Tuesday, July 10, 2012

580 'German-Japanese' model economies challenge 'Englishspeaking' Libertarian model

'German-Japanese' model economies challenge 'Englishspeaking'
Libertarian model

Newsletter published on 12-02-2013

(1) 'German-Japanese' model economies challenge 'Englishspeaking'
Libertarian model
(2) Asian Mercantilist economies challenge Liberal US/UK - Dani Rodrik
(3) Liberal capitalism (UK-US) losing to State capitalism of Germany,
Asia Model countries
(4) Rhine model / Asia model economies trounce Anglo-Saxon /
Englishspeaking model
(5) Collectivism beats Individualism: 'German-Japanese' model vs
'Englishspeaking' Libertarian model
(6) German collectivism does not extend to the Periphery; Germany &
Japan influenced by Anglo-Saxon model

(1) 'German-Japanese' model economies challenge 'Englishspeaking'
Libertarian model

Peter Myers, February 12, 2013

The bulk of this newsletter arises from discussions with Arno Mong
Daastoel of Norway. Arno has just completed his Ph.D. thesis on the
economic theories of Friedrich List, which are followed by Rhine Model
and Asia Model economies.

The differences between the those and the 'Englishspeaking' economies
are described in the book Capitalism Against Capitalism, by Michael
(Michel) Albert (1993) (items 4-5).

Arno agrees (item 6) that since the above book was written, Germany and
Japan have been partially influenced by the Anglo-Saxon /
Englishspeaking model.

The ECB and IMF also follow the Anglo-Saxon / Englishspeaking model and
impose it on others.

Arno further agrees (item 6) that German collectivism does not extend to
the Periphery. Thus, in the current financial crisis in which the
European periphery is indebted to the German centre, Germany has been
following selfish policies detrimental to Europe as a whole.

Were Australia to be integrated into an East Asian zone, creditors Japan
and China could be assumed to take an equally selfish line.

The point being that, while collectivist economies are beneficial for
their citizens, the benefits stop at the border. These societies think
of citizenship as based on descent (blood) rather than place-of-birth.
Such societies reach out to a diaspora around the world, encouraging
expatriates to maintain a "spiritual" bond with the
motherland/fatherland and to retain primary allegiance to it.

Israeli citizenship is also based on descent (blood), although the Law
of Return includes "spiritual" factors.

(2) Asian Mercantilist economies challenge Liberal US/UK - Dani Rodrik
Date: Mon, 11 Feb 2013 13:13:31 +0100 From: Arno Mong Daastoel
Subject: "The New Mercantilist Challenge"


The New Mercantilist Challenge

by Dani Rodrik {Professor of International Political Economy at Harvard
University’s Kennedy School of Government}

Jan. 9, 2013

CAMBRIDGE – The history of economics is largely a struggle between two
opposing schools of thought, “liberalism” and “mercantilism.” Economic
liberalism, with its emphasis on private entrepreneurship and free
markets, is today’s dominant doctrine. But its intellectual victory has
blinded us to the great appeal – and frequent success – of mercantilist
practices. In fact, mercantilism remains alive and well, and its
continuing conflict with liberalism is likely to be a major force
shaping the future of the global economy.

Today, mercantilism is typically dismissed as an archaic and blatantly
erroneous set of ideas about economic policy. And, in their heyday,
mercantilists certainly did defend some very odd notions, chief among
which was the view that national policy ought to be guided by the
accumulation of precious metals – gold and silver.

Adam Smith’s 1776 treatise The Wealth of Nations masterfully demolished
many of these ideas. Smith showed, in particular, that money should not
be confused for wealth. As he put it, “the wealth of a country consists,
not in its gold and silver only, but in its lands, houses, and
consumable goods of all different kinds.”

But it is more accurate to think of mercantilism as a different way to
organize the relationship between the state and the economy – a vision
that holds no less relevance today than it did in the eighteenth
century. Mercantilist theorists such as Thomas Mun were in fact strong
proponents of capitalism; they just propounded a different model than

The liberal model views the state as necessarily predatory and the
private sector as inherently rent-seeking. So it advocates a strict
separation between the state and private business. Mercantilism, by
contrast, offers a corporatist vision in which the state and private
business are allies and cooperate in pursuit of common objectives, such
as domestic economic growth or national power.

The mercantilist model can be derided as state capitalism or cronyism.
But when it works, as it has so often in Asia, the model’s
“government-business collaboration” or “pro-business state” quickly
garners heavy praise. Lagging economies have not failed to notice that
mercantilism can be their friend. Even in Britain, classical liberalism
arrived only in the mid-nineteenth century – that is, after the country
had become the world’s dominant industrial power.

A second difference between the two models lies in whether consumer or
producer interests are privileged. For liberals, consumers are king. The
ultimate objective of economic policy is to increase households’
consumption potential, which requires giving them unhindered access to
the cheapest-possible goods and services.

Mercantilists, by contrast, emphasize the productive side of the
economy. For them, a sound economy requires a sound production
structure. And consumption needs to be underpinned by high employment at
adequate wages.

These different models have predictable implications for international
economic policies. The logic of the liberal approach is that the
economic benefits of trade arise from imports: the cheaper the imports,
the better, even if the result is a trade deficit. Mercantilists,
however, view trade as a means of supporting domestic production and
employment, and prefer to spur exports rather than imports.

Today’s China is the leading bearer of the mercantilist torch, though
Chinese leaders would never admit it – too much opprobrium still
attaches to the term. Much of China’s economic miracle is the product of
an activist government that has supported, stimulated, and openly
subsidized industrial producers – both domestic and foreign.

Although China phased out many of its explicit export subsidies as a
condition of membership in the World Trade Organization (which it joined
in 2001), mercantilism’s support system remains largely in place. In
particular, the government has managed the exchange rate to maintain
manufacturers’ profitability, resulting in a sizable trade surplus
(which has come down recently, but largely as a result of an economic
slowdown). Moreover, export-oriented firms continue to benefit from a
range of tax incentives.

From the liberal perspective, these export subsidies impoverish Chinese
consumers while benefiting consumers in the rest of the world. A recent
study by the economists Fabrice Defever and Alejandro Riaño of the
University of Nottingham puts the “losses” to China at around 3% of
Chinese income, and gains to the rest of the world at around 1% of
global income. From the mercantilist perspective, however, these are
simply the costs of building a modern economy and setting the stage for
long-term prosperity.

As the example of export subsidies shows, the two models can co-exist
happily in the world economy. Liberals should be happy to have their
consumption subsidized by mercantilists.

Indeed, that, in a nutshell, is the story of the last six decades: a
succession of Asian countries managed to grow by leaps and bounds by
applying different variants of mercantilism. Governments in rich
countries for the most part looked the other way while Japan, South
Korea, Taiwan, and China protected their home markets, appropriated
“intellectual property,” subsidized their producers, and managed their

We have now reached the end of this happy coexistence. The liberal model
has become severely tarnished, owing to the rise in inequality and the
plight of the middle class in the West, together with the financial
crisis that deregulation spawned. Medium-term growth prospects for the
American and European economies range from moderate to bleak.
Unemployment will remain a major headache and preoccupation for
policymakers. So mercantilist pressures will likely intensify in the
advanced countries.

As a result, the new economic environment will produce more tension than
accommodation between countries pursuing liberal and mercantilist paths.
It may also reignite long-dormant debates about the type of capitalism
that produces the greatest prosperity.

(3) Liberal capitalism (UK-US) losing to State capitalism of Germany,
Asia Model countries

Is State Capitalism Winning?

by Daron Acemoglu and James A. Robinson

Dec. 31, 2012


CAMBRIDGE – In the age-old contest of economic-growth models, state
capitalism has seemed to be gaining the upper hand in recent years.
Avatars of liberal capitalism like the United States and the United
Kingdom continued to perform anemically in 2012, while many Asian
countries, relying on various versions of dirigisme, have not only grown
rapidly and steadily over the last several decades, but have also
weathered recent economic storms with surprising grace. So, is it time
to update the economics textbooks?

In fact, economics does not say that unfettered markets are better than
state intervention or even state capitalism. The problems with state
capitalism are primarily political, not economic. Any real-world economy
is riddled with market failures, so a benevolent and omnipotent
government could sensibly intervene quite often. But who has ever met a
benevolent or omnipotent government?

To understand the logic of state capitalism, it is useful to recall some
early examples – not the socialist command economies or modern societies
seeking to combat market failures, but ancient civilizations. Indeed, it
seems that, like farming or democracy, state capitalism has been
independently invented many times in world history.

Consider the Greek Bronze Age, during which many powerful states,
organized around a city housing the political elite, formed throughout
the Mediterranean basin. These states had no money and essentially no
markets. The state taxed agricultural output and controlled nearly all
goods production. It monopolized trade, and, in the absence of money,
moved all of the goods around by fiat. It supplied food and inputs to
weavers and then took their output. In essence, the Greek Bronze Age
societies had something that looked remarkably like state capitalism.

