IDEAS, INSTITUTIONS AND ORGANIZED CAPITALISMThe German Model of Political Economy

Twenty Years after Unification1

Christopher S. AllenInternational Affairs, University of Georgia

ABSTRACT

For much of the past two decades since unification, the literature on theGerman economy has largely focused on the erosion of the German modelof organized capitalism and emphasized institutional decline and the corre-sponding rise of neoliberalism. The first part of the article analyzes thestrains unification placed on German economic performance that causedmany observers to call for modification of the model in a more neo-liberaldirection. The second part takes a different focus and lays out the mainrationale of the paper. It inquires why such a coordinated market economywas created in the first place and whether a renewed form of it might still beuseful for Germany, the European Union, and other developed democraciesin the early twenty-first century. The third section articulates the origins ofthe institutional and ideational components of these coordinated marketeconomy models, during both the Bismarckian and Social Market Economyperiods. The final portion inquires whether the failure of the contemporaryliberal market economy approach in the wake of the worldwide financialcrisis and severe recession represents a possible opening for the creation ofa third coordinated market economy not only for Germany but for aredesigned European Union.

KEYWORDS

economic policy models; institutions; ideas; Federal Republic of Germany;European Union; liberal market economy; coordinated market economy;organized capitalism

German Politics and Society, Issue 95 Vol. 28, No. 2 Summer 2010doi:10.3167/gps.2010.280209

Introduction

At the time of German unification, Modell Deutschland was considered tobe the primary reason for the health and stability of the Federal Republic’sforty-year record of strong economic performance. Many observersthought it would be an excellent foundation for incorporating the five newLänder of the former German Democratic Republic. For much of the pasttwo decades since unification, however, the literature on the Germaneconomy has largely focused on the erosion of the German form of orga-nized capitalism (Modell Deutschland) and emphasized institutional declineand the corresponding rise of neoliberalism, which the first part of thisessay briefly reviews.2 But, since mid 2008, the worldwide financial crisishas challenged the virtues of the apparent neoliberal hegemony and per-haps opened up once again a debate regarding appropriate economic pol-icy models. In short, the crisis has suggested that a coordinated marketeconomy (CME) might yet have some considerable virtues.

The second part of this article takes up this possible shift in focus towarda renewed CME, but it argues that in order to explain adequately the ero-sion of the German model in the two decades since unification, we need topose a question that is seldom asked in the literature that chronicles itsapparent demise. This purpose of this article is to investigate why such amodel was created in the first place and whether a renewed form of itmight still be useful not only for a Germany still struggling with unificationissues, but perhaps also for the European Union (EU) and other developeddemocracies in the early twenty-first century. Specifically, it argues that theformation of this organized capitalist model (CME), not only in the postwarperiod, but also during Germany’s rapid industrialization in the late nin-teenth century arose because an Anglo-American free market model wasinappropriate for generating the economic growth that each epochrequired. It also argues that the creation of this policy regime was com-prised of dynamic, flexible institutions and a clear set of visionary ideas inthe context of either state-building or state-rebuilding.3 In light of therecent crisis that has produced sharp challenges for liberal market econ-omy (LME) approaches, might there be opportunities for a revived CME?

The third part of this article articulates the components of these coordi-nated market economy models during both the Bismarckian and SocialMarket Economy periods. It also suggests that the context of state forma-tion (Imperial Germany) and state reformation (the Federal Republic andthe Social Market Economy) were fundamental processes that made theinstitutions and ideas greater than the sum of the parts.

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The final section inquires into whether the failure of the neoliberalmodel in the wake of the worldwide financial crisis and severe recessionrepresents a possible opening for the creation of a third organized capital-ist model not only for Germany but for a redesigned European Union. Itoutlines three possible scenarios: a renewed LME, in spite of its apparentdemise; a hybrid LME-CME formation in which neither dominates, but ele-ments of both are clearly present; or a path that contains institutional andideational elements recognizable from earlier CME models that wouldextend beyond Germany to other continental Western European countriesand perhaps to the EU itself.

Before proceeding further, it is important to clarify terminology. Throughsignificant portions of the postwar period, the German CME has beencalled Modell Deutschland.4 As much as this term has been used, one thingis clear: economic policy “models” are characterizations of institutionalarrangements that only are recognized fully after their creation, sometimesmany years thereafter. In other words, economic policy models are theinstitutional landscapes that we can only see through the rearview mirror.Since this paper focuses primarily on the origins of Germany’s CME expe-riences and only secondarily on their decline, it is more important to iden-tify both the specific institutional and ideational components that shapedthese two CMEs, as well as the processes with which they were formed.Thus, while the paper examines the origins of these two earlier periods, itwill generally avoid using the term “model.” As Kathleen Thelen andWolfgang Streeck5 have argued, the creation of these CME regimes was aniterative, experimental, trial-and-error process that owed much to theinnovative capacities of the economic and political actors and the institu-tions they were creating. They also had unintended consequences, forexample, being created to serve a specific purpose at one moment, only toserve a very different purpose as circumstances changed and institutionsadapted. In this context, this paper stresses that a more free-market LME

was never a serious option as Germany industrialized in the late nine-teenth or reindustrialized in the mid twentieth centuries. Thus, what cameto be recognized as a CME “model” was not visible from the outset ofeither period. Yet, what all of these cooperative and institutionally denseexperiments shared is that they were not embarking on a laissez fairepath. There was no “system designer” for this CME, but, given the pressureto industrialize, develop, and, politically, provide access to resources, mar-kets, and capital, these material pressures forced forms of cooperation asthe only way to industrialize rapidly since the LME option was off thetable. To extent that Otto von Bismarck or Konrad Adenauer/Ludwig

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Erhard “planned” these particular CME regimes, they were in the contextof state formation and reformation, respectively.

