Political governance of capitalism a reassessment beyond the global crisis

Political Governance of Capitalism Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd i 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd ii 18/04/2012 11:35 Political Governance of Capitalism A Reassessment Beyond the Global Crisis Helmut Willke Professor of Global Governance, Zeppelin University, Friedrichshafen, Germany Gerhard Willke Chair of Economics, University of Applied Sciences, Nuertingen, Germany Edward Elgar Cheltenham, UK • Northampton, MA, USA Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd iii 18/04/2012 11:35 © Helmut Willke and Gerhard Willke 2012 All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc William Pratt House Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2012935331 ISBN 978 78100 618 Typeset by Servis Filmsetting Ltd, Stockport, Cheshire Printed and bound by MPG Books Group, UK 01 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd iv 18/04/2012 11:35 Contents List of abbreviations List of figures vi viii 11 51 73 119 163 Exposition – capitalism as systemic risk On the political economy of global capitalism On systemic features and contradictions of capitalism On governance of capitalism as global political economy On global capitalism and the future of democracy Outlook – capitalism in a global knowledge society References Index 179 199 v Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd v 18/04/2012 11:35 Abbreviations ABS AIG Attac BIS CC CDO CDS CMBS CSR ECB EEAG FSB G-20 HRE IIF IMF INGO LTCM LTMF OTC PPP RA RMBS SEC SIV SPE SPV TAN TNC WB asset-backed securities American International Group, the world’s largest insurer Association pour une taxation des transactions financières pour l’aide aux citoyens Bank for International Settlements corporate citizenship collateralized debt obligation credit default swap commercial mortgage backed securities corporate social responsibility European Central Bank European Economic Advisory Group Financial Stability Board Group of Twenty Hypo Real Estate Institute of International Finance International Monetary Fund international non-governmental organization Long Term Capital Management Longer Term Management Fund over the counter (trades) public-private partnership rating agency residential mortgage backed securities Securities and Exchange Commission structured investment vehicle special purpose enterprise special purpose vehicle transnational advocacy network Transnational Corporation World Bank vi Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd vi 18/04/2012 11:35 Abbreviations WEF WHO WTO vii World Economic Forum World Health Organization World Trade Organization Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd vii 18/04/2012 11:35 Figures 1.1 3.1 4.1 5.1 Views on free market capitalism Market capitalism and reactions to disturbances Global context for governing capitalism Four scenarios for the evolution of the global financial system 5.2 SWOT analysis of contemporary democracy 60 82 122 128 viii Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd viii 18/04/2012 11:35 Exposition – capitalism as systemic risk What if capitalism were to collapse? Many critics of capitalism not realize that there is no viable alternative to capitalism after the demise of socialism; there are only alternatives within market capitalism Varieties of capitalism span a broad range from market fundamentalism to welfare capitalism, and these varieties correspond to varieties of democracy (Hall and Thelen 2005; Willke 2009a) As a specific governance regime for the economy, capitalism is based mainly on self-organization and self-governance of markets, supplemented with varying institutional arrangements to safeguard the proper functioning of the market However, at the same time global capitalism has become a systemic risk, and the global financial crisis should be regarded as a ‘normal accident’ within an untenable architecture of global finance This paradox of capitalism – presenting a systemic risk because of and in spite of its achievements – is the base-line for this book Even market fundamentalists not doubt that