GV4D4 - week 4

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These are my notes from October 17 for GV4D4 at the London School of Economics for the 2017-2018 school year. I took this module as part of the one-year Inequalities and Social Science MSc program.

The usual disclaimer: all notes are my personal impressions and do not necessarily reflect the view of the lecturer.

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Worlds of Welfare, Varieties of Capitalism

Readings

The Three Worlds of Welfare Capitalism by Gøsta Esping-Andersen (chapters 1-2)

Introduction

• the point is not to focus on the specific implementation details of different national welfare systems
  • instead, draw out commonalities to understand the bigger picture of how each nation got its specific set of policies in the first place
• the topic of the welfare state is quite polarising
  • there’s a tendency for laissez-faire liberal economists to denigrate it because they think it undermines (economic) freedom and efficiency
  • whereas the social democratic model sees markets as being inherently unjust and thus erects barriers to protect the human beings who might be affected by it
• we must also recognise the role of the state in setting out the conditions required for markets to flourish in the first place
  • markets are the result of political decisions, and the mechanisms by which they run are politically determined

Chapter 1

• we need to remember the context in which classical political economists were writing
  • Adam Smith, for ex, was writing when the alternative was mercantilism & a corrupt state that privileged a small group of elites
  • in that context, then, it makes sense to see the market as a better alternative
• the social democratic model sees some baseline level of social provision as necessary for effective citizen participation and economic efficiency
• two main approaches to analysing welfare systems
  • systems/structuralist approach: we can see the welfare state as an inevitable product of capitalism
  • institutional approach, following Polanyi: social distribution as a mechanism of compensating for market failures/weaknesses
• the definition of “welfare state” is complicated, amorphous
  • we should assess policies based on:
    • their emancipatory potential
    • the degree to which they aid in the legitimation of the system (i.e., by keeping people happy)
    • and their effect on markets (whether they help or hinder them)
  • we should also recognise that measuring the amount of spending may not be the best way of evaluating them
    • for example, means-tested programs can cost more to administer than universal programs, but a lot of that cost is swallowed up by (unnecessary) administrative sinks rather than improving people’s lives
    • instead, we should look at who benefits from specific welfare state spending, and by how much
• the effects of decommodification on labour
  • hard to mobilise and build solidarity unless there is some degree of decommodification—otherwise, market inequalities will inevitably foster divisions
  • decommodification can strengthen bargaining power of workers and weaken the authority of the employer
  • though ofc this is in tension with the desires of employers, who would prefer fully commodified labour and thus obedient workers
• welfare states can be systems for stratification/segregation
  • Bismarckian tradition: preferred status/benefits are conferred on civil servants and others who are seen as deserving
  • in more liberal states (most notably the Anglo-Saxon ones) the middle classes can rely on private healthcare, schools, transport etc while the poor must rely on (typically lower-quality) state-provided services
• the recent rise of strong middle classes (within the last century or so) poses a challenge to the social democratic model
  • they’re not as concerned with unemployment benefits, or labour protections, or a strong safety net—they have jobs, and they’re doing fine
  • they’d often prefer a more liberal state & thus lower taxes
  • the degree of discontent with a specific welfare state system seems to have less to do with the actual amount that’s being spent, and more to do with the class composition of who’s receiving benefits
    • incidentally, LSE’s John Hills has written a book touching on this phenomenon in the UK called Good Times, Bad Times

Chapter 2: decommodification

• for Marx, commodification of labour power led to alienation
• Polanyi’s The Great Transformation highlighted an important contradiction in capital’s drive for total commodification
  • if labour is fully commodified, it will end up undermining capitalism itself (less efficiency, greater chance of revolution etc)
  • wonderful quote from Esping-Anderson: “the market becomes to the worker a prison in which it is imperative to behave as a commodity to survive”
  • capitalism thus requires an uneasy balance between capital’s desire for more commodification and labour’s desire for less
  • decommodification can then be seen as spectrum, not a binary, with various (maybe infinite) equilibrium points along the way
  • commodities pre-exist capitalism (think cash crops under feudalism), but Marx’s point is that capitalism is the first time labour-power is treated as a commoditiy
• proponents of laissez-laire liberalism tend not to like the idea of a strong safety net (social minimum)
  • arguing that it leads to corruption, profligacy, idleness, drunkenness etc
  • their big assumption is that the market is the best mechanism for allocating resources for an optimal society
  • any poverty or helplessness is a result of individual failings, and not an indictment of the system because the system is tautologically great (by liberal economic fiat)
  • the anti-welfare attitude of liberalism can be reconciled w/ specific welfare programs (i.e., those that promote commodification)
    • like social insurance, which pegs entitlements to working (which strengthens the incentive to work)
    • in other words, not all welfare programs are created equal—we need to assess them based on their decommodification potential

