participate in a peer review in which their results are compared with those of others employing different means to the same general ends. Fourth and finally, the goals, metrics, and decision-making procedures themselves are periodically revised by a widening circle of participating actors in response to the results of the review process. Accountability in this system does not entail compliance with a predetermined rule, as in principal-agent governance, but instead providing a good explanation for choosing one way of advancing a common project, in comparison with alternatives pursued by other similarly placed units, and proposing consequent measures for self-correction and improvement (Sabel and Zeitlin, 2008, 2010a; Sabel and Simon, 2010). Experimentalist governance architectures of this type have become pervasively institutionalized in the European Union across a broad array of policy domains, from regulation of energy, financial services, and competition through food and drug safety, data privacy, and environmental protection, to justice and internal security, anti-discrimination, and fundamental rights. They take a variety of organizational forms, including councils of national regulators, networked agencies, open methods of coordination, and operational cooperation among front-line officials, often in combination with one another. Contrary to a widespread misimpression, this experimentalist architecture is not confined to fields where the EU has weak competences and produces mainly non-binding guidelines, action plans, scoreboards, recommendations, and the like. Instead, it is well developed in domains where the Union has extensive legislative powers, and regularly results in the elaboration of revisable standards mandated by law and new principles which may eventually be given binding force (Sabel and Zeitlin, 2008, 2010b). Governance architectures with similar properties are also

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Extending experimentalism transnationally

If strategic uncertainty is one possibility condition for experimentalist governance, then a second is a polyarchic or multi-polar distribution of power, where no single actor has the capacity to impose her own preferred solution without taking into account the views of others (Sabel and Zeitlin, 2010a, pp. 9– 10). Experimentalist governance thus appears particularly well-suited to transnational domains, where there is even in theory no overarching sovereign with the authority to set common goals, and where the diversity of local conditions and practices makes the adoption and enforcement of uniform fixed rules even less feasible than in domestic settings. Yet the very polyarchy and diversity that make experimentalist governance attractive under such conditions can also make it difficult to get a transnational regime off the ground. Thus too many participants with sharply different perspectives may make it hard to reach initial agreement on common framework

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widespread in the USA, both in the reform of public services like education and child welfare, and in the regulation of public health and safety risks, such as nuclear power, food processing, and environmental pollution (Sabel and Simon, 2004, 2010). Experimentalist regulation of private economic activity often seeks to work through public oversight of firms’ own pragmatic governance processes or to induce their development where they do not already exist. Such an approach responds to the widely acknowledged failures of ‘command-and-control’ regulation in a turbulent, fast-moving world. In such a world, fixed rules written by a hierarchical authority become obsolete too fast to be effectively enforced on the ground, and the resulting gap between rules and practice is bridged by an unaccountable proliferation of discretionary waivers and exceptions. The alternative approach is to build on and monitor firms’ own error detection and correction mechanisms by requiring them to develop systematic, verifiable plans for identifying and mitigating possible hazards in their operations in light of available knowledge about safety failures in similar settings. Regulators then review the adequacy of these plans, monitor their implementation, benchmark the results against those of other firms in the same domain, and raise the standard for all concerned by feeding back information on new threats gathered from the analysis of dangerous events and near misses. Increasingly, too, such prudential regulation extends beyond processes within individual firms to require full traceability of products throughout the supply chain (Sabel, 2005; Sabel and Simon, 2010). A well-documented example, to which I will return shortly, is Hazard Analysis of Critical Control Points (HACCPs) in food safety.

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Pragmatic transnationalism in action

In the second half of this address, I will examine how these mechanisms might interact to produce such a form of pragmatic transnationalism by analysing

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goals. Conversely, a single powerful player may be able to veto other proposed solutions even if he cannot impose his own. One possible way forward, though by no means the only one, may be for a single jurisdiction to extend experimentalism beyond its own borders, for example through unilateral regulation of transnational supply chains as a condition of market access. Such measures could also help to enhance the effectiveness of ‘private’ or ‘civil’ regulatory standard-setting schemes organized by businesses and NGOs, which have proliferated in many sectors to fill gaps in transnational governance (Abbott and Snidal, 2009a, b; Vogel, 2009). An obvious danger, however, is that this unilateral extension will produce resentment and resistance by regulatory addressees in other countries, unless they are given a voice in shaping the standards they are expected to meet. Such one-sided extension may also denature experimentalism itself by cutting out the feedback loop between local learning from rule application to the revision of the rules themselves. Hence some further destabilization mechanism may be required to unblock this impasse by opening up such unilateral regulatory initiatives to joint governance by affected parties in other countries. Here the disciplines of the world trading system may prove surprisingly helpful. Thus World Trade Organization (WTO) rules permit member states to restrict imports in order to protect public health and safety and the environment. But as interpreted by the WTO Appellate Body in its landmark Shrimp-Turtle decisions (1998, 2001), these rules also require states wishing to restrict imports on these grounds to ensure that their proposed measures are non-discriminatory and proportional to the intended goals, take account of relevant international standards, and consult with their trading partners to minimize the impact on affected third parties (Chang, 2000; Weinstein and Charnovitz, 2001; Scott, 2004). These disciplines, when they permit such extensions at all, can thus provide a potential mechanism for transforming unilateral regulatory initiatives by developed country jurisdictions such as the EU and the USA into a joint governance system with stakeholders from the developing world, if not a fully multilateral experimentalist regime. This role for the WTO points towards the operation of a more general mechanism, whereby the rules of existing multilateral institutions, though not experimentalist themselves, can nonetheless push unilateral extensions of experimentalism in a more reciprocal direction.