So did the Incas as they built their huge Andean empire in the century
before the Spanish arrived. They, too, had no money (or writing); but
the state conducted decennial censuses, built roughly 25,000 miles
(40,000 kilometers) of roads, operated a system of runners to send
messages and collect information, and recorded it all using knotted
strings called quipus, most of which cannot be read today. All of this
was part of their control of land and labor, based on centrally planned
allocation of resources and coercion.

How is it that societies as disparate as the Greek Bronze Age cities of
Knossos, Mycenae, or Pylos, the Inca Empire, Soviet Russia, South Korea,
and now China all ended up with state capitalism?

The answer lies in recognizing that state capitalism is not about
efficient allocation of economic resources, but about maximizing
political control over society and the economy. If state managers can
grab all productive resources and control access to them, this maximizes
control – even if it sacrifices economic efficiency.

To be sure, in many parts of the world, state capitalism has helped to
consolidate states and centralize authority – preconditions for the
development of modern societies and economies. But political control of
the economy generally becomes problematic, because those running the
state do not have social welfare or optimal resource allocation in mind.
The state capitalism of the Greek Bronze Age or the Inca Empire was not
motivated by economic inefficiency; nor did it necessarily create a more
efficient economy. What it did was help to consolidate political power.

At a deeper level, the real dichotomy is not between state capitalism
and unfettered markets; it is between extractive and inclusive economic
institutions. Extractive institutions create a non-level playing field,
rents, and narrowly concentrated benefits for those with political power
and connections. Inclusive institutions create a level playing field and
give incentives and opportunities to the great mass of people.

But herein lies the problem for state capitalism: inclusive institutions
require a private sector powerful enough to counterbalance and check the
state. Thus, state ownership tends naturally to remove one of the key
pillars of an inclusive society. It should be no surprise that state
capitalism is almost always associated with authoritarian regimes and
extractive political institutions.

This is not an endorsement of unfettered markets. The state plays a
central role in modern society, and rightly so. Modern economic growth,
even under inclusive institutions, often creates deep inequalities and
tilted playing fields, endangering those institutions’ very survival.
The modern regulatory and redistributive state can, within certain
bounds, help to redress these problems. But the success of such a
project crucially depends on society having control over the state – not
the other way around.

To argue that state capitalism’s success proves its superiority is to
put the cart before the horse. Yes, South Korea grew rapidly under state
capitalism, and China is doing likewise today. But state capitalism
emerged not because there was no other way to ensure economic growth in
these countries, but because it enabled growth without destabilizing the
existing power structure. The genius of China’s state capitalism is that
it ensured the continued dominance of Communist Party elites while
improving the allocation of resources, not that it alone could have
provided price incentives to farmers and then managed liberalization of
urban markets.

State capitalism will persist so long as existing elites are able to
maintain it and benefit from it – even if economic growth ultimately
stalls. And there is a good reason why it eventually will. Sustained
economic growth presupposes inclusive institutions, because innovation –
and the creative destruction and instability that it wreaks – depends on
them. Extractive institutions in general, and state capitalism in
particular, can support economic growth for a while, but only the sort
of catch-up growth that South Korea experienced from the 1960’s to the
1980’s, before starting to transform its society and economy more radically.

As the low hanging fruit from catch-up growth is consumed, China, too,
will be forced to choose between the economic and social freedom,
innovation, and instability that only inclusive institutions can
underpin and continued economic, political, and social control in the
service of the elites who control the state.


John Garrett

The authors state that, in state capitalism, elites in the state exert
power/control over the economy an society, "state capitalism is ...
about maximizing political control over society and the economy. If
state managers can grab all productive resources and control access to
them, this maximizes control ..." However, Dr. Stiglitz and others have
argued that, in the US, the flow of power is reversed; that is, the
elites in the economy (the financial sector) have exerted their control
over the state (and society). This suggests an alternative
post-developing-country model for state capitalism.

[...] Sergio Quirós Navas @quiros_navas

Countries that have embraced unfettered markets might have problems
changing their path towards a "modern regulatory and redistributive
state!. The problem we are facing in the US -an avatar of capitalism, as
mentioned above- is that its powerful private sector is not checking the
state but increasingly controlling it. This is, in my opinon, another
example of the self-destructive nature of current capitalism: disruptive
innovation is being interrupted by powerful incumbent firms who control,
through lobbying, regulations that guarantee their hegemony. Elected
representatives are spending "an ever-increasing amount of their time
chasing donors for funds (...) as opposed to chasing citizens for votes"
And this kind of legalized corruption cannot possibly stop when
incumbent firms and their lobbyists -the benefeciaries of the
regulation- are controlling regulation.
Thus, we have state capitalism in which power is in the hands of the
political elite and we have the closest to unfettered capitalism
available in the real world -the US- in which power is in the hands of
big powerful corporations. How to get out of there?

(4) Rhine model / Asia model economies trounce Anglo-Saxon /
Englishspeaking model

Date: Sat, 02 Feb 2013 11:47:57 +0100 From: Arno Mong Daastoel

Capitalism Against Capitalism

Michael (Michel) Albert

London: Whurr, 1993


On the one hand is the "neo-American" model based on individual
achievement and short-term profits. On the other is the Rhine model
practices in Switzerland, Germany, Benelux, Northern Europe and, partly,
in Japan. In the Rhine model collective achievement and public concensus
are seen as the keys to long-term success.

The first is more seductive, the second more effective. These two
opposing forms of capitalism are engaged in a war which, like all
internal conflicts, involves both secrecy and even hypocrisy. The
outcome of this struggle could affect the quality of life on all levels
of society.

(5) Collectivism beats Individualism: 'German-Japanese' model vs
'Englishspeaking' Libertarian model

Capitalism Against Capitalism

How America's Obsession with Individual Achievement and Short-term
Profit Has Led It to the Brink of Collapse

by Michel Albert

Introduction by Felix G. Rohatyn
Translated by Paul Haviland

Wiley, 1993


{p. 5} There is little doubt that capitalism is no monolithic structure,
but an aggregate of tendencies out of which, in each case, two diverging
currents, two broad 'schools' emerge ... and challenge one another for
supremacy. Hence, Capitalism Vs. Capitalism.


Immigration could well tum out to be the subject of political debate in
most of the developed nations in the twenty-first century. Its interest
for the capitalist lies principally in the fact that imported labor will

{p. 6} nearly always provide a given output of work at a lower cost than
domestic labor. This probably explains why the USA has dramatically
relaxed its once stringent immigration policies, notably to the
advantage of Latin Americans. In 1986, a broad amnesty allowed up to 3
million clandestine immigrants to obtain their papers; another law,
passed in 1990, ensures that legal immigration will increase to 700 000
newcomers a year (from 470 000) by 1995. This is in spite of the fact
that the famous melting pot is showing signs of cracking. Today we hear
talk of the 'New Tribalism' of America's multifarious ethnic groups, who
are more concerned with affirming their separate cultural identities
than with becoming 'typical Americans'.

Looking towards Japan - a genuine capitalist country - the contrast
could hardly be more striking. Japan is an ethnically closed country;
that it is also very densely populated may be one, but not the only,
explanation. What is certain is that the treatment meted out to Korean
or Filipino immigrants in Japan would not be tolerated in the USA; the
Japanese find equally unimaginable the idea that General Colin Powell,
the Chairman of the Armed Forces Joint Chiefs of Staff - who happens to
be Black - would have been a hugely popular choice as George Bush's
running mate in 1992, according to opinion polls.

Turning to Europe, Britain - like America - has traditionally shown
great latitude in granting citizenship to it immigrants, whether from
the West Indies, Africa or Asia; Germany, on the contrary, applies the
criterion of blood descent in determining its citizenship and
immigration policies. This means that there is room in the country, and
in the culture, to embrace newcomers ofGerman ancestry from around the
world, but no room (at least in the culture) to absorb the country's
Turkish immigrants. The pattern reveals an Anglo-American model of
immigration on the one hand, and a German-Japanese model on the other.


The question of poverty (frequently linked to that of immigration)
provokes deeply divergent approaches from the various capitalist
countries, both in the way it is asked and in the way the response is
organized in practice. First of all, what does it mean to be poor? In
most human societies down through the ages, the poor man (or woman) has
been viewed as a pathetic character, a hopeless case, a failure, a shiftless

{p. 7} good-for-nothing: suspect, if not actually guilty.

Even today, it is doubtful that there is anywhere a society where the
privilege of being employed does not also entail at least a hint of
scorn for those who are not so privileged. In the two most powerful
capitalist economies, the USA and Japan, it is more than a hint: there,
the unemployed are at best weaklings who lack the drive and
determination to adapt to the requirements of the labor market, at worst
incorrigible shirkers.

