corporatisms past

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Volume 5,Issue 3 2010 Article 4

Capitalism and Society

The Ghosts of Corporatisms Past and Past

Corporatisms: Commentary on Three Articles

Mark Blyth,Brown University

Recommended Citation:

Blyth, Mark (2010) "The Ghosts of Corporatisms Past and Past Corporatisms: Commentary on

Three Articles," Capitalism and Society: Vol. 5 : Iss. 3, Article 4.

Available at: http://www.bepress.com/cas/vol5/iss3/art4

DOI: 10.2202/1932-0213.1079

2011 Berkeley Electronic Press. All rights reserved.


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Like Dickens character Scrooge in A Christmas Carol, I find myself, afterreading these essays, confronted by ghosts. Unlike Scrooge, who must confrontthe ghosts of his own past, I see in these essays the ghosts of both Corporatisms

past (Fascism, Anti-Modernist Catholicism) and past Corporatisms (those of LatinAmerica, Italy and Iberia). Those pasts are, however, like many histories, partcontested, part imagined, and part misplaced. As such, to use another literaryprop, I find myself identifying with Swifts character Gulliver, a man curiouslyout of scale with the environment that he surveys. In the spirit of Gulliver I hopeto travel and learn from the exotic new lands surveyed in these essays, andperhaps, in the spirit of Scrooge, lay a few ghosts to rest in the process.

Gulliver Visits Argentina: The Constitutional Economy of Dynamism and

Inclusion1

Solas paper is ambitious in scope and sweeping in its analysis. He first seeks todisentangle the knots of constitutional economics, constitutional cultures, andrelate these to economic dynamism. His key claim is that the causes ofArgentinas reversal of development are varied butbad incentives in theConstitutional economy and a bad constitutional culture are most significant (p.1). In the manner of Douglass North (1990) Sola argues that constitutional rules(formal institutions) affect the degree of economic dynamism less than thesurrounding and supporting constitutional culturethat is, the norms andconventions that both imbricate and trump the formal rules of economicinteraction. In the case of Argentina this has a particular pathological face, that ofcorporatism, which has caused Argentina to develop a vast class of social

outcasts in the past twenty years (p. 2).Sola defines constitutional economics as the economic analysis of

Constitutional law, where the design of incentives to impede dictatorships andprevent rent seeking and corruption is central (p. 2). Constitutional culture, thatwhich is causally prior, is defined as something embodied in what extrajudicialactors explicitly believe about the constitution (p. 7). As such, if culture andstructure are dialectically related, then agency appears through the ability ofjudges and lawyers to change formal incentives given the background of informalconstraints.

All this matters for Sola since bad constitutional economics embedded in acorporatist culture led politicians with short time horizons to discount long term

growth, which was the case of Argentine economic policyparticularly during

1The subtitle of Solas essay is immediately appealing, An inquiry into the causes of Argentineeconomic decadence, since I am always in favor of a bit of decadence. But it does raise aquestion. If Argentina is as hamstrung by the legacies of corporatism as Sola suggests, then wheredid it ever get the surplus to become decadent?

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Blyth: The Ghosts of Corporatisms Past and Past Corporatisms

Published by Berkeley Electronic Press, 2010


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the 1950s to the 1970s (p. 4). It also led to the rise of hyper-presidentialismwhere weak governors and centralized taxes led to the construction of a mal-distributive coalitional politics of minimum-winning coalitions that prioritizes

rent seeking over growth.The villain in all of this is, however, something not reducible to any of the

foregoing categories of analysis: the Corporatist Constitution. This constitutionappeared in the midst of the 1930sestablishing a functional politicalrepresentation as opposed to a democratic (p. 9). Despite such constitutionsbeing basically extinct after World War IIcorporatist constitutional culture hashad a long intellectual tradition that subsists in many countries with deleteriouseconomic effects (p. 9). This constitutional form comes from the CatholicChurch, specifically from Pope Leo XIIIs encyclical De Rerum Novarum, whichsought to unite opposing economic classes in an organicist and hierarchicalconception of society and economy, based around the notion of discrete trades

and corporations; hence corporatism, which was reinforced 40 years later by theanti-liberal encyclical Quadragessimo Anno that sought to expose the errors ofindividualist economic teaching (p. 12).

The attraction of corporatism is, according to Sola, a closed economywhere an intense protection is established to produce all goods and services athome (p. 12) and where the Corporatist State requires that every organizationand individual be a member of a corporation (p. 12). The result of this is aneconomy that cannot weed out producers who have done badly, which in turnimpedes dynamism, because free entry to business is limited, owners are notautonomous from either self-interested managers or state agencies, and firms justdont go bankrupt (p. 15). As such, the state tries to act as the conductor of the

economic orchestra, but with such bad incentives protected by a corporatistculture, the result is decadence, rather than growth.