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empirical developments in two prominent fields of global economic governance: food safety and sustainable forestry. 3.1

Food safety

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In food safety, elements of a global experimentalist regime have emerged from a patchwork of interactions between national regulations, international organizations, transnational supply chains, and voluntary private standards. The key development here is the worldwide diffusion of HACCP systems for ensuring food safety in place of historic command-and-control methods based on periodic ‘poke-and-sniff ’ inspections of finished products for compliance with minimum health standards. HACCP, in contrast, is a process-based approach, whereby food firms are required to analyse their entire production chain for potential hazards; identify critical points where contamination may arise; develop a testable plan for controlling and reducing such hazards; monitor the implementation of this plan, verify the results, and take remedial action to correct any performance shortfall. Public authorities then review the adequacy of these hazard reduction plans and verification procedures. They may then require their revision to meet rising health and safety standards established by the practices of the best performing firms, although the precise regulatory arrangements vary widely across jurisdictions (Sabel, 2005, p. 138; Wendler, 2007; Demortain, 2008; Henson and Humphrey, 2009; Sabel and Simon, 2010, pp. 49 – 50). HACCP systems originated in the US space program during the 1960s and were first incorporated into federal food safety regulations in the early 1970s. After many years of development by private firms, trade associations, scientific and professional bodies, national governments, and international organizations, guidelines based on HACCP principles were adopted as international standards for food safety in 1992 by the Codex Alimentarius Commission, a joint venture of the UN’s Food and Agriculture and World Health Organizations. These guidelines in turn acquired quasi-legal force in global trade as a result of the Sanitary and Phytosanitary (SPS) Agreement attached to the 1994 treaty establishing the WTO, which recognized the Codex Commission as an authoritative source of international food safety standards. National restrictions on imported food products are thus exempt from challenge under WTO rules if they are based on Codex standards; countries wishing to deviate upwards from these standards in order to achieve higher levels of safety are free to do so, but only on the basis of a scientific risk assessment (Scott, 2007; Wendler, 2007; Bu¨the, 2008, 2009; Demortain, 2008). Since the mid-1990s, the US Food and Drug Administration and Department of Agriculture have introduced mandatory HACCP-based systems for regulating food safety across a growing number of product areas, as have most other

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EU regulations require food business operators to put in place quality management systems ‘based on’ HACCPs, but allow national authorities to enforce the application of HACCP principles more flexibly in small businesses and primary producers (Wendler, 2007, pp. 234–236; Demortain, 2008, pp. 396– 397; Bernauer and Caduff, 2006). US Department of Agriculture HACCP regulations are more detailed and prescriptive, ‘laying down the list of critical control points, contamination thresholds and corrective measures for each type of foodstuff’, but apply to a much narrower range of products than their EU counterparts (Demortain, 2008, p. 400; US Department of Agriculture, 2010).

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industrialized countries (US Department of Agriculture, 2010). In Europe, a key impetus to private adoption came from the 1990 UK Food Law, which subjects food producers and distributors to strict legal liability for exercising ‘due diligence’ to ensure the safety of their products, but allowed the implementation of HACCP systems to serve as a mitigating defence. Subsequent EU legislation prohibits firms from placing unsafe food on the market, requires full process traceability of products ‘from farm to fork’, and mandates the use of HACCP-based systems for achieving these objectives, under the supervision of national authorities. Neither Codex nor EU regulations set out the specific features a HACCP system must have, but instead leave it to member states to define their own variants, with guidance from the Commission and a networked European Food Safety Authority (EFSA). It then falls to firms or groups of firms to adapt these regulatory standards to their own production processes (Wendler, 2007; Demortain, 2008; Henson and Humphrey, 2009).3 EU food safety regulations have extraterritorial reach, insofar as they apply to imported as well as domestically produced goods. As in many other sectors, the EU requires countries exporting food into the European market to demonstrate the equivalence of their domestic regulatory systems. The European Food and Veterinary Office reviews the effectiveness of foreign enforcement arrangements, and proposes recommendations for improvements, along with penalties for noncompliance. Exporting countries are also strongly encouraged to participate in EFSA’s Rapid Alert System for Food and Feed, which pools information on actual and potential public health threats, and identifies areas for necessary revisions in both EU framework rules and national safety practices. Both the EU and the Codex Trust Fund provide capacity-building technical assistance to governments and producers in developing countries to help them meet global food safety standards, with particular emphasis on the implementation of HACCP systems (Alemanno, 2009; Henson and Humphrey, 2009, pp. 13, 32; Vos, 2009, 2010). The increasing stringency of public food safety regulation, with its requirements for process traceability and hazard mitigation systems, has proved a powerful spur to the growth of private standard-setting and certification schemes for their implementation. Many of these schemes take a collective form, in order

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4 GlobalGAP has also taken measures to reduce the costs of meeting its standards for small farmers in developing countries by creating a Smallholder Consultation/Africa Observer and establishing group certification schemes (Henson and Humphrey, 2009, pp. 25, 28– 31).

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to reduce the costs and increase the effectiveness of standard development, application, and verification along the supply chain. They are typically led by large northern food retailers and manufacturers, who are also motivated by concerns for sustaining consumer confidence in the industry and their own brand reputation. Their standards often go beyond compliance with current regulatory requirements, both in the performance levels specified and the range of issues covered. While most of these schemes are national in origin, some have become international in scope, and a Global Food Safety Initiative has been established to benchmark their standards against one another. Seven major global food retailers have now agreed to accept four of these standards and their constituent HACCP systems as mutually equivalent based on this benchmarking exercise (Wendler, 2007, pp. 242– 244; Henson and Humphrey, 2009, pp. 7, 9– 15, 19– 20, 23, 34, 39, 42; Meidinger, 2009). A striking case in point is that of GlobalGAP, analysed in a recent report for the Codex Commission by Spencer Henson and John Humphrey. This organization focuses on the development of pre-farm-gate process standards for fresh produce, based on a broad definition of ‘good agricultural practice’ (GAP), which includes labour and environmental components, as well as HACCP systems aimed particularly at ensuring compliance with EU-mandated levels of maximum pesticide residue. EUREPGAP began as an alliance of large European retailers, but now has global membership as its change of name indicates. The organization has also opened up governance of its standard-setting process to participation by other stakeholders, including food producers and suppliers from developing countries. Henson and Humphrey argue that ‘the interests of developing countries . . . are heard more loudly in GlobalGAP than in Codex’, which is dominated by developed country governments and their national food industries. A key reason is this private body’s greater perceived need to build up the public legitimacy of its standards. GlobalGAP standards are regularly updated to take account of regulatory changes and feedback from national implementing bodies, including in developing countries. These national schemes are in turn benchmarked against each other for equivalence, thereby enhancing both their incorporation of global practices and adaptability to local conditions (Henson and Humphrey, 2009, pp. 15 – 17, 20, 22 – 26, 39; Meidinger, 2009, pp. 240 –241).4 Despite the proliferation of competing HACCP systems, something like a transnational experimentalist regime thus seems to be emerging from the nesting of public and private food safety standards at different levels of governance from the global to the local, and their benchmarking against one