Neither country, as a result of this deeply rooted attitude, has any
intention of setting up the kind of social protection system that
European countries set up to tackle chronic poverty and unemployment -
which they did nearly 50 years ago, when the average European income was
just a fraction of what the average American or Japanese earns today.
The contrast, once again, is stark. Part of the explanation may lie in
the traditional European view that the poor are more sinned against than
sinning - victims, not culprits. There is more scope, more room for
nuances in the European perception, which sees links between poverty and
ignorance and more readily takes account of personal tragedy or social

Europe is nevertheless faced with the problem of actually paying for its
welfare systems, knowing as it does that its two great industrial rivals
are troubled by no such fiscal burden. France, in particular, is in
urgent need of a solution to this very problem.

How does social security affect economic development?

This question actually precedes that of society's attitude towards
poverty, .and is every bit as controversial. For the Reagan-Thatcher
school ofcapitalists, the welfare state is a hindrance to development:
they would argue that social security inevitably creates a dependency
syndrome which rewards laziness and encourages irresponsibility. (Yet it
is a curious footnote to the Thatcher era that, in more than a decade of
radical reform, the NHS remained largely intact.) As for the Japanese,
social security is not considered a matter for the state; rather, it is
up to businesses to provide some form of social safety net, insofar as
they can afford to do so - and many small firms cannot. Japanese
capitalists are here in agreement with the new Anglo-American
conservatism, even though their companies help fund a variety of
optional social insurance schemes.

{p. 8} A different view prevails in much of Europe. From the Alps to the
Benelux countries and in Scandinavia, social security enjoys broad
support: it has traditionally been seen as the rightful outcome of
economic progress, and there are many who would argue that it positively
promotes development by preventing the creation of a permanent
'underclass' of the poor who, beyond a certain point, cannot be
salvaged. This is the reasoning behind policies of guaranteed income
support, as applied in all the highly developed European nations
(Germany, France, Holland, Denmark, and... yes, Britain too).

Not coincidentally, this traditional view is most loudly trumpeted at
election time. Nevertheless, there is evidence of a shift in the
European political debate over social security, whose fiscal burden on
the economy (and its consequent effect on international competitiveness)
is i-ncreasingly open to question. Even in Stockholm, the famous
'Swedish model' is for this reason under attack from the Social
Democratic government itself.

Conversely, the lack of adequate social security provision in the USA is
judged intolerable by a growing section of American public opinion - but
not yet by the majority. Clearly, the issue ofsocial protection is,
today more than ever, one which the capitalist logic cannot avoid.

The income spread

The use of wage differentials and salary scales to motivate workers is a
fundamental part of the capitalist logic. Individuals are to be paid
individually, according to output - end of argument. Policies on hiring
and firing form a subset within this same implacable arithmetic.

There is a large American insurance company whose pay policy has made it
famous throughout the industry. Every year, it publishes its 'Christmas
list' of staff performance: the company calculates how much each
employee costs the firm, and how much each one brings in; salaries (and
careers) are then adjusted accordingly. In America, at least, this
offends nobody.

In the days when social welfare and state interventionism were thought
to be signs of progress, the gap between top and bottom incomes was
gradually narrowing in all the major industrialized countries. Then came
the conservative revolution of the 1980s, and now the

{p. 9} gap has started to widen again in the USA, Britain and a number
of other camp-followers of the Anglo-American model. In France, for
example, the majority view now seems to be that the demands of economic
competitiveness justify a broader spread of incomes than is presently
the case.

But there are other capitalist countries where the private sector
deliberately endeavors to keep the income spread within certain
well-defined limits. Japan provides the most striking example of
collective, consensual pay bargaining, in which the added factor of
strong company loyalty proves to be a greater incentive than mere money.
The income gap is similarly held in check in the 'Alpine economies' (I
will explain this term later) of Switzerland, Austria and Germany. Yet
in all of these countries, traditional attitudes are once again being
challenged. There are impatient voices within the ranks of the
professions, business and industry who are calling for greater
recognition - and rewards - for their talents from an ageing senior
management still clinging to yesterday's prerogatives.

Should taxation promote savings or borrowing?

In France, public opinion is still largely in favor of the former,
although the level of savings is steadily dropping. In Germany and
Japan, thrift is an almost patriotic virtue, and the tax structure is
designed to encourage it.

At the other end of the scale is the USA, where prodigality rules:
personal success is measured in terms of external signs of opulence -
conspicuous consumption' - notably since the Reagan revolution. The tax
structure is designed to encourage borrowing, given that the higher
one's level of indebtedness, the less the taxman can take. In which
case, why pass up the opportunity to consume conspicuously... on credit?
The 1980s produced a spectacular turnaround in this department in both
the USA and the UK: in the space of 10 years American household savings,
as a proportion of disposable income, fell from over 13 per cent to 5
per cent, while British savings plummeted from 7 per cent to less than 3
per cent.

The pattern is again that of Germany and Japan in one camp, America and
the UK in the other. It should come as no surprise that the former have,
for some time now, been financing the latter. The

{p. 10} reason is plain: over the last decade, German and Japanese
households have been saving at about twice the rate of their British and
American counterparts.

Capitalist nations cannot do without a healthy level of personal
savings, and the gap that now separates the two camps is untenable in
the longer term. Anglo-American capitalism now faces the urgent task of
persuading its electorate to rediscover the virtues of thrift, as once
practised in Puritan (or Victorian) times. It is likely to be an uphill
struggle, not least because the 'savings gap', as we shall see, is like
a magnifying glass which reveals in fine detail both the causes and the
consequences of the conflict between the two strains of capitalism.

Which is the better strategy: More state regulation (and hence more
civil servants in charge of enforcement) or less regulation (hence more
lawyers to deal with the increase in litigation)? In all places and at
all times, capitalists have objected to official regulation, and never
more so than when they are prosperous. For some 50 years, their pleas
were ignored; government interventionism was the flavor of the century.
In Britain, successive Labour governments relied so heavily on state
regulation of the economy that the Thatcherite backlash, when it came,
was both ruthless and popular. Ever since then, deregulation has been
the First Commandment of the neo-conservative gospel..

Today, the debate has moved on somewhat, and two contrasting movements
can be discerned:

1. In the USA (and, to some extent, in the UK), it is increasingly
obvious that the major 'winners' in the drive to deregulate the economy
have been the lawyers, for whom chaos in the airlines industry and
bankruptcy among the savings and loans associations have been an
unqualified boon. The practice of law in today's America is no longer a
liberal profession in the European tradition; it is a commercial
venture, having expanded beyond all recognition with the boomin the
consumer litigation 'industry'. The USA now has more lawyers than farmers.

2. The Japanese have not been tempted down this road: for them, bringing
a lawsuit is as shameful as consulting a psychiatrist. The

{p. 11} Germans, too, with their notorious sense of discipline, prefer
their system to be based on precise rules and regulations. But the
European Commission, and EC law in general, have been strongly
influenced by the philosophy of deregulation, and national parliaments
are beginning to worry about the loss of their own regulatory powers.
The debate, it seems, has only just started to hot up.

Bankers or brokers?

Liberal economic theory teaches that the optimal distribution of the
financial resources needed for businesses to develop and expand can be
obtained if, and only if, there is free movement of capital in an openly
competitive environment. For many, this means that the banks' grip on
credit needs to be reduced, in the interest of greater efficiency. In
1970, the US intermediation rate (Le. the proportion of company
financing provided by banks) was 80 per cent; by 1990, it had fallen to
20 per cent. This spectacular drop in bank financing has been matched by
an equally spectacula~ growth in the market for debt and securities -
or, to put it in the simplest possible terms, the stockbrokers have
taken over from the bankers. The 'neo-American model' of capitalism, as
will soon become clear, is predicated on an almost visceral preference
for the stock exchange; it also happens that the British EC
Vice-President (and Commissioner responsible for financial institutions
and competition policy), Sir Leon Brittan, shares this preference.

In the 'Alpine model' of finance - which, for our purposes, must include
Japan - the bankers still have the upper hand. France has yet to make a
clear-cut choice between the two models: the young; upwardly mobile
decision-makers and the older financiers generally support the
Anglo-American approach, while senior management is on record as
favoring the Alpine model (as reported by the Institut de l'Entreprise,
an independent think-tank connected to the French employers' federation).

The question is, in any case, of vital importance to all genuine
capitalists, for whom there are only two admissible methods of making a
fortune: by competing successfully in production or in speculation.
Economies that favor the banks over the brokers provide fewer
opportunities to make fortunes quickly. Only those capitalists who are
immune to the charms of pure speculation - Le. the prospect of becoming rich

{p. 12} overnight - can afford to stand back from the debate.