Varieties of Capitalism by Peter Hall and David Soskice (p1-69)

• this approach focuses on the firm, as opposed to more structural approach of Esping-Anderson
  • bridges management science & political economy
  • results in an actor-centred model, where we assume that political actors are rationally advancing their own interests
  • (the obvious criticism here is: how reasonable is it to expect “rationality” & understanding of the long-term effects of actions? an important countervailing phenomenon that arises here is kind of similar to false consciousness—people don’t really understand the true nature of the economic system they’re in)
• five spheres for resolving contradictions
  • industrial relations (bargaining over wages, working conditions)
  • vocational training and education (skills of workers)
  • corporate governance (getting finance and managing its expectations)
  • inter-firm relations (suppliers, partners, clients)
  • employees (on an individual scale rather than the collective scale of the first sphere), for ensuring that they advance the objectives of the firm
• distinction between coordinated market economies and liberal market economies (elaborated on in the lecture)
  • in LMEs, firms have less safety net, and thus must attain profitability (their access to capital and ability to continue operating independently depends on it)
  • in CMEs, firms rely more on non-market relationships, and the financial system offers more leeway
  • LMEs focus on easily switchable/shorter-term assets whereas CMEs focus on more fixed, longer-term assets
• important to recognise that the current state of any nation’s political economy is inextricably bound up in its history
  • e.g., history of worker mobilisation
  • however, institutions cannot be presumed to act in the same way forever—they must be reaffirmed, otherwise their influence may wane
• problem that can occur in CMEs with its expectation of “patient capital”
  • since current profitability doesn’t necessarily predict longer-term potential, investors need an inside understanding of the company to make informed decisions
  • this is resolved by dense networks (connecting investors & insiders), relying on reputation, and outside monitoring (governance)
  • the equalising of wages (accomplished via collective bargaining) plays a role here too: there’s less poaching, and so less chance of losing employees to competitors
• with LMEs, because share price is considered an important indicator of a company’s success, there’s a tendency against making risky, longer-term investments
  • potential exceptions: the pharmaceutical industry, which has a high income stream and thus doesn’t need to worry as much about the stock market (paraphrasing Hall & Soskice’s arg—I’m not sure I fully understand their logic though)
  • also private tech industry, which is funded by VCs who tend to be less risk-averse (the motto is something like “go big or go home”, or, more specifically, “if you’re not trying to become a monopoly in 10 years’ time then don’t even bother pitching me”
• LMEs tend to have more fluid job markets and shorter job tenures
  • result: employees focus on their personal brand/skills, potentially at the expense of company good (because they might not be at the company for very long)
  • on the other hand, it also means that companies can innovate more quickly—it’s faster to hire people with the skills you need
• we can see technological revolutions as sparks of change, accelerated by liberalisation in the global economy
• financial deregulation can lead to unraveling of CMEs in the future (they could become more like LMEs, not just in the financial industry but in other ways as well, as the effects of further financialisation trickle down)