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another for equivalence. This process is only likely to widen in the coming years, as the USA seeks to extend its own approach to HACCP regulation to cover imported products, including from the EU, while both European and American regulators engage with China’s stumbling steps to build a functioning food safety system (Alemanno, 2009; deLisle, 2009; Epps and Trebilcock, 2009; Tai, 2010). Sustainable forestry/illegal logging

The second case I want to examine is that of sustainable forestry and the fight against illegal logging, one of the most widely studied fields of transnational governance. The big news here over the past two decades has been the development and diffusion of private forest certification schemes organized by NGOs and business associations. These schemes emerged during the 1990s in response to the failure of previous efforts to tackle the problems of global forest deterioration through the negotiation of an international convention and unilateral fixing of environmental standards for imported timber products by northern governments. Thus intergovernmental attempts to agree a binding global forestry convention at the 1992 Rio Earth Summit foundered on opposition by developing countries to potential infringements on their sovereignty, fears of disguised protectionism, and the absence of northern funding support. The Austrian government was likewise obliged to withdraw a law banning import of unsustainably harvested tropical wood products in the face of complaints by developing countries to the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT) (Bernstein and Cashore, 2004; Bartley, 2007, pp. 319 – 321).5 To fill the resulting governance gap, a transnational coalition led by environmental NGOs created the Forest Stewardship Council (FSC) to develop private standards for sustainable forestry and certify their application. The FSC was explicitly designed as a multi-stakeholder organization, with standards and procedures determined through deliberation and supermajority voting by three equal chambers of environmental, social, and business interests, with balanced representation of northern and southern members. The FSCs principles include respect for labour and indigenous people’s rights, as well as biodiversity, ecological sustainability, and environmental management requirements. These principles are elaborated through more specific global standards, which are adapted to local conditions by national or regional 5

An earlier effort in the late 1980s to develop a system for certifying ecologically acceptable forest products through the International Tropical Timber Trade Organization (ITTO) likewise foundered on opposition from timber-exporting countries and charges of GATT-incompatibility (Bartley, 2007, p. 319).

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chapters. FSC-certified forests must have a continuously updated management plan, and monitor its implementation, with periodic verification by an accredited third-party auditor. The auditors’ reports are published on the web, and regularly request specific actions to correct deficiencies as a condition of continued certification. FSC wood must also be accompanied by separate ‘chain-of-custody’ certification to ensure its full traceability through each link in the supply chain from forest to final sale (Cashore et al., 2004; Meidinger, 2006; Cashore et al., 2007, pp. 160 – 161; Gue´neau, 2009; Overdevest, 2010, pp. 53 – 55). The FSC expanded rapidly on the back of activist campaigns aimed at pressuring forestry firms and landowners to certify their operations in order to ward off damaging public attacks and boycotts, while at the same time holding out the prospect of premium sales of certified products to environmentally conscious consumers. This approach proved most effective with large end-of-chain retailers and governments, who extended the demand for certified wood to third-party suppliers and state-owned forests. It also attracted some progressive firms which were already close to compliance with FSC standards. But most forestry firms in North America and Europe chose instead to join industry-run certification schemes with no joint stakeholder governance, lower substantive standards, and weaker verification requirements (Cashore et al., 2004, 2007; Overdevest, 2004, 2010; Meidinger, 2006; Bartley, 2007, pp. 315 – 325). Competition between the FSC and these industry schemes has resulted in revisions on both sides, as Christine Overdevest in particular has argued. Both in North America and in Europe, industry-led certification schemes opened up their governance arrangements to a wider range of stakeholders, raised their substantive standards, and adopted mandatory third-party verification and audit disclosure procedures. The FSC in turn has modified its own standards in certain areas to make certification less costly and more practically feasible. Driving such revisions, as Overdevest shows, was a process of public comparison and benchmarking, conducted by retailers, government procurement agencies, and industry associations, which pushed the industry schemes to ratchet up their standards in order to become accepted as equivalent to those of the FSC, even if they remain some distance apart on important issues (Overdevest, 2004, 2010; cf. Meidinger, 2006, p. 128; Cashore et al., 2007, pp. 164 – 166). By the mid-2000s, private certification schemes had achieved high rates of coverage among industrial forest companies in developed economies. But their take-up by developing countries remains weak, especially in the tropical forests whose deterioration sparked the original campaign for global regulation. In response, NGOs, governments, and international organizations have focused on combating illegal logging, an endemic problem in many developing countries,

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which depresses prices for legally harvested wood and undercuts the adoption of sustainable forestry practices (Cashore et al., 2007, pp. 166– 168; Gue´neau, 2009; Lawson and MacFaul, 2010). The most innovative such initiative is the EU’s Forest Law Enforcement Government and Trade (FLEGT) initiative, which grew out of a set of regional ministerial fora organized by the World Bank, and an Action Program agreed by the G8 summit in 1998. FLEGT seeks to control exports of illegally logged wood by negotiating Voluntary Partnership Agreements (VPAs) with developing countries to create ‘legality assurance’ licensing systems, based on jointly defined standards, regular monitoring and performance review, and benchmarking of alternative approaches to third-party verification. Local civil society stakeholders as well as international NGOs participate both in the definition of ‘legally harvested wood’, and in monitoring its certification, each of which are explicitly conceived as revisable in light of one another. The EU provides development assistance to build up the regulatory capacity of both public and private actors. Agreements with these experimentalist features have been signed with Ghana, Cameroon, and Congo-Brazzaville, whereas negotiations are currently underway with Indonesia, Malaysia, Vietnam, and a number of other African countries (Overdevest, 2009, 2010; Brack, 2010; Lawson and MacFaul, 2010; van der Wilk, 2010). FLEGT VPAs are explicitly designed to be WTO compliant because the import standards they impose are negotiated with developing countries themselves and implemented through local certification, monitoring, and verification. But the effectiveness of this initiative obviously depends on individual developing countries’ willingness to sign such agreements (Brack, 2009, 2010; van der Wilk, 2010). Hence the EU has now passed legislation that would complement FLEGT by controlling demand for illegally logged wood, while at the time reinforcing private forest certification schemes and placing them under public scrutiny. This legislation will require all businesses placing wood products on the EU market to show ‘due diligence’ in ensuring that they had not been illegally harvested, with full traceability throughout the supply chain. Such due diligence can be demonstrated in three possible ways: (a) possession of an export license under a FLEGT VPA; (b) establishment of a private risk management system, with full traceability, risk assessment, and risk mitigation procedures; or (c) participation in a recognized monitoring scheme, based on independent verification of compliance with local forestry legislation. As in the case of food safety, member state authorities are charged with monitoring compliance, not by inspecting the product itself, but rather by reviewing firms’ risk management systems, and proposing corrective action where needed. The European Commission, in cooperation with national authorities, is responsible for determining that recognized monitoring bodies are maintaining effective systems of due diligence

