The Rise of the Plutocrats and the Death of Fiscal Democracy

The most effective way to embed economic conservatism and undermine the fiscal capacity of the state is through a public policy regime of long term tax cuts. This is precisely what occurred in the USA since the late 1970s and Ireland since the early 1990s. The primary mechanism for the redistribution of wealth to the rich has been changes in taxation. And over the past 30 years taxes on the rich have fallen dramatically.

One third of the total gains in income share for the top 0.1 percent in America can be explained tax cuts benefiting the rich.

All of the progressive social policies we associate with democracy are dependent upon the capacity of the state to raise taxes for public consumption goods.

Since the late 1980′s this fiscal capacity has been slowly eroding across Europe and the USA. Tax cuts for the rich under successive Republican and Democrat governments  have contributed to the explosion of income inequality. This has become a major topic of discussion, research and politics across US society. Why has the same not occurred in Ireland and Europe?

It is astonishing that whilst Ireland is in the grips of an IMF financial rescue package; pursuing unprecedented spending cuts in health, education, community and social welfare, there is zero discussion on tax policy.

This is despite the fact that Ireland has instituted one of the most aggressive low tax regimes in Europe. We should be thankful to Sarkosy and Merkel for making Irelands corporate tax rate a topic of discussion. At least it draws attention to the wider public policy regime of taxing capital.

Capital gains and effective corporate tax rates in Ireland are significantly below the Eurozone average, employers pay less social insurance contributions than any other Eurozone country, and income taxes have been narrowed to 50 percent of the population. None of this came about by chance, they were public policy decisions.

The Irish government have no interest in radically reforming the fiscal capacity of the state because it has caught the austerity fever; an obsessive compulsive disorder that is rapidly spreading across western capitalist societies. But the problem is deeper than this and elections wont change a thing.

Why? Because politics is organized combat. Winning requires organization, duration, and focus. The rich are organized and focused. The rest of us are not. Jacob Hacker and Paul Pierson (2010) call this ‘winner takes all politics’. The electoral spectacle is a side show to the real politik of private lobbying and organised interest groups.

The number of corporations with lobbyists  in Washington grew from 120 in 1971 to over 2,445 in the late 1980′s, not to mention the increase in the collective capacity of employers such as the American Chamber of Commerce and Business Roundtable to organise and influence public policy.

Between 1999 and 2009 the financial industry spent $3.5 billion on lobbying and $2.2 billion on campaign donations (Callinicos, 2012).

The rich influence government in such a way to protect and expand their own influence. This is called a plutocracy. Yet we are still convinced that parliament has the capacity to govern autonomously from the rich and powerful.  They don’t. The tug of war currently taking place between sovereign democratic states and international finance markets illustrates this.

Political commentators and analysts will argue that the low tax regime that favors the rich is the outcome of electoral preferences. It is not. Almost every study in the US and Europe show that the electorate have a preference for higher taxes on the rich and significantly more redistribution than is currently in place. There is no shortage of economic resources in Ireland or Europe. They are just concentrated in the hands of those with significant market bargaining power.

Plutocrats are in the process of drowning Fiscal Democracy.

The Politics of Adjustment in Neoliberal America and Monetarist Europe

The different political strategies of adjustment being pursued in America and Europe reflect two very different institutional and policy regimes; neoliberalism and monetarism.

The USA is neoliberal in orientation with the political capacity to be Keynesian. Europe, given that it is single market governed by independent nation states, lacks this political capacity. It is monetarist in orientation and can only generate the political capacity for austerity.

The politics of adjustment being pursued in response to the Eurozone crisis is closer to Thatcher in the late 1980′s. This reflects the institutional constraints of pursuing a common fiscal and labour policy for 17 diverse political economies operating under a fixed exchange rate regime. But, it also reflects the political preference of conservative monetarist elites in Germany.

If America decided to pursue an austerity driven politics of adjustment the Eurozone would be pushed further into crisis. If China, Brazil, India and every other country did the same, the global labour market would be pushed into a depression. It is a classic collective action problem. A strategy that works for one, when pursued by all, leads to chaos.

A monetarist Europe, it would appear, is far more economically conservative than neoliberal America.

To revive economic growth, employment and reduce public debt is a political rather than an economic challenge. It is highly questionably whether member states of the EMU can pursue all three of these simultaneously.

Germany has a domestic institutional architecture that combines high end export manufacturing with coordinated labour markets. Since the crisis, the policy response was not fiscal stimulus but active measures to sustain employment. The same occurred in the Netherlands, Austria and Finland.

Growth was sustained by exports in non-euro markets and employment secured through job subsidies.

The transnational preference and policy prescriptions of Europe, on the other hand, is to  revive economic growth through structural reforms aimed at reducing wage costs, increasing employment through labour market flexibilisation and reducing public debt through fiscal austerity.

This begs the question; would a federal neoliberal Europe be more or less conservative than a fragmented monetary union governed by the national interests of Germany and France?

Macroeconomic Imbalances in Europe is the Problem

The core problem at the heart of Europe is a structural imbalance between export led economies with current account surpluses (Germany, Netherlands, Austria and Finland) and economies with current account deficits (Italy, Spain, Greece, Portugal and Ireland). This is a structural problem with deep historical roots. It has also contributed significantly to the current crisis. Countries are being encouraged to export their way out of the crisis. But, how realistic is this?

Think about it. Not every country can run a current account surplus. Not every country can adopt an export led economy. For every surplus there has to be a deficit. For every export there has to be an import. Trade is a relationship between a buyer and a seller. Europe, overall, has a strong current account surplus, given that the strongest export in the world is at its center – Germany. But, so much of what Germany sells is internal to the European market. They are the biggest beneficiaries. Yet, all of the focus has been on the deficit countries i.e. those who buy and import the exports of the stronger economies. Since 2000 Germany recorded a surplus of €192.2 billion whilst Ireland, Spain, Italy, Greece and Portugal recorded a combined deficit of €192.8 billion.

This structural imbalance is being swept under the carpet for normative not economic reasons. To argue that export led growth for all countries is not the solution, and that those countries with a huge surplus are a core part of the problem is totally alien to economic orthodoxy. But, if we are serious about solving the crisis, it must be put on the table for discussion. Ireland, of all the deficit countries is the only one that can turn a current account deficit into a surplus. That is because it has a relatively strong, capital-intensive, export economy premised on US investment. The rest of European deficit countries do not have this. To reduce their current account deficits and regain competitiveness, all are encouraged to bring down unit labour costs.

This point is crucial. The standard narrative of Europe’s crisis is as follows; the GIIPS countries lost competitiveness since 2000 because unit labour costs got out of control. This made their exports more expensive. Germany on the other hand, controlled unit labour costs and hence their exports increased. This narrative is based on a standard orthodox economic explanation of nominal and relative unit labour costs in the process of production and exchange. If the GIIPS want to get out of the crisis, all they have to do is bring down unit labour costs. This improvement in ‘competitiveness’ will kick-start an export led recovery.

The truth, of course, is much more complicated. A loss of ‘competitiveness’ due to labour costs is probably only true for Ireland. Most countries lost competitiveness, and ended up running a current account deficit simply because they imported more than they exported. Again, this common sense observation has been lost on much of the economic profession. Import demand outgrew exports by 7 percentage points in the GIIPS countries. The opposite occurred in Germany.  The GIIPS countries did not experience a competitiveness problem but a problem of excess domestic demand! People were buying too much stuff.