The Demise of Modell Deutschland

By now, the litany of shortcomings of the postwar form of German orga-nized capitalism is well known. Since the 1990s, the German economy hasbeen beset with increasingly uncompetitive industries, persistent structuralunemployment, and continued stagnation in eastern Germany.6 In addi-tion, the large German banks, which for more than a century served as aguardian for dozens of German firms, began to sever their Hausbank rela-tionships with large German firms in favor of focusing on global opportu-nities and global profits.7 For more than a decade, within the formerlycooperative corporatist industrial relations system, German employershave been deserting their employer associations in favor of “going italone” when negotiating with unions.8 In addition, the latter have faredpoorly in the past twenty years with the share of German workers in tradeunions dropping by almost half, now representing less than 20 percent ofthe German workforce. Finally, the Social Democratic Party (SPD), oncethe exemplar of “capitalism with a human face” after its first years as theleading party in government in the 1970s, recently has turned to seriousretrenchment in the form of the Hartz IV labor market reforms that vic-timized many of its own supporters during the Gerhard Schröder govern-ments of the early 2000s,9 only to lose control of government in the 2005election10 and then suffer its worst postwar defeat in the 2009 election.

The inglorious end of the German organized capitalist “model” cameto be characterized as one comprised of cumbersome, limiting, and scle-rotic institutions incapable of adaptation. The conventional wisdom wasthat only a turn to neoliberal market approaches could pull the Germaneconomy out of the doldrums11 and address the continuing costs of unifi-cation that the postwar system was never able to accomplish. While the2008 financial crisis and subsequent severe recession clearly had cutshort the enthusiasm for neoliberal solutions both in Germany and else-where, the standard consensus by mainstream economists still remainsthat the current version of the organized capitalist economy does notoffer much promise. This view suggests that the neoliberalism proposedby the Free Democrats, the new junior coalition partner of the ChristianDemocrats (CDU/CSU) following the 2009 election, is a more appropriatepolicy model. Specifically, this party argues that an economy dominated

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by older manufacturing industries with comparatively high-priced labormay not be agile enough to remain competitive in an increasingly harsheconomic climate.

Institutional Innovation, Visionary Ideas, & State (re)building

One can tell a great deal about the organization of a nation’s economicpolicy by understanding the country’s timing of industrialization anddemocratization.12 Countries that industrialized early tended to have lais-sez-faire, free market economies that gradually evolved into the world’sleading economies because their good fortune and path-breaking industri-alization allowed them to have relatively easy access to resources, markets,and capital. The UK and the U.S. are the prime examples of this pattern.Countries that industrialized later, such as Germany and Japan, faced a dif-ferent set of choices.13 Lacking ready and predictable access to resources,markets, and capital, they needed to construct a different set of institutionsif they were to catch up to the earlier industrializers. In short, they neededto construct a model that maximized efficient access and use of resources,targeted foreign markets since their own domestic markets were so under-developed, and allocated capital so that each investment had a high proba-bility of success. Unlike the “trial and error” economies of the earlierindustrializers, the latecomers had much less margin for error.

Thus, with neither classical liberalism nor dirigisme (in the post WorldWar II period) possible what other option was there? The most likelyalternative was one that organized and mobilized major producer groupsvia the framing guidance of the state. This was not an easy task. Ratherthan waiting for capitalism to evolve slowly as it had in the Anglo- American world, it needed to be “force-fed” quickly to produce the mostprofitable paths.14 Thus, in both the late nineteenth and mid twentiethcenturies, the state both encouraged and allowed large firms to form withtight coordination from their financial partners. Resources had to beacquired and used efficiently, foreign markets had to be identified and tar-geted (since domestic demand in the early years of both models was quiteunderdeveloped), and capital investment had to have a high expectationof success. “Trial-and-error” capitalism was simply not sufficient or fastenough. Moreover, because production for domestic consumption was asecond order priority, providing some sort of social protection for themajority of citizens who were not favored in these top-down CME systemswas crucial. In essence, this was an “all eggs in one basket” economic pol-

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icy model—especially during the nondemocratic Bismarckian era—thatrequired close coordination or all major producers and the emphatic pro-vision of social order. To be sure, in the democratic Federal Republic, theprospect for dissent and social disturbance was less regime-threateningthan it was during the late nineteenth and early twentieth centuries.

In essence, to make this form of capitalism work at both the economicand political levels the founders of these two models developed a concep-tion of institutions that were both dynamic and flexible. Such a path wasonly possible with visionary ideas to imbue institutions with innovative,transformative policies that could also evolve over time. Theoretically, thisis captured much more effectively by institutional characteristics closer tothe views of Albert O. Hirschman than those of Mancur Olson.15 The for-mer believed that institutions could be more flexible and dynamic withthe effective use of “voice.” The latter saw institutions as impediments toindividual action and often produced suboptimal outcomes at the macrolevel. But in a larger sense, what enabled these institutions and ideas toachieve and then transcend the very effective incremental adaptation atthe beginning of these regimes was the specific process of state formationand reformation. This larger geopolitical perspective gave the respectivesets of leaders a broader tableau upon which to make their case for theseinstitutional and ideational innovations.