markets require legal institutions, political frameworks and cultural patterns in order to function as markets The details of the relations between politics and economy, of the political preconditions of a market economy and of the architectures of a political economy are, of course, contested But it seems evident that a positive, self-reinforcing relationship between capitalism and democracy depends on reining in the self-destructive tendencies of an unfettered market capitalism by defining rules for public goods (Malkin and Wildavsky 1991), rules for accountability (Held 2004; Keohane 2003), rules against ‘predatory’ abuses of market power (Shiller 2009) and rules for coping with economic and financial globalization (Roubini and Mihm 2011; Stiglitz 2007: 269 ff.) The global crisis of 2007 onwards has destroyed the myth of the gloriously self-regulating ‘free’ market But what would be a more adequate description of the range and role of ‘free’ markets? Ironically, Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 18/04/2012 11:35 Political governance of capitalism contrary to the epithet of ‘neo-liberalism’ it is the proponents of classical liberalism who have given answers to this question which still appear to be valid today (Willke G 2003) The centerpiece of their argument is that the market cannot produce its own preconditions – for example rule of law, the institution of private property or prevention of monopolies – and therefore it needs the regulatory powers of polities This book will pursue the argument that revisiting capitalism after the global financial and economic crisis means assessing capitalism before the next crisis The next crisis, however, will not be a crisis of capitalism but a crisis of governance, or more to the point, a crisis of the relation between capitalism and governance and, thus, a crisis pertaining to the governance of capitalism The crises inherent in the deployment of capitalism have always nurtured the suspicion that capitalism is not only running the periodic risks of boom and bust but that capitalism as an unfettered economic regime is a systemic risk threatening the collapse of society as a whole Karl Marx perceived the devastations of 19th- century Manchester capitalism as evidence of a built-in propensity to selfdestruction In 1910 Rudolf Hilferding published a scathing criticism of financial capital, again focusing on the ‘general conditions of crises’ (Hilferding 1981 (1910): part IV) A century later, Nouriel Roubini and Stephen Mihm, among others, expound global financial capitalism as a crisis-prone economy, maintaining that ‘capitalism is crisis; it introduced a level of instability and uncertainty that had no precedent in human history [T]he rise of a small coterie of incredibly powerful, opaque financial firms has generated a far more unsettling problem [it] created a system that is extraordinarily vulnerable to systemic risk’ (Roubini and Mihm 2011: 46 and 210) Indeed, in view of the global financial crisis and its continuing effects on economy, international trade, trade imbalances or public debt, the question is whether Schumpeter’s conceptualization of market competition as a process of ‘creative destruction’ (Schumpeter 1975) is but a euphemism and needs to be reinterpreted as creating destruction on a grand scale As long as ‘capitalism’ actually was a distributed system of nationally defined and delimited spaces, a combination of Schumpeter’s creative destruction and Ricardo’s comparative advantages, even serious crises were limited to regional or national levels The 1990s saw a series of national economic, financial and currency crises which sent shock waves over the Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 18/04/2012 11:35 202 Political governance of capitalism opportunistic decision-making 126 private accountability 32 and private property 15, 16 resurgence of the nation-state 120 global financial system 18, 35–7 scenarios for evolution 121, 122 transformation from loose coupling to tight coupling 41–50 global institutions 98, 99, 106, 111, 117, 161 see also under individual institutions global knowledge society 