The rapid increase in imports overshadowed the stability of export market share in the GIIPS countries. Domestic economies in deficit countries began to overheat and prices became inflated. All of this is based on a lending and borrowing relationship. This is the source of the debt crisis in Europe. Liquidity dried up, financial markets panicked and sovereign states soon found it impossible to raise funds to pay for day to day expenditure. Greece was the first domino to fall, Germany stuck to a non-interventionist policy and the rest is history.

Tightening fiscal policy and holding down incomes in the GIIPS will depress domestic demand. It might lead these countries into current account surplus because imports will fall. But, it will not solve the problem of intra macroeconomic imbalances within Europe. If Germany wants to remain in the Eurozone it has to start using its surplus productively by ensuring, much like the USA, continued liquidity of the European market.

The Future of Ireland and the Euro in 2012

This is the year when the economic experiment of the Fine Gael/Labour coalition and their partners in the IMF/ECB/EU commission will be put to the test. The continuation of the experiment has failed thus far and there is little reason to expect it will succeed in 2012 or 2013. This experiment can be described as an attempt to adjust the economy via an internal devaluation. So, what is an internal devaluation, has it been tried before and why am I so convinced it will end in total failure?

An internal devaluation is the attempt to reduce costs in the economy without adjusting exchange rates by driving down wages and public spending. Ireland cannot make the price of its currency cheaper because it is outside the control of the Irish Central Bank (ICB). It belongs to the European Central Bank (ECB)who are independent but sensitive to the interests of much larger and more important economies than Ireland i.e. Germany and France. According to the leading economic expert on the European Monetary Union, Paul de Grauwe, this inability to adjust the exchange rate in response to a massive economic crisis means that countries like Ireland, in effect,  are operating under a foreign currency.

The purpose of a currency devaluation is to make an economy competitive by offsetting costs to your trading partners. It is far from ideal but has been used extensively throughout European history for weaker economies to regain competitiveness. The objective is to increase exports by making them cheaper. So, in Ireland, a devaluation would reduce the purchasing power of your savings and wages relative to other countries but simultaneously boost exports and reduce debt. The collective outcome is a reduction in debt and an increase in GDP. These are core indicators by financial markets when assessing the capacity of a country to remain solvent. Iceland has adopted this course of action and contrary to what one hears in the mainstream Irish media they are recovering much faster than Ireland.

This is not a controversial argument. It is common sense to anyone who understands the basics of macroeconomics. A country with the capacity to devalue their currency will recover faster than a country that does not. So, can an internal devaluation do the same? This, as stated earlier, is the attempt to achieve what a currency devaluation does through a longer and more arduous process of driving down wages and public spending. The purpose is to make exports more competitive by making labour costs, rather than the currency, cheaper.

A currency devaluation shifts the burden of adjustment on to monetary policy whilst an internal devaluation shifts the burden on to labour market and fiscal policy. Monetary policy is technocratic and outside political contention. No one challenged the government over the 1986 and 1992 devaluation. An internal devaluation is political, deeply contested and therefore much more difficult to achieve. But, can driving down wages and public spending actually work? Will it actually solve Ireland’s economic problems?

The answer to the first question is a definitive no. Since 2008, Ireland has not driven down wages or public spending to the level that would be required in the radical theory of internal devaluation. Wages have been brought down in some sectors and in some firms. But, in general, Irish employers have responded to the crisis by cutting jobs not working hours or wages . Only the government, as employer, have imposed a general wage cut as a strategy to avoid layoffs.

Few, if any, employees have taken legal action against the non-payment of wages act (which makes it illegal to cut wages without negotiated agreement). Most employees in a context of 14 percent unemployment would accept a 3 percent pay cut over losing their job.  But, for employers, it is easier given the absence of labour market coordination to reduce costs through layoffs. This might be rational for an individual firm but the collective impact across society is an employment crisis. Contrary to economic orthodoxy, it is those economies with regulated and coordinated labour markets (i.e. not flexible) that have weathered the employment storm better because employers are forced to pursue job cuts as a last not a first option.

The general point is that an internal devaluation (the implicit policy of the Irish government) drives up unemployment rather than driving down labour costs Therefore, the policy of creating jobs whilst pursuing an internal devaluation is a contradiction in terms.

But, even if employers drove down all wages by 30 percent, would this have the actual desired effect of stimulating exports? Again, the  answer to this question is a definitive no. Taking that much purchasing power out of the domestic economy would depress economic demand and lead to further job losses, shop closures and general stagnation. This is common sense and most honest economists would admit this (even if their deductive models do not).

But, will the second component of internal devaluation, a reduction in public spending work? Ireland has advanced this more than any western economy. It has reduced spending on public sector pay, healthcare, eduction, social welfare and capital investment by more than any other European country. In fact, the level of reduction in public expenditure (current and capital) has led to an adjustment of 14 percent of GNP, which according to the IMF, is the largest ever recorded in the history of western capitalism. But, this is still not enough to achieve what would be required by an internal devaluation.

This radical agenda, being stoked by the irrationality of financial markets, has not and will not work. The deficit remains persistently high and the debt-GNP ratio is growing. Why? Because, taking that much money out of an economy, historically dependent on non-traded sectors of the economy (public sector, construction, legal professions and domestic retail) inevitably leads to a contraction in domestic demand. This is common sense. Most European policy makers know it wont work but to be quite frank, they don’t care. Ireland accounts for less than 1 percent of European GDP. As long as we don’t let the banks fail, stick with the Euro and shift the burden of adjustment on to taxpayers, they will keep their head in the sand.

It is for this reason that we need strong domestic political leadership with the courage to announce and recognise that the experiment has failed. There is a strong possibility that in 2012 Ireland will have a referendum on the new proposed EU fiscal treaty. This, according to the finance minister, Michael Noonan, will be a referendum on the Ireland’s future in the Euro. Those who oppose the treaty (and by default, Ireland’s continuation in the Euro and internal devaluation) will be denounced as irresponsible, crazy, anti-European and radical. Whilst those who support the treaty and Ireland’s participation in the Euro will be presented as rational, level-headed and committed to Europe.

However, it is the radical agenda of pursuing the unprecedented economic adjustment via internal devaluation that is crazy, irresponsible and likely to increase anti-European sentiment in Ireland. Neither the government nor a conservative media establishment will tell the public about this implicit high risk strategy because they dont fully understand what they are doing. They are willing to be bullied by the dicatorship of financial markets. It is high time that the real Europeans stood up and said enough is enough. The strategy is not  working. We need a new approach to integration and it has to be premised on solidarity not austerity.

The Power of Ideas – Explaining the Shift from Keynesianism to Neoliberalism

The importance of economic ideas and beliefs about the political-economic world have an enormous impact on public policy. There have been two dominant paradigms since World War two; Keynesianism and Neoliberalism – the first was a reaction, and a temporary stop-gap, to the dominance of economic liberalism that led to the financial collapse, and great depression in 1929. The rise of fascism and its clash with the march of communism led to world war 2. National governments  then instituted the Keynesian compromise, which lasted from 1950 to the late 1980′s. Since then we had a second coming of economic liberalism i.e. the belief in the rational-efficient market hypothesis; neoliberalism. After the second great financial collapse, brought about by similar capitalist-forces – neoliberalism, this time, has remained politically robust. The austerity response in Europe to financial-credit crisis is but one example of this. To explain why, we have to examine the power of ideas.