Most contemporary scolars working in the varieties of capitalism andcomparative historical institutional fields focus on the decline of thesecoordinated market economies or models. To understand the synergy ofideas, institutions, and state (re)building, this article argues that we alsoneed to see the origins, as well as the decline of these organized capitalistregimes. It draws heavily on the major “historical institutionalist” and pathdependence literature such as that of Paul Pierson and Thelen, whichexamine both the decline and the origins of such regimes. But, the value-added to this project is connecting this institutional analysis to the litera-ture on ideas16 and to selected literature on state formation.17

Latecomers such as Germany—and other continental western Europeannations—were forced to create a set of institutions that could accomplisheconomic and political development quickly because following the gradual,evolutionary path of the UK and the U.S. would have been disastrously insuf-ficient, and ultimately too late.18 While Bismarck was able to use the state asan entrepreneur,19 that option was not possible in the post World War IIperiod due to the Nazis’ colossal abuse of state power. Both epochs, how-ever, did share the use of a universal banking system and close coordina-tion among major producer groups as significant entrepreneurial forces.20

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They were called cartels in the nineteenth century and the more palatableVerbände in the mid twentieth. The larger point here is that neither the uni-versal banks nor organized German business were decisive individually.But, together they anchored a set of economic policies that could industrial-ize—and re-industrialize quickly—and make maximum use of resources, tar-get markets, and use capital efficiently. Not surprisingly, rapid economictransformation based upon industrial development and largely export-ledgrowth did not offer much immediate benefit to ordinary Germans. BothBismarck and the “fathers” of the Social Market Economy, Adenauer andErhard, realized that such social dislocation required protective social poli-cies.21 These leaders did not offer such policies altruistically, rather, theywere preventive policies aimed pragmatically at minimizing social tensionand political opposition while the economy grew. Bismarck’s creation of thefirst social insurance schemes (while simultaneously banning the then revo-lutionary SPD) was one mechanism.22 Another was the less draconian imple-mentation of the Social Market Economy,23 which provided the beginningsof the postwar welfare state in Germany’s first stable democracy.

Unlike more open free-market oriented economic policy models thathad few constraints in terms of resources, markets, and capital, an orga-nized capitalist or coordinated market economy requires close coordina-tion. Making this work required people with visionary ideas to imbuethese institutions (banks, firms, Verbände, works councils, unions, parapub-lic service providers, etc.) with innovative and transformative policies,providing a total that was greater than the sum of the parts.24 Institutionsmay turn into inefficient Weberian bureaucracies when allowed to atro-phy. But, when imbued with a larger public purpose such as invigoratingan economy when the usual market approaches are not available or whenbuilding or rebuilding a nation state, in the right hands and with far-reach-ing vision, they can be much more dynamic than conventional wisdomholds.25 In fact, we have the proof of the capacity of institutional transfor-mation in the presence of Germany’s largest banks (Deutsche, Commerz,and Dresdner which in 2008 merged with Commerzbank) and firms(Siemens, Daimler-Benz, BASF, Bayer), all of which have existed for over acentury amidst periods of great turmoil.

Bismarck and the First Organized Capitalist Model

What specifically were the institutions, ideas and state-building context thatmade these two epochs possible? During the latter half of the nineteenth

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century, first Prussia, and then a united Germany created a universal bank-ing system—an the idea borrowed from Louis Napoleon’s Credit Mobilierthat focused on long-term, targeted investment in the dominant industriesof the “second industrial revolution” (coal, steel, chemicals, machine tools,railroads, and industrial electronics).26 This required large sums of money,but the newly created firms in these sectors were unable to raise the fundsthemselves from the primitive stock markets of the time. By virtue of loans,ownership of company stock, holding proxies for the firms’ shareholders,and having seats on the board of directors, the banks—aided by the state—played a significant role in the industrial direction of these firms.27 By hav-ing deep pockets and a longer term horizon, this strategy enabled firms toestablish their position in world markets. The Verbände (cartels) were essen-tial since members did not see themselves as competitors of one another.28

Rather, they viewed their principal competition as other industries abroad,hence collaboration allowed them to maximize their respective strategies.Skilled labor was also increasingly important for most of these industriesand these firms were able to build on the legacy of the guild system thatproduced workers of exceptionally high skills.29 Finally, Bismarck used thestate more as an architect, rather than in an interventionist, micro-manag-ing way. It supervised and facilitated—but did not direct—the evolution andgrowth of an organized and coordinated set of economic experiments thatlater was to be called a Modell.

What were the visionary ideas that embodied these institutions? Onewas the “marriage of iron and rye” that Bismarck forged between the feu-dal Prussian lords (Junker) who needed a way to get their grain to marketand the new money industrialists who needed cargo to transport on thenew rail system.30 The second was Bismarck’s “iron fist in a velvet glove”that saw him first ban the SPD in 1878, but then initiate one of the party’smajor demands, namely the creation of a welfare system in the 1880s.31

When the SPD was made legal again in 1890, they were a much less revo-lutionary party because Bismarck’s governments had co-opted much ofthe party’s platform. Significantly, both Karl Marx (1883) and FriedrichEngels (1890) had died before the SPD became legal once again. By thattime the revolutionary socialism of the movement’s founders had beenreplaced by Eduard Bernstein’s “evolutionary” socialism.32

This juncture of ideas and newly created institutions took place in acontext of state building that made many of these actions possible. To besure, Bismarck had not built the most stable foundation when Germanyunified, since he had to rely on aggressive nationalism and considerablepolitical repression as major tools. This autocratic version of the organized

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capitalist model was successful economically and politically for a time, butit contained the seeds of its own destruction as World War I, Weimar, theGreat Depression, and the Third Reich painfully show.

This model was ultimately undermined by a series of exogenous andendogenous challenges, all of which were due to the particular timingand character of the rapid growth of the German economy in the nine-teenth century and the specific form that the German state took as it uni-fied the country in 1871. Because Germany was late to industrialize, it wasalso late in acquiring imperial possessions. When it attempted to do so, itused aggressive nationalism to mobilize support for challenging thosecountries that had acquired imperial possessions in Africa, and to acquirethe material resources that a rapidly growing German industry needed.World War I was the truly unfortunate result. The combination of oneother exogenous event (the Russian Revolution in 1917) and endogenousphenomena comprised the ultimately fragile foundation upon which Bis-marck built the Second Reich. Grafting modern industry upon a societythat had never dislodged feudal institutions, a sharp division of the Ger-man Left in the wake of the Bolshevik Revolution, the lack of deep soci-etal commitment to democracy, and dysfunctional economic policy (i.e.,hyperinflation in 1923) in the wake of the Allies’ insistence of massivewar reparations produced catastrophe as the institutional structuresexploded within a decade.