Bankers or brokers? It is a question which the USA, in particular, will
have to air fully and with candour in the coming years. When the Bush
administration brought forward its proposals for rescuing the nation's
archaic banking system from the brink of insolvency, the reform package
was clearly inspired by European, and specifically Alpine, examples. The
plan, however, would mean reducing the number of banks from 12 500 to
about a 1000, and creating some 200 000 redundancies spread throughout
the 50 states. And that is just the beginning.

How should power be distributed within companies?

This question, closely linked to the preceding one, basically comes down
to the division of powers between owners, on the one hand, and
Tnanagement and employees, on the other. From my own experience, I know
that it can transform boardrooms into battlefields. There are companies
in which shareholders 'grill' their Chief Executive Officer, who must
always face them alone (however, they may bring a secretary); others
where shareholders and managers always meet in exactly equal numbers;
and still others in which it is the management who choose the
shareholders instead of vice versa.

In short, the debate is open. The map of the different realms of power
and authority within the modern capitalist company is still being drawn,
and on it depends the nature of the capitalist enterprise itself. Are
companies to be bought and sold by their owners (the shareholders) like
any other commodity or merchandise? That is the AngloAmerican view; but
according to others the company is in fact a community, a complex
organism in which the prerogatives of the shareholders must be balanced
with those of management - who in tum are more or less co-opted by the
banks and (implicitly, at least) by employees. This power-sharing model-
held together with the glue of consensus - is characteristic of the
German and Japanese approach to company organization.

What part should business and industry play in education and training?

The Anglo-American answer is, briefly, as little as possible. Two
reasons can be given: first, training has to be paid for on the spot,
but its

{p. 13} profitability works out only in the long term - and who has time
to think about the long term? Management in Britain and America are far
too busy trying to get immediate results, and the bigger the profits the
better. Second, investing in training is too risky: a mobile workforce
means that once you have trained them, you lose them to your competitors
- which is only to be expected if the 'labor market' is functioning

Again, the Germans and the Japanese adopt an entirely different
strategy. They apply what might be called 'career management through
forward planning' - in other words, professional advancement for all
employees is based on long-term considerations of both individual
performance and community (Le. company) interests. In this scenario, the
danger is that talented individuals may become frustrated and impatient
within the confines of a traditional hierarchy. But the danger of the
Anglo-American approach is that training and experience gained in one
company can so easily be lost to another, higher 'bidder' in the labor

Behind the debate over training lurks the larger question of the
ultimate role and purpose of the company in a capitalist economy. In the
Anglo-American tradition, its sole function is to generate profits;
continental Europe and Japan tend to look beyond the bottom line and see
the company as fulfilling a variety of needs which range from job
creation to the enhancement of national competitiveness.


The insurance business, it seems to me, can stand as a paradigm of the
conflicting tendencies within modern capitalism. As I am myself an
insurer, I may be open to the charge of subjectivity and personal
preference in making this assertion, but I would argue that the
development and refinement of insurance is an indispensable part of the
capitalist process and has a direct bearing on factors such as
innovation or competitiveness. Moreover, the most striking aspect of the
'capitalism vs capitalism' debate is the relative importance which each
model attaches to the present and to the future. There can be no field
in which these dimensions are of greater concern than in the insurance
business, because the insurer's job is to add value to present resources
by transferring them to the future.

{p. 14} The debate within insurance is increasingly polarised between
the Anglo-American stance (insurance is a market commodity like any
other - a view much in vogue at EC headquarters in Brussels) and the
Alpine position, which emphasizes the institutional nature of insurance
as a guarantor of security for firms and individuals alike. Anyone who
thinks this debate is arcane or irrelevant is taking a bit too much for
granted, for who can be sure that the future holds no car accident, no
old-age infirmity requiring home care?

The opposing tendencies of modern insurance go back to ancient
beginnings; today, these differences show up as a stark contrast
between, on the one hand, a gamble based on the calculation of
individual risk and, on the other, a collective endeavor to provide a
secure basis on which to explore the future.

Insurance, then, will serve as an exemplary portrayal of the two models
of capitalism which I propose to examine. Some readers may
(understandably) object that this amounts to a caricature of what is,
after all, an exceedingly complex question. My only defense is that, in
the age of the identikit and the three-minute news analysis, it is
pointless to be coy about the advantages of simplification: caricature
need not be synonymous with exaggeration.

The ten preceding examples of capitalism in action are of interest for
two reasons. First, they contradict the outward impression that, having
obtained an ideological monopoly which is against its very nature,
capitalism is as much a monolithic, impermeable bloc as was Soviet
communism: a new determinism to replace a discredited dialectical
Marxism. Seen from the inside, however, the picture is very different.
In the real life of capitalism as lived by different nations and
cultures, no one best way, no single unambiguous answer to the great
social questions is apparent. Just the opposite: capitalism is a
versatile, complex aggregate of energies and movements. It is a
practice, not a theory. The other point of interest is provided by the
tendency of these diverse practices and approaches to coalesce into two
great streams of comparable size, two opposing models of capitalism
locked in a conflict whose outcome is far from certain.

The claim may appear outrageous, and that is why I began with a few
concrete examples of observable facts. Certainly my hypothesis has

{p. 15} against it the full weight of Anglo-American liberal economic
theory - and its weight in today's world is considerable (if not totally
dominant), from the canteen to the boardroom, from the classroom to the
economic think-tank. According to this school of thought, the market
economy can never have more than one pure, efficient rationale. Any
deviation from price rationality, any taint of political or social or
institutional perrogatives are automatically rejected as an unwarranted
muddying of the waters.

For the theorists of this school, the USA is the one true reference, the
proving ground on which the theory must stand or fall. It is the New
Jerusalem of the New Conservatism.

In practice, things are - fortunately - not so simple. The main purpose
of this book is to demonstrate the existence of a second model of
capitalism, one which can match and even out-perform the American model,
whether measured by the yardstick of economic efficiency or by that of
social justice.

Before going any further, there is the matter of nomenclature. Each
model needs a name, a handy 'label'.

'Anglo-Saxon'vs 'German-Japanese' model

At first glance, the temptation is to set an 'Anglo-Saxon' or
'Englishspeaking' model against a 'German-Japanese' model.

The former terms probably go too far: it does not seem right for
Australia and New Zealand, with their strong Labour tradition, to be
bracketed with the Britain of Mrs. Thatcher and her successors. And
Canada's French-speaking province of Quebec would look even more out
place, especially as it owes much of its exceptional growth of the last
15 years or so to financial institutions (such as the Caisse de Depots
or the Groupe Desjardins) whose strategies are diametrically opposite to
those characteristic of the 'Anglo-Saxon' model over the last decade.

But the main objection lies in the uncomfortable pairing of the USA and
the UK, which overlooks a fundamental difference, mentioned above, in
the realm of social welfare. The disparity here is enormous: not between
two different systems, but between a long-established, comprehensive
system (inspired by Bismarck, no less) that even Mrs. Thatcher could not
undo, and the complete absence of any system of protection at all.

{p. 16} As for the latter term, 'German-Japanese', there are points in
its favor beyond the recognition that, for over 100 years, the Japanese
have been routinely described as 'the Germans of Asia', or the fact that
today the major German and Japanese corporations are teaming up to form
industrial alliances of unparalleled potential (e.g. Mitsubishi and
Daimler Benz, Toyota and Volkswagen, Matsushita and Siemens). There are
precisely analogous traits which bring the two naturally together, such
as their methods of corporate financing or the social role of the
company. The principal resemblance in economic terms is, beyond
question, the emphasis on export-led growth. Yet there are a number of
striking differences: there is no German equivalent of the huge Japanese
business firms, nor is German industry so radically polarised, as it is
in Japan, between large corporations and small subeontractors. The
French research center CEPII (which has been studying the question for
at least 20 years) has even found that, in the matter of industrial
specialization, there could not be two more opposite cases than those of
Germany - with its stable base of traditional expertise in mechanical
engineering, chemicals and transport equipment - and Japan, where the
breakneck pace of industrial change has seen textiles vanish, shipyards
being reconverted, and new specializations (such as cars and consumer
electronics) popping up virtually overnight. On closer inspection, then,
these terms are not entirely satisfactory.

The American model or, more accurately, the 'neo-American model'

Given that the UK, for all Mrs. Thatcher's efforts to import Reaganism,
is destined to draw nearer to Europe while distancing itself somewhat
from America, the inescapable conclusion must be that the USA
constitutes an economic model in and of itself.