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6 The final version of this legislation was adopted by the European Parliament on July 7, 2010 and was expected to be rubber stamped by the Council of Ministers following a prior political agreement with member states and the Commission (Murray, 2010; Phillips, 2010).

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against illegal logging, including procedures for remediation of violations (European Parliament, 2010).6 The EU’s ‘due diligence regulation’ is thus likely to motivate developing countries to sign FLEGT VPAs as a ‘green lane’ into the European market. As in the case of food safety, too, the due diligence requirement should stimulate forestry firms and importers to join private certification schemes, while pushing these schemes to ensure that illegal logging is in fact detected and corrected by subjecting their operations to ongoing review by the European authorities. By alleviating a major source of cost pressure on legitimate timber firms, the legislation, in conjunction with FLEGT, is likely to encourage adherence by developing country producers to more ambitious standards of sustainable forestry promoted by private certification schemes like the FSC. The EU’s approach to combating illegal logging appears likely to be accepted as legitimate not only by the WTO but also by developing countries themselves, because it offers them an opportunity to participate in a jointly governed system of legality assurance, while imposing reciprocal obligations on European importers to exercise due diligence in respecting their laws. These EU initiatives are likely to interact productively with parallel efforts to control illegal logging by other developed countries, such as Australia and the USA, which lack some of their experimentalist features. In the USA, for example, trade in illegally harvested wood is now subject to criminal prosecution under the Lacey Act, with harsher penalties for violators who fail to exercise ‘due care’ in acquiring such products. FLEGT licenses, which apply to signatory countries’ entire wood exports, may serve as evidence of such ‘due care’ in US courts. EU review of private forest certification schemes could likewise be used to enhance the effectiveness of the US enforcement system, which relies primarily on spot inspections by customs and wildlife officials, often based on tipoffs from competing firms. Conversely, the European Parliament successfully incorporated an ‘underlying offense’ of handling illegal timber inspired by the Lacey Act into the due diligence regulation (Brack, 2010; British Woodworking Federation, 2010; Lawson and MacFaul, 2010). Both the USA and the EU schemes can also be expected to have a major impact on China, now the world’s largest trader in wood products, which has signed bilateral coordination agreements with each of them to reduce illegal logging and promote sustainable forestry in third countries (Lawson and MacFaul,

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2010; van der Wilk, 2010). In forestry, as in food safety, the intersection of global supply chains, WTO rules, private standard-setting schemes, and regulatory initiatives by developed country governments seems thus to be leading towards the emergence of a pragmatic form of transnational governance, with significant experimentalist elements and growing participation by developing country stakeholders. Conclusion

The trajectories analysed in these cases draw attention to one broad class of mechanisms, whereby extension of experimentalist regulation along global supply chains, disciplined by the rules of the world trading system, may give impetus to the construction of a jointly governed transnational regime involving a multiplicity of public and private actors from developed and developing countries. But this is far from the only pathway through which such pragmatic transnationalism may develop. Thus, for example, a global experimentalist regime may emerge out of reflexive learning by state and non-state actors from previous failures of multilateral institutions and agreements, as Gra´inne de Bu´rca (2010) has shown in the case of the UN Convention on the Rights of Persons with Disabilities. This innovative instrument incorporates many experimentalist features, including broad, open-ended goals such as ‘reasonable accommodation’ for the disabled; participation of national NGOs and human rights institutions in implementation monitoring; and annual review of its operations on the basis of comparative national data by an inclusive conference of stakeholders. These experimentalist features, as de Bu´rca documents, arose out of a sustained debate among participating governments and NGOs about the deficiencies of traditional international human rights treaties, based on detailed catalogues of specific obligations for states and sporadic international monitoring. Another pathway towards transnational experimentalism may run through reforms of established private certification and monitoring schemes resulting from critical reflection on their limited effectiveness by NGOs, multinational firms, and national governments. This pathway, evidence of which can been seen in both food safety and sustainable forestry, is particularly relevant in the case of labour standards, where WTO rules and opposition from developing countries largely preclude unilateral regulatory initiatives by northern governments. The key here, as recent research by Richard Locke and others suggests, is closer integration of monitoring labour conditions with pragmatic learning about how to improve them through root-cause problem-solving, diagnostic review, and performance comparison at multiple levels within and across firms. Associations and public institutions in developing economies also have a role to play in supporting upgrading of supplier capabilities, setting minimum

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Acknowledgements For helpful comments and suggestions, not all of which I was able to incorporate, I am grateful to Gary Herrigel, Sigrid Quack, Chuck Sabel and Steve Frenkel, as well as to the audience at the Philadelphia conference.

