Capitalism formerly known as the German Model and its Re-Formation. Part II

Wolfgang Streeck (MPIfG), a scholar of political economy, studies the relations between markets, states and institutions, the dynamics of their development, their interrelatedness and historical changes. His new book “Re-forming capitalism” (Oxford University Press 2009) is devoted to institutional changes in capitalism formerly known as the German Model and its social consequences. An important book, particularly to those who refuse to give up on liberalism. Back to Part I

Why capitalism?

“Why capitalism? If the gradual disorganization and liberalization of “postwar market economy” like Germany is to be explained, as I believe it must, as a secular historical process driven by endogeneous dialectical force, conceptions of “the economy” as a system in, ore on the way to, static equilibrium, however defined, are not really of use. Speaking of capitalism instead has the advantage that it conceptualizes the economy as inherently dynamic – as a historical social formation defined by a specific, characteristic dynamism, and as an evolving social reality in real time. Speaking of capitalism, in other words avoids the fallacies of misplaced abstractness that plague mainstream economics as well as rational choice social science and prevent them from engaging the world as it happens to be. Specifically, the concept of capitalism draws our attention to a core concept of market expansion and accumulation that, it suggests, makes up the substance and defines the identity of what is now the hegemonic and indeed the only form of economic organization in the modern world. Moreover, it also (…) moves into the center of analysis the fundamental issue of the compatibility of expanding markets with the basic requirements of social integration, thereby providing a coherent analytical framework in which to consider the manifold social conflicts associated with the ‘capitalist constant’ (Sewell 2008) of progressive commodification. ” (Streeck 2009, p. 230)

A society that consumes its institutions?

Streeck makes a strong argument insofar as the transformation of political-economic institutions he describes with the terms of ‘disorganization’, ‘flexibilization’ and ‘economization’ is severe in its consequences in terms of solidarity and social justice. Of course, all institutions are in transformation. So are the social economic institutions of capitalism: collective bargaining, intermediary organizations, social policy and the welfare state, and, of course, corporate governance. As Streeck shows convincingly, this process also involves public financing. But as the state extensively goes after its own interests, e.g. in rising incomes tax for the wealthier parts of the population, rising taxes on goods, inventing new fees for just about everything, lowering the standard of welfare, and hiding the true level of unemployment, this does not leave social solidarity in Germany untouched. Streeck puts this in the term “capitalism” meaning a social order rather than about an abstract “economy” meaning a functional subsystem or the market in a model of the word. But both terms leave that open tough competition, power struggle, inequality and unfairness occur. Slowly but continuously, without major disruptions, capitalism formerly known as the German model has been undermined in complex interplay of systemic, institutional and endogeneous change, not just as a result of external factors such as ‘globalization’ and ‘technology’, but rather because institutions were struggling with specific problems of systemic and social integration. The logic of flexibilization and disorganization is driven by characteristic dispositions of actors, the relationship of rule-making and rule-taking.

Two examples may serve to illustrate that the institutional change that Streeck describes with the keywords of ‘disorganization’, ‘liberalization’ and ‘flexibilization’ affect solidarity. But is it a change from ‘mechanical solidarity’ to ‘organic solidarity’ that comes as an effect of globalization? Or is this institutional change a pathological development that comes as a quasi-natural consequence of capitalism? Or is institutional change, as it happens de facto, unbalanced to such a degree that a good development in theory leads to a decline of social solidarity in practice?

The policy of “activation” as to incentivize people in need to go to work and contribute back to the community which has become a characteristic of the ‘new’ social policy put into place by Germany’s government and implemented by Bundesagentur für Arbeit and the local agencies (ARGEs). “Positive activation” means to incentive people to take entrepreneurial initiative to make money or to get back into the job market. “Negative activation” pins down to forcing people into the job market. In many cases, this means forcing academics, professionals and skilled workers out of their vocation, profession or academic discipline in an effort of identifying people do not “deserve” welfare. Punishment means reducing the monthly rate, possibly to the level of zero. At the same time people in welfare have the obligation to show bank accounts to the local agency as to give evidence they have no wealth left. Recognition of the contribution of the needy to the to community is reduced to the amount that people in this situation earn beyond a Minimum (Freibetrag) and give back to the welfare system such that “paying back to the community” means earning money or other ways of generating income leading to a reduction in monthly payment, since civil engagement is not recognized by the local agencies. In the Hartz IV legislation, the standard monthly rate for unmarried people is € 351. Married people with a partner who has at least a low income are reduced by €80. The standard rate for children is the one for grown ups minus € 80. The childrens‘ rate was judged unconstitutional by Germany’s highest court BGH because the rate does not acknowledge the fact that children have special needs. Moreover, all the rates mentioned here include payment for electricity. Today, behind the “record employment” numbers Germany’s Grand coalition has published in the recent year we find more than 3 million people in low paid jobs and more than 3 million children who depend on welfare (out Germany’s 14,5 children and teenagers under 18).