But if Germany was to industrialize and unify successfully in the nine-teenth century, it is hard to see another viable path. This first iteration ofan organized capitalist model suggests that imposing this framework uponone’s neighbors and one’s own citizens may produce the initial goals ofindustrialization and state formation. But, without adapting these ideasand institutions to subsequent conditions (both inside and outside the

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Institutional Innovation & Rapid Industrialization— Banks and long-term, targeted investment— Verbände—heart of organized capitalism— Modernized guild system—skills foundation— State as framing architect not “model builder”

Visionary Ideas— Marriage of iron and rye— “Iron fist in velvet glove” (banning spd and creating beginnings of first welfare state)

State Formation via Nationalism and Political Repression

Table 1: Rise of the Bismarckian Era

country), which encompass both peaceful relations with neighbors, as wellas genuine political accountability and democratic representation, it ishighly unlikely that such a model would be sustainable.

The Social Market Economy: The Second Organized Capitalist Model

Many observers of contemporary Germany characterized the post WorldWar II period as Stunde Null (zero hour) and the 1949 founding of the Fed-eral Republic as a sharp departure from all that had happened in Germanyover the previous century. Politically, this was true in the sense that theFederal Republic of Germany (FRG) was the country’s first stable democ-racy. With respect to the postwar economy, one scholar suggests that thereason for the rapid growth in the mid 1950s was a legacy of the Naziperiod.33 Yet, for those who looked closely at the foundational elements ofthe political economy of the FRG, there was an unmistakable, deeper conti-nuity with the late nineteenth century.34 The Allies’ original plan for Ger-many after the war as proposed by U.S. Secretary of the Treasury HenryMorgenthau was to deindustrialize Germany and emphasize agriculture.The Cold War and imperatives to restore a functioning German economy,however, trumped such fanciful concerns. Thus, both public and private-sector actors chose familiar patterns of industrial organization to rebuild thecountry since a trial-and-error free market model once again was off thetable. Not only did Germans have no experience with large-scale laissez-faire economic practice, but the imperative to rebuild the German econ-omy quickly with the onset of the Cold War took precedence. Since speed

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Table 2: Decline of the Bismarckian Era

Exogenous Challenges— Late imperialism— Russian Revolution

Endogenous Challenges— World War I— Unstable industry-agriculture coalition— Division of the Left— Too few believed in democracy— Dysfunctional economic ideas

Institutional Collapse and National Socialist Ideas

of industrial development was paramount, German banks and large Ger-man firms adopted familiar organized patterns. Universal banking, with itsdeep ties to larger German firms was re-established quickly, providing astable and profitable link between finance and manufacturing.

Table 3: Rise of the Social Market Economy

Nevertheless, since this form of organized capitalism was now imple-mented under democratic auspices, other institutions re-emerged to act as acheck on arbitrary power by the financial and manufacturing community.German unions, for instance, expanded the concept of the earlier Betrieb-sräte (works councils) to establish a democratic corporatism in which laborplayed a much more prominent role than it did under Bismarck. The tradeunions and their allies in both the SPD and the CDU/CSU agreed to Mitbes-timmung (codetermination), which gave trade unions membership rights onthe boards of all large German companies.35 This second organized capital-ist model in Germany also saw a unique form of framework regulation(Rahmenbedingungen) that acted not like American-style regulation, whichtries to belatedly address specific market failures like a fire brigade. Rather,Rahmenbedingungen regulated the general rules of the game, more like anarchitect.36 Significant examples of this included encouraging banks tomaintain high capital adequacy reserves and vetting all of those who heldresponsible positions in the financial sector. These framing regulationsproved crucial for the health of the economy since, once again, Germanywas creating an “all eggs in one basket” set of institutions in which financeand manufacturing were deeply intertwined and were mutually dependentfor their—and the country’s—economic success.

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Institutional Innovation— Bank-firm links and long-view investing— Rahmenbedingungen regulatory framework — Democratic corporatism: Mitbestimmung and Betriebsräte — Personalized proportional representation electoral system

Visionary Ideas

— Freiburg School Ordoliberalismus—between market and state— Incremental adaptation via high skills

State Re-formation with Mixed Economy and Stable ParliamentaryDemocracy

The visionary ideas that animated this second iteration of a coordinatedmodel came from a group of economists who were collectively known asthe Freiburg School.37 Acknowledging that a laissez-faire policy would notwork in a country with no history of it, and that the use of the state as anentrepreneur had been compromised fatally by the Third Reich, theFreiburg School economists developed a theory that refused to frame eco-nomic policy as a stark choice between state and market—a view that wasmost succinctly articulated by Wilhelm Röpke during the early years ofthe Social Market Economy:

….(our program) consists of measures and institutions which impart to com-petition the framework, rules, and machinery of impartial supervision whicha competitive system needs as much as any game or match if it is not todegenerate into a vulgar brawl. A genuine, equitable, and smoothly func-tioning competitive system can not in fact survive without a judicious moraland legal framework and without regular supervision of the conditionsunder which competition can take place pursuant to real efficiency princi-ples. This presupposes mature economic discernment on the part of allresponsible bodies and individuals and a strong impartial state…38

The second visionary idea that emerged as a guiding principle of theSocial Market Economy was the conception of innovation. In liberal mar-ket economies that celebrate the role of the individual, innovation is gen-erally characterized by lone individuals or small firms discovering newproducts. In coordinated market economies without this laissez-faire tradi-tion, by contrast, innovation came to be defined in very different ways.Rather than inventing new products, the large German firms would adaptinventions developed elsewhere and then integrate them into the produc-tion process and improve existing products.39 Perhaps that most obviousmanifestation of this pattern is the long-running television commercials(shown in the U.S) of the German chemical firm BASF that conclude: “Wedon’t make (product x); we make (product x) better.”

