Contrastación y validación de la hipótesis especifica H e3

The Theoretical Foundation for this research is the Varieties of Capitalism literature with a particular focus on the new institutionalisms.

Arguably the most influential critique of market liberalism ever written was The Great Transformation (1944) by Karl Polanyi. Fred Block (2001) says of it that the emergence of the Cold War, and the polarised public discourse that attended it, left little room for Polanyi’s nuanced and complex arguments. But in the context of the modern debate about globalisation his work is increasingly seen as being particularly relevant.

According to Fred Block (ibid) Polanyi does not fit easily into standard mapping of the political landscape; although he agreed with Keynes’ critique of market liberalism, he was not a Keynesian per se. He claimed to be a socialist although he did not agree with the concept of economic determinism in a Marxist sense. The core tenets of his argument were that labour, land and money could not be treated as commodities and that the economy should be embedded in social relations rather than the other way around as is the case with market liberalism. Mark Blyth (2002) describes Polanyi’s Double Movement theory in which the advance of capitalism and the commodification of labour create disembodied markets provoking a reaction by labour. In other words those dislocated by the market will try to use the state to protect themselves, the consequence of which is large scale institutional change. Of course this can happen in reverse too as was the case in the early 1970s when business interests in the US mobilised to deconstruct the New Deal Settlement.

David Harvey (2005) says that Polanyi saw liberalism (and by extension neo-liberalism) as a utopian construct. As such his fear was that it could only be sustained by resort to authoritarianism. The freedom of the masses would be restricted in favour of the freedom of the few.

Fred Block is the best known proponent of neo-Polanyian theory which he conceptualises in terms of four specific theses, viz:

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i. Market economies are always and everywhere embedded.

ii. Market societies and the contemporary world economy have been shaped by an on-going double movement.

iii. The interests of employers vary over time and space, but they play a critical role in shaping the development of market societies.

iv. Competition among nations within the world economy tends to produce new variations in the structures of economic institutions.

This latter thesis links with the Varieties of Capitalism School insofar as it implies that there are multiple strategies for maintaining or improving a nation’s relative position. For example, investment strategies for different economic sectors or for education and training might be prioritised. The path chosen is likely to lead to institutional innovations that could increase the institutional variations among market societies.

Taken together these four theses suggest that the trajectory of market societies can be seen as being shaped by political conflicts and political struggles. The importance of political institutions and political conflicts in shaping social development represents an overlap of significance between neo-Polanyian theory and the work done within ‘new institutionalist’ frameworks in political science and sociology. Carlo Trigilia (2002) suggested that Polanyi was an institutionalist, meaning that for him economic life could not be understood in individualistic terms but was influenced by social institutions.

Moreover, employer class interests and counter movements can contest to influence State power to make deep changes in the structure of the economy thus providing multiple paths to successful economic adaptation.

In Polanyi’s reasoning it was not the First World War, or fascism in Europe nor the onset of the Russian Revolution that ended the civilisation of the nineteenth century as manifested in liberal capitalism. Rather it could be traced to a conflict between the functioning of markets and the requirements of social life – a view that finds a resonance in Europe post the 2008 financial crisis.

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According to Katzenstein (1985:34) for small European states, with their open economies and fear of retaliation by other governments, exporting the costs of market competition and change through protectionist policies was not a viable option. Protectionism would risk retaliation. Competitiveness was the only economic option but that required building a national consensus. A consensus required everybody to realise that they were in the same small boat, fighting high waves, and everybody needed to pull the oars. Thus it followed that domestic quarrels were a luxury that could not be afforded. Building a consensus required the protection of citizens from the worst effects of open international markets.

The formula adopted was democratic corporatism. It involved agreements on incomes policy and broad social and economic policy between government and both sides of industry. Initially these were embodied in a number of landmark agreements as follows: Norway’s Basic Agreement of 1935, Sweden’s Saltsjobaden Agreement of 1938, the Netherlands’ fifth corporatist chapter of the new Constitution of 1938, Belgium’s Social Solidarity Pact of 1945 and Switzerland’s Peace Agreement of 1937. The ‘truce’ between employers and unions eventually transitioned into a permanent way of doing business which was consolidated after the war (Katzenstein, 1985: Chapter 1).