References Abbott, K. W. and Snidal, D. (2009a) ‘The Governance Triangle: Regulatory Standards Institutions and the Shadow of the State’. In Mattli, W. and Woods, N. (eds) The Politics of Global Regulation, Princeton, NJ, Princeton University Press, pp. 44–88. Abbott, K. W. and Snidal, D. (2009b) ‘Strengthening International Regulation through Transnational New Governance: Overcoming the Orchestration Deficit’, Vanderbilt Journal of Transnational Law, 42, 502 – 577. Alemanno, A. (2009) ‘Solving the Problem of Scale: The European Approach to Import Safety and Security Concerns’. In Coglianese, C., Finkel, A. M. and Zaring, D. (eds) Import Safety: Regulatory Governance in the Global Economy, Philadelphia, PA, University of Pennsylvania Press, pp. 171 –189. 7 For a discussion of how to transform firm and plant-level efforts at improving labor conditions within transnational supply chains into a full-blown pragmatic regime based on information pooling, performance benchmarking, and diagnostic review, see Sabel (2007, pp. 270– 273).

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performance standards, and overseeing their internal monitoring systems (Locke et al., 2007; Locke, 2009; Locke et al., 2009; Locke and Romis, 2010).7 Heightened environmental volatility, complexity, and strategic uncertainty have overwhelmed the capacities of conventional principal-agent governance in many settings and encouraged the emergence of alternative organizational models. Pragmatic or experimentalist forms of governance based on provisional goal-setting and revision through recursive learning from monitoring of comparative implementation experience have proliferated widely in both private economic coordination and public rule-making. They seem especially well-suited to transnational problems where there is no hierarchical authority even in theory to set common goals and the breadth of local diversity makes enforcement of fixed rules even less practicable than within the nation-state. Yet these same conditions may also create initial barriers to the creation of a transnational experimentalist governance regime. In this address, I have focused on one class of mechanisms that may work together to generate the emergence of such a regime. But many other pathways are also possible, and comparison among them is likely to prove fruitful. Extending experimentalist governance transnationally is thus itself an experimental process.

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Bartley, T. (2007) ‘Institutional Emergence in an Era of Globalization: The Rise of Transnational Private Regulation of Labor and Environmental Conditions’, American Journal of Sociology, 111, 297– 351. Bernauer, T. and Caduff, L. (2006) ‘Food Safety and the Structure of the European Food Industry’. In Ansell, C. and Vogel, D. (eds) What’s the Beef? The Contested Governance of European Food Safety, Cambridge, MA, MIT Press, pp. 81–96.

Brack, D. (2009) ‘Combating Illegal Logging: Interaction with WTO Rules, Energy, Environment and Resource Governance Illegal Logging Briefing Paper 2009/01’, London, Chatham House, June, accessed at http://www.illegal-logging.info/ on July 28, 2010. Brack, D. (2010) ‘Controlling Illegal Logging: Consumer Country Measures, Energy, Environment and Resource Governance Illegal Logging Briefing Paper 2010/01’, London, Chatham House, January, accessed at http://www.illegal-logging.info/ on July 28, 2010. British Woodworking Federation (2010) ‘European Parliament Agrees Timber Due Diligence Regulation’, June 23, accessed at http://www.bwf.org.uk/help/news/news/ date/2010/07/13/european-parliament-passes-due-diligence-legislation/ on July 28, 2010. Bu¨the, T. (2008) ‘The Globalization of Health and Safety Standards: Delegation of Regulatory Authority in the SPS Agreement of the 1994 Agreement Establishing the World Trade Organization’, Law and Contemporary Problems, 71, 219– 255. Bu¨the, T. (2009) ‘The Politics of Food Safety in the Age of Global Trade: The Codex Alimentarius Commission in the SPS Agreement of the WTO’. In Coglianese, C., Finkel, A. M. and Zaring, D. (eds) Import Safety: Regulatory Governance in the Global Economy, Philadelphia, PA, University of Pennsylvania Press, pp. 88–109. Cashore, B., Auld, G., Bernstein, S. and McDermott, C. (2004) Governing through Markets: Forest Certification and the Rise of Non-State Authority, New Haven, CT, Yale University Press. Cashore, B., Auld, G., Bernstein, S. and McDermott, C. (2007) ‘Can Non-State Governance “Ratchet Up” Global Environmental Standards? Lessons from the Forest Sector’, Review of European Community and International Environmental Law, 16, 158– 172. Chang, H. F. (2000) ‘Toward a Greener GATT: Environmental Trade Measures and the Shrimp-Turtle Case’, Southern California Law Review, 74, 31– 48. de Bu´rca, G. (2010) ‘The EU in the Negotiation of the UN Disability Convention’, European Law Review, 35, accessed through SSRN at http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1525611 on July 28, 2010. deLisle, J. (2009) ‘The Other China Deficit: Export Safety Problems and Responses’. In Coglianese, C., Finkel, A. M. and Zaring, D. (eds) Import Safety: Regulatory

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Bernstein, S. and Cashore, B. (2004) ‘Is Forest Certification a Legitimate Alternative to a Global Forest Convention?’. In Kirton, J. J. and Trebilcock, M. J. (eds) Hard Choices, Soft Law: Voluntary Standards in Global Trade, Environment, and Social Governance, Aldershot, Ashgate, pp. 33 –63.

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Governance in the Global Economy, Philadelphia, PA, University of Pennsylvania Press, pp. 22 –49. Demortain, D. (2008) ‘Standardizing through Concepts: The Power of Scientific Experts in International Standard-Setting’, Science and Public Policy, 35, 391–402. Epps, T. and Trebilcock, M. J. (2009) ‘Import Safety Regulation and International Trade’. In Coglianese, C., Finkel, A. M. and Zaring, D. (eds) Import Safety: Regulatory Governance in the Global Economy, Philadelphia, PA, University of Pennsylvania Press, pp. 69–87.