These renewed institutions and context-specific ideas took place at a timewhen Germany could not function as a “normal” nation state and whenmany questioned its ability to “behave” as a democratic polity. The coun-try’s ability to renew these nineteenth century economic institutions, butframe them in a way that enhanced rather than retarded political democ-racy, enabled Germany to emerge over succeeding decades as the eco-nomic, and eventually, the political lynchpin of Europe. To put this moredirectly, Germany’s “economic giant, political dwarf” period in the earlyyears of the postwar period, allowed it to rebuild a state that would beanchored solidly in a democratic Western Europe yet not project the cen-tralized power that its neighbors feared for much of the previous half-

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century. By building a semi-sovereign federal state that diffused strong cen-tral power but still produced economic growth and political accountability,state reformation provided an overarching context for the specific mix ofideas and institutions that produced the second variation of a German CME.40

The erosion of this second model of Germany’s organized capitalisteconomy did not go the way of the first, with a “bang,” rather, it erodedmore with a “whimper.” Ideas and institutions that were once congruentto specific purposes and needs do not always maintain their efficacy asThelen has powerfully argued in several of her works. In some cases, theycontained the seeds of their own destruction, and, in their failure to adaptto changing conditions, can precipitate catastrophe as was the case withthe first model. In other cases, such as the time of German unification inthe early 1990s, they erode slowly and almost imperceptibly. Without aconscious effort by the actors that inhabit these institutions to find organi-zational and ideational renewal, a once coherent policy model can erode.

Table 4: Decline of the Social Market Economy

To be sure, at the beginning of the 1990s, Germany faced three exoge-nous shocks that contributed to the erosion of the efficacy of this seconditeration of organized capitalism. The combination of accelerated global-ization, the expansion of the EU with its neoliberal directives that whittledaway the nationally specific German coordinated market institutions, andfinally (and most importantly), the stresses of unification41 constitutedpowerful forces challenging this model.42 There also were endogenousforces at work. First, this particular model thrived in both epochs as onethat was created to “catch up” with economic powers that were moreadvanced. Yet, by the 1980s, Germany was seen as rivaling Japan as thetwo leading candidates to displace the U.S. as the leading capitalist coun-

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Exogenous Factors— Globalization— European Union— Unification

Endogenous Factors

— What happens when a “late” model catches up?— “Siren song” of deregulation— Loss of institutional memory

Institutional Atrophy and “keine Ahnung”

try. This did not come to pass, of course, but it raises the larger issue ofwhether this model is suitable once it “catches up.” Part of the problemhere is that while non-Germans could see and articulate how this modelworked, Germans themselves were remarkably reticent about touting it asan explicit model. They were also complacent about assuming that theirSocial Market Economy would keep working, even though the FreiburgSchool economists whose ideas animated the model long had expired.This ambivalence prevented them from understanding how much a threatthe neoliberalism of the Anglo-Americans in the 1980s, and later the EU

itself were a threat to Germany’s nationally specific economic and politicalinstitutions.43 In a sense, the Kohl government lost its “institutional mem-ory” regarding the functioning of the Social Market Economy with respectto the challenges of unification.44 Specifically, in the policy areas of prop-erty, currency, and state-market relations—pressing issues in the late 1940sand in the early 1990s—the Kohl government’s policy ignored the Ade-nauer/ Erhard governments’ policies on these issues. In the 1990s and2000s, much of the architecture of the German model, while still physi-cally present, had lost much of its original functionality due to the abovestresses (as well as unification), and, more importantly, the ideas that onceanimated it.

Economic policy models can erode in different ways: dramatically andcatastrophically, such as at the end of the first model, but they also slowlyand quietly such as the end of the second model. What is similar in bothforms of erosion is that the institutions that once were their foundation andthe ideas that once animated them were no longer capable of responding tonewer challenges. The larger lesson to take from the rise and decline of thesecoordinated market models is that they are intrinsically neither superior nordeficient to liberal market ones. Rather, their success or failure depends onthe capacity of actors within these coordinated market models to use well-articulated and appropriate ideas in order to imbue the institutions with thedynamism and flexibility to respond to ever changing challenges.

Towards a Third Organized Capitalist Model?

One of the virtues of writing an article that attempts to extrapolate fromthe past to the future is that it is very difficult to know what the outcomewill be, thus leaving the writer somewhat “off the hook.” Nevertheless, ifusing frameworks that embrace historical institutionalism and path depen-dence (two schools of thought upon which the larger project of which this

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article is drawn) are to be useful, there should be some reasonable expec-tation of a payoff. This conclusion offers three scenarios that assess thelikelihood (or not) of Germany and the EU developing a policy model thatbears some resemblance to the first two models articulated above.

1. Neoliberalism Renewed

The first scenario would hold that, for all of the financial crisis and attendanteconomic dislocation, the neoliberal agenda, particularly as instituted by theEU and apparently embraced by most European social democratic parties, hassimply progressed too far. This scenario would argue further that the age ofnational models has passed and that globalization is too powerful a force toallow for the social protections that the older models embodied. Together withthe hypermobility of capital and labor, the erosion of the core organized capi-talist institutions, “hard” laissez-faire policies, and the European Union’s rolein eroding national sovereignty through its dominance of monetary and fiscalpolicy, it is simple to make the case that the easy “exit” from these institutionshas destroyed the capacity for use of the “voice” necessary to rebuild them.