The neoliberal approach to aggregate demand, employment determination and income distribution can be described as follows. Economic demand comes from the free-intersection of market forces and any attempt to politically control or coordinate market resources leads to inefficiencies. The price mechanism will allocate value and efficiently distribute economic resources such as money. Employment determination emerges from this natural-market structure. Labour and capital are factor prices, and will be bought at a price that the efficient market sets. They move up and down (i.e nominal wage and price flexibility) because the market is efficient and responsive to exogenous shocks. Any interference such as wage setting institutions, corporatism(s) and trade unions upset the natural equilibrium and should be removed (of course, this can only be done by force or accommodation, thus requiring a strong state). Income distribution is a result of price-value. People get paid what they are worth in the market. The reward or return on labour and capital will distribute income in a normal-efficient manner. This might lead to inequality but reflects the resource allocation of the market and therefore it is efficient.

The neoliberal approach to monetarist and fiscal policies of the state are as follows. Monetary policy should be determined by independent central banks and the primary purpose is price stability. To keep inflation low ensures efficient capital investment as investors are certain about future price-returns. This creates a less risky betting (or investment environment). Fiscal policy, by design, is determined by elected governments, therefore it should be aggressively controlled, unlike the market. Government should step away from the market, shrink and minimize its direct role. Budgets should be balanced and taxes kept at a minimum. To pay for public services – privatize them. Governments under no circumstance should do what private market actors can do and never engage in deficit financed public spending. Macroeconomic policies should be left to market-technocrats.

The Keynesian approach to aggregate demand, employment determination and income distribution can be described as follows. The market should allocate resources but this is rarely sufficient to ensure aggregate demand, and therefore full employment. To ensure a balance between the two, requires activist state-political management. This commitment to non-market allocation of resources is primarily to ensure that labour is put to work. Employment determination in the market leads to inefficient outcomes – it is wasted. Wage coordination is not flexible and does not respond, like a price, to changes in supply and demand. It involves collective-corporatist actors such as trade unions and therefore we have to view the labour market not through the methodological-individualism of the market but societal-bargaining power. Income determination therefore is political. But, what is most important is a political commitment to full employment through activist-macroeconomic policies.

The Keynesian approach to monetarist and fiscal policies of the state are as follows. Monetary policy needs to be accommodating. Exchange rates need to politically adjust to boom-bust crisis. This might lead to inflation but in a recession, this is a lesser evil. Fiscal policy, in the periods of inevitable economic downturn in a capitalist mode of production, can replace a fall in domestic demand-investment. Whilst the private sector de-leverages, the state should engage in deficit-financed public spending. This, of course, is dependent upon a heavily regulated finance market, quite unlike what exists today.

The Keynesian ideational paradigm collapsed in response to a series of crisis that political-economists such as Marx and neo-classical economists predicted, albeit from two very different normative standpoints. The main problem was inflation and public debt. The state commitment to full employment, and comprehensive  social protection, in a period of recession generated a fiscal crisis for Keynesian welfare states.Furthermore, wage militancy could only be compensated by national income policies that some but not other countries could construct (USA, UK in the latter). The state response to a crisis of democratic capitalism (i.e. national governments trying to balance democratic stability through redistribution and capitalist-market expansion) provided the conditions for a return to neoliberalism. This led to a rapid change in the capitalist mode of production, a globalised financial-capital system of mobility, a rapid increase in precarious labour markets, the privatization, liberalization and re-regulation of the state-economy relationship.

The general point is that the last thirty years, despite its institutional variety, was an era of neo-liberalism and born out of the crisis of the brief Keynesian-welfare state. The type of capitalist-economy that gave rise to the great depression was, similar to what occurred over the past thirty years, premised on an idea and belief system about how the political-economic world works. Therefore we need to probe the power of the idea of efficient markets if we are to explain the current crisis and the future trajectory of institutional change in capitalist economies.

Neoliberalism is supported by a belief, reflected in the method of inquiry in much of social science, in a micro-rational theory of behaviour and a macro-theory of system-equillibrium. Mark Blythe, the international political economist, calls this belief ‘ELEN’. The four underlying assumptions are as follows. The first is that the world is in equilibrium. This is because the world is reduced to generalized market exchange with rational actors calculating the cost and benefits of their action. Secondly, underlying causes in a perfectly stable rational system are linear. If y exists in the economy it can be explained by x. All relations are causative. This is the opposite of the Marxian method of inquiry premised on dialectics. In this method, social relations are not causative but a configuration and dynamically interact with one another. It is holistic. The third assumption is that all change in an  efficient-equilibrium system, premised on causative relations are exogenous. It takes an oil shock, government intervention or a collapse of the monetary economy as external to the system. Change in any equilibrium system cannot be endogenous as it would no longer, by definition, be rational-stable-equlibrating. Finally, all outcomes in a rational-efficient system are normally distributed. Stability is the norm and fringe noises are to ignored. Think statistical averages.

All of these assumptions lend themselves to a rational-efficient method inquiry and simple public policy recommendations such as tighter fiscal rules on prolifigate politicians, and hence their dominance in the economics social sciences. Actor are rational, markets are efficient but require rules and regulations for risk management. This is why the EU is currently obsessed with instituting hard-fixed fiscal rules to avoid over indebtedness by national governments (despite the fact that this , if even, only applies to the Greek case). They cannot overcome the powerful belief that markets are efficient because their underlying public policy reccomendations are wedded to fixed epidemiological and ontological assumption of sceintific economic management. But, any common sense observation of the world would debunk the ELEN asssuptions.

We live in a world of capital accumulation, a particular mode of production that is in constant flux, change, process and motion. It is a dynamic system that has jumped from crisis to crisis, that are produced internlly within the system. Since the 19th century there have been 80 financial crisis but anyone doing an MBA, in a top university, is still taught that markets, financial or otherwise are self-regulating, efficient and capable of rapid adjustment. It is simply NOT true. Most relations are non-linear and change is almost always endogenous to social systems. Finally, interests and resource allocations are not normally distributed. They are conditioned by those with more or less market-bargaining power i.e. those with financial assets. Hence, the global tug of war between national-sovereign states and oligarchs in international finance markets.

All of this points to the need for an epistemological and ontological revolution in the social sciences to illustrate that the idea of efficient markets and their foundations in rational calculation are a Utopian illusion with political consequences. Change is not a process of technical management or the rational adjustment to exogenously induced problems but a dynamic interaction between social forces with unequal power resources.

Explaining Institutional Change in European Political Economies – The Case of Ireland

How do domestic political actors (state, capital and labour) respond to the adjustment constraints of globalised variants of international market liberalisation? This question guides the analysis of my PhD, and premised on an argument that the politics of capitalist change can be traced to a decline in the strength of trade unions and the liberalisation of labour markets. The weakening of trade unions and institutionalised labour markets, it is argued, explains the public policy paradigm shift from Keynesianism to neoliberalism across Europe. The role of the state in conditioning this pattern, and the diverse trajectory of change it invoked, is central to institutional political science. The political shift was a response to the adjustment constraints of globalisation, changes in the labour force, capital mobility and financialisation in general, and Europeanisation-EMU, in particular. The diverse mechanisms through which the adjustment played out, however, are endogenous to national institutional politics. This dialectic between exogenous constraints and endogenous politics explains the interactive process, form and variation of change in a given capitalist institutional regime. Or, more precisely, in Streeck or Polanyian terms, the attempt to resolve the tension between capitalist market expansion and national democratic stability explains the trajectory of change in the study of comparative political economy. What is most interesting about the shift to European market liberalisation, and the decline in the strength of trade unions, is that it was compensated by new forms of state led social pacts and tri-partite dialogue in public policy.

