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Capitalism and Society

Volume 5, Issue 3

2010

Article 4

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
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Blyth: The Ghosts of Corporatisms Past and Past Corporatisms

Like Dickens character Scrooge in A Christmas Carol, I find myself, after


reading these essays, confronted by ghosts. Unlike Scrooge, who must confront
the 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 Latin
America, Italy and Iberia). Those pasts are, however, like many histories, part
contested, part imagined, and part misplaced. As such, to use another literary
prop, I find myself identifying with Swifts character Gulliver, a man curiously
out of scale with the environment that he surveys. In the spirit of Gulliver I hope
to travel and learn from the exotic new lands surveyed in these essays, and
perhaps, 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 to
disentangle the knots of constitutional economics, constitutional cultures, and
relate these to economic dynamism. His key claim is that the causes of
Argentinas reversal of development are varied butbad incentives in the
Constitutional 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 the
surrounding and supporting constitutional culturethat is, the norms and
conventions that both imbricate and trump the formal rules of economic
interaction. In the case of Argentina this has a particular pathological face, that of
corporatism, 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 and
prevent rent seeking and corruption is central (p. 2). Constitutional culture, that
which is causally prior, is defined as something embodied in what extrajudicial
actors explicitly believe about the constitution (p. 7). As such, if culture and
structure are dialectically related, then agency appears through the ability of
judges and lawyers to change formal incentives given the background of informal
constraints.
All this matters for Sola since bad constitutional economics embedded in a
corporatist culture led politicians with short time horizons to discount long term
growth, which was the case of Argentine economic policyparticularly during

The subtitle of Solas essay is immediately appealing, An inquiry into the causes of Argentine
economic decadence, since I am always in favor of a bit of decadence. But it does raise a
question. If Argentina is as hamstrung by the legacies of corporatism as Sola suggests, then where
did it ever get the surplus to become decadent?
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Capitalism and Society, Vol. 5 [2010], Iss. 3, Art. 4

the 1950s to the 1970s (p. 4). It also led to the rise of hyper-presidentialism
where weak governors and centralized taxes led to the construction of a maldistributive 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 constitution
appeared in the midst of the 1930sestablishing a functional political
representation as opposed to a democratic (p. 9). Despite such constitutions
being basically extinct after World War IIcorporatist constitutional culture has
had a long intellectual tradition that subsists in many countries with deleterious
economic effects (p. 9). This constitutional form comes from the Catholic
Church, specifically from Pope Leo XIIIs encyclical De Rerum Novarum, which
sought to unite opposing economic classes in an organicist and hierarchical
conception of society and economy, based around the notion of discrete trades
and corporations; hence corporatism, which was reinforced 40 years later by the
anti-liberal encyclical Quadragessimo Anno that sought to expose the errors of
individualist economic teaching (p. 12).
The attraction of corporatism is, according to Sola, a closed economy
where an intense protection is established to produce all goods and services at
home (p. 12) and where the Corporatist State requires that every organization
and individual be a member of a corporation (p. 12). The result of this is an
economy that cannot weed out producers who have done badly, which in turn
impedes dynamism, because free entry to business is limited, owners are not
autonomous from either self-interested managers or state agencies, and firms just
dont 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 corporatist
culture, 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 Sola
seeks to explainArgentinas economic underperformancehas been dealt with
by authors who have studied Argentinas failed attempt to move from Import
Substitution Industrialization (ISI) to Export Led Growth (ELG) during the 1960s
and 1970s (Sikkink 1991, Haggard 1990). In brief, the whole point of ISI was to
beat 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 this
quite successfully, particularly in East Asia (Wade 1990, Amsden 1989, Johnson
1982) where a strong state could face down landed-class interests while providing
cheap capital to business, in Latin America a combination of weak states,