However, it would be wrong to think that everything went smoothly at all times.

Industrial conflict did occur. Moreover, centralised bargaining was abandoned in Sweden in 1984 and subsequently in some other countries. Incomes policy in both Denmark and the Netherlands has a mixed record. One of the interesting points brought out by Katzenstein is that best results are achieved where strong peak organisations of employers and unions exist. He notes that while Britain tried incomes policies on a few occasions, weak peak organisations and decentralised systems of collective bargaining condemned Britain’s efforts to no more than intermittent success (Katzenstein, 1985: Chapter 2, see also Scharpf, 1991: Chapter 5). Hardiman (1988) argues that Ireland was subject until the 1980s to similar problems in its collective bargaining system.

Another feature of small European States is that protection of citizens from the ravages of markets requires a fairly large public sector to provide social transfers for

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compensation and good quality public services. Therefore, public spending, and taxation, tends to be high. When Katzenstein was writing the average small State spent 45 per cent of its gross national product on public services while the large countries averaged 38 per cent.

The defining characteristics of corporatism are (i) an ideology of Social Partnership, (ii) a centralised and concentrated system of economic interest groups, and an uninterrupted process of bargaining among all the major political actors across different sectors of policy. Proportional Representation in the electoral system is important because it lends itself to a system of coalition or minority governments.

This fosters an inclination to share power between political opponents with a view to jointly influencing policy. It adds to the orientation towards consensus and a negotiated economy (ibid, see also Lijphart, 1999).

This is very much associated with the social democratic model whereby the labour movement is integrated to a strong national consensus through strong socialist parties and strong trade unions. While it does not mean that social democratic parties will always be successful in elections it does mean that even conservative parties have to stay with a social democratic policy framework if they want to be successful (Vartiainen, 2011). In some cases, for example Anders Fogh Rasmussen, former prime minister of Denmark, politicians of the right have acknowledged the merits of the social democratic framework (Boss, 2010).

To summarise Katzenstein’s thesis it is that the vulnerability of small countries to internal conflicts and external changes in the 1930s and 1940s caused them to adopt a policy of combining openness to international markets with social compensations.

He described this as ‘Democratic Corporatism’ constituted of a blend of centralised politics, ideological consensus and complex bargains among interest groups, politicians and administrators. By balancing open economies and flexible industrial policies within Social Partnership the small countries of Northern Europe succeeded in adjusting to rapid changes in the international political economy without damaging social cohesion or political stability. However, he did not see that there was a universal model to fit all situations but rather that historical and institutional factors were influential (ibid).

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While small countries lacked the market size and economies of scale of larger countries Katzenstein saw that there were alternative advantages to small size. All relevant parties could more easily get to sit around a table together to discuss pragmatic approaches to problems associated with vulnerability and to devise solutions. It was also possible to coordinate, to limit internal conflict and to duck and weave around international vulnerabilities sometimes by designing policies and institutions with which to contend with international forces otherwise beyond control (see also Campbell and Hall, 2010 a).

Hall and Soskice (2001) developed this thinking about coordination and institutions further. In their perspective Katzenstein had also given insufficient weight to the role of firms in the economy. This was something of a rebalancing of the primacy given to trade unions. They also emphasised the importance of culture. Societies that are deeply divided culturally, for example, might find difficulty in cooperating.

A feature of the Northern European countries is that they are culturally quite homogenous (although this may be changing somewhat with immigration as discussed in Chapter 6). In this respect Campbell and Hall (2010) note that according to the World Economic Forum in 2006, five small countries – Switzerland, Finland, Sweden, Denmark, and Singapore – are the most competitive economies in the world.

