Political governance of capitalism a reassessment beyond the global crisis

List of abbreviations vi List of fi gures viii 1 Exposition – capitalism as systemic risk 1 2 On the political economy of global capitalism 11 3 On systemic features and contradictions o

Political Governance of Capitalism

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List of abbreviations vi

List of fi gures viii

1 Exposition – capitalism as systemic risk 1

2 On the political economy of global capitalism 11

3 On systemic features and contradictions of capitalism 51

4 On governance of capitalism as global political economy 73

5 On global capitalism and the future of democracy 119

6 Outlook – capitalism in a global knowledge society 163

References 179

Index 199

ABS asset-backed securities

AIG American International Group, the world’s largest

insurerAttac Association pour une taxation des transactions

fi nancières pour l’aide aux citoyensBIS Bank for International Settlements

CC corporate citizenship

CDO collateralized debt obligation

CDS credit default swap

CMBS commercial mortgage backed securities

CSR corporate social responsibility

ECB European Central Bank

EEAG European Economic Advisory Group

FSB Financial Stability Board

G-20 Group of Twenty

HRE Hypo Real Estate

IIF Institute of International Finance

IMF International Monetary Fund

INGO international non-governmental organization

LTCM Long Term Capital Management

LTMF Longer Term Management Fund

OTC over the counter (trades)

PPP public-private partnership

RA rating agency

RMBS residential mortgage backed securities

SEC Securities and Exchange Commission

SIV structured investment vehicle

SPE special purpose enterprise

SPV special purpose vehicle

TAN transnational advocacy network

TNC Transnational Corporation

WB World Bank

Abbreviations vii

WEF World Economic Forum

WHO World Health Organization

WTO World Trade Organization

1.1 Views on free market capitalism 9

3.1 Market capitalism and reactions to disturbances 60

4.1 Global context for governing capitalism 82

5.1 Four scenarios for the evolution of the global fi nancial

system 1225.2 SWOT analysis of contemporary democracy 128

1 Exposition – capitalism as

systemic risk

What if capitalism were to collapse? Many critics of capitalism do

not realize that there is no viable alternative to capitalism after the

demise of socialism; there are only alternatives within market

capi-talism Varieties of capitalism span a broad range from market

fun-damentalism to welfare capitalism, and these varieties correspond

to varieties of democracy (Hall and Thelen 2005; Willke 2009a) As

a specifi c governance regime for the economy, capitalism is based

mainly on self-organization and self-governance of markets,

sup-plemented with varying institutional arrangements to safeguard the

proper functioning of the market However, at the same time global

capitalism has become a systemic risk, and the global fi nancial crisis

should be regarded as a ‘normal accident’ within an untenable

archi-tecture of global fi nance This paradox of capitalism – presenting

a systemic risk because of and in spite of its achievements – is the

base-line for this book

Even market fundamentalists do not doubt that markets require

legal institutions, political frameworks and cultural patterns in order

to function as markets The details of the relations between politics

and economy, of the political preconditions of a market economy

and of the architectures of a political economy are, of course,

con-tested But it seems evident that a positive, self-reinforcing

relation-ship between capitalism and democracy depends on reining in the

self-destructive tendencies of an unfettered market capitalism by

defi ning rules for public goods (Malkin and Wildavsky 1991), rules

for accountability (Held 2004; Keohane 2003), rules against

‘preda-tory’ abuses of market power (Shiller 2009) and rules for coping

with economic and fi nancial globalization (Roubini and Mihm 2011;

Stiglitz 2007: 269 ff )