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Blyth: The Ghosts of Corporatisms Past and Past Corporatisms

powerful landed (export agriculture) interests, clientelistic politics, small firms,


and large home markets meant that ISI became embedded behind tariffs and
cronyism flourished. Indeed, the literature on this subject in political science and
sociology is truly massive and unusually united in its conclusions. That is, you
can explain much of what Sola seeks to explain without ever invoking a bunch of
Catholic encyclicals or a set of constitutions and conventions invented in the
1930s that were, by his own admission, dead by the 1940s.
Similarly, the broad culture trumps structure claim needs to be
demonstrated, not simply asserted. I know its fashionable for economists to use
culture as a variable these days, but their understanding of it should go beyond
that 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 to
say the least. Papal encyclicals exist on abortion, human rights, family law and
contraception. 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 during
the 1960 election that he was not taking instructions from the Vatican to calm
Protestant fears, Sola is going to have to do more than show a rough correlation
between the existence of papal organicism/anti-modernism in documents from the
1890s 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 make
it 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 past
twenty years. This is indeed backed up by the rise in the Argentine Gini
coefficient from 0.36 in 1974 to 0.51 in 2000 (Altimir et al 2002). But was this
caused by a corporatist culture? One could just as well invoke labor market
deregulation that lowered real wages and increased unemployment in the 1990s,
or the distributional consequences of the lost-decade and the debt crisis of the
1980s (Altimir et al 2002). Similarly, a glance at the Penn World Tables shows
that Argentine real GDP per capita grew from an index of 7813 in 1950 to 11406
in 1975, a 45.98 percent increase. But if one looks at the last twenty years of data
from 1987-2007 one sees the index shift from 10844 (lower than it was 15 years
previously) 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 more
growth (and a lower Gini) than the last twenty years under conditions of
liberalization?
Finally, much of Solas own argument seems extraneous to his concerns
with 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 the
US as a corporatist state? China is a fiscally federal state, so does it follow that it
is 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 economic
freedom, but if one wishes to make a case for owners being dependent upon
managers and attendant patterns of rent-seeking, one does not have to go to
Argentina. One should only reflect upon the one complete workers revolution of
the 21st Century American Banking where the workers (managers) took
control of the means of production from owners (shareholders), destroyed their
investments, and passed the costs onto the serfs (taxpayers). As for not allowing
firms to go bust, I am sure that Sola is well aware of Chapter 11 of the US
bankruptcy 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 most
surprising to me is that in his entire discussion of corporatism, this Argentine
Catholic ghost that seemingly haunts the political economy, Sola never actually
discusses the mechanisms through which this ideational hangover persists in the
minds of actual Argentines. Perhaps, given the centrality of such a mechanism to
the argument of Morck and Yeung, as well as Sola, we can find a better
exposition 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 historical
analysis that tries to make exactly the type of links between Catholic social
thought and the economic policies of particular cases that Solas essay suggests
but 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 adopted
corporatism most fully those with Roman Catholic Majorities or French
Educated elites retain corporatist institutions that retard financial development
(abstract). To make this claim, their argument, like Solas, has several interlinked
steps.
The 19th Century Catholic Church hated liberal individualism and rejected
Smiths key insights concerning human nature. So they set out to challenge both
precepts with a set of Papal encyclicals that declared that hierarchy trumps both
equality and liberty since society is organically interlinked and inherently
unequal. As such, the constituent parts of the body politic, the corporations of this
corpus, must be actively organized by the state (run by Catholic, or at least French

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Blyth: The Ghosts of Corporatisms Past and Past Corporatisms

educated, elites) to produce the harmony of interests that the free flow of
competitive 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 avowedly
corporatist economy (p. 1) which, with papal endorsement, spread to Iberia,
Latin America, Vichy France, and after the war [to] the Spanish, Portuguese and
Dutch colonial empires. Ataturk and the Falangists brought [this] to the Middle
East, where Arab movements embraced the ideology (p. 1). Noting correlations
too strong to ignore between Catholic, Islamic, and French legal systems and
enfeebled financial systems and retarded economic development (p. 2,
emphasis added) Morck and Yeung confidently posit a corporatist shadow upon
Catholic countries, ex-colonies with French educated leaders, and perhaps many
Islamic countries (p. 2) As such, wetherefore posit that empirical evidence
linking financial and economic infirmity to Catholicism, Islam, or the Napoleonic
code may well actually capture a residual corporatist tradition (p. 2, emphasis
added).
Before going any further let us take stock of this claim. Fascism is
corporatism, Islam is corporatism, French intellectuals are handmaidens of the
Catholic church, and as a consequence all such states have enfeebled, retarded,
and infirm financial systems. So from Dublin to Dubai to Djibouti the ghost of
corporatisms past is really to blame for why most of the world is financially
retarded. Invoking Keynes dictum on ideas at the end of their paper that the
ideas of defunct (in this case Catholics and French intellectuals) being more
powerful than we realize, Morck and Yeung argue that the reason the world
outside of Anglo-America (for thats what is really being claimed here) is
economically enfeebled, retarded, and infirm is down to Catholic encyclicals
and 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 financial
repression, where, if it wasnt for something getting in the way and
repressing activities (always and everywhere the state), finance would
naturally flower. Here we have a variant of this argument where any country
touched by Catholicism or Islam2 (together 3.6 billion people out of 6.8 billion
globally), plus anyone French or touched by France (about another 250 million bringing us to about 60 percent of the worlds population) can have their
economic backwardness explained by something else that got in the way and
made their economies enfeebled, retarded, and infirm: what Morck and