Another example that Streeck gave his Jena talk “Flexible Markets – stable societies?” (DGS conference, Jena, October 2008) was about the social consequences of economic uncertainty in German Society. Between 1970 and 2005, the employment rate went up from 65,8 % with 45,9 % among women) to 68,9 % (with 63,1 %) among women. And atypical employment has been rising since the 1990s. In 1997, 11,7 % of the workforce worked part time, 4,5 % worked in low paid in mini jobs, 6,3 % worked in limited contracts, adding up to a total of 17,5 % of the workforce in Germany outside regular jobs (Normalarbeitsverhältnis). In 2007, 16,4 % worked in part time jobs, 9,2 % were in low paid mini jobs, 8,8% worked in limited contracts, adding up to a total of 25,5 % of the German workforce in atypical, flexible employment. Streeck also observes a decline in the institution of the family. Less and less people get married, the number of divorces increases. In 1970, there were 72,9 marriages and 12,6 divorces in 10.000 people. The ratio between marriage and divorce was at 5,8. Since then, Streeck has observed steady decline in the willingness to get married and a higher likelihood of divorce. In 2005, there were 47,1 marriages and 24,5 divorces in 10.000 people. With a ratio of between marriage and divorce changed to 1,9, chances that marriage will last for a lifetime have declined significantly. While in 1970, there were 13,4 births in 1000 inhabitants, this rate went down to 8,3 in 2005, leaving the German population below the necessary reproduction rate of 2.1 children per woman. Streeck explains the development with the fact that uncertainty generates difficult condition with regard to founding and maintaining a family which requires a strong long term commitment: “Roughly in this way, the economic need for capitalist growth, as well as for the sustainability of the welfare state, to expand the supply of labor by households to the market seems to have met with an emergent cultural preparedness to live with ever more market uncertainty and make do with considerably less stable arrangements in social life.” (Streeck, Jena speech October 2008)

Of course, the decline of the family, the social policy on the side of the nation state and the reality of unemployment and welfare play together as an effect of legislation that increasingly supports policies of ‘disorganization’, ‘flexibilization’, ‘economization’, and, as I might add ‘activation’ and weakens the Fordist arrangement of the single male breadwinner model of the family. The younger generation of adults are so busy coping with the economic uncertainty that they have little time nor will to engage in founding a family and raising children, Streeck argued in his october talk.

Streeck’s observation of patholocical developments in institutional change departing from postwar “Social Market economy” cannot so easily be put aside. There’s a difference between a good idea in a theoretical model and way the institutional change really did play out in the case of the institutional framework of German capitalism: First, because the policies of ‘disorganization’, ‘flexibilization’, ‘economization’ (+ ‘activation’) meant to incentivize people to engage in economy and society have been turned in to anti-incentives when people get confronted with several sources of uncertainty simultaneously. Second, because the welfare system has been redesigned that people in need learn their unemployment is their own blame and guilt rather than the result of social development in the face of a shortage of regular full time jobs. The needy and their children are given little chance to work their way out of a desperate situation. Third, because a social policy indifferent of forcing people out of their vocation, profession or academic discipline leads to a devaluation of educational investment and contradicts the idea to incentivize job seekers to invest in their employability. Hence, it is insufficient and unfair to argue that institutional change in the light of economic globalization, no matter how fast, how unbalanced and however tough the social consequences, is just a social fact which is external, universal, a reality sui generis and coercive, because this view essentially pins down to saying “let’s simply call it your fate!”

The development corresponds with Durkheim’s three forms of pathological division of labor: First, anormal division of labor points to a lack of authorities and strong rules leading to uncertainty and lack of reliability. Second, imposed division of la¬bor becomes relevant the welfare state uses people’ need to force them out of their vocation, profession or academic discipline, leading to permanent class struggle and social conflict. Third, wherever assets are destroyed, institutions weake¬ned, educational investment devalued or entrepreneurial investment made worthless, we are confronted with a third form of pathological division of labor which produces useless functions. The consequences of the development will be that 30 years down the road too few adults will have to finance too many olds and German society will have too few children since becoming mother and father adds to manifold risks of poverty.