The global crisis of 2007 onwards has destroyed the myth of the

glo-riously self-regulating ‘free’ market But what would be a more

ade-quate description of the range and role of ‘free’ markets? Ironically,

contrary to the epithet of ‘neo-liberalism’ it is the proponents of

classical liberalism who have given answers to this question which

still appear to be valid today (Willke G 2003) The centerpiece of

their argument is that the market cannot produce its own

precondi-tions – for example rule of law, the institution of private property

or prevention of monopolies – and therefore it needs the regulatory

powers of polities

This book will pursue the argument that revisiting capitalism after

the global fi nancial and economic crisis means assessing capitalism

before the next crisis The next crisis, however, will not be a crisis of

capitalism but a crisis of governance, or more to the point, a crisis

of the relation between capitalism and governance and, thus, a crisis

pertaining to the governance of capitalism

The crises inherent in the deployment of capitalism have always

nurtured the suspicion that capitalism is not only running the

periodic risks of boom and bust but that capitalism as an unfettered

economic regime is a systemic risk threatening the collapse of society

as a whole Karl Marx perceived the devastations of 19th- century

Manchester capitalism as evidence of a built-in propensity to

self-destruction In 1910 Rudolf Hilferding published a scathing

criti-cism of fi nancial capital, again focusing on the ‘general conditions

of crises’ (Hilferding 1981 (1910): part IV) A century later, Nouriel

Roubini and Stephen Mihm, among others, expound global fi

nan-cial capitalism as a crisis-prone economy, maintaining that

‘capital-ism is crisis; it introduced a level of instability and uncertainty that

had no precedent in human history [T]he rise of a small coterie of

incredibly powerful, opaque fi nancial fi rms has generated a far more

unsettling problem [it] created a system that is extraordinarily

vulnerable to systemic risk’ (Roubini and Mihm 2011: 46 and 210)

Indeed, in view of the global fi nancial crisis and its

continu-ing eff ects on economy, international trade, trade imbalances or

public debt, the question is whether Schumpeter’s

conceptualiza-tion of market competiconceptualiza-tion as a process of ‘creative destrucconceptualiza-tion’

(Schumpeter 1975) is but a euphemism and needs to be reinterpreted

as creating destruction on a grand scale As long as ‘capitalism’

actu-ally was a distributed system of nationactu-ally defi ned and delimited

spaces, a combination of Schumpeter’s creative destruction and

Ricardo’s comparative advantages, even serious crises were limited

to regional or national levels The 1990s saw a series of national

eco-nomic, fi nancial and currency crises which sent shock waves over the

Exposition – capitalism as systemic risk 3

globe but seemed to be solvable, temporary and necessary to correct

bad economics and bad economic governance

This complacent interpretation of economic crises appears to have

outlived its appeal with the global fi nancial crisis and its aftermath

The challenge now is to devise ways to steer between the Scylla of

capitalism as systemic risk and the Charybdis of missing alternatives

to capitalism This book will argue that any viable way out of this

conundrum must involve a revised and reconsidered role of

politi-cal governance of capitalism Capitalism has become a global force,

sustained within a network of economic, fi nancial, technological

and regulatory interdependencies and, at the same time, deprived in

some crucial respects of the moderating powers of the nation-state

Political governance of capitalism, therefore, needs to be confi gured

as a multi-level system comprising national, regional and global

levels This kind of governance is more exacting and more diffi cult to

achieve than previous models of political-economic regimes because

it has to tackle the fundamental problem of balancing national

ego-tisms and global public goods – which do have repercussions on the

welfare of nations And it has to come to grips with an increasingly

pressing antinomy between a democratic mode of political

govern-ance (as exemplifi ed by most OECD nations) and an authoritarian

mode of politico-economic governance (as exemplifi ed mainly by

China and Russia)

It turns out that capitalism is a systemic risk for two reasons As

economic operational mode it is plagued by internal contradictions

that threaten to undermine the very preconditions of its own

func-tioning As part of a politico-economic constellation capitalism is

coupled with democracy (an apparently ideal combination

promis-ing the end of history, Fukuyama 1992) but in reality openpromis-ing up

a battle zone of continuous confl ict between diff ering rationalities

Whereas democracy builds on the principle of equality, the ‘axial

principle of equality’ (Bell 1976b: XVII) – one person one vote –,

capitalism’s driving force is diff erence (as inducement for exchange),

resulting in vast diff erences of wealth, infl uence and authority As

providers of jobs, taxes and other incentives large corporations,

trusts, foundations, banks and other fi nancial organizations are in

a position to derogate the egalitarian principles of democracy The

more an ideology of market fundamentalism and deregulation

pre-vails in a democracy, the more the gates are opened for unfettered

collusion between economic and political elites inviting, for example,

the creation of a huge and unregulated ‘shadow banking system’ or

the revocation of the Glass-Steagall Act by the infamous

Gramm-Leach-Bliley Act of 1999, thus abolishing the barriers against

dev-astating internal confl icts of interest in huge fi nancial conglomerates

(Roubini and Mihm 2011: 74 f.)