Exorcising (or Invoking) the Argentine Corporatist Ghost?

This is heady stuff, big-picture thinking, but is it necessary? Much of what Solaseeks to explainArgentinas economic underperformancehas been dealt withby authors who have studied Argentinas failed attempt to move from ImportSubstitution Industrialization (ISI) to Export Led Growth (ELG) during the 1960sand 1970s (Sikkink 1991, Haggard 1990). In brief, the whole point of ISI was tobeat declining terms of trade on exports of primary products and move towards

the export of manufactured goods that did not suffer from the same problem.Unfortunately for Argentina (and Brazil and Mexico), while some states did thisquite successfully, particularly in East Asia (Wade 1990, Amsden 1989, Johnson1982) where a strong state could face down landed-class interests while providingcheap capital to business, in Latin America a combination of weak states,

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http://www.bepress.com/cas/vol5/iss3/art4

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powerful landed (export agriculture) interests, clientelistic politics, small firms,and large home markets meant that ISI became embedded behind tariffs andcronyism flourished. Indeed, the literature on this subject in political science and

sociology is truly massive and unusually united in its conclusions. That is, youcan explain much of what Sola seeks to explain without ever invoking a bunch ofCatholic encyclicals or a set of constitutions and conventions invented in the1930s that were, by his own admission, dead by the 1940s.

Similarly, the broad culture trumps structure claim needs to bedemonstrated, not simply asserted. I know its fashionable for economists to useculture as a variable these days, but their understanding of it should go beyondthat of a set of instructions issued from the Vatican that people slavishly follow.For a discipline grounded in concepts such as agency costs, this is surprising tosay the least. Papal encyclicals exist on abortion, human rights, family law andcontraception. All of them are routinely ignored in staunchly Catholic countries

such as Italy and Argentina. Just as John F. Kennedy may have had to say duringthe 1960 election that he was not taking instructions from the Vatican to calmProtestant fears, Sola is going to have to do more than show a rough correlationbetween the existence of papal organicism/anti-modernism in documents from the1890s and 1930s and economic outcomes in Argentina decades after the fact.Simply asserting that things continue to have a hold on the mind does not makeit so.

Alternative Explanations?

Solas empirical claims can also be more readily explained by other factors. Take,

for example, his claim concerning a vast class of outcasts generated over the pasttwenty years. This is indeed backed up by the rise in the Argentine Ginicoefficient from 0.36 in 1974 to 0.51 in 2000 (Altimir et al 2002). But was thiscaused by a corporatist culture? One could just as well invoke labor marketderegulation that lowered real wages and increased unemployment in the 1990s,or the distributional consequences of the lost-decade and the debt crisis of the1980s (Altimir et al 2002). Similarly, a glance at the Penn World Tables showsthat Argentine real GDP per capita grew from an index of 7813 in 1950 to 11406in 1975, a 45.98 percent increase. But if one looks at the last twenty years of datafrom 1987-2007 one sees the index shift from 10844 (lower than it was 15 yearspreviously) to 15272, a 40.83 percent increase. So how can the 1950s to the 1970s

be a period of politicians ignoring long term growth when it produced moregrowth (and a lower Gini) than the last twenty years under conditions ofliberalization?

Finally, much of Solas own argument seems extraneous to his concernswith corporatism. Minimum winning coalitions and side payments to coalition

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members are the very stuff of American politics, so should we also think of theUS as a corporatist state? China is a fiscally federal state, so does it follow that itis also a corporatist culture? Argentina does indeed have a DHont electoral

system, but so do Turkey, Finland and Wales. As for limiting entry to markets,Argentina is indeed 114 out of 141 in the Fraser Institute ranking on economicfreedom, but if one wishes to make a case for owners being dependent uponmanagers and attendant patterns of rent-seeking, one does not have to go toArgentina. One should only reflect upon the one complete workers revolution ofthe 21

st Century American Banking where the workers (managers) took

control of the means of production from owners (shareholders), destroyed theirinvestments, and passed the costs onto the serfs (taxpayers). As for not allowingfirms to go bust, I am sure that Sola is well aware of Chapter 11 of the USbankruptcy code.