http://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 usually
applied to China and takes the form, China was technologically ahead of the
West for centuries, but it stagnated as the West advanced because something got
in the way. That something was Confucian culture, and so the West overtook
China (Hobson 2004). Swap Confucian for Corporatist and you have the same
story in Morck and Yeung. The problem with the Peter Pan story is that one
doesnt have to invoke retardation or some similar blockage to explain why
something didnt happen. What happened in the Chinese case was that their
security threats came from the Steppe, not the Sea. So when the Europeans
developed a competitive advantage in seaborne violence at a time when the
Chinese could not respond (Arrighi 2009), they were conquered. There is no need
to invoke some vague cultural variable as that which naturally stopped them
becoming like us. Yet in Morck and Yeung we see the same causal mechanism
proposed for countries as different as Argentina and Indonesia, based upon an
observed correlation, the value of which we are never told. Corporatism got in
the way and stopped finance flowering (AKA these states never grew up) and
as 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 comparative
case 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 the
authors reckoning at least (p. 9), or that George Bernard Shaw was a fellow
traveler? (p. 30) Likewise the exposition of Catholic thought (pp. 11-15) taught
me more than my twelve years in Catholic School ever did about the Church. But
despite all the details, the weakness of the argument is apparent.
First of all, despite the caveats made by the authors concerning
neocorporatism (cases of modern successful corporatist states as defined by labor
market regulations and bargaining agreements and union density and coverage
and the like), corporatism is not an end: its a means to an end. Corporatism is a
method of organization to secure collective agreements of labor market and
product market partners in order to control price inflation and guard against the
risks inherent in economic openness (Katzenstein 1985, Blyth 2002). It is not
fascism. No amount of definitional footwork will make it so. Indeed, I do have to
wonder what is the point of doing trying to make the two equivalent?
In the 1930s Fascism was the end and corporatism was the means. Calling
fascism fundamentalist corporatism creates a ghost insofar as the means become

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Blyth: The Ghosts of Corporatisms Past and Past Corporatisms

the ends. Italy used corporatist methods to consolidate power in the Duce and the
Grand Fascist Council given the failure of liberal markets to produce recovery
after 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 had
to smuggle their encyclicals out of the country, the ideas supposedly driving these
events, to get them published, as the authors admit, surely suggests which
direction in which power was flowing.
Similarly, Nazi Germany used corporatist means, but even on that level
its a stretch to see millions involved in forced labor, death camps, and the whole
apparatus of the state extracting all resources from society in order to create a
permanent war machine as either corporatism or anything dictated by the
Vatican and a handful of French thinkers (Baker 2006). This quite fundamentally
confuses and ideological goal with a means of coordination. Are the authors really
saying that French romantics and Vatican theologians guided Hitler in his
actions? If so, this is a bit like describing the Roman Empire as capitalist
because it had laws of property and prices in the markets. It seems plausible until
you remember the bit about 90 percent of Roman output coming from slaves and
capital accumulation coming from conquest and tribute rather than productivity
growth.3
Several Bridges and Conceptual Leaps Too Far
Austria is another case the authors identify as Catholic-fascist, and Spain under
Franco was indeed Catholic and fascist, but the extent to which the Church ever
had 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 particular
there is nothing either voluntary or intellectual about occupation. Yes, there were
collaborators, and yes, they appropriated the language of corporatism since taking
their language of justification straight from the page-book of the Nazis would
have undermined what very little legitimacy they had, but such linguistic
adoptions hardly show the power of fundamentalist corporatist ideology.
In one particularly Gulliver moment I found the France described by the
authors to be completely out of scale with the one I am used to. Yes, France
produced catholic organicists such as Comte and Saint Simone (and even
Rousseau). But it also produced the revolution - libert, galit, fraternit - and all
that. 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