In addition, a regulatory focus on single fi rms and their risk

behav-ior is neglecting structural issues and negative externalities of the risk

strategies of single fi rms New types of operational risks emanating

from individual fi rms might coalesce to systemic operational risks

and market risks that overwhelm the coping capacities of

indi-vidual actors of the fi nancial system: ‘The internal risk management

regime – for credit and market risk, operational risk, compliance

risk – needs to meet a more exacting standard The requirements for

operational resilience for technology systems are necessarily more

demanding’ (Geithner 2004: 4) Obviously, this also increases the

complexities of fi nancial governance to manage systemic risk

The shifting grounds for regulatory supervision correspond with

a marked change in risk perception within global fi nance during

the last decade In the 1990s, major risks derived from aberrant or

criminal behavior of single fi rms and persons By 2003, the sources

of risks had shifted to complex (if not outright deceitful) fi nancial

instruments and adverse macroeconomic conditions for the

busi-ness strategies of fi nancial fi rms At present, the systemic eff ects of

individual risk taking are becoming more accentuated, because the

traditional separation of diff erent types of fi nancial institutions, in

particular the separation between banks, insurance companies,

secu-rities and funds, already loosened by the Gramm-Leach-Bliley Act

of 1999 (for the USA) is undermined by a non-transparent

concate-nation of risk propensities via diff using eff ects of structured credit

instruments (Plender 2005) and the creation of a massive shadow

banking system intended to hide major transactions, to enhance lack

of transparency and to cover serious parts of the fi nancial system

under a veil of ignorance by operating outside regular banking

supervision and national regulation The shadow banking system

‘is a nexus of private equity and hedge funds, money-market funds

and auction-rate securities, non-banks such as GE Capital and new

securities such as CDOs and credit-default swaps On the eve of

the crash, more capital was fl owing through it than through the

con-ventional banks’ (Economist 2009: 20 f.)

As the fi eld of options within the fi nancial system is extended into

Exposition – capitalism as systemic risk 5

the abyss of structured derivative instruments and into the labyrinths

of prolonged chains of conditioned events, the chances and risks of

aggregate or even systemic eff ects of mutual reinforcement,

snow-balling, leverage and positive feedback loops beyond single fi rms

loom large A complex array of options corresponds with chances

of ‘low-probability, high-impact events’ (Kohn 2004) A regulatory

focus on single fi rms necessarily makes governance blind to systemic

turbulences These turbulences certainly start with some actions and

decisions of single fi rms, like kids throwing snowballs, but these

actions then turn into avalanches by setting off chain reactions that

follow the logic of the fi nancial system and defy the motives and

reasons of individual people or fi rms involved

When the bubble bursts and the crisis is unfolding, systemic risks

turn into systemically relevant threats of meltdown Again, nobody

can know for sure what event and what organization/institution

exactly is systemically relevant The notion covers various aspects:

(1) an organization is ‘too big to fail’, meaning that its failure

precip-itates the downfall of an entire sector of the fi nancial system; (2) an

organization’s failure would kick off an avalanche of related failures

within the fi nancial system, particularly by destroying the

quintes-sential trust which fuels fi nancial transactions (like interbank loans);