In short, almost all of what Sola seeks to explain can be, and has been,

explained much more effectively without recourse to constitutional cultures,constitutional economics, Catholic teachings and corporatism. What is mostsurprising to me is that in his entire discussion of corporatism, this ArgentineCatholic ghost that seemingly haunts the political economy, Sola never actuallydiscusses the mechanisms through which this ideational hangover persists in theminds of actual Argentines. Perhaps, given the centrality of such a mechanism tothe argument of Morck and Yeung, as well as Sola, we can find a betterexposition of such a mechanism in their essay?

Gulliver Goes on a Ghost Hunt: Corporatism Goes Global with Morck and Yeung

The virtue of Morck and Yeungs paper is its deep comparative and historicalanalysis that tries to make exactly the type of links between Catholic socialthought and the economic policies of particular cases that Solas essay suggestsbut fails to clinch. Yet, their claims are even more sweeping, and as we shall see,even more problematic. Their basic claim is that countries that adoptedcorporatism most fully those with Roman Catholic Majorities or FrenchEducated elites retain corporatist institutions that retard financial development(abstract). To make this claim, their argument, like Solas, has several interlinkedsteps.

The 19thCentury Catholic Church hated liberal individualism and rejectedSmiths key insights concerning human nature. So they set out to challenge both

precepts with a set of Papal encyclicals that declared that hierarchy trumps bothequality and liberty since society is organically interlinked and inherentlyunequal. As such, the constituent parts of the body politic, the corporations of thiscorpus, must be actively organized by the state (run by Catholic, or at least French

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educated, elites) to produce the harmony of interests that the free flow ofcompetitive forces can never achieve.

Come the crash of 1929 and the consequent ebbing of faith from liberal

capitalism and we find that Mussolini created the worlds first avowedlycorporatist economy (p. 1) which, with papal endorsement, spread to Iberia,Latin America, Vichy France, and after the war [to] the Spanish, Portuguese andDutch colonial empires. Ataturk and the Falangists brought [this] to the MiddleEast, where Arab movements embraced the ideology (p. 1). Noting correlationstoo strong to ignore between Catholic, Islamic, and French legal systems andenfeebled financial systems and retarded economic development (p. 2,emphasis added) Morck and Yeung confidently posit a corporatist shadow uponCatholic countries, ex-colonies with French educated leaders, and perhaps manyIslamic countries (p. 2) As such, wetherefore posit that empirical evidencelinking financial and economic infirmityto Catholicism, Islam, or the Napoleonic

code may well actually capture a residual corporatist tradition (p. 2, emphasisadded).

Before going any further let us take stock of this claim. Fascism iscorporatism, Islam is corporatism, French intellectuals are handmaidens of theCatholic church, and as a consequence all such states have enfeebled, retarded,and infirm financial systems. So from Dublin to Dubai to Djibouti the ghost ofcorporatisms past is really to blame for why most of the world is financiallyretarded. Invoking Keynes dictum on ideas at the end of their paper that theideas of defunct (in this case Catholics and French intellectuals) being morepowerful than we realize, Morck and Yeung argue that the reason the worldoutside of Anglo-America (for thats what is really being claimed here) is

economically enfeebled, retarded, and infirm is down to Catholic encyclicalsand French intellectuals.

Once Variable, One Correlation, and the Peter Pan Problem

Note that the language used here is similar to that used in discussions of financialrepression, where, if it wasnt for something getting in the way andrepressing activities (always and everywhere the state), finance wouldnaturally flower. Here we have a variant of this argument where any countrytouched by Catholicism or Islam2 (together 3.6 billion people out of 6.8 billionglobally), plus anyone French or touched by France (about another 250 million -

bringing us to about 60 percent of the worlds population) can have theireconomic backwardness explained by something else that got in the way andmade their economies enfeebled, retarded, and infirm: what Morck and

2http://www.adherents.com/Religions_By_Adherents.html

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Yeung call fundamentalist corporatism (p. 3). One variable, 4 billion people,over 100 countries: I think we should be nervous about such claims.

The first problem with such an analysis is the Peter Pan problem (the

boy who never grew up); a variant of something got in the way. This is usuallyapplied to China and takes the form, China was technologically ahead of theWest for centuries, but it stagnated as the West advanced because something gotin the way. That something was Confucian culture, and so the West overtookChina (Hobson 2004). Swap Confucian for Corporatist and you have the samestory in Morck and Yeung. The problem with the Peter Pan story is that onedoesnt have to invoke retardation or some similar blockage to explain whysomething didnt happen. What happened in the Chinese case was that theirsecurity threats came from the Steppe, not the Sea. So when the Europeansdeveloped a competitive advantage in seaborne violence at a time when theChinese could not respond (Arrighi 2009), they were conquered. There is no need

to invoke some vague cultural variable as that which naturally stopped thembecoming like us. Yet in Morck and Yeung we see the same causal mechanismproposed for countries as different as Argentina and Indonesia, based upon anobserved correlation, the value of which we are never told. Corporatism got inthe way and stopped finance flowering (AKA these states never grew up) andas a result they are all enfeebled, infirm and retarded.