Since 1980, America's singularity has been even more pronounced. The
election of Ronald Reagan put an abrupt end to the tendency, apparent
since the Depression, of US capitalism to take on some of the
characteristics of European capitalism (e.g. greater state intervention
in the economy). This movement had much to do with the need for
trans-Atlantic solidarity in the confrontation with communism. Nowhere
in continental Europe has there been anything remotely like the 'Reagan
revolution' in the USA. A new economic model was

{p. 17} forged (and baptized Reaganomics, already in every dictionary);
its fame was to spread far beyond the boundaries of America, even as its
shortcomings have started to become apparent at home. It is an
extraordinary phenomenon, and part of its complexity stems from
psychological factors which seem to outweigh real economic performance.
The American model has been transformed by Reaganism into something new,
which I will henceforth refer to as the neo-American model.

Can one therefore speak ofa 'European model' as such?

Everything would seem to point in that direction: the European Community
has been under construction for over 30 years; it takes the form of an
essentially economic union, regardless of the current debate over
political, social, diplomatic or military ties; it is a concrete reality
with its own dynamics. And yet there is no single, consistent European
economic model. The British pattern more closely resembles that of
America than of Germany; the Italian version (dominated by 'family
capitalism' and characterised by an almost non-existent state, an
astronomical public-sector deficit and an amazing vitality among small
and medium-sized bUSinesses) resembles no other, with the possible
exception of the Chinese diaspora.

France and Spain are unusual cases as well - all the more so as contrary
to appearances, they have agreat deal in common. Both have long
experience of protectionism, state interventionism and inflationary
corporatism, and both have been actively engaged in throwing off these
obsolete accoutrements in a frenzy of modernisation. Finally, they are
both torn between comp~tingtendencies.Against the pull of institutional
traditions wh1Ch, if rejuvenated, would take them in the 'Alpine'
direction, there are strong 'Americanizing' forces in the growth of new
businesses, increased speculative activity and a plethora of social
tensions typical of polarized economies; furthermore, there is even an
'Italian tendency' at work, with the rise of great personal and family

Decidedly, it would be unwise to speak of a 'European model'.

'Core' model of classic European economy

There does exist, nevertheless, a kind of 'core' model of the classic
European economy. It has two complementary sides to its nature:

{p. 18} 1. The Alpine aspect, Le. the 'Deutschmark zone' of influence
which includes Switzerland and Austria, but not the Netherlands. Seen
from a monetary and financial angle, the Alpine model embodies all the
principal features that run directly counter to the neo-American model.
In particular, no currency has been managed more differently from the
dollar in the last quarter-century than the German mark.

2. The Rhine aspect, Le. the social component of the economic policies
and practices of the new Germany, which took shape in Bonn (on the Rhine
River) and not in Berlin, capital of Prussia. It was on the banks of the
Rhine, in the spa town of Bad Godesberg, that the German Social
Democratic Party decided, during its historic 1959 conference, to commit
itself to capitalism. It seemed a surprising choice at the time. Yet
there could be no mistake: the new SPD program explicitly insisted on
'the need to protect and promote private ownership of the means of
production' and gave full approval to 'open competition and free
enterprise'. Every socialist party in Europe cried treason, of course...
and every one of them has come to accept the same principles (if not
always so explicitly, then at least in terms of pragmatic behaviour).

Today, Helmut Kohl continues in the tradition of Adenauer, Erhard, and
even Brandt and Schmidt, at the helm of an economy which exemplifies
what I call the Rhine model of capitalism. It includes not only the
Rhine countries in the narrow geographical sense - Switzerland, Germany
and the Netherlands - but also, to some extent, Scandinavia and (with
allowances for the inevitable cultural differences) Japan as well.

Now that the actors are in position, the show can begin.

With the collapse of communism, it is as if a veil has been suddenly
lifted from our eyes. Capitalism, we can now see, has two faces, two
personalities. The neo-American model is based on individual success and
short-term financial gain; the Rhine model, of German pedigree but with
strong Japanese connections, emphasizes collective success, consensus
and long-term concerns. In the last decade or so, it is this Rhine
model- unheralded, unsung and lacking even nominal identity papers -
that has shown itself to be the more efficient of the two, as well as
the more equitable.

{p. 99} Chapter 6 The other capitalism

In economics, as in entertainment, the spectator is more likely to
remember an outrageous, over-the-top performance than a quietly
understated one. In other words, the glitter of Wall Street and the
gladiatorial drama of the casino economy enjoy a worldwide notoriety
denied to the subtle balancing act of the German Sozialmarktwirtschaft
(social market economy). In their dreams of a capitalist nirvana, the
downtrodden inhabitants of Tirana or Bratislava or Ulan Bator naturally
conjure up visions of a prosperity made in America, and packaged by
Hollywood; dreams made all the more legitimate and credible now that the
fulminations, falsehoods and false hopes of half a century of communist
propaganda have been firmly swept aside. When, in the summer of 1990, a
few dozen Albanians managed to escape the last European bastion of
Stalinism and find refuge in France, it soon emerged that their true
destination was America: the America of Dallas, Chicago and Wall Street.
And when the Budapest Stock Exchange was inaugurated earlier that same
year, it was cause for national celebration. Hungarians at last had
tangible proof that the capitalist Eldorado was just around the corner.

It would certainly come as a shock to most people in the former
communist countries, then, to learn that capitalism is not one and
indivisible, that market economies - like cars - come in different
makes, and that the most efficient one is not necessarily the glamorous
American model. One who would not be surprised, though, is Lech Walesa.
Poland's new President has openly talked of his quest for an ideal model
which would reconcile the supposed prosperity and efficacy of American
capitalism with the relative security, in social welfare terms, of the
old regime (see Guy Sorman, Sortir du socialisme: Fayard; 1991); a model
which would allow people, in the words of a much-quoted War-

{p. 100} saw witticism, 'to live like the Japanese without having to
work harder than the Poles'.

Were President Walesa to look over his shoulder to Germany, he would
find something not unlike his ideal system. To take but one example, the
former West German states could boast an average of 1633 hours per year
of real working time per employee in manufacturing industry. Joking
aside, this does fit the description of 'working less than the French
while producing as much as the Japanese' (see Futurihles, January 1989).
German metalworkers already enjoy a 36V2 -hour working week, and it is
quite possible that the 35-hour week scheduled to be introduced in 1995
will (in spite of the enormous controversy it has aroused) eventually
become the norm. The point is that, of all the great industrialized
nations, Germany can lay claim to both the shortest working week and the
highest wages, while at the same time building up an enormous trade
surplus with the rest of the world.

Yet Germany is but one example, one particular incarnation, of the
'other capitalism', the Rhine model-largely unrecognised or, at best,
misunderstood - which extends from northern Europe to Switzerland, and
partially includes Japan. Like its rival, the neo-American model, it is
indisputably capitalist: the market economy, private property and free
enterprise are the cornerstones of both systems. In the last 10 or 15
years, however, the neo-American model has begun to veer off in another
direction, a trend described by sociologist Jean Padioleau as 'the
speculator gaining the upper hand over the industrial entrepreneur, and
the race for easy, short-term profits undermining the collective wealth
built up through long-term investment'.

The Rhine model represents a very different vision of economic
organization; it presupposes different financial structures and social
controls. It is far from perfect, but its characteristic features
combine to produce a stable, yet dynamic (and remarkably powerful)
system. The same aphorism may be applied to it as to democracy: it is
the worst system in the world, except for all the others. And although
it has never received anything like the public recognition and
international prestige of the neo-American model, there is evidence of a
greater awareness among economic decision-makers. A survey of 300
European company directors, carried out by the French polling
organization SOFRES in August 1988, makes for interesting reading in
this respect.

{p. 101} Asked to name their preferences if they had to subcontract more
work abroad or purchase more foreign goods, they opted for West Germany
(as it was then) by a huge margin, in spite of its higher salary costs -
of which they were, naturally, well aware. (France, incidentally, was
their second choice, with the Benelux countries coming in third.)

Let us now tum to some of the fundamental aspects of the Rhine economic
model, those which distinguish it most clearly, and in many cases
radically, from the neo-American model.

The role of the market

Just as there can be no socialist society in which all goods and
services are free, so can there be no capitalist society in which all
goods and services may be bought and sold. Some assets, by definition,
cannot be transferred from one owner to the other. They may be personal
(love and friendship, generosity and honor, for example) or collective
(democracy, public freedoms, human rights, justice etc.). They are what
may be termed non-negotiable (or non-exchangeable) goods, and they are
baSically the same for both models of capitalism, with one major
exception: religion.

Where the models diverge significantly is in the realm of negotiable
goods (i.e. commodities and services that can always be exchanged), and
in that of mixed goods. The two diagrams on page 102 will give a rough
idea of the market status of certain types of goods in each model. The
differences are clearly visible: the neo-American model gives pride of
place to negotiable goods, while the Rhine model has a preponderance of
mixed goods (those which are partly negotiable on the open market and
partly dependent on public-sector initiative). It is worth examining
each item in tum.