Whereas this ‘Varieties of Capitalism’ literature speaks to the practical way economies and societies are organised, political science provides a theoretical approach with three main perspectives: rational choice theory; behaviouralism; and the new institutionalisms. Rational choice theory is based on the assumption that individuals are rational and behave as if they engage in a cost-benefit analysis of each and every choice available with a view to maximising their material self-interest. Rational choice theory seeks to produce a deductive and predictive science of the political, modelled on neo-classical economics. The behaviouralism approach is to focus on power as decision-making and to assume that an analysis of the inputs into the political system, such as the pressure exerted by interest groups upon the State, is sufficient to account adequately for political outcomes. Both approaches have been criticised by Colin Hay (2002). In particular he has drawn attention to an

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inherent flaw in rational choice theory by virtue of perverse incentives not to engage in collective action in pursuit of public goods. Referring to the so-called ‘tragedy of the commons’ he explains how an individual country might not want to incur the competitive disadvantage of the costs of environmental protection if it can be free rider getting the benefit of the input of others.⁹

The origins, philosophy and approach of new institutionalism are given detailed treatment in a book written by John L Campbell Institutional Change and Globalisation. He explains that new institutionalism emerged in the 1970s in reaction to persistent problems for which neo-classical economics seemed to have no answer. These related to the realisation that competitive markets did not always produce the most efficient economic behaviour. The new institutionalists argue that markets were in fact typically inefficient insofar as monitoring and enforcing transactions could be done at lower costs through different institutions like corporate hierarchies or long term subcontracts. By institutions they meant systems of formal and informal rules and compliance procedures. Whereas neo-classicals had disregarded institutions in favour of unfettered markets the new institutionalists wanted to bring the analysis of institutions back into economics. The new institutionalists, however, cannot be said to hold a homogenous world view (Campbell, 2004).

New institutionalism is also explained in terms of the extent to which it emphasises how political conduct is shaped by the institutional context in which it occurs, the historical legacy and the diversity of actors’ strategic orientation to the institutional situation in which they find themselves. Rational choice institutionalism presents the State as a rational actor pursuing the national interest or as a structure of incentives within which rational actors follow their preferences. Historical institutionalism focuses on the constituent parts of the State and on how the State has originated and evolved. This brings into play a logic of path dependence.

Sociological institutionalism sees the State as socially constituted and culturally framed, with political agents acting according to ‘the logic of appropriateness’ that

9 One is tempted to suggest that Ireland’s attitude to corporation tax and transfer pricing fits this description. By undervaluing imports from subsidiaries abroad and overvaluing exports to subsidiaries outside Ireland, affiliates of MNCs can declare higher profits for taxation purposes in Ireland and move after tax profits out of the country.

Ireland’s 12.5 per cent corporation tax rate allows it to attract FDI but it is arguably contributing to a ‘race to the bottom’ for all European countries in their tax relations with MNCs.

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follows from culturally-specific rules and norms. Discursive institutionalism is concerned with ideas and discourse used to explain or legitimate political action in an institutional context. New institutionalism began in the 1970s with the aim of bringing institutions of the State back into the explanation of political action (Hay, 2002; Schmidt, 2006).

But it is the treatment of ideas that is particularly challenging within this discipline.

Mark Blyth (2002) asserts that ideas are important because they can change how people conceptualise their own self-interest. He complains that social scientists have had difficulty accepting that ideas matter, preferring instead to rely on self-interest as the ever ready tool of explanation. He makes the case for reconceptualising Polanyi’s double movement thesis towards an analysis which is not static but which sees institutional change being driven sequentially by events where ideas have different effects at different junctures. In other words, institutional change may be a process comprehending the reduction of uncertainty, the specification of causes and the actual supply of new institutions. He explains it this way:

‘While Polanyi saw the double movement as a function of agents with structurally given interests reacting to self-apparent crisis, what this and other static accounts of institutional change miss is the importance of uncertainty and ideas in determining the form and content of institutional change. Economic ideas are causally powerful in this way because of the world that precedes them.’