163–78 global law 27, 77–8, 79, 161 global market regime 20 global political economy 7–8, 73–118, 153–4 framework for global capitalism 86–111 responsibilities and resilience 111–18 self-governance of capitalism 87–95 self-governance of politics 81–7 global public goods 17–18, 21–2 global public sphere 177–8 globalists 73, 176 globalization 7, 10, 38–9, 44, 99, 153, 166 contradictions of capitalism 51–3, 61–2 impacts on governance 73–8 opportunities for democracy 127 and the spirit of capitalism 161 good governance 11, 27 goods private 7, 12–19 public see public goods governance costs 11 governance regime 8, 19, 79 democratic ethics and the spirit of capitalism 148–62 framework for global capitalism 105–11 government failure 16, 58, 61, 88 Gramm-Leach-Bliley Act Hahnel, R 150 Halper, S 123 Hamel, G 116, 139 Handy, C 109, 110 Hardin, R 172 Harvard University 169 Hayek, F von 91, 92, 151–2 health care 157–8 Held, D 25 high frequency trading 94–5 high-reliability organizations 147 high-reliability systems 44, 118 high-risk technologies 43 Hilferding, R Hobbes, T 81 Holcombe, R 12 horizontal subsidiarity 106–9 Hume, D 81 Hutter, B 13 Hypo Real Estate (HRE) 101–2 Iceland 43 ignorance 70 collective 91–2 incomprehensibility 47–9 increasing returns 168 individuals 80, 82 industrial society 146, 156 inequality 149–51, 155 see also equality information asymmetries/ imperfections 88–93 ING 107 innovation 69 input-legitimacy 129–30, 132, 143 Institute of International Finance (IIF) 99–100, 101, 110 institutions 58 international and global 98, 99, 106, 111, 117, 161, 173 smart governance 176 intellectual property rights 169 intelligent firms 147, 175 interactive complexity 44–7 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 202 18/04/2012 11:35 Index interdependence 98–9, 154 and independence 83–5 International Criminal Court (ICC) 21, 27 international institutions 98, 99, 106, 111, 117, 161, 173 see also under individual institutions International Labor Organization (ILO) 76 International Monetary Fund (IMF) 16, 78 investment banks 141 ‘invisible hand’ 57 irrelevance 126, 127 Jasanoff, S 169 job creation 145–6 Kay, J 88, 141 Keohane, R 30, 79 Keynes, J.M 68, 69, 90 Keynesianism 150 King, M 107 knowledge as a factor of production 166–70 and uncertainty 69–70 knowledge-based (cognitive) decision-making 76–8, 97, 147, 156–7 knowledge economy 146–8, 170–1 knowledge society 30–1, 71, 97–8, 127, 146–8, 155–7 global 163–78 Krugman, P 39, 51 labor 166–7, 168 Lall, R 104 land 166–7, 168 Landemore, H 137–8, 152, 172 lateral world systems 76–8 learning capabilities 103 legal accountability 25, 26–7 legitimacy 79, 119–20, 129–31, 132 input-legitimacy 129–30, 132, 143 output-legitimacy 22, 129, 130–1, 132, 139, 143 203 throughput-legitimacy 130, 131, 132 Lehman Brothers 46, 101 Leisinger, K 24 leverage 39 regulatory 110–11, 117 leverage ratios 101–2 liability 100–1 liberal paradigm 115 Lindblom, C 125, 129, 137, 174 Lloyds Banking Group 107 long-termism 86–7, 94, 171–2 loose coupling 40–1, 41–2, 49, 108, 116 LTCM 118 Luhmann, N 83–4, 92, 147 Malkin, J 13 market accountability 25, 29 market failure 16, 58, 61, 87–93, 95, 140 market fundamentalism 33, 66–7, 165 markets 1, 53–8, 64–5 authority of the market 19–20 disturbances in 54–6, 59, 60 Marx, K 2, 51, 112 mass media 126 Matten, D 23 Mattli, W 104 Mauro, B di 173 McNally, C 105 Merton, R.K 136 Mihm, S Mill, J.S 131 money 141, 142, 146 Moody’s Investors Service 31 moral hazard 101 mortgages ARMs 45, 46 securitization 108 subprime 39, 44–5, 45–6, 89–90, 176–7 nation-states 10, 15, 73, 120, 134, 172–3, 177 diffusion of power 74–5 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 203 18/04/2012 11:35 204 Political governance of capitalism interdependence with other nation-states and international institutions 98–9 negative externalities 93–5, 111–12, 140 normal accidents 43–4, 47, 48, 92–4, 99, 178 Nye, J 79 Obama, B 146, 157, 172 OECD countries 79, 119, 120, 156 opaqueness, unavoidable 48–9 opportunistic decision-making 126 opportunities of democracy 127, 128 optimism 60–1 organizational intelligence 169 output-legitimacy 22, 129, 130–1, 132, 139, 