(3) the failure of a sector of the fi nancial system would expand into

the ‘real’ economy, putting fi rms and jobs at risk, thus impinging

on the social security system and thereby connecting to politically

touchy fi elds; and (4) an organization’s failure would trigger social

unrest, protest and more violent expressions of deception and

inse-curity from aff ected people, thus again connecting to politically

touchy arenas

The notion of ‘systemic relevance’ implies a responsibility of

politics to prevent a critical state of fi nancial/economic aff airs Its

defi nition derives less from fi nancial/economic reasoning than from

political judgments of political relevance Politics fi nds itself in a

double-bind of unavoidable non-knowledge and non-transparency:

political decision-makers have no way to know the exact fi nancial/

economic implication of a critical situation since even most of the

fi nancial and economic agents involved have no clue of what is going

on – or going wrong; and they have no way of knowing whether or

not political action (such as bailout, guarantees, grants, the creation

of ‘bad banks’ or even nationalization of fi rms and so on) will solve

the problem or whether the solution will trigger the next crisis

A case in point: The bailout of the investment bank Bear Stearns

by the US Federal Reserve in March 2007 was seen as a successful

intervention against the risk of ‘systemic shocks’ from the failure of a

large fi nancial corporation ‘The bailout was justifi ed on the grounds

that the collapse of Bear Stearns appeared to be driven by marked

illiquidity rather than insolvency Yet, it has been noted that

the Fed did not have fi rst-hand information on Bear Stearns, as this

was outside its supervision How can a central bank with no

supervi-sory power over investment banks tell whether one such institution

is or is not insolvent?’ (Sinn 2009: 85)

In spite of many remaining doubts, the notion of ‘systemic

rel-evance’ is helpful in confi guring the transition points in the relation

between economy and polity Politics is defi ned as the functional

subsystem of (modern) societies responsible for making collectively

binding decisions Politics is in charge of deciding on the range of

public goods – and of providing them Thus, political action seems

appropriate as soon as a public good (for example systemic

stabil-ity) appears to be at risk Although the distinction between private

concern and public interest will remain controversial in most cases,

the distinction itself must be made, and the political system is

enti-tled to defi ne ‘systemic relevance’ along its own operational decision

criteria

To be sure, there is no guarantee that even legitimate and

appro-priate regulation will prevent crises: ‘Given the fi nancial system’s

fallibility, regulation is bound to be fallible too’ (Economist 2009:

20) The point here is that capitalism is not a free fl oating system

but is necessarily embedded in societal contexts in general and in

democratic prerogatives in particular ‘The case for a

government-led capitalistic approach (and for not allowing the free market to

run roughshod) has seen no more compelling evidence than the

2008 credit crisis’ (Moyo 2011: 141) As soon as the gyrations of

markets impinge on public goods or concerns, as in some instances

they inevitably do, democracy must impinge on capitalism, too

In this sense, core components of democracy, i.e legitimacy,

par-ticipation, accountability and transparency, have repercussions on

the selection of valid models out of a variety of optional forms of

capitalism – including its fi nancial system And thus, major changes

in the constitution of systemic risk in the global fi nancial system

demand adequate responses from democratic polities (and even

non- democratic ones) which try to regulate global fi nance: ‘Given

Exposition – capitalism as systemic risk 7

our current knowledge, it is not realistic to expect a single measure of

systemic risk to cater to all purposes; in fact, it is actually dangerous

to do so’ (Borio 2011: 6)