The analytic approach adopted in this thesis is premised on a variant of actor-centred institutionalism, in the study of comparative capitalism, which appreciates the historically evolved, structural and context-specific constraints in shaping domestic actor strategies and preferences. But, importantly, unlike most theories of action in comparative political economy, it is constructed around a power-distributional understanding of collective agency, not rational choice. The latter, most associated with the varieties of capitalism game theory, explains institutional diversity on the basis of two path dependent equilibrium strategies of rational firms in high-end production. A power-distributional approach does not assume efficiency seeking actors, nor the functional design of capitalist institutions. It conceptualizes the latter as a political process of compliance, compromise and non-compliance between associational actors with unequal power resources that change over time. Thus, it takes history and capitalism seriously. This has significant implications for how we explain institutional change and variation in the domestic governance of European industrial relations, in LME and CME type economies, as will be shown in chapters 1 and 2. Corporatism (s) and new social pacts will be presented as a state strategy, or different modes of economic governance in various state traditions, to ensure social order and stability. The economic performance and coordination effects, whilst important, are secondary to this governance function. This explains why corporatist type arrangements can emerge in neoliberal oriented political economies, such as Ireland.

The structure and outline of the thesis is as follows;

Introduction

The introduction sets up the Irish case on the basis of why centralised wage bargaining collapsed in response to the Eurozone crisis, whilst outlining the economic and distributional performance of Ireland’s political economy, in a comparative European perspective, in the pre and post EMU era. The puzzle of Ireland’s political economy, and its industrial relations regime in particular, was that it was managed through a tripartite mode of economic governance, locally known as social partnership. Unionised wage relations were not decentralized to the market, as in the UK, but centralised at national level. The explanatory problem, therefore, is trying to explain the conditions that led to the emergence, consolidation and collapse of social pacts over time. Or, more precisely, why did successive centre-right governments, in a period of neoliberalism, institute social partnership as the default position of Irish politics but shift to a market led adjustment in response to the crisis. The core argument is that social partnership was an institutional construct of the state to adapt to the exogenous constraints of being a small open economy on the periphery of Europe, but the dynamics that made this possible are endogenous to Irish politics. National income agreements have their historical roots in Irish state-nationalism, catholic-corporatist ideology and successive Fianna Fáil governments. Thus, to explain the rise and fall of social partnership we need an actor-centred analysis grounded in a power-distributional institutional analysis. This leads to a prioritisation of the following independent variables in explaining the Irish variant of corporatism; the coordinating role of the political executive of the state, the low-tax market conforming political exchange, elite networks and a voluntarist-exclusive structure of collective bargaining.

Theory

Chapter 1 probes the literature on comparative political economy and its relationship to the study of corporatism (s) and the labour market-wage relation. It will outline three schools of thought; critical-Marxism, neoclassical economics and comparative political economy that seek to explain industrial relations. It argues that comparative political economy is best placed to explain the variation and diversity of European varieties of capitalism, because it takes institutions and context specific actor preferences seriously. But, within this framework there are competing perspectives on how to explain and define institutions; historical, sociological, rational choice and power-distributional. They differ on how to relate a micro theory of social action with a macro capitalist institutional order. The thesis will argue in favour of a power-distributional theory of institutions because it takes class politics seriously. It will subsequently use this power-distributional framework to outline the benefits and shortcomings in the literature on neo-corporatism, varieties of capitalism and new social pacts. It will argue that all three fail to appreciate the changing role of the state in managing the trajectory of change in a neo-liberal EMU economy, and the shift toward processes of market conforming political exchange underpinning European industrial relations. National pacts are premised on a process of policy concertation but their structure is conditioned by historically evolved regimes of collective bargaining. Thus, we need to bring a power-distributional analysis back in to the study of domestic capitalist institutions.

Chapter 2 will explain, using the power-distributional approach to institutions, the renaissance of corporatist policy making in Europe. It will illustrate, using the ICTWSS database, the European cross-country trend toward the use of social pacts by government, in the context of a simultaneous decline in the effective institutional power resources of labour; trade union density, centralized wage bargaining, collective bargaining coverage, coordinated wage setting and strike action. Given this decline in the power resources of European labour, it will be argued that to explain the new corporatism(s) and forms domestic economic governance, associated with national pacts, we have to examine the strategic interest of the state and new forms of political exchange. The literature on new social pacts explains state strategy on the basis of weak electoral governments or rational problem solving. Both are important but fail to appreciate the use of social pacts by the state to increase their strategic capacity to govern fiscal, labour and wage policy under a neoliberal-monetarist regime. The structure of collective bargaining underpinning national wage agreements is a central variable in explaining diverse state strategies of democratic governance, and social pacts are but one example of this. Based on the collective bargaining literature, the thesis will outline a comparative typology of different modes of economic governance in European industrial relations. The constituent variables of the typology are measured by the instrumental-economic and expressive-political function of corporatism (s). Some countries require a direct role for the state whilst others do not. The comparative typology will then isolate the case of Ireland, as the dependent variable, in the diachronic historical case study.

Method

Chapter 3 is a brief methodological defence on the use of single country historical case-studies. Based on the literature and typology outlined in chapter 2, Ireland will be presented as the archetype liberal market variant of corporatism. Historical-time periods are selected as the optimal means to diversify the dependent variable. The case study is divided into a comparative study on the emergence, consolidation and decline of social partnership in the pre and post EMU period. The process in each case study is traced to actor strategies, in response to a given problem, within an evolving set of institutional constraints. Elaborating on the introduction, it will argue that the core explanatory variables in explaining centralised wage agreements in the Irish case are a) the coordinating role for the state b) a market conforming political exchange d) processes of elite access to government and d) voluntary and exclusive structures of collective bargaining. Combined, these constituted a particular power configuration or political coalition – the Irish third way – which exhausted itself over time. The causal process tracing analysis is based on forty elite interviews, archival-documentary analysis and a variety of statistical sources.

Empirics

Chapter 4 traces the emergence of social partnership, from 1987, to the coordinating role of the political executive of the state (Prime Minister), in response to a fiscal-debt crisis. It was an intentional strategy by administrative elites to embed a national incomes policy, premised on a neoliberal exchange and fiscal adjustment, to enhance the developmental prospects of Ireland’s national economy in a fixed monetary regime. The endogenous political context of a decline in trade union density and an emergent right wing parliamentary majority shifted the preference of trade union leaders toward social partnership with Fianna Fáil. Access to governmental decision making was the glue that consolidated trade union strategy whilst the commitment to three years of competitive wage restraint ensured employer acceptance. The guarantee of political-industrial stability ensured a willingness by the state to support a new national corporatist regime of inclusive economic governance. The outcome was a state project to open up the political system to organised-economic interests. This began a Sisyphean process of institutional change, moving Ireland from an Anglo-Irish to a Euro-Irish industrial relations regime.

Chapter 5 traces the continued consolidation of national wage agreements in the pre-EMU period to the constraints of Maastricht and an attempt to solve Ireland’s long standing employment problem. A new centrist government committed to cutting income taxes whilst simultaneously adopting a developmental role in job creation facilitated a strategy of wage restraint by employers. For a variety of factors, Ireland experienced an employment boom which became directly associated with social partnership, even if it was not the direct cause. Access to political power, via the Prime Minister’s office and nurtured by state managers, in the context of a rapid decline in trade union density and a voluntarist collective bargaining regime embedded ‘partnership’ as the national strategy of ICTU. Employers continued with the process as it guaranteed wage restraint, significantly higher returns on capital investment and put no legal-formal constraints on the sectoral interests of US multinationals. The outcome, for a brief period, given the focus on wage management (as opposed to the expressive legitimation of government policy) was a form of ‘competitive corporatism’, a concessionary trade union strategy in the interest of full employment.