Among the key indicators for the resilience of neoliberalism would be:

• Continued hypermobility of capital and labor • Minimal effective re-regulation of market activity• Increased liberalization of the EU and continued loss of national

sovereignty• Erosion of core CME labor market and social protection institutions• Continued push for laissez faire economic policies• Policies encouraging “exit” from organizations and lack of “voice” as

institutional renewal mechanism• Fundamental challenge to comparative historical institutionalism

and adaptive institutions

Specifically, in Germany and Europe we would see the re-emergence ofpre-crisis patterns in terms of corporate behavior (such as a continuedemulation of Anglo-American business practices) and ineffective attemptsto reintroduce government regulation of business, especially the financialsector. Theoretically, this would represent a sharp challenge to compara-tive historical institutionalism and its foundational core insight of adaptiveinstitutions. But, the great unknown in the wake of the international finan-cial crisis and serious recession that began in 2008 is whether the power ofneoliberal forces within the EU and among many of the national govern-ments of Europe is as durable as it was before the crisis.

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2. Hybrid Patterns

The second scenario would see no dominant model emerge. Even nowwithin Germany, one can see evidence of this trend. While the large Ger-man banks have “gone global” (to the recent consternation of some ofthem), many of the smaller regional and local banks still maintain a Haus-bank relationship with firms in their local regions. This second scenariowould see a number of unfocused experiments with no coherent policy. Inother words, there would be regional and sectoral examples of both orga-nized and laissez-faire economic policy models with neither becominghegemonic in Europe. Indicators of this scenario would include:

• No dominant hegemonic model• Unfocused experimentation with incoherent policy• Regional, sectoral examples of organized and laissez faire policies• Implication that path dependence and comparative historical

institutionalism not generalizable beyond a few favorable cases

The context that would indicate that this outcome was occurring wouldbe patterns of experimentation in different CME countries and regions inGermany and Europe. These outcomes would likely be driven by suchvariables as the kinds of sectors and industries in particular regions, thetypes of governments in specific areas, and the inability of private and pub-lic-sector policy makers to impose (or generate) either a dominant LME orCME pattern of governance of the political economy. A spirit of pragmatismrather than ideological hegemony would shape the dominant discourse.

3. Towards a Third (European) CME

Finally there could be a third scenario that would produce an organizedcapitalist model reminiscent in the spirit—but not the letter—of the first twomodels. Until the financial crisis exploded in mid 2008, this was the leastlikely of the three scenarios. But, looking back, the conditions underwhich these two earlier organized models tended to thrive in the late nine-teenth and mid twentieth centuries were when markets either were notavailable or had failed. We are now, once again, in one of these moments.When the essential features and core assumptions of liberal marketeconomies (unfettered access to resources, markets and capital) are nolonger easily attained, then neoliberalism looks far less hegemonic, oreven attractive as an economic policy model. The very act of proposingthis third scenario argues that Germany—and the EU—may represent apotentially critical case of third-generation CME ideas, institutions and state

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reformation. Among the indicators that might suggest such a scenario wasdeveloping would be:

• Continued uncertainty about access to resources, markets andcapital

• Serious discussion about the purpose of capitalism—financialinnovation or production of needed goods and services?

• Human capital formation—long-term investment and productivitygrowth

• Social welfare to soften harsh economic dislocation• From single market to a democratic polity—democratic deficit

overcome by empowered EU citizens• Only successful with twenty-first-century set of ideas to transform

European political institutions towards a polity

Among the questions that have not been asked during the neoliberalascendancy of the last two decades, are existential ones about the purposeof capitalism itself. Is capitalism concerned only with financial innovationfor its own sake with little concern for the production of needed goodsand services in the “real economy”? Is long-term oriented investment nec-essary for larger projects with slower expectations of profitability nolonger important? Is human capital formation—essential for productivitygrowth—no longer seen as a collective good for all firms or is it proprietaryonly for those firms that can afford it at the moment? Is a functioningsocial welfare state that can soften the blow for those who are displaced bythis economic transformation no longer necessary?

If these are important goals for modern twenty-first-century developedeconomies, then adapting the spirit of earlier organized models might beof much greater use than continuing to press for a neoliberalism that hasshown some extremely serious shortcomings at the end of the first decadeof the century and apparently offers no better options for the near future.But, there is one large problem that a third generation of organized capi-talist “model builders” must face: the age of national models in Europe isover. Any such construction would have to confront the redoubtablearchitecture of the EU, i.e., state (re)building. In the late1980s “Europho-ria” days, many Europeans believed that they could embrace the advan-tages of Europeanization without any serious consequences. Yet, whenincreasingly neoliberal treaties and directives were adopted and individualnation states saw their sovereignty eroded in the form of reduced controlover fiscal policy (the 3 percent mandate regarding deficit spending) and

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monetary policy (for those sixteen countries that have joined the Euro-zone), political power had essentially been transferred to Brussels withoutthe possibility of return.45 This transfer was not literal of course, but thedecreasing domestic control over fiscal and monetary policy meant thatEU policies in these areas often pre-empted domestic ones. If these policiesare to be changed and a coordinated market economy is to replace it,Europeans would need to tackle the lack of political accountability that theEU has not yet addressed—namely a democratic polity and not just a mar-ket. By early 2010, political tensions in Greece, Spain and Portugal overdeficit spending to maintain social benefits produced the first serious ques-tions concerning the long term role of the EURO among countries withvery diverse fiscal policies This third scenario is clearly a long-term pro-ject, but if Europe wishes to avoid economic catastrophe and create a sta-ble political environment, then there are clearly options that offer morepromise than the neoliberalism that no longer seems to be a panacea fordeveloped democracies.