In the Rhine model, religions do not generally function as economic
institutions; in Germany, for example, pastors and priests are paid out
of public funds, just as if they were civil servants. In the USA, it
would seem, religious movements are increasingly run as mixed-economy
institutions, often using the most sophisticated methods of marketing,

{p. 103} In the neo-American model, a company is a negotiable good like
any other, whereas for the Rhine economies it is not just a commodity,
but a community - in other words, a mixed good. Companies Housing
Housing is also almost exclusively a market commodity in the USA. In
Rhine economies, by contrast, public sector initiatives account for a
significant proportion of housing and rents are often subsidised. Urban
transport The situation in urban transport is analogous to that of
housing, although even in the USA it is subject to some public
regulation; one of the few places where untrammelled competition
prevails in this sector is Santiago, the capital of Chile, where, thanks
to General Pinochet's 'Chicago boys', anyone can set up a bus service
and set fares at will. As a result, bus traffic there is the heaviest in
the world, and pollution levels are worse than ever. Nevertheless, the
many deficiencies of municipal transport services in Rhine countries
have put them under increasing scrutiny, and moves toward privatization
are on the increase. This is indicated in the diagram by an arrow
pointing in the direction of the 'negotiable goods' category. Wages The
same holds for wages, which, in the neo-American model, are increasingly
subject to the prevailing winds of the market at any given moment; the
Rhine system, however, tends to base wages on factors not directly
connected with worker productivity, such as qualifications, seniority
and nationally agreed pay scales. They are thus negotiable goods in one
case, mixed goods in the other. The media Similarly, the media -
especially television - which have traditionally belonged to the public
sector in Rhine economies, face increasing privatisation. Oddly, this is
the one case where the American trend goes against the grain; its
all-commercial broadcasting sector is

{p. 104} a new growth of 'community-run' television stations financed
through public subscription. Thus the arrows in the diagram point in
opposite directions for this commodity. Education

This spans all three categories of goods in both models. Nevertheless,
it is readily apparent, in the case of the neo-American model, that the
proportion of educational establishments subject to market forces is
enormous, and still growing steadily (as indicated by the arrow in the
direction of 'negotiable goods').


Like education, health embraces the three different categories of goods
in,both models, but in the Rhine model, where a greater role is accorded
to public hospitals and mutual benefit schemes operating in tandem with
Social Security, there is as yet no sign that the authorities are keen
to transfer many of their prerogatives to the private sector - as is
increasingly the tendency in both English-speaking and Latin countries.
It is a point which needs underlining, as it admirably illustrates
capitalism's potential for both short-term wealth creation and longterm
erosion of social values. The latter may occur if public authorities
fail to exercise their supervisory role, and when there are no other
strong social values to compete with that of money and wealth. As the
late French economist Fran<;ois Perroux once wrote:

For any capitalist society to function smoothly, there must be certain
social factors which are free of the profit motive, or at least of the
quest for maximum profits. When monetary gain becomes uppermost in the
minds of civil servants, soldiers, judges, priests, artists or
scientists, the result is social dislocation and a real threat to any
form of economic organization. The highest values, the noblest human
assets - honor, joy, affection, mutual respectmust not be given a price
tag; to do so is to undermine the foundations of the social grouping.
There is always a more or less durable framework of pre-existing moral
values within which a capitalist economy operates, values which may be
quite alien to capitalism itself. But as the economy expands, its very
success threatens this framework; capitalist values replace all others in

{p. 105} the public esteem, and the preference for comfort and material
well-being begins to erode the traditional institutions and mental
patterns which are the basis of the social order. In a word, capitalism
corrupts and corrodes. It uses up society's vital life-blood, yet is
unable to replenish it.

Le Capitalisme, in the 'Que sais-je?' series: 19~2

These are prophetic words indeed, and any number of concrete examples
may be found to illustrate them. To take but one which concerns us all
(directly or not), let us examine the American legal process, which has
begun to take on all the characteristics of a marketable, negotiable

In Japan, it is considered somewhat shameful to bring a lawsuit; every
avenue of negotiation and compromise must be explored before resorting
to such an extreme measure. In the European tradition, the legal
profession - like all the other professions - frees its members from the
need to chase profits and calculate prices, in order to be able to
concentrate in a disinterested fashion on serving the public good. It is
this notion of service to a higher ideal- whether this be defined as
'justice' or 'health' or 'education' - which in turn defines the code of
professional conduct: in a word, honor. Honor is the key concept, as the
term 'honorarium' (payment for professional services) clearly indicates.

This ancient tradition (stretching back to Hippocrates, in the case of
medicine), fundamental to the liberal professions, is the cornerstone
which anchors them firmly outside the market place. But in the USA, a
radical change is under way. The legal profession is now more aptly
described as 'the lawsuit industry'.

This latest victory of a certain brand cif capitalism has been fully
documented in Walter Kolson's study, The Litigation Explosion (Truman
Talley Books: New York, 1991). In his review of Kolson's book in The New
York Times of 12 May 1991, former Supreme Court Chief Justice Warren
Burger notes that this unprecedented change began to gather real
momentum in 1977, when the Supreme Court ruled that lawyers should be
allowed to advertise their services on television. The immediate upshot
of this decision has been the exponential growth of contingency fee
agreements, whereby a prospective plaintiff in a lawsuit hires the
services of a lawyer on the following terms: no fee will be payable if
the suit is lost, but if it is won and damages are awarded, the lawyer will

{p. 106} take a percentage cut of the damages. Such arrangements are now
routine in road accident cases, so much so that an injured victim is not
surprised to find a lawyer by his side in the ambulance, urging him to
sign a contingency fee agreement before they reach hospital.

According to the statistics, there has been a 300-fold increase in the
number of malpractice suits against US doctors and hospitals since 1970.
Given that the resultant cost of malpractice insurance may reach the
equivalent of £30 000 per year for some doctors, it is no wonder that
aggressive profit-making is the order of the day in the medical
profession as well - as innumerable American women (to take just one
example) could testify on being advised by their gynaecologists to
undergo a hysterectomy on the sole grounds that the onset of menopause
has made the uterus 'redundant'.

Another statistic speaks volumes: the number of federal judges found
guilty of corruption and tax evasion in the 1980s exceeded the total of
the previous 190 years ofUS history. The judiciary, too, is swaying to
the siren song of the profit motive. Do not imagine, however, that dark
irrational forces are at work: your lawyer, who sees you as a rich vein
of potential lawsuits waiting to be mined, is working to a logical plan
which begins and ends with maximum gain; your doctor is merely following
the same capitalist reasoning, in which you are a biological generator
of profit. But here's the rub: in such a system, who can you trust? And
what is a society really 'worth' if it systematically breaks down trust?

Bank capitalism

In the Rhine model, the 'golden boys' and their breathless exploits on
the floor of the Stock Exchange are conspicuously absent. Banks, not
stock markets, are the principal guardians of the capitalist flame in
Germany and Switzerland: one has only to compare the Frankfurt or Zurich
Bourse with their heavyweight British or French counterparts.
Frankfurt's total capitalization is a third that of London, and nine
times smaller than Wall Street or Tokyo. It is only recently that
options and futures markets were introduced on the German exchanges,
which remain narrowly focused and decidedly unglamorous. German
companies in search of financing are far more likely to talk to their
bank than to raise funds on the financial markets or through public

{p. 107} Some - including giants like Bertelsmann, the biggest :European
press and publishing group- are not even listed on the stock exchange.
Just the opposite, in other words, of what we see in the UK and the USA,
and all the more striking a contrast in the light of Germany's economic
power and influence.

It is the strength and vigor of German banks that explain this
situation. While everyone has heard of the Deutsche Bank, with its
commanding position in the German economy, and of others such as the
Dresdner Bank or the Commerz Bank, few suspect how very powerful they
are. Crucially, they may (unlike American banks) conduct all types of
business; no regulations restrict them to a single activity or sector.
German banks are 'universal' institutions: they make ordinary loans and
have ordinary depositors; they deal in stocks and bonds, and manage
company treasuries; they also operate as commercial banks, providing
investment advice and carrying out acquisitions and mergers. And
finally, they maintain whole networks of economic, financial, business
and industrial information for the benefit of client companies. The
result is a special relationship between bankers and their customers in
which mutual cooperation is constantly reinforced.

Above all, German banks have assumed the role of company financiers,
which elsewhere has been taken over by the stock markets. Most firms
have their 'house bank' to whom matters of finance are entrusted; one
can almost imagine the German banker telling his client, the company
president: 'You just take care of improving production and increasing
sales, and leave the financial problems to us!' In Japan, as mentioned
earlier, the symbiosis of industry and banking is even more pronounced,
with many industrial groups owning their own banks. It is almost
possible to reverse the equation and say that the Japanese banks (and
insurance companies) own their own industrial groups.

