The Economic Institutions of Post-War German Capitalism

Germany has long been identified as a distinct type of capitalism that combines low wage inequality, regulated labour markets, high wages and international competitiveness. This ‘organised capitalism’ has been eroding for some years but it is still an interesting case for those who argue for an economic alternative to the Anglo-American neoliberal model, premised on financialisation and market re-regulation of social relations. The most important factor in explaining the success of German economic performance is the role of economic institutions, particularly those that institutionalised labour power, in the productive process. It has managed, since the 1950’s, to combine external competitiveness with high wage employment. Labour regulation induced business to seek and pursue strategies of product specialisation premised on diversified quality production.

Scholars such as W Streeck have long argued that the socio-economic institutions that underpin German capitalism were the result of a political compromise between liberal democracy and socialism, social democracy and Christian democracy, traditionalism and modernism. The institutions of economic governance were constructed not to improve economic performance/efficiency but to generate stability and social order in a crisis prone system i.e. capitalist markets. Unlike Sweden, the German compromise was not premised on social democratic class forces. The Calvinist traditionalism and the strong role for small-artisan businesses in the German economy, in addition to strong Catholic and Christian democratic unions, resulted in a social market economy. It is now often referred to as a ‘coordinated capitalist economy’, in the sense that strategic interaction between corporatist-associations, rather than arms length market-contracts, govern the relationship between labour-capital-state. Like Japan, there is an emphasis on trust, reciprocal relations, long-term investment and status (as opposed to the quick buck capitalism of finance).

In Germany, institutions that govern wage, corporate and employment relations are politically negotiated and legally constitutionalised.  Markets are considered creations of public policy to serve public interests. Some have called this ‘ordo’ rather than ‘neo’ liberalism. Small firms were historically assisted to compete with large firms, or protected from competition. Given the historical fragmentation of markets (prior to the EU), competition was sought on the basis of product specialisation rather than mass production (much like Northern Italy). This meant that price considerations were secondary to product specialisation (the opposite of Ryanair style low-cost, low-quality, price competition). In addition, the internal behaviour of firms is subject to extensive social regulation; formal-law and collective labour agreements have instituted co-determination at firm level, and reflected in the work council system. Up until recently this meant  a race upwards in quality not a race downwards in price. In this regards, German trade unionists have always been concerned about global market demand and ensuring competitive-productive upgrading (i.e. the underlying conditions that allow for long-term high-wage growth).

The German state is neither laissez faire nor etatiste but enabling. It has always been constitutionally dedicated to competitive markets and a hard monetary regime. These are depoliticised and outside direct state control. The Bundesbank is unique in the study of comparative capitalism in that it never adopted the role of monetary easing. This conservatism has been internalized by all actors (political parties, media, trade unions), quite unlike other European countries. But, the state is also constitutionally obliged to provide for equalised living conditions and standards across the Landers. After German re-unification there was a transfer of approx €100bn per annum from west to east. Whilst it went unnoticed in English speaking countries, this was a remarkable social transfer that contributed to unprecedented stability in the border regions of East German, Central and Eastern Europe. Wages in east and west were gradually equalised – this meant holding down wages in the west (hence when Ireland is compared to Germany, the latter has seen minimal increase in unit labour costs whereas Ireland’s soared (they were starting from very diverse positions). German taxpayers funded huge infrastructural projects to equalise living standards (quite unlike north and south Italy). There is no such economic coordination across Europe, either between north and south, or centre and periphery. It is distinct to the nation-state of Germany.

What is also unique about national German capitalism is the role played the state in enabling collective action amongst encompassing employer and labour associations. Significant responsibility is delegated to these autonomous associations to manage the labour market/training/employment and social policies. This governance function has often been described as ‘neo-corporatist’ and directly correlated  with egalitarianism in the German economy. Joint governance of the labour market occurs in both the distributional and productive realm, leading to a particular variety of capitalism that is not neoliberal in design.  Trade unions and employers are not just bargaining over wages but strategies of production. They are  producer-functional associations (and mandated by the state to be so) not vested interest/lobby groups that defend particular corporate interests (such as the American Chamber of Commerce or the INTO).  The outcome of the German system of collective bargaining is low dispersion of wages. Work related knowledge is vested in an occupational qualification structure that enables a career path that is stable. The diversification of their export industries links up withy the training-educational vocational system to produce high quality, non-transferable skills (i.e. the opposite of Ireland). Therefore, there is an embedded employment strategy that links up with export growth. This does not exist in Ireland – most people train in the professions to secure stable employment (teachers, nurses, legal etc), or over the past 10 years – construction related trades. 