Similarly, quoting Nazi Aryan philosophy on self-sacrifice to the group as being the same as
Catholic teaching borders on poor taste rather than evidence (p. 25).
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Foucault. Just how the French educational system subsequently spread Catholic
corporatism 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 Latin
American dictatorshipslikewise followed Iberian corporatist prescriptions under
the tutelage of Catholic clerics (p. 30). But most authors that I am aware of who
have written about Latin Americas post war development stress that these very
neocorporatist ideas came from globally connected money doctors (Helleiner
2009) and the UN Council on Latin America (ECLA), utilizing the best
development economic theory of the day to promote ISI as Keynes for the third
world (Hirschman 1981, Sikkink 1991), the ideas for which came right out of
elite US economics departments (Chwieroth 2010). This had nothing to do with
Catholic clerics.5 Nasser 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 invent
capitalists (late modernizing Arab and South Asian post-colonial states), these
catch-up spurts most often ended badly but not because of French ideas. What
the authors lay stress on, the French connection, is tenuous at best. No
mechanism is proposed, nor are particular agents identified beyond very broad
assertions. Like Sola, this is another example of a situation where a very broad
correlation between a vague notion of hierarchy and retarded development is
confused with causation, with as far as I can see, no real evidence brought to bear
to establish it. For example, if one adds up the populations of the cases discussed
in depth (Italy and Germany and Austria) in the 1930s, you get about 100 million
people. 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) and
you reach about 250 million. The argument is supposed to apply to more than half
the 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 back
to why some states have retarded financial sectors. But to get there do we really
have to ignore that for Germany in the 1930s fascism and corporatism is hardly a
distinction without a difference? Similarly, to make all this work do we have to
posit some transmission mechanism, as yet undefined, where the ideas of the

Likewise, the fact that one biographer of Pierre Trudeau argues he was influenced by the
Jesuits 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 cabinet
appointee 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 upon
the development of deep, sophisticated, and liquid financial systems, are both
Catholic. Doesnt that count as very strong evidence against the entire thesis
being pushed here? So why did Francoism, Spanish corporatism, and the legacy
of the encyclicals gave way so easily in the 1990s and 2000s to a bank and
tourism based model of development that instantiated the largest dual labormarket (as anti-corporatist a device as one can imagine) in Europe? And isnt
Ireland90 percent Catholic Irelandthe only example we have a modern
developed 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 century
precisely 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 get
started on the road to industrialization, the more the initial conditions have
changed given first mover advantages. Laggard states can hope to catch-up by
importing the latest technology and fitting into product cycle niches. But being
able to do so relies upon such technologies being embedded in local institutions
that may not in fact support such adoptions. As such, backwardness is double
edged. Consequently, as broad front industrialization proceeds the costs of
catch-up increase exponentially while the risk to any individual entrepreneur far
outweighs their available capital. Thus we see Gerschenkrons observed pattern
where, in developing states from Germany and Japan in the 1870s onwards, the
state must take a greater and greater role in organizing capital, creating labor
markets, 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 a
view of development was not heresy: it was mainstream development economics
and it was passed out around the world as best practice by the WBRD, ECLA, and
others. 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 state
becomes so big and yet so disembedded from society that ISI turns (outside of
East Asia) into a rent seeking cash machine that destroys development. Part of
those ISI ideas were that corporatist means were necessary to achieve the end of
industrial 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 Catholic
Church: 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 of
millions. The Vatican didnt program it and the French didnt popularize it. By
confusing fascism and corporatism, means and ends, they have created a ghost, a
chimera, an illusion that they now blame for the failure of most of the world to
develop large banking systems, when there are much simpler ways of explaining
all 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 area
where the deductive method can be put to work and another that is subject to no
canons of science and is therefore open to unconstrained speculation (Barry
1985: 285). If economists want to get serious about using culture in their
explanatory 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 better
understand the world they do indeed need to engage with concepts such as
culture, ideas, ideologies, institutions and the like. But if they are to do so then
they need to read more widely, and attend more closely, to the work of those who
have been using such concepts for a very long time, namely sociologists,
anthropologists, and even political scientists. Culture is not some set of instruction
sheets 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 make
sense of the world around them. Applying culture in the way Morck and Yeung
and Sola have done to date is a start, but in its current form these arguments risk
obscuring 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 system
relies upon the machinations of the Vatican then you are probably looking under
the lamppost because thats where the light is, rather than seeking any real
illumination. As a final example consider the following two counterfactuals. If it
werent for the impact of French intellectuals sub-Saharan African states would
have 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.