Going Deeper to Find the Evidence: You Mean Hitler was a Catholic?

The second problem is of course proving this, which is where their comparativecase evidence comes in. I really enjoyed reading these sections and learned a huge

amount from them. Who knew Schumpeter was a weak-kneed fascist, by theauthors reckoning at least (p. 9), or that George Bernard Shaw was a fellowtraveler? (p. 30) Likewise the exposition of Catholic thought (pp. 11-15) taughtme more than my twelve years in Catholic School ever did about the Church. Butdespite all the details, the weakness of the argument is apparent.

First of all, despite the caveats made by the authors concerningneocorporatism (cases of modern successful corporatist states as defined by labormarket regulations and bargaining agreements and union density and coverageand the like), corporatism is not an end: its a means to an end . Corporatism is amethod of organization to secure collective agreements of labor market andproduct market partners in order to control price inflation and guard against the

risks inherent in economic openness (Katzenstein 1985, Blyth 2002). It is notfascism. No amount of definitional footwork will make it so. Indeed, I do have towonder what is the point of doing trying to make the two equivalent?

In the 1930s Fascism was the end and corporatism was the means. Callingfascism fundamentalist corporatism creates a ghost insofar as the means become

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the ends. Italy used corporatist methods to consolidate power in the Duce and theGrand Fascist Council given the failure of liberal markets to produce recoveryafter World War One. The Pope may have been cheering from the sides, but the

fact that the fascists were killing priests in the countryside while the Vatican hadto smuggle their encyclicals out of the country, the ideas supposedly driving theseevents, to get them published, as the authors admit, surely suggests whichdirection in which power was flowing.

Similarly, Nazi Germany used corporatist means, but even on that levelits a stretch to see millions involved in forced labor, death camps, and the wholeapparatus of the state extracting all resources from society in order to create apermanent war machine as either corporatism or anything dictated by theVatican and a handful of French thinkers (Baker 2006). This quite fundamentallyconfuses and ideological goal with a means of coordination. Are the authors reallysaying that French romantics and Vatican theologians guided Hitler in his

actions? If so, this is a bit like describing the Roman Empire as capitalistbecause it had laws of property and prices in the markets. It seems plausible untilyou remember the bit about 90 percent of Roman output coming from slaves andcapital accumulation coming from conquest and tribute rather than productivitygrowth.

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Several Bridges and Conceptual Leaps Too Far

Austria is another case the authors identify as Catholic-fascist, and Spain underFranco was indeed Catholic and fascist, but the extent to which the Church everhad a say in policy in Spain or France is contestable at best (Ban 2010). Dragging

Vichy France into this is even more problematic. In the French case in particularthere is nothing either voluntary or intellectual about occupation. Yes, there werecollaborators, and yes, they appropriated the language of corporatism since takingtheir language of justification straight from the page-book of the Nazis wouldhave undermined what very little legitimacy they had, but such linguisticadoptions hardly show the power of fundamentalist corporatist ideology.

In one particularly Gulliver moment I found the France described by theauthors to be completely out of scale with the one I am used to. Yes, Franceproduced catholic organicists such as Comte and Saint Simone (and evenRousseau). But it also produced the revolution - libert, galit, fraternit - and allthat. It also produced the French state, which was set up largely to disempower

the Catholic church, especially in the area of education. It gave us Sartre and

3 Similarly, quoting Nazi Aryan philosophy on self-sacrifice to the group as being the same asCatholic teaching borders on poor taste rather than evidence (p. 25).

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Foucault. Just how the French educational system subsequently spread Catholiccorporatism around the world from such roots remains a mystery.4

When we get to Latin America (let alone the Islamic world) the logic

becomes even more tenuous. Morck and Yeung argue that, other Cold war LatinAmerican dictatorshipslikewise followed Iberian corporatist prescriptions underthe tutelage of Catholic clerics (p. 30). But most authors that I am aware of whohave written about Latin Americas post war development stress that these veryneocorporatist ideas came from globally connected money doctors (Helleiner2009) and the UN Council on Latin America (ECLA), utilizing the bestdevelopment economic theory of the day to promote ISI as Keynes for the thirdworld (Hirschman 1981, Sikkink 1991), the ideas for which came right out ofelite US economics departments (Chwieroth 2010). This had nothing to do withCatholic clerics.