Mutual-Interest networks

In Germany, too, the common ground shared by banks and industry goes
some way beyond purely financial considerations. As important company
shareholders, banks enjoy a privileged status and their views are
listened to, on at least two accounts: first, through direct ownership
of a portion of the capital; and, secondly, .through voting rights exer-

{p. 108} cised on behalf of shareholders who bank with them. Combining
these two levers of influence gives German banks a considerable say in
boardroom decisions. Thus, Deutsche Bank owns a quarter of the shares
•and with it a minority veto - in the automotive giant Daimler Benz
(which also makes engines and aircraft parts), as well as in Philipp
Holzmann (Germany's premier construction firm) and in Karstadt (the
leader in volume retailing). Dresdner Bank and Commerz Bank similarly
have a 25 per cent or more stake in a dozen major companies. Conversely,
the banks' largest single shareholders tend to be these same industrial
groups (although this seldom represents more than a 5 per cent holding
in each case). And there are other links, such as the supervisory boards
which oversee banking activities: big business usually has its seat on
these, too. Again, both conditions apply to Daimler Bern: vis-a.-vis
Deutsche Bank.

This interpenetration of banking and business interests forms the warp
and weft of an industrial-financial fabric which is both stable and
highly resistant to outside factors. There are at least three
consequences of this marriage of interests for the economy as a whole,
and all are beneficial.

To begin with, the banks tend to have the long-term interests of
business at heart; unlike the brokers of Wall Street, for whom regular
quarterly profits are the sole criterion, German banks see their stake
in a company as an enduring commitment. They accept that risks must be
taken, involving large sums over long periods of time, as the price for
backing a diffkult but potentially rewarding venture. Why else would the
Swiss banks have invested heavily in the watch-making industry at a time
when it appeared to be in terminal decline, and what else explains
Metallgesellschaft's ability to increase its holdings in the mining
industry when raw materials were synonymous with doom and gloom?

A second positive consequence for managers of businesses, and for the
economy generally, is that banks make for stable shareholders. Their
basic loyalty gives management room to breathe, secure in the knowledge
that no sword of Damocles (in the form of a hostile takeover bid) is
hanging over their heads. Corporate executives are free to devote
themselves to managing the fIrm; their time and energy are not being
lavished on interminable, and unproductive, legal wrangles and

{p. 109} the devising of anti-takeover strategies. It is one of the
reasons German· companies continue to be highly competitive on world
markets. The same can be said of Japanese, Swiss or Dutch firms: their
managers do not live under the constant threat of a sudden restructuring
imposed by outsiders, although not always for the same reasons. Japanese
capitalism has a number of quasi-feudal characteristics of its own,
which will be explored in a later chapter. In Switzerland, the role of
the three great banking groups is rather different from that of the
German banks. It is through the restrictive rules governing
shareholders' voting rights that the capital stock of Swiss firms is
protected from would-be predators. As for the Netherlands, a whole
battery of anti-takeover measures ensures that CEOs and executives sleep

This relatively secure set-up does not mean that managers in the Rhine
economies can afford to relax on the job or that their mistakes go
unnoticed. There is always a nucleus of principal shareholders (banks
and others) who take their supervisory powers and responsibilities
seriously, acting as a counterweight to executive prerogatives. They do
not shrink from punishing cases of management negligence or dereliction
- and thus, indirectly, also help protect smaller investors.

The third consequence of banking's pre-eminent role in the economy is
that the sheer density of the web of mutual interests cannot be easily
penetrated by outside forces. It is fair to say that the German economy
is driven by consensus (rather than commanded - nothing horrifies German
decision-makers more than the idea of a command economy) involving a
relatively small group of people, who all know one another well and
travel in the same social circles. Personal relations are a decisive
factor in protecting the German economy from the unwanted attentions of
foreign investors. When a firm is under threat, its bankers will quite
naturally seek a home-grown solution to the problem rather than look for
help from abroad. Deutsche Bank, for example, stepped in to rescue the
ailing Klockner-Werke group; and when the computer fIrm Nixdorf ran
aground, the banks were instrumental in arranging for its takeover by
the electronics giant Siemens. If mergers and acquisitions are handled
this way, one can imagine the difficulty, for any foreign investor who
might be contemplating a hostile raid on German property, of getting
past the vigilant front lines of the banks. There are exceptions to
every rule, of course. German companies

{p. 110} are perhaps no longer as invulnerable to foreign takeover as
they once were; of the 3000 West German firms which changed hands in
1989, 459 were acquired by foreign investors spending an estimated total
of $3 billion - which is twice as much as the figure for 1988. (French
investors accounted for 63 acquisitions, a threefold increase since
1986.) Yet these figures should be treated with caution, for on closer
inspection they show that the vast majority of foreign takeovers
involved small or medium-sized businesses. In 1989 a single acquisition
(that of Colonia by the French insurer La Victoire) accounted for more
than half of the total French investment in West Germany. Meanwhile,
German investors made twice as many acquisitions in France as vice
versa, and there is every reason to think that the imbalance in
Germany's favor will continue to grow.

Rhine companies thus enjoy financial stability and benefit from a host
of safeguards which promote long-term development arid enhance
competitiveness. But it is not only in the management of capital that
they excel; the very structure of company management also plays an
important part.

A well-managed consensus

In a 1986 report to the EC President entitled 'Federal Germany: Its
Ideals, Interests and Inhibitions', W. Hager and M. Noelke wrote that
German society showed 'a tendency to avoid contentious issues and
questions that might jeopardise the social consensus'.The same statement
applies to Japan, and this is no coincidence: both defeated in World War
II, they remain, in their new capacity as economic superpowers, keenly
aware of their own vulnerability. In both countries, political democracy
and economic prosperity are too recent not to be somewhat fragile,
making it easier perhaps to enforce a particular social discipline
typical of the Rhine model.

Turning to the power structure and patterns of organization within
companies, it is clear once again that the emphasis in the Rhine model
is on mutuality and shared responsibilities. In Germany, all parties are
invited to participate in company decision-making: shareholders,
employers, executives and trade unions alike cooperate in a variety of
ways to achieve a unique form of joint management (the German term,
'Mitbestimmung', is perhaps best translated as 'co-responsibility'). A

{p. 111} 1976 law makes it compulsory for all firms of 2000 or more
employees to implement this system of shared decision-making at
virtually every level.

At the top, to begin with, there are two key bodies: the board of
directors, responsible for company management as such, and the
supervisory board, elected by shareholders in the AGM, whose role is to
oversee the activities of the board of directors. Both bodies are at all
times required to assist one another in ensuring that company affairs
run smoothly. Real checks and balances are thus brought to bear, bear,
allowing equal time for each side (owners and investors on the one hand,
management on the other) to put its views and be listened to, yet
without either one dominating.

{p. 112} To this top-level division of powers is then added the
distinctive German brand of industrial democracy referred to above as
co-responsibility. Workers' participation in management dates back to
1848 and is thus a well-established tradition. It takes the form of
committees which may be likened to British works councils (or French
comites d'entreprise), but with real and wide-ranging powers. All issues
of concern to the workforce are referred to these councils: training,
redundancies, schedules, methods of payment, work patterns etc. It is in
fact mandatory for ~enior management and works councils to come to an
agreement on these matters. But co-responsibility does not end there.

Employees have another means of influencing decisions in the form of the
company supervisory boards, to which they elect delegates. Since 1976,
German firms employing more than 2000 workers must allocate an equal
number of seats on these boards to employees as to shareholders.
Although the supervisory board will always have as its chairman (who
casts the deciding vote in split decisions) a representative of the
shareholders, it is nevertheless remarkable that employees should have
such a strong voice on one of the most important executive organs. In
the German view, dialogue between partners is the indispensable oil that
keeps the wheels of business turning and reduces the likelihood of
destructive social friction.

From the French standpoint, this mode of decision-making and
supervision would appear so heavy-handed, and so time-consuming, as to
paralyse all initiative. Yet this is manifestly not the case. Not only
are German firms as dynamic as their competitors, if not more so, but
they benefit from the enhanced sense of belonging which
co-responsibility fosters. The company is seen by all its members as a
community of interests, a true partnership. American sociologists have
christened this the 'stakeholder' model of organization, as opposed to
the 'stockholder' model. The latter concentrates exclusively on those
who own shares (stock) in the business, while the former treats everyone
as a partner with a personal interest (stake) in the company's fortunes.

In Japan, a different set of concepts, not always clear to Western eyes,
produces the same result: a feeling of belonging to a community, almost
a family. For example, under the term amae - virtually untranslatable -
are grouped notions of the need for solidarity and protection,

{p. 113} and the search for emotional fulfilment which the company must
satisfy. Another word, iemoto, describes the leadership which an
employer must display and carries familial overtones. According to
sociologist Marcel Bolle de Bal, 'Amae and iemoto are mutually
cOQlplementary notions: one is distinctly charged with feminine
principles of love, feelings, emotions, and the group; the other carries
a masculine charge embracing concepts of authority, hierarchy,
production, and the individual. Both are inseparably united in the
ongoing effort to build a durable organization' (see Revue franr;aise de
gestion, February 1988).