Chapter 6 traces the consolidation of social partnership in the post-EMU era. In the absence of exogenous constraints the government began to use the process, not for austere economic management, but building state capacity to supplement a poorly functioning parliamentary system. Organised interests were embedded into a structured process of policy formulation in the administrative-state. However, inflationary pressures induced by the EMU, put significant pressure on the national wage agreements. The government responded by slashing income taxes and instituting a pro-cyclical tax-growth regime premised on real estate. There was a growing divergence of interest between ICTU and IBEC, on labour market regulation, in the context of full employment and growing house price inflation. But, similar to the emergence of social partnership, access to political power via elite networks, constructed around the political executive of the state, in the context of declining labour power, generated compliance amongst the actors. The expansion of the policy process and a shift away from instrumental-wage management, toward expressive-legitimation of government policy, led to a form of ‘pluralist corporatism’. Again, the interest of government was stability and social order.

Chapter 7 will trace the collapse of social partnership, under conditions of crisis, to the policy constraints of EMU and voluntarist-exclusive structures of collective bargaining. After 2004, employers increasing opted out of the voluntarist framework, in search of cheap labour associated with EU expansion. In response, trade unions demanded a legal-right to collective bargaining and an enhancement of legal rights for non-union workers. This was reflected in the 2006 national-pact agreement; T16. But, before any of the policy gains were implemented, the global financial crisis hit and Irelands housing bubble burst. The government and employers pulled out of the process, internalised the policy constraint of EMU, shifted the entire burden on to the labour, and pursed a market led adjustment premised on internal wage devaluation. As an institution, the Irish variant of corporatism was premised on the political preference of government not the institutional-effective power resources of labour. This voluntarist-flexibility enabled it to consolidate as a process in an LME context, but it simultaneously meant that trade unions lacked any capacity to impose an effective institutional constraint on the strategy of capital under conditions of crisis. The low tax liberal market exchange was, in the end, a Faustian bargain for organised labour.

Conclusion

Chapter 8 will argue that the Irish political economy never internalised the economic constraint of EMU. After 2000 its fiscal, labour and wage policies were totally inappropriate to a fixed and unaccommodating monetary regime. However, corporatism, as argued in chapters 1 and 2, is primarily about generating political stability and social order. In rational-ideal choice terms, the national wage agreements would have technically coordinated and ensured a balanced equilibrium with a monetary regime. In power-distributional terms, this cannot be assumed. The institution was and only could be held intact by generating a distributional return for the actors. This embedded a political coalition that was fragile and contingent upon economic growth and the preference of government. Returning to the typology in chapter 2, the core explanatory factors underpinning the Irish variant of corporatism will be unpacked: the political executive compensated for weak collective bargaining structures at the micro-level, and a neoliberal exchange premised on low taxes ensured trade union compliance. The voluntary and exclusive nature of the process meant there were no legal-formal constraints on the actors. This benefited the strategic interest of employers, as they could exit the process at any stage. To what extent, therefore, Ireland can be considered ‘corporatist’ (i.e. lacking encompassing and representative employer associations) is an open question. In the end, it was a state strategy to re-nationalise the few remaining policy tools available to government in a globalised economy. The condition that made this possible was not weak government but a strong political executive.

The conclusion will draw some brief lessons from the Irish case, based around the theoretical framework in chapters one and two, for the study of social pacts, political exchange and varieties of capitalism. It will be argued that the future trajectory of labour relations in the context of a new politics of adjustment at transnational European level is definitively Hayekian rather than Polanyi in design. Whilst it is perfectly conceivable that the Irish state will pursue a national-wage pact at some stage in the future, given that it is not dependent on any structural pre-conditions other than the political preference of government, it is highly unlikely that it will make any difference to a broader institutional trajectory of change toward a neoliberal oriented industrial relations regime. As argued by Bacarro et al (2011), the form of social partnership type arrangements governing corporatism (s) may remain intact but their function has categorically shifted from one based an effective labour constraint and democratic governance to liberating the competitive process of capital accumulation, and legitimating an increasingly defunct parliamentary system. In the absence of an effective counter-power or change-agent, we are likely to witness continued convergence of national economies toward EMU induced economic orthodoxy (or, in the words of economists – technical coordination), even if the configuration of their constituent and institutional elements in fiscal, labour, wage and social policy remain divergent. The lesson for the study of comparative political economy is that variation in institutionalised labour power-resources and political partisanship at state level, not the rational-efficient design of high performance institutions by multi-nationals, explain the diversity of European varieties of capitalism.

The Myth of Price Formation in Capitalist Markets

The fluctuation in the price of government issued bonds is causing chaos. This begs the question – why has there been no attempt to politically control fluctuating market prices for government debt? Why have democratically elected governments not stood up to anonymous markets in the interest of social stability? The answer to this question is relatively straight forward - conservative governments and elite technocrats across Western capitalist society believe in the economic idea that markets are more efficient than alternative mechanisms to control the price of government issued debt. It is this belief in the efficiency of market allocation of resources that governs  the public policy approach to price formation.

But, price formation (in this case, for government debt) is not best served by the market. The past 15 years have shown that free finance-markets are a totally inefficient means to allocate money, judge solvency and reward merit. One does not need a degree in economics to recognise this common sense observation. It is even acknowledged by the economic orthodoxy. But, obviously, given their normative commitment to the utopian free-market, they are unwilling to countenance any political intervention or institution to constrain the fictitious law of supply and demand. This applies, in particular, to the price of money-currency and labour. Hence, the economic contempt for trade unions, collective bargaining and state own public investment banks, or anything that constrains the free-market capitalist.

It is important to remember that the Irish state is ‘insolvent’ because the market (large credit rating agencies) put an unaffordable price on government bonds after the taxpayer guaranteed bank debt. Government debt is now too expensive to buy. It is perfectly conceivable for the political powers that be, in Europe, to ignore the credit rating agencies and establish their own mechanism to set the price of government debt. Prices are not some mystical outcome of markets. They are, and always have been, controlled by powerful capitalist actors or in some cases, associational-corporatist actors such as trade unions and employers (wage setting). Those who set the price of bonds and other financial assets are asset fund managers and college graduates gambling online, betting against uncertainty. Surely it is more rational for public control?

It is perfectly reasonable to expect political parties, representing the government of the state, to set market prices in the interest of a higher public good other than protecting the finance-banking sector. The idea of full employment, social stability, coordinated investment and public protection, against vagaries of market-price fluctuations are rational objectives for any political-economic system to pursue. To politically control the price of money-debt is no less reasonable than arguing for a national minimum wage (which, orthodox economist oppose as labour-price control). Both can be defended on the grounds of efficiency and social justice.

The hegemonic consensus of economic orthodoxy is keeping millions of people in unemployment and our social system in turmoil. The first way to tackle this hegemony is to directly confront their theories of ‘price formation’ in hypothetical free-markets. If economists and policy makers argue that markets are more efficient in setting the price of debt and labour - ask them to prove it. Only a fool would answer yes. The reality is that money-debt, like labour, cannot be commodified in the same way as a pair of shoes or a bag of chips. Money and labour are fictitious commodities. Political price fixing in these domains offer material security and normative stability against market chaos. Politics is an independent force that can and must exert itself over anarchic capitalist markets.