Gilson, R. J., Sabel, C. F. and Scott, R. E. (2009) ‘Contracting for Innovation: Vertical Disintegration and Interfirm Collaboration’, Columbia Law Review, 109, 431 –502. Gue´neau, S. (2009) ‘Certification as a New Private Forest Governance System: The Regulatory Potential of the Forest Stewardship Council’. In Peters, A., Koechlin, L., Fo¨rster, T. and Fenner Zinkernagel, G. (eds) Non-State Actors as Standard Setters, Cambridge, Cambridge University Press, pp. 379 –408. Helper, S., MacDuffie, J. P. and Sabel, C. F. (2000) ‘Pragmatic Collaborations: Advancing Knowledge while Controlling Opportunism’, Industrial and Corporate Change, 9, 443 –488. Henson, S. and Humphrey, J. (2009) ‘The Impacts of Private Food Safety Standards on the Food Chain and on Public Standard-Setting Processes’, paper prepared for FAO/WHO, Rome, Codex Alimentarius Commission, accessed at http://www.ids.ac.uk/index. cfm?objectid=7D8A984D-B119-7A24-4E28D9545EAA3B56 on July 28, 2010. Herrigel, G. (2004) ‘Emerging Strategies and Forms of Governance in High-Wage Component Manufacturing Regions’, Industry and Innovation, 11, 45–80. Herrigel, G. (2010) Manufacturing Possibilities: Creative Action and Industrial Recomposition in the United States, Germany, and Japan, Oxford, Oxford University Press. Herrigel, G. and Zeitlin, J. (2010) ‘Inter-Firm Relations in Global Manufacturing: Disintegrated Production and Its Globalization’. In Morgan, G., Campbell, J., Crouch, C., Pedersen, O. K. and Whitley, R. (eds) The Oxford Handbook of Comparative Institutional Analysis, Oxford, Oxford University Press, pp. 527–561. Humphrey, J. and Schmitz, H. (2008) ‘Inter-Firm Relationships in Global Value Chains: Trends in Chain Governance and Their Policy Implications’, International Journal of Technological Learning, Innovation and Development, 3, 258–282. Ivarsson, I. and Alvstam, C. G. (2009) ‘Local Technology Linkages and Supplier Upgrading in Global Value Chains: The Case of Swedish Engineering TNCs in Emerging Markets’, Competition and Change, 13, 368 –388.

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European Parliament (2010) ‘Obligations of Operators Who Place Timber and Timber Products on the Market’, P7_TA-PROV(2010)0268, texts adopted 7 July, accessed at http:// www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2010-0268& format=XML&language=EN#BKMD-16 on July 28, 2010.

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Kristensen, P. H. and Zeitlin, J. (2005) Local Players in Global Games: The Strategic Constitution of a Multinational Corporation, Oxford, Oxford University Press. Lawson, S. and MacFaul, L. (2010) ‘Illegal Logging and Related Trade: Indicators of the Global Response’, London, Chatham House, July, accessed at http://www. illegal-logging.info/ on July 28, 2010.

Locke, R. M. and Romis, M. (2010) ‘The Promise and Perils of Private Voluntary Regulation: Labor Standards and Work Organization in Two Mexican Garment Factories’, Review of International Political Economy, 17, 45–74. Locke, R. M., Amangual, M. and Mangla, A. (2009) ‘Virtue Out of Necessity? Compliance, Commitment, and the Improvement of Labor Standards in Global Supply Chains’, Politics and Society, 37, 319 –351. Locke, R. M., Qin, F. and Brause, A. (2007) ‘Does Monitoring Improve Labor Standards? Lessons from Nike’, Industrial and Labor Relations Review, 61, 3–31. Lui, C. (2009) ‘Collaboration on Thin Ground: Contract Production Arrangements between Taiwanese Firms and their American MNC Customers in the Personal Computer Industry’, unpublished paper, Department of Sociology, University of Wisconsin-Madison, on-file with the author. McDermott, G. A. (2007) ‘The Politics of Institutional Renovation and Economic Upgrading: Recombining the Vines that Bind in Argentina’, Politics and Society, 35, 103–143. McDermott, G. A., Corredoia, R. A. and Kruse, G. (forthcoming) ‘Public-Private Institutions as Catalysts of Upgrading in Emerging Market Societies’, Academy of Management Journal. Meidinger, E. (2006) ‘The Administrative Law of Global Public-Private Regulation: The Case of Forestry’, European Journal of International Law, 17, 47–87. Meidinger, E. (2009) ‘Private Import Safety Regulation and Transnational New Governance’. In Coglianese, C., Finkel, A. M. and Zaring, D. (eds) Import Safety: Regulatory Governance in the Global Economy, Philadelphia, University of Pennsylvania Press, pp. 233–251. Murray, J. (2010) ‘European Parliament Approves Illegal Timber Ban’, Business Green, July 7, accessed at http://www.guardian.co.uk/environment/2010/jul/07/european-approvesillegal-timber-ban on July 28, 2010. Overdevest, C. (2004) ‘Codes of Conduct and Standard Setting in the Forest Sector: Constructing Markets for Democracy?’, Relations Industrielles/Industrial Relations, 59, 172 –195. Overdevest, C. (2009) ‘Exporting Experimentalism and the Case of FLEGT’, unpublished memo prepared for the project on ‘Extending Experimentalist Governance: From the EU to the World?’, University of Wisconsin-Madison, March 6–7, on-file with the author. Overdevest, C. (2010) ‘Comparing Forest Certification Schemes: The Case of Ratcheting Standards in the Forest Sector’, Socio-Economic Review, 8, 47–76.

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Locke, R. M. (2009) ‘Making Globalization Work for All? Reflections on Improving Labor Standards in Global Supply Chains’, presentation to workshop on ‘Improving Labor Standards in Global Supply Chains’, Center for World Affairs and the Global Economy (WAGE), University of Wisconsin-Madison, November 6, on-file with the author.

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Perez-Aleman, P. (2003) ‘Decentralised Production Organisation and Institutional Transformation: Large and Small Firm Networks in Chile and Nicaragua’, Cambridge Journal of Economics, 27, 789 –805. Perez-Aleman, P. (2005) ‘Cluster Formation, Institutions, and Learning: The Emergence of Clusters and Development in Chile’, Industrial and Corporate Change, 14, 651 –677.