143 overmanaged societies 124, 125 overregulation 104 ‘parliaments’ of experts 144 participation 130, 131, 132, 132–6, 143 democratic ethics and the spirit of capitalism 151–2, 160 Pascual, C 75, 177 passive societies 124, 125 Perrow, C 43, 92 pessimism 60–1 pluralism 24 Polanyi, K 56, 64–5 policy failure 16, 58, 61, 88 political contradictions of capitalism 67–70 political economy of global capitalism 7, 11–50 private risks and systemic risk 34–41 public and private accountability 25–34 public and private authority 19–25 public and private goods 12–19 transformation of global finance 41–50 political governance 3, 10 political intervention 85–6, 87–8 political parties 132–4 political society 71 political system 65–6, 80, 82, 82–4 politicization of corporations 115–16 Popper, K 137 popular authority 22 populism 126, 132, 138–9 Porter, T 22 Posner, R 88, 104 post-modern (active) societies 124–5, 139 Power, M 28 power 141–2, 146 diffusion of 74–5 pre-modern capitalism 160 preferences 91 price mechanism 54, 57 principles-based regulation 17, 99–105, 117 private accountability 7, 25–34 private authority 7, 19–25 private goods 7, 12–19 private risks 34–41 privatization 13, 15–16 procedural democracy 131, 132 procedural rationality 102–4, 117, 130 professional accountability 25, 30–1 profit motive 53–4, 113–15 property 14–16 proprietary knowledge 169 Protestant ethic 148–9, 151 Prysby, C 132–3 public accountability 7, 25–34 public authority 7, 19–25, 58 public goods 6, 7, 12–19 global 17–18, 21–2 public interest 104 public-private partnerships (PPPs) 18, 21 public sphere global 177–8 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 204 18/04/2012 11:35 Index Rajadhyaksha, R 46 Rajan, R 173 rating agencies (RAs) 31, 46–7, 90–1 rational capitalism 160 real estate 49–50 realism 176 rebalanced multilateralism 121, 122 redistribution 159 and knowledge 170 re-engineered Western-centrism 121, 122 regulation 4, 6, 37 banking sector 62–3 diversity of regulators and regulatory philosophies 47 financial accountability 28 modes of 16–17 overregulation and underregulation 104 principles-based 17, 99–105, 117 private-sector involvement 32–3 self-regulation 17, 58–9, 60 regulatory leverage 110–11, 117 Reich, R 167 religion 81, 148–9 representation 130, 132 representative democracy 132, 135 reputation 31–2 reputational accountability 25, 29–30, 31–2 residential mortgage backed securities (RMBSs) 108 resilience 116–18, 127, 128, 139, 143, 161 resolve 123–4 responsibilities 23–5, 33–4, 111–16, 116–17 see also corporate citizenship (CC); corporate social responsibility (CSR) responsible capitalism responsible sovereignty 75 responsiveness 132 restraint 123–4 return on investment (ROI) 57–8 revenue 53–4 205 Ricardo, D risk 60–1 complementarity between risktaker and risk-bearer 100–2, 117 private 34–41 systemic see systemic risk robber-capitalism 160 Roberts, J 88 robust models of societal order 72 Rosenau, J 38–9, 97 Roubini, N Royal Bank of Scotland 107 rule of law 115, 126, 129 Samuelson, P 12 Sarbanes-Oxley Act 28 Sassen, S 75 scandals 27, 160 Scavo, C 132–3 Scharpf, F 130 Scholte, J 27 Schumpeter, J 2, 34, 145 science 136–7 Scitovsky, T 51 Securities and Exchange Commission (SEC) 17, 41, 47, 95 securitization 108 mode of 45–6 self-control 16, 175 self-destruction 126, 127 self-governance 10, 36–7, 77, 140 of capitalism 87–95 of politics 81–7 self-organization 37, 54–5 self-regulation 17, 58–9, 60 Senge, P 48–9, 139 separation of economy and politics 113, 116 Sethi, P 89, 114 shadow banking system 4, 42, 46 shareholder valuism 29, 51–2 Shiller, R 49, 98 shocks 61 short-termism 86–7, 94–5, 171–2 Sinn, H.