The Politics of Taxing and Socialising Wealth

Post world war two, the dominant public policy paradigm in Europe was Keynesianism. This meant that economic activity was politically directed toward productive investment. The Fordist industrial mode of production was labour intensive. Therefore, the capital accumulation regime ‘put labour to work’. From 1950-1980, full employment was maintained across Europe and increased the bargaining power of labour. This acted as an effective constraint on capital, and made possible by a single-earner household family structure. Profit was accumulated and capital privatized but the surplus was used for expanding production – it was a labour inclusive regime (neither by default nor design but because of a given public policy-institutional structure).

From the 1980′s capital markets were deregulated as a response to a crisis of accumulation, and rapid changes in the labour market. The post-war growth model slowed down, inflation soared (partially because of a strong labour movement) and debt was accumulated by the state. To induce employment and economic growth the policy response by European governments was to ‘free up capital’ through financial re-regulation for credit growth. Labour was weakened and capital-business strengthened. Or, more precisely, large finance houses (rather than small artisan firms) became the new locus of investment. The new dominant public policy regime was ‘neoliberalism’. The underlying growth model was ‘post-Fordist’. Firms began to put money-finance rather than labour to work, and the state took on a developmental role, re-regulation for competition.

In a system where money rather than labour is prioritized, the character of the regime fundamentally changes. The assembly of wealth is less driven by the state and public policy but private-capital ownership. As argued by the varieties of capitalism theory, there was a shift from politics to the private market. Or, more precisely, from the state toward the private firm. Taxes on those who own capital were decreased (an empirical trend across the OECD) and national boundaries collapsed by financial markets. The outcome, contrary to the assumptions of neoclassical economic theory, was a concentration and centralization of capital, wealth and income. Whilst rarely described it such terms – it was a large wave of capital privatization (or creation).

Thus, neoliberalism as the dominant public policy paradigm was a) an idea that allowed capital accumulation to occur via the privatization of money in free financial markets (previously restricted), b) a practice that varied across space and time, but strongly backed by state-governmental actors and public policies and, c) a strategic project supported by elite power business-corporate actors seeking to expand markets. The outcome was a rapid increase in income inequality, weakened labour and a reconfiguration of state power. It varied across countries, but the commonalities are just as important.

This accumulation regime is the background to the 99 versus 1 percent debate in the USA. The richest 1 percent of the US population own 33 percent of net worth. The US has 400 billionaires, most of whom are the owners of firms such as Microsoft – Bill Gates.  Income growth, according to all research, has proven to be incredibly uneven. From 1979-2007, the top 1 percent of US households saw their real after tax income grow by 275 percent. For the top 20 percent, it was 65 percent. For the 60 percent majority in the middle it was 40 percent, and for the poorest 20 percent of the population it was 20 percent. The reason for this dramatic increase in income inequality is the concentration of market income. The rich do much better in an economic system premised on aggressive and de-regulated finance markets, and unlike previous politically governed modes of capitalism, the rich are free to do what they want with the surplus.

Even in Marxist economic theory of M-C-M, it was assumed that the rich would invest their surplus into expanding production. This was based on a national-protectionist system, and was assumed to empower labour. This makes no sense in a world of global capital mobility. The state no longer takes away a large percentage of the private-capital surplus, as occurred in post-war social democratic regimes. Capitalists, and those who own financial assets, are free to do what they want with their capital. This is the logic of free markets and a powerful philosophical paradigm underpinning contemporary public policy.

Jumping forward to the current crisis  (where we are living with the consequences of financial deregulation and the privatization of money). A debate is emerging about what to do with the 1 percent i.e. those who own most of the world’s income-assets-wealth. Most policy prescriptions have focused on taxing the income, the wealth or imposing a financial transaction tax. These are welcome developments. However, they ignore the more important question i.e. how to use the private ownership of scare resources for social gain.

The state can tax the 1 percent and generate a little bit of revenue. But, given the few numbers involved it wont raise much tax (unless a 90 percent tax was imposed). Furthermore, the state will use the revenue to pay off bad debt not strategic investment. Thus, the capital will not be used productively nor will it be socialized to compress and re-distribute income. Therefore, the focus on ‘tax the rich’ is somewhat misplaced. The question should be on the capacity of the state to nationalise/socialise the wealth for productive investment. Or, should governments develop a legal regime that imposes a regulatory obligation on those who own scare resources to use them for productive-labour use rather than a) private luxury consumption and b) finance stock-asset recycling. In the Irish case, this might involve a legal requirement for MNC firms to re-invest 20 percent of their surplus in local job creation.

The general point is that there are surplus money-resources for productive investment that can solve the crisis and re-distribute to minimize income inequality. But, because these resources are privately owned, and protected through legal guarantees, the state cannot touch them. Nor does it want to, for a whole variety of reasons, not least the stickiness of the ideational paradigm underpinning public policy. But, in the absence of restrictive capital controls or beneficial constraints to use these resources they will remain in private and unproductive ownership. Therefore, it is ultimately boils down to a strategic choice on how to use surplus private capital. Should it be maintained as a) private luxury for the 1 percent b) taxed as means to generate state revenue or c) socialized for productive labour-intensive investment? These are some just some policy considerations for the occupy movement and progressive political parties to consider. We need a new public policy paradigm to govern the production, distribution and exchange of scare resources for the next thirty years – premised on a labour intensive ecological revolution.

The European Government of Goldman Sachs

So, Berlusconi was eventually removed, like Papendreou, by external forces in the ECB alongside European technocrats and anonymous bankers. The money markets decided that Italy must pay a premium on its bonds for having Berlusconi as head of government. Within days he was gone. We don’t know the fine details of the communication between ECB, international finance actors and domestic technocrats in Italy. But, we do know that it was not the millions of furious Italians that brought Berlusconi down. It was the political pressure of markets. Central to this nexus of political power is Goldman Sachs.

 What do Mario Monti (new Italian head of government), Lucas Papademos (new Greek head of government), Mario Draghi (new head of ECB) and Peter Sutherland (hugely influential in Irish public policy) have in common? They all worked for the American investment bank – Goldman Sachs. This is not a coincidence, there is a subtle takeover taking place in Europe, oriented around elite networks of business plutocrats, in alliance with political technocrats, to ensure that the crisis is resolved without damaging the banking sector. Goldman  Sachs is weaving a powerful network through a subtle form of quiet politics, under the guise of economic technical management.

Draghi was Goldman Sachs vice chairman of the European division, from 2002-2005, during the period they helped cover up dodgy accounting practices in the Greek treasury. Monti was a special adviser to European Goldman Sachs from 2005, using his influence to “open doors” to the corridors of European political power. Papademos worked as a trader for the investment bank, and as governor of the Greek central bank from 1994-2002, was centrally involved in covering up Greek debt with assistance from Goldman Sachs. Sutherland is a chairman of Goldman Sachs international, with direct access to the political executive of the Irish state, because of his close Fine Gael connections. He was hugely influential upon the decision to bail out the banks – and make the Irish state insolvent.

 These are just four players in the European Goldman Sachs network. There are many more in high seats of the European civil service, finance ministries, and national central banks. The strategy of the US investment banks, according to the French journalist,  Marc Roche, is to target EU commissioners and central bankers. This ensures direct access to information on interest rates, and undisclosed political decision-making. Discretion and quiet politics is the strategy. Goldman Sachs do not want their name mentioned anywhere. They are content with a subtle process of manufacturing collective consensus, behind closed doors, in alliance with other neutral ’economists’, to ensure the rules of the game are instituted in their favour.