Lecture

• briefly mentions the term fixed effects (in econometrics) which refers to persistent features that explain a non-zero baseline level (in this case, of inequality)
• we should think of political economies as systems: interconnected parts that form a cohesive whole
  • institutionalism; looking at how institutions shape social, economic, and political interactions
  • institutions can include (formal or informal) customs/rules/organisations that structure social behaviour
  • they provide structure and stability to social life
  • can help explain why some features persist in some nations
  • can create a path dependency as they close off some paths and thus make one particular path seem like the only option
  • some historical institutions remain today with very little modification
    • obvious example: monarchy
    • means that long-forgotten events and customs can still shape our lives today, because institutions have a tendency to outlast their original rationale (I like to call this “drift”)
• on Hall & Soskice’s Varieties of Capitalism, which mostly looked at the US and Western Europe
  • differentiates between liberal & coordinated market economies
  • more nuanced than simply treating the amount of state intervention as a scalar—instead, clarified that there can be different approaches to state intervention in the market
  • typical LME:
    • more competition between individuals and firms
    • more emphasis on the price mechanism for allocating resources
    • deregulated finance, with the stock market worshipped (obvious implications for instability)
    • product markets have low barriers to entry and few trade restrictions (like licensing) or environmental/consumer protection
    • less regulated labour markets, weaker trade unions, employment law protects employers more than employees, employment precarity
    • workers tend to develop easily transferable skills (not specific to a particular firm)
    • higher income inequality as a result
    • in general, the market is less fettered; there are fewer barriers to constrain/absorb both positive and negative movements
  • typical CME:
    • more emphasis on coordination/cooperation
    • some degree of reliance on the price mechanism but more insulated/restricted
    • finance more regulated, more about banks lending to businesses than betting on assets
    • obstacles to hostile takeovers of corporations; more longer-term thinking (“patient capital”)—though of course this didn’t stop Germany, Sweden, etc from losing money during the financial crisis (recall that this theory was developed in the 90s and published 2011)
    • more regulated product markets with higher barriers to entry (ex: pharmacies will require a license)
    • sheltered labour market: high unemployment compensation, acceptance of unions, strong worker protections
    • workers develop firm-specific skills since there is less turnover
    • main result of this more centralised & collective wage bargining: lower income inequality!
  • chart showing (mostly) inverse correlation between stock market total capitalisation & degree of employment protection in many countries
  • clear separation between countries that are mostly LMEs (the Anglo-Saxon countries) & CMEs (Europe, Japan)
  • logical correlation between the form of the financial industry & that of the labour market
    • if the stock market plays a larger role, then shareholder pressures tend to result in cost-cutting, thus exerting pressure on labour
  • this theory developed in the context of the end of the Cold War
    • meant to challenge the idea of economic convergence (where globalisation would result in one “best” model of capitalism everywhere)
    • they wanted to show that not every economy would become an LME (race-to-the-bottom fears of capital flight, competition); CME models could still work (at least at the time)
  • Q: where does the LME/CME distinction come from? what causes a nation to become more like one than the other?
    • there’s a theory (that we saw last time) that electoral rules (PR v. majoritarianism) can have an influence
    • also: history of guilds/unions
  • critiques of this model:
    • Europe is quite varied; it’s not as simple as this binary LME/CME distinction would imply
    • implies a fairly static view of capitalism & economic models
    • takes a benign (i.e., not Marxist, i.e., naive) view of labour-capital relations (kind of assumes these opposing classes can somehow cooperate)
• alternative model: 3 Worlds of Welfare Capitalism (Esping-Anderson’s model)
  • takes a sociological approach that draws on Karl Polanyi’s The Great Transformation (1944)
  • for Polanyi, capitalism is a destructive force, and commodification is a result of the destructive process of building a self-regulating market
    • this force inspires a double movement (backlash): workers who realise they’re being exploited by capital try to push back, imposing protective institutions in the process
    • though ofc not all protections are equal; the nature of the rebellion (workers’ movements, social Catholicism, monarchy, etc) determines the result too
  • the three worlds are:
    • the social democratic model
      • highest amount of decommodification
      • more egalitarian
      • Scandinavian countries
    • conservative/Christian Democratic regime
      • limited decommodification (only within existing hierarchies)
      • not quite egalitarian (large focus on hierarchies within families, communities, Church, etc)
      • some protection workers rights’ in labour markets
      • social insurance model (you must have worked in order to claim benefits)
      • extensive unemployment benefits w/ high replacement rate) but not for everyone (the young and women often excluded)
      • Bismarckian model (invented by imperial Germany)
      • Germany/France
    • liberal welfare regime
      • only very basic, residual protections from the market (threadbare safety net)—just enough cushioning to keep people from, say, eating their own children
      • limited social services
      • means-tested benefits
      • middle classes get basic services from the market (pensions, healthcare, education, housing)
      • unemployment benefits have low replacement rates re: regular wages (to discipline labour)
      • Anglo-Saxon countries
  • critiques of this model
    • data from 1980s and thus there’s little on Southern Europe (Greece, Spain, Italy, Portugal), so Esping-Anderson pretty much omits discussion of those countries entirely
    • Ferrera suggests a fourth model to cover this Mediterranean periphery: patrimonialism/clientelism in welfare policy, similar to Christian Democratic but stronger emphasis on family/community/church as institutions
      • welfare state tends to be more politicised, with vote-buying and patronage
      • greater separation of insiders & outsiders (non-workers, immigrants, or just those excluded by their community)
      • heavy dependence on family/community for basic social services
      • interventionist state with a large informal sector
• Q: where does the welfare state come from?
  • is it labour’s ability to challenge employers (re Esping-Anderson’s model?)
  • or is it that capital collaborates with labour to design a welfare state for maximum efficiency (Hall & Soskice’s take)
  • personally I think this depends on how self-aware (read: intelligent) the capitalist class is
    • in the Anglo-Saxon countries, especially the US, there’s a lot of discourse that suggests not all of the pro-capitalist camp is aware of the role played by the welfare state in maintaining the conditions that allow capitalism to thrive
    • basically I’m saying that Republicans who denigrate the welfare state are Extremely Ignorant cus it’s literally what props up capitalism