CHRISTOPHER S. ALLEN is the Josiah Meigs Distinguished Teaching Pro-fessor in the Department of International Affairs at the University of Geor-gia. He is co-author of European Politics in Transition, now in its 6th edition.He has published articles on comparative political economy and on demo-cratic representation in numerous journals including: Harvard BusinessReview, Comparative Politics, Journal of Public Policy, Policy Studies Review,Party Politics, German Politics, Economic and Industrial Democracy, and Journalof Policy Analysis and Management. This article is part of a larger book manu-script in progress entitled: Ideas, Institutions and Organized Capitalism: Ger-many, Europe and 21st Century Economic Policy Models.

Notes

1. I would like to thank Jeffrey Anderson and Carolyn Forestiere for comments on an ear-lier version that appeared as a working paper at Johns Hopkins American Institute forContemporary German Studies in December 2008; available at http://www.aicgs.org/documents/advisor/callen1208.pdf. Additional versions were presented at: “TheBonn/Berlin Republic at 20: From Unification to Unity?,” a symposium organized bythe editors of German Politics and Society at Georgetown University, 7-8 May 2009, forwhich I would like to thank Richard Deeg, Anke Hassel, Konrad Jarausch, Eric Langen-bacher, and Stephen Silvia; the 35th Annual Conference of the International Associa-

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tion of the Study of German Politics, Aston University, Birmingham, UK, 26-27 May2009, for which I would like to thank Dan Hough, Wade Jacoby, Philipp Klages,Stephen Padgett, and Peter Pulzer; and the 21st Annual Meeting of the Society for theAdvancement of Socio-Economics (SASE), Sciences Po, Paris, France, 16-18 July 2009.Thanks also to Leah Langford, my research assistant during the Fall 2009 semester.Finally, special thanks go to Wolfgang Streeck and Martin Höpner for their support ofmy research in 2008 and 2009 as a Visiting Research Affiliate at the Max Planck Insti-tute for the Study of Societies in Cologne. This paper is part of a larger book manu-script in process; for a more extensive working paper on this theme, please consult mywebsite (http://csallen.myweb.uga.edu) or contact me at csallen@uga.edu. Commentsare welcome.

2. Wolfgang Streeck, Re-Forming Capitalism: Institutional Change in the German Political Econ-omy (New York, 2009).

3. Peter A. Hall and David W. Soskice, Varieties of Capitalism : the Institutional Foundations ofComparative Advantage (Oxford, 2001); Paul Pierson, Politics in Time: History, Institutions,and Social Analysis (Princeton, 2004); Kathleen Thelen, How Institutions Evolve: The Politi-cal Economy of Skills in Germany, Britain, the United States and Japan (New York, 2004).

4. Herbert Kitschelt and Wolfgang Streeck, Germany: Beyond the Stable State (London,2004); Andrei S. Markovits, Modell Deutschland : The Political Economy of West Germany(New York, 1982).

5. Wolfgang Streeck and Kathleen Thelen, Beyond Continuity: Institutional Change inAdvanced Political Economies (New York, 2005).

6. Jeremy Leaman, The Political Economy of Germany under Chancellors Kohl and Schroeder:Decline of the German Model? (New York, 2009).

7. Richard Deeg, “Industry and Finance in Germany in the Heyday of Financialization,”in this issue.

8. Stephen J Silvia, “From Unification to Fragmentation: The German Economy sinceUnification,” in this issue.

9. Anke Hassel, “Labor Markets and Labor Market Reform since Unification,” in thisissue.

10. Christopher S. Allen, “’Empty Nets:’ Social Democracy and the ‘Catch-all Party Thesis’in Germany and Sweden,” Party Politics 15 (2009): 635-653.

11. Alberto Alesina and Francesco Giavazzi, The Future of Europe: Reform or Decline (Cam-bridge, 2006).

12. Barrington Moore, Social Origins of Dictatorship and Democracy (Boston, 1966).13. Wolfgang Streeck and Kozo Yamamura, The Origins of Nonliberal Capitalism: Germany

and Japan in Comparison (Ithaca, 2001).14. Gregory Jackson, “The Origins of Nonliberal Corporate Governance in Germany and

Japan in Comparison,” in Streeck and Yamamura (see note 13), 121-170.15. Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations,

and States (Cambridge, 1970); Mancur Olson, The Logic of Collective Action: Public Goodsand the Theory of Groups (Cambridge, 1965).

16. Sheri Berman, “Ideas, Norms, and Culture in Political Analysis,” Comparative Politics 33(2001): 231-250; Mark Blyth, Great Transformations: Economic Ideas and InstitutionalChange in the Twentieth Century (Cambridge, 2002); Peter A. Hall, The Political Power ofEconomic Ideas: Keynesianism Across Nations (Princeton, 1989). J. Nicholas Ziegler, Govern-ing Ideas: Strategies for Innovation in France and Germany (Ithaca, 1997).

17. Pepper D. Culpepper, Creating Cooperation: How States Develop Human Capital in Europe(Ithaca, 2003); Geoff Eley, Society, Culture, and the State in Germany, 1870-1930 (AnnArbor, 1996); Peter B. Evans, Dietrich Rueschemeyer and Theda Skocpol, Bringing theState Back In (Cambridge, 1985); Isabela Mares, The Politics of Social Risk: Business andWelfare State Development (Cambridge, 2003); Charles Tilly, The Formation of NationalStates in Western Europe (Princeton, 1975); Daniel Ziblatt, Structuring the State:The Forma-tion of Italy and Germany and the Puzzle of Federalism (Princeton, 2006).

