ABSTRACT
The critical importance of initial bargains As countries industrialized, capitalist institutions took shape according to the preferences of those who had the political power to organize economic activity in the late nineteenth and early twentieth century. Over time, economic behavior formed ingrained and interlocking patterns of mutual expectations that became institutionalized (both formally and informally) and complementary. These capitalist institutions were preserved because stable political institutions prevented substantial alterations to them, once in place. In some countries, however, these established practices were disrupted; the distribution of political power changed, creating an opportunity to re-create capitalist institutions that better served the socioeconomic goals of newly powerful interests. Laws were passed, and new institutions were created. At first, legal enforcement of the new rules forced actors to alter their behavior. Over time, these behavioral patterns again became institutionalized and mutually reinforcing. As shown with the quantitative evidence and the case studies, the distribution of political power at the time capitalist institutions were (re)created has fundamental and long-lasting consequences.1 And because most countries’ institutions did not change after World War II (only five of the 15 countries considered changed their constitutions after World War II), the bargains struck during the pre-World War II period matter more for most countries than the bargains struck in the post-World War II period. At the same time, it is important to emphasize that the analysis is not incompatible with subsequent change, particularly as capital becomes more influential. Subsequent change is simply constrained by the pre-existing institutional structure. For example, the French Regulation School (Boyer, 1990) has argued that capital has supplanted labor as the dominant actor affecting the structure of national political economies. However, capital is sometimes inserting itself into countries with pre-existing institutional structures that lead to awkward fits, particularly in those cases where institutions were created with capital as a weak partner, as with agrarian (early nineteenthcentury US), statist (post-World War II Austria), and Mediterranean (post-World War II France) capitalist systems. Many have pointed to the US’s uniquely
fragmented and inefficient financial system; indeed, the US economy has succeeded in spite of it (e.g., with many unit banks hampering the financing of corporations with industrialization in the nineteenth century: Lamoreaux, 1994; Calomiris, 2000). The French political economy has likewise faced considerable difficulties accommodating capital’s increasing importance since the mid-1980s (first attempting to adopt German style institutions, then giving this up and continuing to search for an alternative solution). Thelen (2004) discusses some alternative mechanisms by which institutional change can occur, but the key point, as these country examples illustrate, is that change is constrained by the structure of the pre-existing institutions, both capitalist and political. In addition, as Hall and Soskice (2001) argue, political economies continue to exhibit attributes of their pre-existing capitalist architecture, rather than transforming into Anglo-American replicas. For example, hostile takeovers are a key feature of LMEs, and are conducted with the sole purpose of maximizing shareholder value, and usually lead to layoffs. While CMEs have implemented various liberalizing (LME-style) reforms since the 1980s, in recent years they have adopted stiff resistance to hostile takeovers that would undo the core of the initial labor-capital bargain (and tilt the balance in favor of capital) with a variety of measures consistent with the country’s pre-existing institutional arrangements: government intervention in Austria; market-conforming mechanisms such as poison pills in Japan and Germany; and a combination of marketconforming measures and state intervention in France, including the increased use of poison pills, boosting corporate ownership with funds from the state pension (the biggest institutional investor in France), and protecting certain “strategic” sectors from foreign acquisition. A key lesson is that understanding capitalism among today’s wealthy democracies demands that we look back to the origins of the institutions and consider the political power of the key actors when they struck bargains over their design.