We in the West are constantly being reminded of the peculiar
characteristics ofJapanese corporate life - guaranteed lifetime
employment, pay based on seniority, in-ho~se trade unionism, group
incentive schemes etc. - which are the concrete manifestations of unique
cultural values. Unique they may be, but the result is the same: a
collective feeling of belonging. The 'company spirit' is as strong in
the Japanese variant of the Rhine model as it is currently weak in the
neo-American economies.

As the world becomes a more and more uncertain place, immaterial factors
like trust and belonging are increasingly important. It becomes
essential for all corporate enterprises to ensure that their members
play the same game by the same rules, share the same views and fit into
the same patterns, so that in the end decisions can be taken by
consensus and energies can be mobilised naturally, spontaneously.

Stability at home is all the more valuable when uncertainty and
instability are abroad; far from stifling change and adaptability,
domestic harmony can be turned to competitive advantage. It is worth
noting, at this juncture, that just as America is not New York (and New
York is not just Wall Street), so the largest American corporations have
successfully avoided the trap of short-termism in their management of
human resources, ifnot always in their financial management. Companies
such as IBM, ATT, General Electric and McDonald's have, as far as
possible, steered clear of the 'casino economy' mentality which
currently disfigures the neo-American model and which sees employees as
so many poker chips in a high-stakes game. They have understood that in
order to build and consolidate a multinational endeavor, it is better to
gamble on stability, incentive and even co-responsibility.

{p. 114} Training: the loyalty factor

The German brand of power-sharing is thus highly rewarding to companies;
but, equally, it is of immense benefit to their employees. Purely in
terms of wages, to begin with: German workers are among the best paid in
the world, at an average DM 33 per hour as against DM 25 in the USA and
Japan, DM 22 in France (at 1988 rates). Moreover, the gap between the
best-paid and the lowest-paid workers is not as wide as in other
countries (see B. Sausay, Le Vertige allemand: Orban, 1985), making
Germany a far more egalitarian society than America or even France.

Surprisingly, wages and salaries account for a smaller percentage of
German GDP - 67 per cent in 1988 - than is the case in other leading EC
member states (71 per cent in France, 72 per cent in Italy and 73 per
cent in the UK). Although partly explained by Germany's huge trade
surplus (pre-unification), this little-known statistic is highly
revealing: it means that German companies manage to payout the highest
wages in Europe (keeping industrial unrest to a minimum) and still have
more funds left over for self-financing than their competitors.

German workers are not only better paid than their American or French
counterparts but, as previously noted, they work fewer hours. What,
then, of their overall career prospects? The litmus test for promotion
is, in the Rhine model, based on qualifications and seniority. Thus the
twin priorities for an employee who wishes to 'get ahead' are dear:
company loyalty and further training. Not coincidentally, the pursuit of
both is beneficial to all.

It is not unusual to find that senior managers of German (and Japanese)
firms have spent their entire working lives in the same company, having
moved up the ladder of promotion from shop floor to executive suite.
Nothing could be further removed from the attitude now prevalent in
America, whereby job mobility and frequent career changes are seen as
proof of excellence and individual initiative. (France has not been
immune to this 'nomadic' bug: as with so many fashionable trends
imported from the USA, the concept was widely, and enthusiastically,
adopted. Recently, the pendulum seems to be swinging back towards
greater career stability - except in the lecture halls of the top
business schools, where 'self-affirmation through mobility' is still
being taught.)

{p. 115} If proof were needed that the German system of power-sharing
and co-responsibility could be decisive in moulding a more competitive
national economy, the recession years of 1981-82 provided a striking
example. Employers and trade unions agreed to keep wa.,ge settlements
down, so as not to further penalise companies in distress; in some
cases, they even negotiated salary cuts amounting to 3 per cent or 4 per
cent of purchasing power. (Even greater sacrifices were conceded by
Japanese workers following the oil crisis of 1974-75.) The resulting
recovery was extraordinarily vigorous: by 1984 the German economy had
begun to grow again, creating new jobs and winning back its share . of
world markets. And when, in 1984, a major strike was finally brought to
an end, the workforce as a whole mobilised itself in order to make up
the losses.

Co-responsibility, if skilfully applied, can be a potent weapon in the
economic armory; it may even prove to be the decisive edge of one
competitor over another. Training and education provide a further
illustration of the benefits of the Rhine vision of devolved management.

Vocational training and skills upgrading are now widely recognised as
supremely important for business and industry, whose real wealth lies,
not in capital or plant, but in the knowledge and expertise of the
workforce. In the European context, it is again Germany which has taken
the lead in this endeavor, and again the approach is based on dose
cooperation between management and employees. Long a matter of top
national priority, training in the German workplace (and outside it as
well) is based on three fundamental principles:

1. It must be widely available. Only 20 per cent of the working
population in Germany have no paper qualification, as opposed to 41.7
per cent of the French. The German apprenticeship system is particularly
remarkable in that it absorbs half of all school-leavers; the
disappointing figure for both France and the UK is 14 per cent. As a
result, the proportion of German school-leavers who find themselves
unemployed or in a job involving no further training is a mere 7 per
cent, while in France it is 19 per cent, and in Britain... 44 per cent!
Furthermore, there is strong emphasis on vocational studies (leading to
the equivalent of a City and Guilds qualification, for

{p. 116} example), involving some 53 per cent of the German workforce,
as compared with only 25 per cent in France.

2. Training must not be restricted to the elite. While it may be that
the USA boasts an educational system which, at its best, is unrivalled
anywhere (see Chapter 2), and even France has a better-educated elite
than Germany, the reverse is true of intermediate levels of training.
According to the DGB (the largest German trade union), in a
representative sample of 100 people and their qualifications, the top 15
in France are educated to a higher standard than the top 15 Germans; but
the other 85 are far better trained in Germany. This emphasis on a more
egalitarian pattern of education means that Germany has been able to
build a dynamic, competitive economy on the bedrock foundation of a
generally well-qualified workforce, as ~.report commissioned by the
French Department of Industry admitted in 1990. In France, as in the
English-speaking world, professional training is like polo: a sport for
the elite. In Germany, it is more like angling or jogging, a popular
activity that anyone can do.

3. Further education is for the most part financed by employers, with
help from government subsidies. A.s for its content, the emphasis is on
behaviour and attitude: training is designed to impart values such as
accuracy, reliability, even punctuality. As such, it meshes perfectly
with the qualities needed for advancement. The pathway to promotion in
Germany almost always involves an itinerary of further education and
qualification: nine out of ten apprentices finish their training and are
awarded a certificate; 15 per cent of those will then go on to do more
training. It would seem that, in the final analysis, professionalism is
more highly esteemed in Germany than elsewhere. As one report put it,
'In West German companies, one does not usually reach executive level
until the age of 40 and only then on the basis of proven performance,
not just diplomas. But there are solid links between business and higher
education: virtually all the top business leaders take on some teaching
duties' (Michel Godet, Futuribles: April 1989).

{p. 117} If only because it is a factor in determining company loyalty,
training is of the utmost importance for both models of capitalism. It
is an issue that can no longer be ignored: it concerns literally every
worker and every workplace. To sum up, the 'battle' pits two ;ival
systems against one another:

• The Anglo-American model of employment, in which a company seeks to
maximise its competitiveness by sharpening the competition between
individual employees. This entails a relentless drive to recruit the
best and brightest, whatever the cost, and then to keep them by paying
the 'going rate' as dictated at any given time by market forces.
Salaries, like jobs, are fundamentally individualised, and highly

• The Rhine-Japanese model has an entirely different set of priorities.
It rejects the notion that employers have the right to treat staff as so
many productive units or raw materials to be bought and sold on the
market. The company-as-community has an obligation to ensure a certain
level of job security, to earn its members' loyalty, and to provide
educational and training opportunities - which do not come cheaply. As a
result, it may not be able to pay each worker at his or her current
market value; what it can do is lay the ground for a lasting career, and
smooth out some of the rough spots along the way. In this model of
employment, there is no virtue in promoting cutthroat (and ultimately
destructive) in-house competition. ...

(6) German collectivism does not extend to the Periphery; Germany &
Japan influenced by Anglo-Saxon model

Date: Mon, 11 Feb 2013 13:20:06 +0100
From: Arno Mong Daastoel <am@daastol.com>

> Germany and Japan seem to have been influenced by the Anglo-Saxon model

Yes, you are right.

> German collectivism does not extend to the Periphery.

That is the problem with the Mercantilist (Nationalist) model.
It leaves to every nation to take care of itself.

No comments:

Post a Comment