5Nasser in Egypt and Suharto in Indonesia were singing from the

same developmental economics hymn sheet. Indeed, in such countries, where the

state had to organize labor because it couldnt organize itself, and even inventcapitalists (late modernizing Arab and South Asian post-colonial states), thesecatch-up spurts most often ended badly but not because of French ideas. Whatthe authors lay stress on, the French connection, is tenuous at best. Nomechanism is proposed, nor are particular agents identified beyond very broadassertions. Like Sola, this is another example of a situation where a very broadcorrelation between a vague notion of hierarchy and retarded development isconfused with causation, with as far as I can see, no real evidence brought to bearto establish it. For example, if one adds up the populations of the cases discussedin depth (Italy and Germany and Austria) in the 1930s, you get about 100 millionpeople. Add in all the other cases (except Islamic states since the linkage to

catholic corporatism and French thought is too weak to bear any weight at all) andyou reach about 250 million. The argument is supposed to apply to more than halfthe current worlds population: it simply cannot hold.

Another Form of Financial Retardation?

Recall that all this Catholic Theology and historical detail is supposed to link backto why some states have retarded financial sectors. But to get there do we reallyhave to ignore that for Germany in the 1930s fascism and corporatism is hardly adistinction without a difference? Similarly, to make all this work do we have toposit some transmission mechanism, as yet undefined, where the ideas of the

4 Likewise, the fact that one biographer of Pierre Trudeau argues he was influenced by theJesuits hardly makes Canada a corporatist country influenced by the Vatican (p. 31).5 Could the authors, I wonder, show one single finance ministry or central bank or cabinetappointee that was a priest in any of these countries?

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1930s (Papist or French) capture elites across the globe from Senegal to Saigon,and this in turn somehow explains why their banks are under-developed today?

But one could reasonably point out that Spain and Ireland, the poster

children of modern bank-based development, states that based their growth uponthe development of deep, sophisticated, and liquid financial systems, are bothCatholic. Doesnt that count as very strong evidence against the entire thesisbeing pushed here? So why did Francoism, Spanish corporatism, and the legacyof the encyclicals gave way so easily in the 1990s and 2000s to a bank andtourism based model of development that instantiated the largest dual labor-market (as anti-corporatist a device as one can imagine) in Europe? And isntIreland90 percent Catholic Irelandthe only example we have a moderndeveloped state that bankrupted itself by not retarding its financial system?Ireland is now far more feeble and infirm than it has been in half a centuryprecisely because it sought to develop a deep and sophisticated financial sector.

How should we factor this information into the thesis proposed here?

Surely There Is a Simpler Explanation for All of This?

Gerschenkrons magisterial Economic Backwardness in Historical Perspective(1962) provides a useful angle: its a question of timing. The later states are to getstarted on the road to industrialization, the more the initial conditions havechanged given first mover advantages. Laggard states can hope to catch-up byimporting the latest technology and fitting into product cycle niches. But beingable to do so relies upon such technologies being embedded in local institutionsthat may not in fact support such adoptions. As such, backwardness is double

edged. Consequently, as broad front industrialization proceeds the costs ofcatch-up increase exponentially while the risk to any individual entrepreneur faroutweighs their available capital. Thus we see Gerschenkrons observed patternwhere, in developing states from Germany and Japan in the 1870s onwards, thestate must take a greater and greater role in organizing capital, creating labormarkets, building banks, and even inventing capitalists themselves (Polanyi 1944,Blyth 2002, Zysman 1983, Wade 1990, Evans 1995, Chang 2002).

By the time we get to the 1940s, given the aftershock of the 1930s, such aview of development was not heresy: it was mainstream development economicsand it was passed out around the world as best practice by the WBRD, ECLA, andothers. But what might be called Gerschenkrons revenge kicked-in: wait too

long, as in the Arab world found out in the 1960s, and the post-colonial statebecomes so big and yet so disembedded from society that ISI turns (outside ofEast Asia) into a rent seeking cash machine that destroys development. Part ofthose ISI ideas were that corporatist meanswere necessary to achieve the end ofindustrial development. So corporatism was a part of this movement, but it didnt

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define it, and it had very little to do with French intellectuals or the CatholicChurch: it was not an end, it was a means .