It is an extraordinary network of power that leads from Washington, Dublin, Brussels, Frankfurt, Rome and to Athens. The Europen Goldman Sachs government has significantly more influence than national politicians, backbenchers, and of course, European citizens. They, like most financiers, have a contempt for any attempt at politicizing macro-economic policies. This is why they want Prime Ministers replaced with technocrats, preferably from the central bank, to get on with the job of imposing structural adjustment in wage, fiscal and labour market policies. The Irish, Italian, Spanish, Portugese and Greek governments (whether they realise it or not) are nothing more than debt collecting agents of international finance. Democracy has been suspended in the interest of the London/Frankfurt stock exchange.

A Theory of Institutional Change in Capitalist Societies

“You cannot step into the same river twice; nothing endures but change”’   Heraclitus (535 BC)

In the study of democratic capitalism one is confronted with the challenge of explaining how institutions change and evolve over time. Previously, a large shock or an event (such as the French revolution or the oil crisis in the 1970’s) was used to explain periods of stability and change. But, much like the study of biology, scholars recognised that gradual and incremental changes can often lead to transformative social change that goes unnoticed, and can only be analysed ex post. This change takes place in-time; therefore time itself becomes an important variable in explaining social phenomena. Given technological developments over the past 20 years – time has become increasingly compressed and social change more complex. The macro-institutional change that occurred in the political economies ofEurope, from the late 1980’s, for example, is increasingly described as a shift from ‘Keynesianism to Neoliberalism’. The institutional process and explanatory factors that enabled this change to take place, however, is deeply contested.

The focus on institutions is central to the study of comparative political economy and economic sociology for empirical reasons i.e. it enables us to explain variation – why Italian politics is different to Dutch politics, why wage bargaining leads to egalitarian outcomes in Denmark but not Ireland. Institutions include wage setting, electoral and welfare systems, corporate governance, industrial sectors and political parties. At its most basic, an institution is a ‘rule’ or a ‘norm’ that imposes constraints and opportunities on actors. In the study of comparative capitalism, institutions are often conceptualised as beneficial constraints upon the greedy pursuit of self-interested actors (i.e. labour market regulations exist as a counter-force to the power of capital. It is a beneficial constraint for social cohesion). Institutions also overcome problems of collective action. All actors (trade unions, employers, government) in an economy want full employment; institutions enable them to coordinate their strategies into a shared public pursuit of this goal. Different institutional regimes, therefore, explain capitalist diversity. The study of national incomes policies in the 1970’s was central to this research program. But, if capitalist institutions are increasingly converging on the same market conforming function (let’s call it neoliberalism) does this mean that varieties of capitalism (the replacement theory of neo-corporatism) no longer exist?

In most western capitalist economies ‘neoliberalism’ was not imposed via shock therapy as occurred in central and Eastern Europe. It was a gradual process of political liberalization, in response to a given set of environmental factors; capital mobility, globalisation, EMU, financialisation, technological change, shifts in structure of the family and labour market (Streeck and Thelen, 2005). The causal process is complex but most agree that the de-regulation of capital markets had the most significant impact on the strategic capacity of domestic actors, particularly the state, to pursue non-neoliberal modes of adjustment. Keynesian democratic institutions that imposed ‘beneficial constraints’ on capital were gradually liberalized with unforeseen consequences.  Political and business actors gradually morphed institutions (that previously existed for different functions) to enact market conforming rules and regulations in the interest of capital accumulation; to ensure economic and employment growth (think about European wage setting systems, during the 1950s-1970s, these were previously used to compress income differentials. From the 1990′s they evolved into a means to ensure wage restraint and competitiveness).

The shift toward a market conforming paradigm, or neoliberalism, did not come from above but from below. In social science terms, it was a gradual endogenous development that took expression in different ways, at different times and in different places. Thus, whilst we know, intuitively, that there has been a paradigm shift toward market conforming rules in all areas of public policy, we still lack the analytic tools to test and explain how this transformative change took place. This is because we do not have a fully fleshed out theory to explain institutional change (Thelen, 2010). Powerful business interests did not just turn up to parliament one day and take power; it was a much more gradual process of quiet politics (Culpepper, 2010). InEurope, the institutionalisation of the single market, and then the single currency, changed the rules of the game for all capitalist actors, but this did not lead to the construction of new institutions. Old rules were morphed, ignored, transformed or layered on to pre-existing ones.

To explain institutional change and stability in complex and heterogeneous societies is no easy task. There have been three main schools of thought that attempt to do this: historical institutionalism, rational choice institutionalism and sociological institutionalism (Hall & Taylor, 1996). Historical institutionalists focus on how institutions, such as centralised wage bargaining, emerge and set in place a series of lock in effects to create a path dependent mode of behavior for actors. Path dependence is broken by exogenous shocks or critical junctures. The problem with this analytic framework is that it provides an insufficient account of the actors who underpin and constitute institutions. Rational choice institutionalists, on the other hand, give priority to agency but in timeless game-theoretic terms. Institutions are considered the outcome of rational calculation by intentional actors to ensure system equilibrium. The problem with this analytic framework is that it is apolitical and ignores the importance of culture, power and history. Institutions are more than a series of nested games to ensure equilibrium. Capitalism, as argued by Streeck (2009) is a social order not a rational-efficient system. Sociological institutionalists recognize this. Their frame of reference is focused on the role of norms and codes of appropriateness in governing and constituting behavior. The problem with this analysis is that it is prone to tautological hypothesis, and does not provide a sufficient account of rational or purposive action. Institutions become indistinguishable from culture – which is hard to measure and define.

This essay proposes a fourth approach to explaining and understanding the processes of actor-centered institutional change in capitalist societies: power-distributional. This builds upon the work of Thelen and Mahoney (2010) but differs in three respects. Institutions in political economy have to be considered first and foremost as capitalist. Thus, as argued by Streeck (2010), we need to bring capitalism back in to the study of institutional and social change. Secondly, institutions have to be analysed according to how they are used by the coalition of actors that underpin them. If we are to explain change we must examine the purposive action of agents, and the coalitions they form (individuals, groups, associations), not market transactions. Thirdly, capitalist institutions are inherently unstable because powerful actors have the capacity to exit, challenge and confront existing norms. Therefore, a change in institutionalised power relations and its impact upon the underlying political coalition explains the process of capitalist change. When applied to the incremental but transformative shift towards neoliberalism – it is the decline in the effective power of labour that provides the most powerful explanation. Thus, contrary to the most influential theory in the study of comparative political economy; varieties of capitalism (Hall and Soskice, 2002), a power-distributional approach locates the driving force of change to be capitalist firms operating in the absence of a labour constraint. The interest of corporate business is central to explaining capitalist diversity but not in rational equilibrium terms. Capitalism is a social order and the variety it takes is a reflection on the institutional strength and weakness of its counter-power: labour.

Capitalist institutions both condition and are framed by the strategic preferences of the actors who underpin them. Whilst one cannot assume the fixed preference of actors, a priori, we can reasonably expect that employers, trade unions and political parties in government will have different perspectives and preferences on fiscal, labour market, social and macro-economic policy. Corporatist institutions, in particular, are political legacies of concrete historical struggles that try to strike a strategic compromise between different interests. They attempt to mediate between state and civil society for two purposes: economic performance and democratic legitimacy. But, they are only sustained to the extent that they generate a distributional return to the actors. Institutions, in this regard, are a resource for actors to pursue and recognize their strategic interests.  In my PhD, for example, I ask why the Irish state, employers and trade unions pursued a strategy of ‘social partnership’ and the conditions that enabled the state to exit the process in response to the Eurozone crisis. The empirical conclusion is that elite networks constructed around the Prime Ministers office ensured compliance. This access to cabinet government, in addition to a political exchange premised on low incomes taxes, sustained the distributional coalition. But, the decline in the effective labour power of trade unions, and the voluntarist structure of collective bargaining, meant that it was ultimately dependent on the preference of employers and the state.

