Beneath the Surface

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I have been discussing the symbiotic relationship between capitalism and democracy as described by Torben Iversen and David Soskice. So far I’ve ignored variations among advanced capitalist democracies. But the authors warn against using any one country–such as the United States in discussions of the “Washington Consensus”–as a model for how ACDs have developed or should develop.  The American version of the emerging knowledge economy is only one version, and one that has its origins in a certain kind of history.

Two paths to capitalist democracy

The symbiotic relationship between democracy and capitalism developed along with the industrial economy. One link between the two was human capital development. Industrialization required a labor force with at least some basic skills, such as reading and writing, and that required some commitment to democratic institutions such as the public school.

How was the political order to be broadened to include the opinions and interests of workers? In some countries, such as Denmark, Sweden, Netherlands, Belgium and Germany, pressure from the working class itself played a major role. In others, such as Britain, U.S., France, Australia, Canada and New Zealand, the initiative came more from modernizing elites who were challenging the power of agrarian interests unsympathetic to industrialization and democracy.

Those differences had their origins in preindustrial patterns of organization:

[T]he countries in which democratization was eventually the result of working-class pressure were organized locally on a quasi corporatist basis both in towns, with effective guild systems, and in the countryside with a widespread socially rooted semiautonomous peasantry, rural cooperatives, and/or dense rural-urban linkages…. [A]ll of these states were Ständestaaten in the nineteenth century—a system in which the different estates (including organized professions) played a direct role in governing. We therefore refer to the preindustrial political economy of these societies as protocorporatist.

The authors do not give any simple definition of corporatism, but I think of it as the opposite of rugged individualism. While classical British and American liberalism celebrates the self-interested individual, corporatism sees people more as representatives of strong group interests, such as guilds or churches. To make a long story short, the protocorporatist countries provided more fertile ground for the emergence of strong worker organizations.

Things were different in Britain and America:

The elite-project societies, in essence Anglo-Saxon (apart from France, which we discuss separately), functioned quite differently: well-developed property markets with substantial freedom of labor mobility, towns with limited local autonomy, and guild systems which had either collapsed (Britain) or had hardly existed (the settler colonies and the United States, minus the South). We refer to the preindustrial political economy of these societies as protoliberal.

In both kinds of countries, some democratization accompanied industrialization, but it took different directions. In the protocorporatist countries like Denmark and Germany, “effective training systems were built on guild and Ständestaat traditions and provided a large pool of skilled workers, which in turn led to unified labor movements with the capacity to extract democratic concessions from elites.” In the protoliberal countries like Britain and America, “the absence of either guild or Ständestaat traditions led to fragmented labor movements with privileged craft-based unions but no effective training system. Here democracy emerged as the result of industrial elites compelling a reluctant landed aristocracy to accept expansion of education and other public goods required for industrialization.”

Political representation

These two paths to democracy had consequences for electoral systems. Where the working class was highly unified and organized, the more socialist left came to be better represented in politics. The elites and other prosperous members of society might resist democratization until the demands of the working class became too strong to ignore. Then they supported a system of proportional representation rather than winner-take-all elections, to protect themselves against the possibility of a working-class majority. Some of these democratic countries (Germany, Austria, Italy) reverted to authoritarian rule for a time in order to counter a perceived threat from the left, but democracy eventually prevailed.

In countries like the United States and Britain, where organized labor was weaker and more politically divided, majority rule worked better for the modernizing elites and other beneficiaries of industrial capitalism.

In these cases industrial elites had little fear of the working class, but they had a strong incentive to expand public goods, especially education and sanitation, required for the development of an effective labor force (in part to circumvent union control over the crafts). The key obstacles to this project were landowners and more generally conservatives who had no interest in an expansion of public goods and who held strong positions politically, especially at the local level. Majoritarian democracy in these cases essentially emerged as a means to force the landed elites to accept major public investments in education and infrastructure needed for modernization. At the same time, a majoritarian system with a strong bias toward the middle classes effectively excluded the radical left from influence over policies.

Iversen and Soskice see a perfect correlation between the alternative paths to democracy and the electoral systems. The “protocorporatist” countries adopted proportional representation systems that gave worker parties more voice, while the “protoliberal” countries adopted majority-rule systems where major parties had to be more-or-less centrist to win a majority.

Inequality and educational opportunity

Democratic governments of different kinds have adopted many of the same policies to support the growing knowledge sectors of their economies, for example by liberalizing trade and investing more in education. All of them have experienced some increase in inequality as technological innovation has rewarded workers with the right skills and penalized those without them. However, they differ markedly in the extent of the inequality and the associated decline of economic opportunity. The U.S. Council of Economic Advisers introduced the term “Great Gatsby curve” to describe the inverse relationship between economic inequality and intergenerational mobility among countries.

In general, the countries with weak worker organization and majoritarian electoral systems now have relatively high economic inequality and relatively low social mobility. This is true of the United States, United Kingdom and France. Canada and Australia are more average in inequality and social mobility.

In contrast, the countries with strong worker organization and proportional representation systems now have relatively low economic inequality and relatively high social mobility. This is especially true of the Nordic countries: Finland, Norway, Sweden and Denmark. Germany is more average in inequality and social mobility.

I think this is an important finding, because it means that even in a world of global, hi-tech competition, countries have choices. Economic growth and global competitiveness do not necessarily require the extravagant executive salaries and tax cuts enjoyed by the American 1%! Nor do they require tossing aside former manufacturing workers without making provision for their economic security or retraining.

One of the biggest factors in economic opportunity is education, and here the international findings reflect badly on the United States. Here the authors use an index of educational opportunity based on such variables as the availability of vocational training, the public spending on preprimary education, the public/private division of higher educational spending, and the age at which students are tracked (since early tracking can restrict opportunity). Among advanced democracies, only Japan and South Korea scored lower than the U.S. on this index. The Nordic countries scored the best.

Many readers may find this puzzling because the U.S. has so many fine schools, especially major research universities. But the quality of individual schools is not the same thing as educational opportunity. A good prep school that serves only the affluent does little to provide upward mobility.

In our majority-rule system, the interests of the downwardly mobile minority are not being well served. Their interests have diverged more sharply from those of more successful workers, making it harder for the traditional party of labor to represent them. This relates very much to the next topic, the threat that populism poses to democracies with high inequality.

Continued