What Morck and Yeung call fundamentalist corporatism is better

understood as Fascism. It had a 20-year life span and caused the deaths ofmillions. The Vatican didnt program it and the French didnt popularize it. Byconfusing fascism and corporatism, means and ends, they have created a ghost, achimera, an illusion that they now blame for the failure of most of the world todevelop large banking systems, when there are much simpler ways of explainingall this.

6 In doing so Morck and Yeung exhibit what Brian Barry once termed,

the tendency of [economics] to divide the social realm sharply into one areawhere the deductive method can be put to work and another that is subject to nocanons of science and is therefore open to unconstrained speculation (Barry1985: 285). If economists want to get serious about using culture in theirexplanatory toolkit, then need to do more, and better, than this.

Gullivers Exorcism

I admire the ambition of Sola and Morck and Yeung. If economists want to betterunderstand the world they do indeed need to engage with concepts such asculture, ideas, ideologies, institutions and the like. But if they are to do so thenthey need to read more widely, and attend more closely, to the work of those whohave been using such concepts for a very long time, namely sociologists,anthropologists, and even political scientists. Culture is not some set of instructionsheets passively handed down from elites to masses that program responses(Blyth 2003, Seabrooke 2006). It is, as Ann Swidler (1986) called it, a tool kit

that creative agents use and misuse to get what they think that want and makesense of the world around them. Applying culture in the way Morck and Yeungand Sola have done to date is a start, but in its current form these arguments riskobscuring more than they illuminate.

In short, if ones analysis of why states as varied as Vichy France,Argentina, Egypt, and Indonesia dont have an Anglo-American banking systemrelies upon the machinations of the Vatican then you are probably looking underthe lamppost because thats where the light is, rather than seeking any realillumination. As a final example consider the following two counterfactuals. If itwerent for the impact of French intellectuals sub-Saharan African states wouldhave fully developed banking systems? If it werent for the impact of Catholic

encyclicals Argentina would be as rich as the US? If such claims are being made,then they are ghosts in search of an exorcism.

6Banking systems, it must be remembered, have so far cost taxpayers globally over $2 trilliondollars since the 2008 meltdown. Why countries are better off with such systems when the data donot support this assertion suggests an ideological prior at work.

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The Institutions (and Laws) of Innovation Driven Growth

Foxs essay, the third contribution to this issue, does not deal with corporatism

directly, but the ghost of corporatism haunts his essay in a different way. In Foxsessay, corporatism appears in two guises. First, as the opposite of Foxs preferredset of institutions that produce innovation led growth, which I detail below.Second, as the bank-dependent, internal-fund raising firms that operate well in aworld of infrequent change but cannot deal, by implication, with the modernworld. Such institutions, Fox argues, will prove dysfunctional and less adept atcapitalizing upon growth enhancing innovations, as the data that comparescorporatist Europe and Japan and the US that he provides seem to bear out.

Fox is interested in the finance process the system in an economy thatlinks savings to real investment (p. 3). There are basically two ways of doingthis, one of which sounds like the neocorporatist models of contemporary Europe.

The good (non-corporatist) institutional set up comprises an active market forcorporate control, relatively high payouts of the cash flows of establishedcorporations to their investors, a substantial venture capital sector, an activemarket for IPOs, and high level of corporate transparency, and relatively accurateprimary and secondary share prices (p. 3, 35). Given this, the bad (corporatist)institutional set up would be one that has a restricted market for corporate control(possibly because of legal restrictions, cross-share holdings among firms thatcollaborate, or perhaps because many firms are not publically listed), low payoutsto investors, a small venture capital sector, less IPO action, and less corporatetransparency.7That system sounds a lot like a (neo)corporatist system.8

To make his case Fox walks us through a series of possible worlds of

investment that allows him to build complications into his general argument ashe proceeds. His overall goal is to deduce the optimum set of institutions thatwould enhance the capacity of the economys finance process to identify andimplement the most promising investment projects (p. 13). To get us there Foxdetails such factors as the standard operating procedures for funding decisionsinside established corporations, how mangers maximize their interests when thereis an active market for corporate control, why banks shirk funding negative NPVprojects, and why IPOs are escape clauses for venture capitalists. When you addthis analysis to the institutions detailed above Fox is able to make the case thatthese decidedly un-corporatist institutions (and reciprocal behaviors) are muchbetter at enhancing long term growth in a world of rapid change than the slow-

moving corporatist alternative.

7I treat the point about share price accuracy as a separate concern below.8 In fact, it sounds an awful lot like the contemporary German economy, the worlds leadingexporter, a point to which I return in the conclusion.