(ibid:10)

Colin Hay (2002) suggests that the new institutionalism departs from the mainstream political science of the 1980s in important respects. First, it rejects the simplifying assumptions which make possible rational choice theory’s modelling of political behaviour. Secondly it challenges the assumed regularity in human behaviour in which rests behaviouralism’s reliance on a logic of extrapolation and generalisation (or induction). In their place the new institutionalists propose more complex and plausible assumptions which seek to capture and reflect the complexity and open-endedness of processes of social and political change. The result has been a series of hybrid positions, the most influential of which is probably rational choice institutionalism which examines the extent to which institutions can provide

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solutions to collective action problems and, more generally the (institutional) context-dependence of rationality.

Vivien Schmidt (2006) suggests that Peter Katzenstein has moved his thinking in a constructivist direction. She categorises him as being in the historical institutionalist tradition when he wrote his book on small open economies in 1985 but by 1996 she considered him to be in the sociological institutionalist camp. This trajectory is associated with the accommodation of ideas. She regards him as one of those scholars, ‘who see ideas more as static ideational structures, as norms and identities constituted by culture and thus remain largely sociological institutionalists….’ (ibid:

112). Similarly Peter Hall, whose original work was within historical institutionalism, moved over time to combine a historical institutionalist approach to the structures of capitalism with a rational choice institutionalist focus on strategic firm coordination (2001), and in between focussed on the role of economic ideas to explain change. Schmidt’s (ibid) opinion is that, whereas in his first ideational approach on the adoption of Keynesian ideas he remained largely historical institutionalist because historical structures come prior to ideas, influencing their adoptability, the second work on the introduction of monetarist ideas to Britain crossed into discursive institutionalism because ideas are central to change and constitutive of new institutions.

Discursive institutionalism came along somewhat later than the other three institutionalisms and arose from a concern that none of them were seemingly able to explain change, such as the collapse of the Berlin Wall, given their often static view of institutions. The use of ideas and discourse to explain change was a natural step in these circumstances. On the other hand ideas had formerly already been part of the DNA of sociological institutionalism (ibid). This is a point which has implications for the methodology used in this research which will be revisited in the next chapter (ibid:109).

Hall and Taylor (1996) identify three sub species of institutionalism as manifest in theories of EU integration. The first is rational choice institutionalism which is closely related to liberal intergovernmentalism and rational choice theory. It is based on the idea that human beings are self-seeking and behave rationally and

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strategically. This means that institutions do not alter preferences but will have an impact on the ways in which actors pursue those preferences. Consequently, changes in the institutional rules of the game, such as the introduction of the co-decision procedure, will cause actors to recalculate how they will behave in order to realise their preferences. What can be strategically important in this analysis is the agenda setting power of the various institutions. Another important aspect of rational choice institutionalism is the application of the ‘Principal – Agent Analysis’

to EU politics. Here self-regarding actors (Principals) find that their preferences are best served by the delegation of certain authoritative tasks to common institutions (Agents). In an EU context this might be the Commission or the European Court of Justice (ECJ) (ibid).

If institutions engage with one another in a decision making process, then patterns that evolve over the early years of that institution may ‘lock in’ and become a permanent template for decision making. This is the basis of path dependency in which it is very difficult for the institution concerned to break out from established patterns of decision making. Policy entrepreneurs may attempt to redesign institutions to meet current needs, but they do so in the face of institutional agendas that are locked in and which are, in consequence, difficult to reform. This is the essence of historical institutionalism (ibid).

Sociological institutionalism is somewhat aligned to the constructivist school in international relations. The literature tends to reject the other institutionalisms because of their inherent rationalism. Sociological institutionalism/constructivism operates with a distinct ontology by which actors’ interests are not seen as pre-set but as being the product of interaction between actors. As Hall and Taylor (1996) explain it, ‘Institutions do not simply affect the calculations of individuals, as

Sociological institutionalism is somewhat aligned to the constructivist school in international relations. The literature tends to reject the other institutionalisms because of their inherent rationalism. Sociological institutionalism/constructivism operates with a distinct ontology by which actors’ interests are not seen as pre-set but as being the product of interaction between actors. As Hall and Taylor (1996) explain it, ‘Institutions do not simply affect the calculations of individuals, as