Locked in flexibility? Regime making & regime breaking

Slowly but continuously, without major disruptions, coordinated capitalism formerly known as the German model has ceased to exist. While I would rather emphasize the aspect of ‘globalization’ in the sense of economic interconnectedness of global markets and national economies and mutual interrelations when it comes to solidarity and social justice, Streeck focuses strongly on the institutional landscape on the national level. He emphasizes the emergence and the characteristics of the new “regime” or “conception of control”. I see a commonality in that both a ‘globalization’ view which emphasizes efforts to strengthen the “Finanzplatz Deutschland”, to lure foreign direct investment and management into the country and a and political economic view that qualifies institutional change in ‘Social Market Economy’ as two reverse sides of the same coin that should be seen as complementary rather than competing perspectives, because a highly educated workforce and “Sozialer Friede” cannot be valued high enough. Streeck discussions theses of convergence (‘globalization’ school) and divergence (‘Varieties of Capitalism’ school) as two forces operating simultaneously, in different dimensions of the institutional structure, as well as for different reasons, with the effect Germany’s postwar institutional arrangement of organized, nonliberal capitalism is being replaced by a new regime and the Fordist arrangement of the 1970s is decomposed, the outcome is a new regime that is still not a copy of the liberal capitalism of the United States – on the other hand, the ‘economic rationale’ in changing the institutional arrangement is institutional change as to adapt to the liberal economy of the United States as it is perceived from a German perspective. What is the new regime about? It is about ‘liberalization’, ‘flexibilization’, ‘disorganization’, ‘econo¬mization’ and, as I might add for financial market capitalisms, ‘activation’ for enforcing participation in the economic process, and ‘indifference’ in the sense of disregard of social consequences and the individual fate unconceivable until recent years. Capitalism, argues Streeck quoting Schumpeter, is by nature a form or method of economic change and can never be stationary, and the fundamental impulse that sets and keeps the capitalist engine in motion is innovation. Capitalism has to be enacted and re-enacted. Institutions are interrelated with other institutions and embedded into a Weberian Herrschaftsverband of rule makers and rule takers in a surrounding society of “third parties” (Streeck 2009: 236-238).

“From a Durkheimian perspective, capitalism appears as a social field with strong inherent tendencies toward entropy, due to the characteristic cunningness of actors in socially sanctioned pursuit of unlimited profit exempted from expectations of both solidarity with others and goodwill with regard to the enactment of social rules that stand in the way of their material interests. Institutional analysis of capitalism must expect, therefore, not order in equilibrium, but what Beckert has called a “dynamic disequilibrium”: (…) a continuous contest between the creative destruction of social rules by enterprising innovators interested, at best, in expedient voluntary arrangements for efficient coordination from below, and political projects to defend or regain a modicum of social stability.” (Streeck 2009, page 246)

Speaking of Polanyi, Streeck continues:

“Rather than treating society as a functional infrastructure, however indispensables, Polanyi emphasized what he regarded as a fundamental tension between stable social integration and the operation of self-regulating markets, the latter inevitably eating away at the former unless society mustered the capacity and the will to put markets in their place and keep them there. It is this view of the relationship between the liberal market economy that is behind Polanyi’s powerful metaphor of the “satanic mill” grinding away the social fabric unless it is somehow safely contained by appropriate social institutions” (Streeck 2009, 248).

In his final chapter “Bringing capitalism back in”, Streeck argues against the logic of ‘flexibilization’, ‘liberalization’ and ‘economization’ in the sense that scarcity has become an instrurment of governing such that political economic institutions of Gemany’s “Social Market economy” are consumed and the social fabric is grinded away for economic purposes, leading to second best and sometimes even first best competitive solutions to economic problems and become a component of a Weberian iron cage of ‘flexibilization’, ‘liberalization’, ‘economization’ (+ ‘activation’ and ‘indifference’, tg). Enactment, however, is essentially unpredictable to the rule makers, and therefore offers the potential to overcome the iron cage (Streeck 2009, page 258). Consequently whenever regimes are enacted and enforced by incumbent actors and institutions with vested interests in having their conception of control in place, keeping the challengers down and out, regimes can also be broken and new regimes can be enacted by challengers and invaders becoming institutional entrepreneurs. In the current financial and economic crisis, national governments and federal reserves have been active to ameliorate the consequences, but as we have learned from this important book, has followed its own interests for decades and has been involved in the emergence of the miserable situation due to the moral hazardous behavior of the German government in attempting to balance the federal budget in fall 2008 when the financial and economic crisis was already on the spreading across markets and national economies.

One conclusion I drew when reading Streeck’s new book is the financial and economic crisis affecting the German economy will hardly be overcome without a game changer, e.g. with a broad social movement with a powerful leadership that takes responsibility and helps put a new regime into place. Such a new regime, ending the gridlock of not lending, not buying and not trusting, should redefine the terms ‘liberalization’, ‘flexibilization’, ‘disorganization’, ‘economization’ such that these terms are applied as to create an institutional framework that supports entrepreneurship and opens opportunities of exchange and cooperation rather rather than imposes constraints upon actors for their presumably individual failure. Capitalism formerly known as the German model needs refreshment by a new regime of exchange, cooperation, trust and confidence, recognition of value, recognition economic achievement and contributions to solidarity. I would expect a better institutional environment for innovation and innovators to become reality bottom up on the basis of a powerful social movement rather than to be implemented in an old-fashioned top-down manner by a national government or even supranational political structure.

Read also Streeck, Wolfgang. 2008. „Flexible Markets – Stable Societies?“ (WP08-6)

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