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Fox has a good argument, and evidence to back it up. The US has morestart-ups than Europe and Japan. Modes of outsider financing are deeper in the USthan elsewhere. Internal financing firms tend to pay shareholders less than those

dependent upon outside financing. Such firms tend to be more hierarchical, withautonomous management structures that encourage thinking inside the box, andare therefore less adept at seeing opportunities for innovation led growth, etc. Allof this is true. But I would ask if Foxs vision is slightly skewed in terms of itsfocus, and does Foxs preference for innovation led growth come at a steep buthidden price that he misses with this analysis?

Producing Productivity

Foxs best piece of evidence comes from comparing growth rates ofmanufacturing per hour in the US, Europe and Japan from 1995 to 2008. The US

averages 4.9 percent, compared to 3.3 percent for Japan and 2.5 percent forEurope (Table 1 p. 38). So the critical issue is how much of this productivitygrowth differential can we really attribute to the five institutions that heidentifies?9The first one, an active market for corporate control, is not costless. Ithas produced a series of debt led takeovers whose value to the economy as awhole is contestable at best. The second one, high payouts from cash flows, isuseful only to the extent that the cash paid out finds is itself reinvested in theeconomy. If it is simply taken as consumption by a tiny fraction of the incomedistribution, as it is in the US, then its social utility is not self-evident (Cassidy2010). The third and fourth elements, substantial venture capital and IPO activity,depend upon the definition of the word substantial. According to Foxs own

figures, the US venture capital industry averages around two percent of GDP (p.42). IPOs accounted for around one percent of GDP at their height in the techbubble years. Taken together this implies, given the cited productivity differential,a very small investment tail wagging a very large productivity dog.10Yet even ifthey are taken at face value, such forces for growth are also shrinking, with IPOsat an all-time low at the end of this decade (Cassidy 2010).

11The final element,

relatively accurate share prices, an invocation of the benefits of market

9Lets also ignore the fact that Europe over these time periods includes everyone from hi-techFinns to peasant agriculturalist Portuguese. Its a meaningless thing to average out.10 Forthcoming research on the US Venture Capital industry by William Janeway and Michael

McKenzie (personal communication) presents evidence that suggests that a small number of fundsgenerate all the excess return over the public equity markets and that the returns for venturecapitalists generally are heavily dependent upon access to an active IPO market, the like of whichhas not existed for a decade. Returns for venture capitalists are now negative over the past tenyears and capital committed to the sector is falling.11In fact, as far as investment banks such as JP Morgan are concerned, Foxs finance process isjust 15 percent of their business (Cassidy 2010).

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completion and efficiency, deserves its own commentary since it links to thediscussion of innovation that is missing: financial sector innovation.

It is worth noting that Fox compares Europe, Japan and the US on

manufacturing productivity growth rate differentials. There are good reasons fordoing so. While it is relatively easy to count and standardize output per worker inmanufacturing, in the service sector this is far more complex. Value added interms of output relative to inputs has to deal with everything from the choice ofcalculus (hedonic or not) to the fact that according to such calculations bankingexecutives are the most productive workers in the world. But doing so is alsoproblematic in that the part of the US economy that Foxs argument directlyrelates to, manufacturing, is some 11 percent of GDP. Yet over 80 percent of theUS economy is service sector, most of which is low productivity and non-tradable. The US economy is also 78 percent consumption driven, and that drivesthe worlds largest structural balance of payments and fiscal deficits, and has done

for over 30 years. In short, the sum total of venture capital and IPO funds incomparison with the real (sic) US economy is a drop in a bucket.

Furthermore, there has indeed been a great deal of innovation in the USthat reflects poorly on Foxs argument, most of it in the financial sector. Lets notforget that the single-minded devotion to share prices and options paymentsbrought the world ENRON, World Com and the whole dot com bust, where, weshould remember, the US venture capital industry took a beating. Let us alsoremember that those transparent and efficient markets that provide us withaccurate share prices managed to systematically misprice first tech stock sharesand then real estate related securities by orders of magnitude, costing investorsbillions, if not trillions of dollars. Let us, in our accounting for growth, also bring

into consideration how innovations such as taking the income streams from theCDS payments taken out on entities that issued MBSs brought us such wonders asthe SDO squared, 75 times leverage, and covering your positions with 3 percentof capital.

These innovations that drove the sector where 40 percent of US corporateprofits were made over the past decade, despite being only 10 percent of GDP(Krippner 2011), caused a two trillion dollar bust that it could not internalize,which is now being paid by ordinary taxpayers. Once one expands beyond therelatively small part of the economy to which Foxs argument actually applies, thepicture for innovation-led growth looks much more mixed, as the costs, as well asthe benefits, come to the fore, and the source of the productivity differential

comes back into question, which brings me back to the issue of Germany.