However, since 2000, the German ‘model’ has begun to erode. The pressure to deconstruct German capitalism originates in the labour market and structural pressures to generate full employment through low wage, flexible and precarious employment (like the UK). The low tax, minimal regulation of Anglo-American economies cannot sustain a growth in incremental trained, skilled export oriented jobs.  Employers seeking immediate profit as a first preference will increasingly want to rid themselves of the labour constraint that enabled the German industrial strategy to succeed. The outcome is a search for low wage employment. Work-seeking-workers and profit-seeking-employers in a context of relatively high unemployment (Germany for the past ten years was the backward economy of Europe, and Ireland the star pupil) established a process to embed a very different labour market to that which was constructed since 1960-1998. The new labour market has been de-regulated to market forces not collective bargaining. This, in addition to the pressure of the European Union, has led to a gradual transformation of Germany into a more neoliberal oriented economy.

National boundaries, in the EU, are bound to fail under the pressures of globalisation, the single currency, the expansion of finance-credit markets and the entry of new accession states (many of whom experienced post-communist shock therapy with no welfare state, trade unions or collective bargaining – Slovenia being the remarkable exception). The ability to manage a national labour market with constraints on capital has become increasingly difficult, if not impossible, to sustain. Even though it was Germany (with support from the UK) who instituted the competition regime in the single market, they also tried and failed to embed the social dimension of soziale marktwirtschaft at European level (this time because of UK opposition). The European Union, as has been argued by German economic sociologists and political economists for over a decade, is premised on negative-market integration not positive-social integration. There is no domestic class force at EU level, as occurred at national level in Germany, to make this socio-political compromise between labour-capital possible. The outcome is, as many Germans feared, chaos. The social underpnnings of a market economy have been always prioritised by German intellectuals – as a neccessary pre-condition for social cohesion.

Furthermore, state capacity is weak and fragmented in both the globalised and European economy. The ECB operates under the same principles as the German Bundesbank but unlike the national German economy, it is not committed to the equalization of living standards. The European commission cannot, like the German state, actively intervene to empower corporatist-associations to pursue collective goods such as competition, employment and high labour-wage standards. Institutionalised monetarism was transferred to the European level without the underpinning associative self governance in the labour market that makes the German national economy – sozialvertrdglich. This means that there is a structural bias in the European Union that makes neoliberal re-regulation for market forces the default position of adjustment (i.e. the IMF-ECB structural adjustment reforms being imposed on Ireland, Greece, Portugal and Italy). For example, when the crisis hit the national-German economy, the state and corproative associations immediately responded by making underemployment rather than unemployment the primary strategy of adjustment (i.e. reduce working time,  job sharing, increase productivity). Given the absence of embedded economic institutions to coordinate, strategise and plan a Euro recovery, the response was let the market rip. There is no association between euro-collective bargaining and the state at a transnational European level to act as a functional equivalent to what exists in Germany.

This inability of Europe to become a social force has led many economic sociologists, such as Wolfgang Streeck, to the conclusion that market correcting political intervention in the economy can only occur within the boundaries of the nation-state. Globalisation in general, and Europeanisation in particular, has induced privatised and de-politicised market forms of coordination as a mechanism to generate social order (even though we know, from history, that markets and price fluctuations are better described as chaotic and neurotic than rational).  The capacity to politically intervene in the economy is radically reduced because of external constraints. Ideally, these external constraints would induce member states (such as Ireland) to follow the German capitalist regime.Given the deep history, culture and embedded nature of this regime (which is being eroded under the same constraints), this is not likely to happen. But, if German or Swedish style capitalism cannot be exported it means that the future of Europe will be premised on UK-USA style neoliberalism i.e. private-contractual rather than political-public economic governance as this is easy to implement. This does not bode well for Ireland or the future of Europe.

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