Banking systems, it must be remembered, have so far cost taxpayers globally over $2 trillion
dollars since the 2008 meltdown. Why countries are better off with such systems when the data do
not support this assertion suggests an ideological prior at work.
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Blyth: The Ghosts of Corporatisms Past and Past Corporatisms

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 Foxs
essay, corporatism appears in two guises. First, as the opposite of Foxs preferred
set of institutions that produce innovation led growth, which I detail below.
Second, as the bank-dependent, internal-fund raising firms that operate well in a
world of infrequent change but cannot deal, by implication, with the modern
world. Such institutions, Fox argues, will prove dysfunctional and less adept at
capitalizing upon growth enhancing innovations, as the data that compares
corporatist 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 that
links savings to real investment (p. 3). There are basically two ways of doing
this, one of which sounds like the neocorporatist models of contemporary Europe.
The good (non-corporatist) institutional set up comprises an active market for
corporate control, relatively high payouts of the cash flows of established
corporations to their investors, a substantial venture capital sector, an active
market for IPOs, and high level of corporate transparency, and relatively accurate
primary 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 that
collaborate, or perhaps because many firms are not publically listed), low payouts
to investors, a small venture capital sector, less IPO action, and less corporate
transparency.7 That 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 as
he proceeds. His overall goal is to deduce the optimum set of institutions that
would enhance the capacity of the economys finance process to identify and
implement the most promising investment projects (p. 13). To get us there Fox
details such factors as the standard operating procedures for funding decisions
inside established corporations, how mangers maximize their interests when there
is an active market for corporate control, why banks shirk funding negative NPV
projects, and why IPOs are escape clauses for venture capitalists. When you add
this analysis to the institutions detailed above Fox is able to make the case that
these decidedly un-corporatist institutions (and reciprocal behaviors) are much
better at enhancing long term growth in a world of rapid change than the slowmoving corporatist alternative.

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

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Fox has a good argument, and evidence to back it up. The US has more
start-ups than Europe and Japan. Modes of outsider financing are deeper in the US
than elsewhere. Internal financing firms tend to pay shareholders less than those
dependent upon outside financing. Such firms tend to be more hierarchical, with
autonomous management structures that encourage thinking inside the box, and
are therefore less adept at seeing opportunities for innovation led growth, etc. All
of this is true. But I would ask if Foxs vision is slightly skewed in terms of its
focus, and does Foxs preference for innovation led growth come at a steep but
hidden price that he misses with this analysis?
Producing Productivity
Foxs best piece of evidence comes from comparing growth rates of
manufacturing 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 for
Europe (Table 1 p. 38). So the critical issue is how much of this productivity
growth differential can we really attribute to the five institutions that he
identifies?9 The first one, an active market for corporate control, is not costless. It
has produced a series of debt led takeovers whose value to the economy as a
whole is contestable at best. The second one, high payouts from cash flows, is
useful only to the extent that the cash paid out finds is itself reinvested in the
economy. If it is simply taken as consumption by a tiny fraction of the income
distribution, as it is in the US, then its social utility is not self-evident (Cassidy
2010). 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 tech
bubble years. Taken together this implies, given the cited productivity differential,
a very small investment tail wagging a very large productivity dog.10 Yet even if
they are taken at face value, such forces for growth are also shrinking, with IPOs
at an all-time low at the end of this decade (Cassidy 2010).11 The final element,
relatively accurate share prices, an invocation of the benefits of market