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Conclusions: Beyond the Ghosts of Corporatism

Sola and Morck and Yeung chase the ghosts of corporatisms past and see their

shadows everywhere in the present. Yet Argentina can be, as I believe PaulKrugman once described it, the retirement home for bad economic ideas,without ever invoking the Vatican. Likewise, Morck and Yeung really shoulddisentangle the endsof genocidal (or at least mildly xenophobic) fascism from themeansof corporatism. Their ghosts are properly the ghosts of Nuremberg, not theNational Industrial Recovery Act, even if they both came about in 1933. Fox has agood argument, but it too creates a ghost, the Ghost of America past, aninnovative industrial America that is quite unlike the hyperfinancialized andconsumption driven America we actually inhabit: an America where 40 percent ofcorporate profits come from a zero sum game in the financial sector and whereincome skewing has become so pronounced that the top one percent of the

population (post 2008 crash) still have a quarter of national income while one inseven Americans live in a family of four on less that $22,000 per year, working innon-tradeable services immune to productivity enhancement through capitaladdition.

In Foxs world non-corporatist institutions are supposed to produceprosperity for all, but in actual fact, they dont: (neo)corporatist institutions do.The phrase prosperity for all was the post war rallying-cry of the GermanChristian Democratic party under Konrad Adeneuer. His government, like manyaround Europe, set up explicitly corporatist institutions. They fostered collectivebargaining at regional and national levels between organized capital andorganized labor. They built upon existing bank-firm linkages to provide patient

capital. They protected their firms and banks from takeovers. They taxed, andspent, a lot.

I went to graduate school at Columbia in the early 1990s, just asglobalization was becoming the buzzword and convergence on the Americanmodel was said to be the only game in town. In those days all my economicsprofessors assured me that these corporatist states and their institutions weredoomed (in a very unselfconsciously Marxist turn of phrase) for the scrapheap ofhistory. Yet it didnt happen. These states survived and actually prospered. Therichest countries (and the happiest according to surveys) in the 1980s are still thesame ones today: the tax and spend and corporatist to the core Scandinavianwelfare states (Steinmo 2010).

Indeed, in terms of industrial production and skill formation (that othercomponent of innovation) the corporatists are still leading the pack. On jobtraining, the EU-15 spent a total of 66.6 billion on active labor market policies in2003, about ten times more than the United States in the same year, according toJochen Kluve of the Institute for Economic Research in Essen, Germany.

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Furthermore, according to the 2002 OECD Employment Outlook, France,Germany, Sweden and the Netherlands all spent well over 1 percent of GDP onactive labor market policies, while the US spent a mere 0.13 percent on such

programs. In terms of overall worker training, tiny Denmark currently spends 6percent of GDP, while the US spends 0.6 percent. On employment, while it iscorrect that the United States created more jobs in the 1980s and 1990s, thefigures show a markedly different picture for the past 15 years. According to theMcKinsey Global Institute, the rate at which Europe successfully created newjobs in the last decade above population growth was greater than that of theUnited States. From 1995 to 2008, the EU-15 created 23.9 million additional jobs,while the United States created 20.5 million. Add to this the two trillion dollarbust and consequent loss of output generated by the US financial system after itrode two giant asset bubbles to completion and a rather different picture emerges.

Rather than the ghosts of mythical corporatisms past being of concern to

our authors, perhaps they should turn their attention to how existing corporatiststates manage to prosper in a world of dynamism and change despite all theprognostications of their demise and dysfuntion? Why was it that these stateswere able to use their corporatist institutions as internal shock absorbers forexternal trade shocks (Katzenstein 1985, Steinmo 2010)? Why were they able toavoid turning their economies into giant bubble-riding Ponzi schemes whereimmense rewards were privatized while the costs were socialized, as happened inthe US? Why would, Ill bet, each of our authors rather own an Audi, a BMW, ora Mercedes, built by expensive organized, corporatist labor, than any Americanautomobile? Yes, the US has more startups, but in Europe, more of them survive,and its the net that counts, not the gross.

In sum, celebrating the USs admirable innovative capacities whileignoring the costs of such innovations, or castigating a form of economicorganization that does well in the real world on the basis of a mythical past towhich it was tangentially related, may make us feel better in the current momentof uncertainty. But it is, as is always the case, no substitute for analysis of the realthing.

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