-W 6, 7, 108 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 205 18/04/2012 11:35 206 Political governance of capitalism Skidelsky, R 68, 90 smart governance 127, 128, 175–6 Smith, A 12, 57, 58 social contract 81, 164, 174 social justice 150–1 see also equality social obligation 14–15 social responsibilities see responsibilities socialism 40, 112 overmanaged societies 124, 125 societal contradictions of capitalism 70–2 societal guidance types 124–5 societal reason 71 Solvency II 28, 109 sovereignty 74–5 disaggregated 98–9 special purpose enterprises (SPEs) 108 special purpose vehicles (SPVs) 108 specialization 107 specialized knowledge 69 speculation 53, 59–61, 63–4, 94 sphere of influence, company’s 23–5 spirit of capitalism 148–62 Spitzer, E 107 Standard and Poor’s Ratings Group (S&P) 31 state failure 16, 58, 61, 88 statists 73, 176 Stiglitz, J 53, 73 strategic action 167–8 strategic intent 141–2 strategic resolve 171–2 Streeck, W 56 strengths of democracy 86–7, 126–7, 128 structured financial instruments 4, 42, 45–6, 175–6 see also under individual instruments structured investment vehicles (SIVs) 108 subprime mortgages 39, 44–5, 45–6 housing and subprime crisis 89–90, 176–7 subsidiarity 24, 105–9, 116, 172–3 supervision 4, 17, 37 supranational authority 22 supranational institutions 98, 99, 106, 111, 117, 161, 173 see also under individual institutions Swiss National Bank 101 Switzerland 43 SWOT analysis of democracy 123–7, 128 symbolic analysts/analysis 147, 156 systemic contradictions of capitalism 51–72 systemic impact 49–50 systemic relevance 5–6 systemic risk 64, 66, 103–5, 154 capitalism as 1–10 private risks and 34–41 Tabellini, G 104 Tea Party movement 139 technical authority 22 Tett, G 32 threats to democracy 126, 128 throughput-legitimacy 130, 131, 132 ‘Tiger States’ 72, 122–3, 164 tight coupling 40–50, 93, 108 time 86–7 incongruence 93–5 short-termism and long-termism 86–7, 94–5, 171–2 Tobin tax 94–5 ‘too big to fail’ organizations 5, 107–8 totalitarianism 120 trade imbalances 45 transnational corporations 114 transparency 132, 135 transport 177 trust 32, 56–7, 92 turbulences, systemic unavoidable opaqueness 48–9 ultra-stability 117–18 uncertainty 69–70 underregulation 104 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 206 18/04/2012 11:35 Index unemployment 68, 145–6, 149 ungovernability 97, 106 United States (US) 66–7, 132–3, 177 Federal Reserve 6, 33, 38, 47 Glass-Steagall Act 4, 41, 107 Gramm-Leach-Bliley Act health system 157–8 high frequency trading 94–5 housing and subprime crisis 89–90, 176–7 regulatory agencies 47 SEC 17, 41, 47, 95 subprime mortgage lending 39, 44–5, 45–6 Tea Party movement 139 trade deficits 45 universities 169 Välikangas, L 116 varieties of capitalism 11, 66, 67, 85, 163 varieties of democracy 66, 67, 85 vertical subsidiarity 105–9 views on free market capitalism 8–9 207 Volcker, P 107 voting 26, 130, 132–4 Walzer, M 24 ‘Washington consensus’ 42, 67, 73, 165 weaknesses of democracy 126, 128 Weber, M 65, 70, 81, 129, 148–9, 160, 163 Weick, K 40, 41 Western democracies 8, 72, 132 weaknesses of the Western model 163–6 Whitehead, A 92 Wildavsky, A 13 Williamson, O 11, 19, 174 Wolf, M 101 Woods, N 104 World Economic Forum 102 World Health Organization (WHO) 76, 78 World Trade Organization (WTO) 20, 27, 76, 78, 79, 174 Wyman, O 121 Zandi, M 49 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 207 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 208 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 209 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 210 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 211 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 212 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 213 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 214 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 215 18/04/2012 11:35 Helmut Willke and Gerhard Willke - 9781781006184 Downloaded from Elgar Online at 04/17/2017 02:14:01PM via King's College, London WILLKE PRINT.indd 216 18/04/2012 11:35 ... with globalization as the most important new factor changing the face of capitalism and reconfiguring the relation between capitalism and governance Globalization has created a fundamental incongruence... 11:35 Political governance of capitalism the creation of a huge and unregulated ‘shadow banking system’ or the revocation of the Glass-Steagall Act by the infamous GrammLeach-Bliley Act of 1999,... this a daunting task is the complexity of global capitalism on the one hand and the fragmentation and diffusion of political authority in global contexts on the other Concerning governance of capitalism,