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.

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Why the U.S. economic recession will bite Germany, too

Do you feel the pain already? No? Get a loan, buy that car you always dreamed of, get some jewelry for your wife, go for an extended vacation overseas and enjoy a two star molecular dinner and better go for it now because it might b the last time for a while. My hunch is that the current crisis on the U.S. housing market and the credit crunch will bite the German economy. Not now. Later. CNN Business editor Todd Benjamin has been predicting recession and rising oil prices for a while, and Jack Cafferty has asked CNN viewers „What’s the difference between a “mental” recession and a real one?“ A brief look into the media raises fears that the U.S. economy has more gloomy days ahead, e.g. NYT1, NYT2, IHT1, Atlantic, Business Week, FT1, FT2, IHT2, Le Monde, NZZ, FAZ, SPIEGEL, Handelsblatt.

Socioblogger Dan Hirschman has already layed the foundations [some thoughts on the mortgage crisis; a follow-up on the mortgage crisis], so why follow the U.S credit monster any further? Why disturb the happiness since German business leaders, politicians and financial analysts prefer to discuss the crisis only in very moderate tones? Like Dan, I am not an economist, so I also draw on a different toolbox. My focus is on the structural and cultural change in companies – especially the public banking sector – in Deutschland AG (Germany Inc) and the consequences in the face of this development.

Going West – from Germany Inc to the Global Financial Market

For more than 40 years, German companies have profited from a very specific strategy vis-à-vis an emerging global economy: a strong technological orientation, high quality orientation with regard to products and processes and incremental innovation of making small changes in products and processes rather than radical innovation of seeking opportunity in fundamentally new technologies, business sectors or world markets. German companies would spread risks broadly by engaging in various activities simultaneously and not limit their activities to few profitable activities. Thus they were able to maintain their niche by exporting products characterized by strong technological specialization. The business environment where this strategy worked out fine for decades was „Deutschland AG“ – a network of financial relations and interlocking directorates among Germanys large industry companies, banks and insurance companies. Deutschland AG emerged as a strong coherent organizational field with two companies at the core: Deutsche Bank AG and Allianz AG. Since the mid 1990s, though, we witness the dissolution of Deutschland AG. That is, the number and intensity of interrelations of mutual shares and interlocking directorates is declining and German companies show a stronger orientation toward the global financial markets rather than seeking shelter in the established network relations of Deutschland AG.

Referring to the various writings of Wolfgang Streeck, Martin Höpner and Jürgen Beyer and to my dissertation it is safe  enough to say that core companies of former Deutschland AG such as Deutsche Bank, Allianz and subsequently many other players in the German finance sector saw greater business opportunities in a strategy shift – to withdraw from the boards of the various companies, to enter the global investment sector and to benefit from the dynamics in the organizational field of global capital markets because a flourishing global financial market opens the door to much more capital. Investment money from diverse sources on global capital markets comes at the prize of a small size of German companies as compared to the largest players on global organizational fields, e.g. finance, chemistry, pharmaceuticals etc.

As these graphs by Lothar Krempel at MPIfG show, Deutschland AG has been declining since the mid 1990s to the present day based on the data from the Monopolkommission (German anti trust commission).  Whereas graphs in blue show the decline in financial relations, the graph in gray shows the network of interlocking directorates in Deutschland AG for the year 2006 [MPIfG document here].

State-owned banks traditionally play a special institutional role in German corporate capitalism. They were established to provide economic development with the recources necessary and contribute to a sound business development with long term orientation. One of the few remaining nodes is Kreditanstalt für Wiederaufbau. KfW, originally established on the basis of the Marshall plan in 1948, is a state-owned development bank designed to assist the German economy and developing countries. The bank lends to small and midsized German businesses and buys securitized small and midsized business loan portfolios from German banks in order to keep that area of lending robust. KfW also provides funds for housing, infrastructure, environmental protection and preservation, and venture capital. KfW has adopted a global stategy in recent years.

Deutsche Industriebank (IKB), located in Düsseldorf, was founded 1973, is also specialized in lending to small and medium sized companies to foster German economic development. In August of 2007, IKB became the first victim of the U.S. credit crunch in the housing business since a 100 percent IKB owned company named Rineland Funding Capital Corporation (RFCC) as a result of extensive speculation on the US subprime mortgage market. The essence is that IKB was refinanced by state-owned KfW: While it is expectable and legitimate that German banks engage in the U.S. mortgage market and will be held accountable for their expected writedows, IKB was rescued by German tax payers payers money after Rineland Funding Capital Corporation (RFCC) had extensively lost on US. subprime mortgages. The future of IKB still remains uncertain [FAZ2; FAZ3; PR inside].