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18. Alexander Gerschenkron, Bread and Democracy in Germany (Ithaca, 1989).19. Richard H. Tilly, Financial Institutions and Industrialization in the Rhineland. 1815-1870

(Madison, 1966).20. Richard Deeg, “On the Origins of Universal Banking in Germany,” in Origins of National

Financial Systems: Alexander Gerschenkron Reconsidered, eds. Douglas Forsyth and DanielVerdier (London, 2002), 87-104; Caroline Fohlin, Finance Capitalism and Germany’s Riseto Industrial Power (Cambridge, 2007); Gary Herrigel, Industrial Constructions: The Sourcesof German Industrial Power (Cambridge, 1996).

21. E. P. Hennock, The Origin of the Welfare State in England and Germany, 1850-1914: SocialPolicies Compared (Cambridge, 2007); Alexander M. Hicks, Social Democracy & WelfareCapitalism: A Century of Income Security Politics (Ithaca, 1999); Anthony James Nicholls,Freedom with Responsibility : The Social Market Economy in Germany, 1918-1963 (Oxford,1994); Wilhelm Röpke, A Humane Economy (Chicago, 1960); Mark E. Spicka, Selling theEconomic Miracle : Economic Reconstruction and Politics in West Germany, 1949-1957 (NewYork, 2007).

22. Philip Manow, Social Insurance and the German Political Economy (Cologne, 1997).23. Alfred Müller-Armack, “The Second Phase of the Social Market Economy: An Addi-

tional Concept of a Humane Economy,” in Standard Tests on the Social Market Economy,ed. Horst Friedrich Wünche (Stuttgart, 1982), 49-61.

24. Gerhard Lehmbruch, “The Institutional Embedding of Market Economies: The Ger-man ‘Model’ and Its Impact on Japan,” in Streeck and Yamamura (see note 13), 39-93.

25. Charles Tilly, Trust and Rule (New York, 2005).26. Manfred Pohl, Entstehung und Entwicklung des Universal Bankensystems: Konzentration und

Krise als wichtige Faktoren (Frankfurt/Main, 1986).27. Hugh Neuberger, German Banks and German Economic Growth from Unification to World

War I (New York, 1977).28. Wilfried Feldenkirschen, “Competition and Cartelization: Concentration in German

Industry and the Banks’ Influence on their Development, 1870-1939,” (Boston, 1984).29. Kathleen Thelen and Ikuo Kume, “The Rise of Nonliberal Training Regimes: Germany

and Japan Compared,” in Streeck and Yamamura (see note 13), 200-227.30. Colleen A. Dunlavy, Politics and Industrialization: Early Railroads in the United States and

Prussia (Princeton, 1994).31. Philip Manow, Social Protection and Capitalist Production: The Bismarckian Welfare State and

the German Political Economy: 1880 - 1890 (Amsterdam, 2007).32. Eduard Bernstein and Edith C. Harvey, Evolutionary Socialism: A Criticism and Affirma-

tion (New York, 1909).33. Simon Reich, The Fruits of Fascism: Postwar Prosperity in Historical Perspective (Ithaca,

1990).34. Volker R. Berghahn and Sigurt Vitols, Gibt es einen deutschen Kapitalismus? Tradition und

globale Perspektiven der sozialen Marktwirtschaft (Frankfurt/Main, 2006).35. Barry J. Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond

(Princeton, 2007).36. Kenneth H. F. Dyson, The Politics of German Regulation (Aldershot, 1992).37. Agnès Labrousse and Jean-Daniel Weisz, Institutional Economics in France and Germany:

German Ordoliberalism versus the French Regulation School (Berlin, 2001); Philip Manow,“Ordoliberalism as an Economic Theology of Order,” Leviathan: Zeitschrift fur Sozialwis-senschaft 29 (2001): 179-198.

38. Wilhelm Röpke, “The Guiding Principles of the Liberal Programme,” in Wünche (seenote 23), 188.

39. Bruno Amable, “Institutional Complementarity and Diversity of Social Systems ofInnovation and Production,” Review of International Political Economy 7 (2000): 645-687;Andrew Chadwick and Christopher May, “Interaction between States and Citizens inthe Age of the Internet: ‘e-Government’ in the United States, Britain, and the EuropeanUnion,” Governance 16 (2003): 271-300.

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40. Peter J. Katzenstein, Politics and Policy in West Germany: The Growth of a Semi-SovereignState (Philadelphia, 1987); Renate Mayntz and Fritz W. Scharpf, Policy-Making in the Ger-man Federal Bureaucracy (Amsterdam, 1975).

41. Andreas Busch, “Shock Absorbers Under Stress: Parapublic Institutions and the DoubleChallenges of German Unification and European Integration,” in Governance in Contem-porary Germany: The Semisovereign State Revisited, eds. Simon Green and William E. Pater-son (Cambridge, 2005), 94-114.

42. German unification here is initially viewed as an exogenous shock, but it has nowbecome endogenous. The European Union is viewed principally as an exogenousshock, even though Germany’s role as a founding member of the organization suggestsand endogenous role. The point here is that the neoliberal ethos of the EU’s economicpolicy was very much at variance with that of Germany’s organized capitalism.

43. In a series of interviews on an earlier project in 1990-91 with economic elites from theformer Sprecher of the Deutsche Bank (F. Wilhelm Christians) to economists with theGerman Greens, virtually all of them believed that the German CME would be able towithstand the new challenges of neoliberalism. To a person, a common theme emerged,namely that they expected German institutions to behave has they had for much of theprevious decades. But, none of them offered specific reasons for how and why thiswould take place.

44. Christopher S. Allen, “Institutions Challenged: German Unification, Policy Errors andthe ‘Siren Song’ of Deregulation,” in Negotiating the New Germany: Can Social PartnershipSurvive?, ed. Lowell Turner (Ithaca, 1997), 137-156.

45. Fritz W. Scharpf, “Legitimacy in the Multilevel European Polity,” European Political Sci-ence Review 1 (2009): 173-204.

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