Phillips, L. (2010) ‘EU Takes Landmark Stance against Illegal Timber’, EUObserver, June 17, accessed at http://euobserver.com/885/30308 on July 28, 2010. Sabel, C. F. (1994) ‘Learning by Monitoring: The Institutions of Economic Development’. In Smelser, N. and Swedberg, R. (eds) Handbook of Economic Sociology, Princeton, NJ, Princeton University Press and Russell Sage Foundation, pp. 137–165. Sabel, C. F. (2004a) ‘Beyond Principal-Agent Governance: Experimentalist Organizations, Learning and Accountability’. In Engelen, E. and Sie Dhian Ho, M. (eds) De Staat van de Democratie. Democratie voorbij de Staat, Amsterdam, Amsterdam University Press, pp. 173 –195. Sabel, C. F. (2004b) ‘Pragmatic Collaborations in Practice: A Response to Herrigel and Whitford and Zeitlin’, Industry and Innovation, 11, 81– 88. Sabel, C. F. (2005) ‘A Real Time Revolution in Routines’. In Heckscher, C. and Adler, P. S. (eds) The Firm as a Collaborative Community, Oxford, Oxford University Press, pp. 106 –156. Sabel, C. F. (2007) ‘Rolling Rule Labor Standards: Why Their Time Has Come, and Why We Should Be Glad of It’. In Politakis, G. P. (ed) Protecting Labour Rights as Human Rights: Present and Future of International Supervision, Geneva, International Labour Organization, pp. 257 –277. Sabel, C. F. (2009) ‘Bootstrapping Development: Rethinking the Role of Public Institutions in Promoting Growth’. In Nee, V. and Swedberg, R. (eds) On Capitalism, Palo Alto, CA, Stanford University Press, pp. 305 –341. Sabel, C. F. and Simon, W. H. (2004) ‘Destabilization Rights: How Public Law Litigation Succeeds’, Harvard Law Review, 117, 1015 –1101. Sabel, C. F. and Simon, W. H. (2010) ‘Minimalism and Experimentalism in American Public Law’, unpublished paper, New York, Columbia Law School, accessed at http://www2.law.columbia.edu/sabel/papers.htm on July 28, 2010. Sabel, C. F. and Zeitlin, J. (2004) ‘Neither Modularity nor Relational Contracting: Inter-Firm Collaboration in the New Economy’, Enterprise and Society, 5, 388–403. Sabel, C. F. and Zeitlin, J. (2008) ‘Learning from Difference: The New Architecture of Experimentalist Governance in the European Union’, European Law Journal, 14, 278 –280.

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Perez-Aleman, P. (2010) ‘Collective Learning in Global Diffusion: Spreading Quality Standards in a Developing Country Cluster’, Organization Science, articles in advance, 1 –18, accessed at http://orgsci.journal.informs.org/cgi/search?andorexactfulltext= and&resourcetype=1&disp_type=&sortspec=relevance&author1=perez-aleman&fulltext= &pubdate_year=&volume=&firstpage= on September 21, 2010.

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Sabel, C. F. and Zeitlin, J. (2010a) ‘Learning from Difference: The New Architecture of Experimentalist Governance in the European Union’. In Sabel, C. F. and Zeitlin, J. (eds) Experimentalist Governance in the European Union: Towards a New Architecture, Oxford, Oxford University Press, pp. 1 –28. Sabel, C. F. and Zeitlin, J. (eds) (2010b) Experimentalist Governance in the European Union: Towards a New Architecture, Oxford, Oxford University Press. Scott, J. (2004) ‘International Trade and Environmental Governance: Relating Rules (and Standards) in the EU and the WTO’, European Journal of International Law, 15, 307–354.

Tai, S. (2010) ‘What China Is Doing About What It Doesn’t Know: Exploring the Regulatory Robustness of China’s New Food Safety Law’, presentation to conference on ‘Strategies for Import Safety: Regulatory and Market Approaches’, Center for World Affairs and the Global Economy (WAGE), April 14, on-file with the author. US Department of Agriculture (2010) ‘A Focus on Hazard Analysis of Critical Control Points (HACCP)—Updated Version’, Washington, D.C, Food Safety Research Information Office, National Agricultural Library, accessed at http://fsrio.nal.usda.gov/ nal_web/fsrio/fsheet.php?id=227 on July 28, 2010. van der Wilk, N. (2010) ‘China and the EU’s Normative Approach to Africa: Competitor or Collaborator? A Case Study of Forest Law Enforcement, Governance and Trade (FLEGT)’, unpublished M.A. thesis, University of Amsterdam, on-file with the author. Vogel, D. (2009) ‘The Private Regulation of Global Corporate Conduct’. In Mattli, W. and Woods, N. (eds) The Politics of Global Regulation, Princeton, NJ, Princeton University Press, pp. 151 –188. Vos, E. (2009) ‘Extending EU Experimentalist Governance into Global Food Safety’, unpublished paper prepared for the project on ‘Extending Experimentalist Governance: From the EU to the World?’, University of Wisconsin-Madison, October 23–24, on-file with the author. Vos, E. (2010) ‘Responding to Catastrophe: Towards a New Architecture for EU Food Safety Regulation?’. In Sabel, C. F. and Zeitlin, J. (eds) Experimentalist Governance in the European Union: Towards a New Architecture, Oxford, Oxford University Press, pp. 151–176. Weinstein, M. M. and Charnovitz, S. (2001) ‘The Greening of the WTO’, Foreign Affairs, 80, 147 –156. Wendler, F. (2007) ‘The Public-Private Regulation of Food Safety through HACCP: What Does It Mean for the Governance Capacity of Public and Private Actors?’. In Vos, E. (ed) European Risk Governance: Its Science, Its Inclusiveness, and Its Effectiveness, Connex Report Series No. 6, University of Mannheim, Germany, pp. 223–255, accessed at http://www.connex-network.org/ on July 28, 2010. Whitford, J. and Zeitlin, J. (2004) ‘Governing Decentralized Production: Institutions, Public Policy, and the Prospects for Inter-Firm Collaboration in the United States’, Industry and Innovation, 11, 11 –44.

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Scott, J. (2007) The WTO Agreement on Sanitary and Phytosanitary Measures: A Commentary, Oxford, Oxford University Press.