Taking for granted that capitalism is unstable, conflicted and contested (i.e. the opposite of a rational choice equilibrium model); actors will pursue their strategies within a given set of broader institutional constraints. In capitalist societies, employer strategies are conditioned by institutions of the labour market (particularly the structure of collective bargaining) not because of the institution per se but because of the extent to which it increases or decreases the power resources available to the actors to engage with one another as ‘social partners’. If capital-employers can totally ignore labour, they will. But, this is rarely, if ever, the case. All of the main functional actors in a capitalist economy – state (represented by government/political parties), trade union and employers have a shared interest in managing and directing fiscal, wage, social and labour market policy. When a compromise is reached on these issues and embedded over time – it is generally referred to as ‘corporatism’. Ireland is the archetype example of liberal market corporatism in the neoliberal era. The lesson to be learnt from the Irish case is that state corporatism and centralised wage agreements, as a mechanism to ensure social order, can occur in the absence of a social democratic exchange. Furthermore, it emerged as a mechanism for the state to legitimise fiscal adjustment. But, over time, it began to serve very different purposes.

A power-distributional approach to institutions is particularly useful in explaining the process of change in industrial relations and corporatist political democracy, as it takes historical continuity and strategic action seriously.  The main institutions of the labour market that increase or decrease the effective power of labour include; the legal and institutional framework of wage setting (i.e. is it voluntary or legally enshrined), trade union density, collective bargaining coverage (inclusive or exclusive), the formal involvement in formulation of public policies and parliamentary strength of leftist parties. The social action strategies available to actors, thus, are embedded in the institutions of country specific industrial relations regimes. Therefore, it is the institutions that impact upon the effective power of labour to act as a constraint on capital that one should look to when trying to explaining change in a capitalist society. The change we can observe over the past twenty years has been to weaken labour, increase income inequality, and replace direct with indirect taxes – all in the interest of generating a specific regime of capitalist accumulation. One can easily come to this conclusion (empirically) without having to argue whether it is a good or bad thing (normative). Most economists will celebrate the removal of collective labour constraint and a return to market forces. Most critical-Marxists will lambast trade unions for entering into any compromise with the system. Economic sociologists, whilst generally sympathetic to labour, simply point out that the strategic relationship between actors and institutions is central to explaining capitalist change – i.e. this can take place via the market, corporatist-associations or state imposed rules and regulations. It does not rule out, a priori, like neoclassical economists and critical-Marxists, the strategic pursuit of tri-partism.

Once created, institutions are not easy to change, particularly those that have legal-constitutional guarantees. Most European collective bargaining, labour market and wage setting regimes have some form of legal protection. This explains their institutional embeddedness. Employers certainly try to bend the rules and adopt strategies to overcome these constraints – Germanybeing a particular case in point. Therefore, from a power-distributional perspective, stability is best understood as a process of compliance. Why do actors comply with the rules? Why don’t people hand back their keys to the bank when they are in negative equity? Think of this in terms of a board game. If four friends are playing scopa (Italian card game) they will generally comply with an explicit set of rules. But, if one starts to break the rules they are likely to be viewed unfavorably by others. Established rules and institutions bring actors closer together and over time they establish a set of norms, habits and procedural acceptance. If the rules are voluntary, open for contestation and not embedded in any structural sense – they will decrease the possibility of compliance. But, even in this case, actors in an established process (such as the voluntary social partnership process ofIreland) will not exit whilst there is a distributional gain to be extracted from the institutional resource. Actors invest a significant amount of political capital into creating, nurturing and complying with an institutional regime. This process of nurturing compliance is central to a process of institutionalisation.

Thelen and Mahoney (2010) define institutions (although not explicitly couched in capitalist terms) as distributional instruments laden with power implications that require constant mobilization of political support. An institution changes when there is a shift in the balance of power. If a social democratic party, in coalition with manufacturing based trade unions, is the most powerful coalition in the construction, genesis and evolution of corporatist-wage bargaining, then they are likely to condition the underlying dynamics, outcome and structure. But, because it is a capitalist institutions one must not assume stability as the default position, one must assume change and conflict as the established social order. The ability of Swedish employers to bring down centralised wage bargaining is a case in point. The general point is that change is not exogenous to a capitalist institution (such as compliance with a national wage agreement) but endogenous to the strategic action choices of the actors who choose to comply (or not) with it.

Institutions that restrict creative capital power will always be contested. This can lead to total breakdown or it can lead to an existing institutional form being crafted for new end goals, or in he case of Thatcher and Pinochet, it can be imposed by an authoritarian state. The function rather than the form of an institutional regime can change. This is precisely what has happened in most European countries with traditionally egalitarian collective bargaining structures (see Bacarro and Howell, 2011). The same occurred internally within many European social democratic and labour parties. Their form and structure has remained relatively stable but the function, policies and market ideology underpinning their political platform has been transformed. In many ways, this transformation explains the crisis underpinning social democracy acrossEurope – the party (like trade unions) still exists as actors but their institutional strategies and ideational paradigm within which they operate has changed dramatically.

When there is ambiguity in a capitalist institution business will exploit it. One only has to think of the ingenious strategies adopted by finance firms when capital mobility was de-regulated. Or, think about the creative accounting practices that MNC firms adopt to take advantage of low corporate tax regimes (transfer pricing) in Irelandand the Netherlands.  But, this exploitation of ambiguity is not unique to business; public sector unions can take advantage of the state in national wage agreements by pushing for higher wage increases, which the state has to pay for through public revenue (public sector benchmarking being a classic example). The general point is that when adopting a power-distributional approach to explaining institutional change the focus shifts from the rule or the institution to the strategy of actors in exploiting it. Capitalist markets by design (as opposed to large bureaucracies) generate more space for creative destruction (outside strict legal contracts), as a dynamic tension is built into them. For Streeck (2011), the motor of history is the attempt to resolve this internal conflict between expansionary capitalist markets and political-distributional democracy. Various types of corporatism(s) are the outcome of this strategic interaction, and their form and function conditioned by the underlying power-distributional dynamic.

Political conflict drives the politics of institutional change in capitalist societies. The coalition pattern through which takes place varies across time and space, and central to explaining capitalist diversity.  A power-distributional theory enables us to explain this complex coalition pattern underpinning institutional change, as it conceptualizes the social order of capitalism as made up of associational-collective actors with unequal power resources, not free-efficient and competitive markets in equilibrium. Societies with an institutional ecology that provides minimal effective power to labour (USA) and maximum power to corporate interests are more likely to experience higher levels of wage inequality and the direction of institutional change will be aggressively neoliberal, unless the state is autonomous enough to act in the interest of non-capitalist accumulation. Therefore, if one wants to reverse the pattern of neoliberalism, it requires an effective change agent that increases the power of labour – beyond voluntarist structures of compliance (Ireland). In the next essay I will use this power-distributional institutionalism to account for the change and diversity of corporatism(s) in the EMU, before applying it to the political-economic history of centralised wage bargainingIreland.