Seminar

Started with a group-based activity where each group was given a description of a national economy and was asked to identify the type of economy (based on the readings). Pretty straightforward. The only unusual one was the description of Denmark, which combines a social democratic welfare state with a fairly liberal financial industry; this combination, sometimes called “flex-security”, isn’t really covered in the literature.

The following notes are just things I jotted down during the discussion (pretty scattered).

• why does the level of exposure to international trade matter?
  • has to do with the compensation hypothesis
  • high exposure -> govt has less control over supply/demand, less sheltered from the vagaries of the market, and thus more at the mercy of international economic issues (e.g., global slumps)
  • thus the compensation hypothesis suggests that govts need to provide some sort of shield against the open market (via welfare institutions) in order to keep their citizens politically happy
• lots of welfare states started off with the distinction between insiders/outsiders
  • many evolved from Bismarckian origins—social protections were employment-linked, resulting in clear separations between who was protected and who wasn’t
  • theoretically, over time, democracy will result in increased coverage (though ofc that depends on the level of political engagement among the “outsider” population)
• the models we studied in the readings don’t really seem to make sense anymore, post-crisis
  • they assume a fairly static model of capitalism
  • one student brought up Wolfgang Streeck’s criticisms of the Hall & Soskice model
    • Streeck is a German economic sociologist who has written some excellent books which I highly recommend checking out
    • Streeck’s problem with the model is precisely its lack of dynamism, whereas Streeck (writing post-crisis) is more inclined to believe that capitalism’s internal contradictions are moving us toward uncharted territory
• one debate that’s going on right now in the literature: how much can you “export” an institution from one country to another?
  • can you just take something that works well in Denmark and set up a similar thing in Greece and expect things to be magically fixed?
  • or do you need to consider it from a more holistic angle (multicollinearity)
• on commodification
  • commodification occurs when one’s claim to a share of produce depends on their participation in the market
  • the degree to which any one person is “commodified” labour depends very much on their specific job (for example, Hopkin probably doesn’t feel too commodified, whereas a Deliveroo rider would feel it a lot more)
  • you only fully cease to be commodified when you own capital (and thus become the commodifier)
  • the problem with commodification (and the reason it has such negative connotations in everyday parlance) has to do with the lack of choice
    • historically, it comes down to primitive accumulation, dispossession, enclosure of the commons
    • nowadays, this phenomenon manifests via the need to sell your labour-power to live unless you are otherwise in possession of capital
    • so we become forced to sell our labour-power, forced to commodify ourselves
  • one student brought up an interesting point: why is commodification a problem? why does it matter that we have to work to live under capitalism, if we would also have to work under communism?
  • my own response (which, admittedly, is a heavy thing to bring up 5 mins before the end of the seminar) is that it comes down to the type of work we have to do
    • the issue with capitalism is that we end up working on things that we as individuals would not want to do, and do not consider socially productive or advantageous
    • but because we’ve constructed this system that no one individual can really dismantle, we are then forced to succumb to its exigencies even if we realise that what we’re doing doesn’t align with what we think should be done
    • in other words, capitalism has pointed humanity in the wrong direction—by putting ourselves at the mercy of the market, and relying on that mechanism to construct our world, we are drifting away from a world we’d actually want
    • I could write about this all day (I think about post-work economics a lot) but instead I’ll just link to this article on fully automated luxury communism
  • another student put it quite eloquently: we become tools, used to drive economic growth at the expense of human actual prosperity

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