Socio-Economic Review (2011) 9, 207–208

doi:10.1093/ser/mwq031

Thanks to our reviewers in 2010

Christian Albrekt Larsen Karen Anderson Edith Archambault Patrik Aspers A.S.M. Sohel Azad Filippo Barbera Jean-Claude Barbier Uwe Becker Jens Beckert Emmanuelle Be´nicourt Albert Bergesen Thomas Beschorner Fred Block Petri Bockermann Jean-Michel Bonvin Gerhard Bosch Je´roˆme Bourdieu Marius Busemeyer John Campbell Bruce Carruthers Steven Casper Kuangchi Chang Jean-Bernard Chatelain Andrew Clark Jochen Clasen Colin Crouch Pepper Culpepper Douglas Cumming Simon Deakin Richard Deeg David Dequech

Christoph Deutschmann Michelle Dion Rick Doner Ronald Dore Gillian Doyle Sophie Dubuisson-Quellier Rachel Dwyer Werner Eichhorst Marc Eisner Christine Erhel Marcel Erlinghagen Michael Faust Qiushi Feng Anthony Ferner David Finegold Henning Finseraas Peer Fiss Marion Fourcade Pierre Francois Duncan Gallie Markus Gangl Heiner Ganßmann Marie-France Garcia Kurtulus Gemici Elvire Guillaud Markus Hadler Bob Hancke´ Anke Hassel Silja Ha¨usermann Mark Hayes Thomas Hegghammer

Friedrich Heinemann Wolf Heydebrand Jennifer Hochschild Matissa Hollister Bettina Hollstein Laura Horn Jinn-Yuh Hsu Richard Hyman Gregory Jackson Mads Jaeger Bob Jessop Arne Kalleberg Bruce Kaufman Scott Kennedy Lane Kenworthy Stefan Kesting Daniel Kim Bernhard Kittel Philipp Klages Tomas Korpi Walter Korpi Stefan Ku¨hner Jon Kvist Knut Lange Matthew Lange Erik Larson Thomas Lawrence Adam Leaver Arnaud Lechevalier Frank Lechner Ivan Ledezma

# The Author 2011. Published by Oxford University Press and the Society for the Advancement of Socio-Economics. All rights reserved. For Permissions, please email: [email protected]

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One can hardly overestimate the contribution of reviewers to the quality of a journal. We know how much we depend on their competence and dedication. The editorial team would like to thank all those who have generously devoted time to this important task in 2010. The following individuals have reviewed manuscripts for Socio-Economic Review:

208

Reviewers in 2010

Philippe Pochet Jonas Pontusson Alexandru Preda Hans Daniel Pruijt Antoine Rebe´rioux Marino Regini Philipp Rehm Martin Rhodes Bert Sadowsk Dieter Sadowski Peter Saunders AnnaLee Saxenian Fritz Scharpf Gu¨nter Schmid Reinhard Schmidt Claus Schnabel Barbara Schneider Ben Ross Schneider Martin Schro¨der Leonard Seabrooke Charles Smith Stefano Solari Arndt Sorge David Soskice Sven Steinmo John Stephens Wolfgang Streeck Thomas Stucky

Stefan Svallfors Peter Swenson Giuseppe Tattara Sue Tempest Tobias Ten Brink Mark Thatcher Kathleen Thelen Grahame Thompson Ming-Chang Tsai Ming Tsui Andrew Tylecote Frans Van Waarden Gerry Veenstra Elke Viebrock Jelle Visser Allison Vos Thomas Voss Karin Wagner Stefanie Walter Christy Weer Raymund Werle Christopher Whelan Josh Whitford Kjersten Whittington Ulrich Witt Amos Witztum Mark Zbaracki Matthias Zick Varul

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Patrick Le Gale`s Kevin Leicht Thomas Lindh Johannes Lindvall Edward Lorenz Malte Lu¨bker Susanne Lu¨tz Donald MacKenzie James Mahoney Cathie Jo Martin Isaac William Martin Bill Maurer Renate Mayntz Leslie McCall Gertraude Mikl-Horke Robert Mochrie Oscar Molina Matthieu Montalban Glenn Morgan Kimberly Morgan Jacqueline O‘Reilly Mitchell Orenstein Ozgur Orhangazi Dennie Oude Nijhuis Jason Owen-Smith Stefano Palombarini Eve Parts Thomas Paster

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ISSN 1475-1461 (PRINT) ISSN 1475-147X (ONLINE)

Socio-Economic Review Volume 9

John L. Campbell An institutional analysis of the U.S. financial crisis: lessons for theories of complementarity Jared Peifer Morality in the financial market? A look at religiously affiliated mutual funds in the United States Jochen Hirschle The affluent society and its religious consequences: an empirical investigation of 20 European countries Daniel Oesch and Jorge Rodríquez Menés Upgrading or polarization? Occupational change in Britain, Spain, and Switzerland, 1990–2008

On Terence C. Halliday and Bruce G. Carruthers Bankrupt: Global Lawmaking and Systemic Crisis. Stanford, Standford University Press, 2010. Gregory Shaffer, John L. Campbell, Glenn Morgan, Terence C. Halliday, and Bruce G. Carruthers

Volume 9

Number 1

2011

SPECIAL ISSUE Commonalities of capitalism

2011

ARTICLES

DISCUSSION FORUM

Review

Number 1

IN FORTHCOMING ISSUES

Socio-Economic

ARTICLES

R E V I E W E S S AY

Bruno Amable Morals and politics in the ideology of neo-liberalism

Arndt Sorge Financial catastrophe and its implications for socioeconomics

Fred Block Crisis and renewal: the outlines of a twenty-first century new deal

PRESIDENTIAL ADDRESS

REVIEW SYMPOSIUM

Robert Boyer Are there laws of motion of capitalism?

On David Stark The Sense of Dissonance. Accounts of Worth in Economic Life (with Daniel Beunza, Monique Girard, and János Lukács). Princeton, Princeton University Press, 2009. Jens Beckert, Akos Rona-Tas, and David Dequech

Christoph Deutschmann A pragmatist theory of capitalism Uwe Schimank Against all odds: the ‘loyalty’ of small investors Wolfgang Streeck Taking capitalism seriously: towards an institutionalist approach to contemporary political economy

Rebecca Oliver Powerful remnants? The politics of egalitarian bargaining institutions in Italy and Sweden

Articles are published online in advance of publication in the Advance Access section of the Socio-Economic Review website at http://ser.oxfordjournals.org

www.ser.oxfordjournals.org

2

in association with The Society for the Advancement of Socio-Economics

SASE Annual Meeting 2010 Pragmatic transnationalism: governance across borders in the global economy Jonathan Zeitlin