Lets also ignore the fact that Europe over these time periods includes everyone from hi-tech
Finns 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 funds
generate all the excess return over the public equity markets and that the returns for venture
capitalists generally are heavily dependent upon access to an active IPO market, the like of which
has not existed for a decade. Returns for venture capitalists are now negative over the past ten
years and capital committed to the sector is falling.
11
In fact, as far as investment banks such as JP Morgan are concerned, Foxs finance process is
just 15 percent of their business (Cassidy 2010).
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completion and efficiency, deserves its own commentary since it links to the
discussion 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 for
doing so. While it is relatively easy to count and standardize output per worker in
manufacturing, in the service sector this is far more complex. Value added in
terms of output relative to inputs has to deal with everything from the choice of
calculus (hedonic or not) to the fact that according to such calculations banking
executives are the most productive workers in the world. But doing so is also
problematic in that the part of the US economy that Foxs argument directly
relates to, manufacturing, is some 11 percent of GDP. Yet over 80 percent of the
US economy is service sector, most of which is low productivity and nontradable. The US economy is also 78 percent consumption driven, and that drives
the 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 in
comparison with the real (sic) US economy is a drop in a bucket.
Furthermore, there has indeed been a great deal of innovation in the US
that reflects poorly on Foxs argument, most of it in the financial sector. Lets not
forget that the single-minded devotion to share prices and options payments
brought the world ENRON, World Com and the whole dot com bust, where, we
should remember, the US venture capital industry took a beating. Let us also
remember that those transparent and efficient markets that provide us with
accurate share prices managed to systematically misprice first tech stock shares
and then real estate related securities by orders of magnitude, costing investors
billions, 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 the
CDS payments taken out on entities that issued MBSs brought us such wonders as
the SDO squared, 75 times leverage, and covering your positions with 3 percent
of capital.
These innovations that drove the sector where 40 percent of US corporate
profits 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 the
relatively small part of the economy to which Foxs argument actually applies, the
picture for innovation-led growth looks much more mixed, as the costs, as well as
the 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 Paul
Krugman once described it, the retirement home for bad economic ideas,
without ever invoking the Vatican. Likewise, Morck and Yeung really should
disentangle the ends of genocidal (or at least mildly xenophobic) fascism from the
means of corporatism. Their ghosts are properly the ghosts of Nuremberg, not the
National Industrial Recovery Act, even if they both came about in 1933. Fox has a
good argument, but it too creates a ghost, the Ghost of America past, an
innovative industrial America that is quite unlike the hyperfinancialized and
consumption driven America we actually inhabit: an America where 40 percent of
corporate profits come from a zero sum game in the financial sector and where
income 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 in
seven Americans live in a family of four on less that $22,000 per year, working in
non-tradeable services immune to productivity enhancement through capital
addition.
In Foxs world non-corporatist institutions are supposed to produce
prosperity 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 German
Christian Democratic party under Konrad Adeneuer. His government, like many
around Europe, set up explicitly corporatist institutions. They fostered collective
bargaining at regional and national levels between organized capital and
organized labor. They built upon existing bank-firm linkages to provide patient
capital. They protected their firms and banks from takeovers. They taxed, and
spent, a lot.
I went to graduate school at Columbia in the early 1990s, just as
globalization was becoming the buzzword and convergence on the American
model was said to be the only game in town. In those days all my economics
professors assured me that these corporatist states and their institutions were
doomed (in a very unselfconsciously Marxist turn of phrase) for the scrapheap of
history. Yet it didnt happen. These states survived and actually prospered. The
richest countries (and the happiest according to surveys) in the 1980s are still the
same ones today: the tax and spend and corporatist to the core Scandinavian
welfare states (Steinmo 2010).
Indeed, in terms of industrial production and skill formation (that other
component of innovation) the corporatists are still leading the pack. On job
training, the EU-15 spent a total of 66.6 billion on active labor market policies in
2003, about ten times more than the United States in the same year, according to
Jochen 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 on
active 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 6
percent of GDP, while the US spends 0.6 percent. On employment, while it is
correct that the United States created more jobs in the 1980s and 1990s, the
figures show a markedly different picture for the past 15 years. According to the
McKinsey Global Institute, the rate at which Europe successfully created new
jobs in the last decade above population growth was greater than that of the
United 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 dollar
bust and consequent loss of output generated by the US financial system after it
rode 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 corporatist
states manage to prosper in a world of dynamism and change despite all the
prognostications of their demise and dysfuntion? Why was it that these states
were able to use their corporatist institutions as internal shock absorbers for
external trade shocks (Katzenstein 1985, Steinmo 2010)? Why were they able to
avoid turning their economies into giant bubble-riding Ponzi schemes where
immense rewards were privatized while the costs were socialized, as happened in
the US? Why would, Ill bet, each of our authors rather own an Audi, a BMW, or
a Mercedes, built by expensive organized, corporatist labor, than any American
automobile? 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 while
ignoring the costs of such innovations, or castigating a form of economic
organization that does well in the real world on the basis of a mythical past to
which it was tangentially related, may make us feel better in the current moment
of uncertainty. But it is, as is always the case, no substitute for analysis of the real
thing.
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