A fi rst step of the following reasoning will be to delineate some of

the democratic interfaces of capitalism, perceived as the contextual

framework providing the ground-rules for separating and

recombin-ing public and private goods, public and private authority, public

and private accountability and, increasingly, public and private

risk An intricate interplay of private and public aspects of major

dimensions of democratic societies exposes the public sphere to

private concerns and interests, including an infl ux of expertise and

commitment of private actors and organizations promoting specifi c

common goods such as transparency, accountability, sustainability

or responsiveness At the same time the interleaving of public and

private is sustaining the embedding of capitalism in societal contexts

It is by confronting capitalism with the elaborate demands of public

responsibilities that capitalist dynamics impinge on public goods

When this containment and embedding fails (corresponding to a

failure of politics), as in the global fi nancial and economic crisis,

capitalism becomes a systemic risk – that is, a risk of destroying

capitalist democracy

The second step in the reasoning of the book is concerned with

globalization as the most important new factor changing the face

of capitalism and reconfi guring the relation between capitalism and

governance Globalization has created a fundamental incongruence

between a truly global reach of economic and fi nancial transactions

on the one hand and a domestic/national reach of public rules and

regulations on the other, exposing the nation-states’ incompetence

to deal effi ciently with a global crisis: ‘Globalisation of fi nancial

markets has systematically and vastly outpaced the development

of their governance: governments have lagged behind in

reshap-ing domestic and international institutions as well as in changreshap-ing

and adapting policy behavior’ (Sinn 2009: 59) This incongruence

becomes more threatening for the stability and viability of the global

economic and fi nancial system if the proposition is taken seriously

that a poorly governed capitalism is amounting to a systemic risk

Chapter 3 will address this problem

The disparity between globalized markets and national

politi-cal systems brings forth new challenges for a global politipoliti-cal

economy Chapter 4 argues that governing global capitalism remains

a euphemism as long as the means of governance remain tied to

nation-states A sober evaluation of the capacity of governance and

self-governance of politics is needed to gain an understanding of the

reach and restrictions of political governance of capitalism Equally

important are the means of self-governance of capitalism as a system

of self-regulating economic activities Capitalism, however, is not

self-suffi cient but depends on contextual conditions provided by

political systems as the institutions for making collectively binding

decisions Creating a framework for global capitalism is the most

demanding task of the fl edgling institutions of global governance

In chapter 5 we describe core elements of a governance regime for

global capitalism, connecting the future of capitalism with future

developments of democracy Essentials of democracy, such as the

components creating input-, output- and throughput-legitimacy,

increasingly are infl uenced by consequences of globalization and

thus are changing the option space for democracy and for political

governance The Chinese case of combining political dictatorship

with economic freedom of sorts poses a serious challenge to the

‘Western’ ideal of combining political freedom with economic

lib-eralism Rising competition between global varieties of capitalism

forces the traditional ‘Western’ model of combining democracy and

capitalism to elaborate its idea of democratic ethics and to specify its

notion of ‘the spirit of capitalism’

This, we surmise, should be understood as a chance to revise

capitalism and, in particular, to devise more intelligent modes of

political governance of capitalism The ongoing global crisis has

shown the face of an ‘ugly capitalism’, mainly portraying managers

of some large investment banks and hedge funds but also some

sys-temic traits of global fi nance (for example excessive risk taking and

‘irrational exuberance’) So it seems all the more important to think

about a ‘responsible’ variety of capitalism which acknowledges its

embedding in democracy and which addresses the smoldering global

problems of asymmetries and unjust terms of trade, of predatory

exploitation and wasteful exhaustion, and of social and

environmen-tal destructiveness in the interest of its own survival, thus making

a revised capitalism more attractive even in the eyes of the more

sophisticated of its discontents

There are plenty of discontents In a survey conducted for

the BBC during June and October 2009, including almost thirty

thousand adults in 27 countries, only 11 percent of respondents

Exposition – capitalism as systemic risk 9

considered capitalism to work well, whereas about half of the

respondents answered that regulation and reform were needed to

cure capitalism (see Figure 1.1) In spite of continuing predictions of

capitalism’s imminent demise (Kotz 2009: 316), however, capitalism,

including global fi nance, is recuperating from the serious downturn

of the ongoing crisis It is another indication of historical evidence

that capitalism is more fl exible, dynamic and resilient than its radical

critics like to assume

Delineating some crucial prerequisites for political governance of

global capitalism means to bring up again the dormant dilemmas of

political economy within an intensifying debate about the

relation-ship between democracy and capitalism (Iversen 2006; Nelson 2009;

Streeck 2010, 2011) This theme will run through the entire book and

will be treated from diff erent angles in the various chapters

The legitimacy of global capitalism hinges on the ability of

modern democracies to reconcile democratic ethics and a spirit

of capitalism which is based on responsiveness and resilience In

this sense, revising a variety of capitalism which has become a

systemic risk encompasses three distinctive but related spheres of

[It] has problems that can be addressed through regulation and reform (5)

[It] is fatally flawed

and a different economic

system is needed (23)

Don’t know / Not sure /

Depends (15)

Source: BBC World Service 2009.

Figure 1.1 Views on free market capitalism

● First, global capitalism as a self-regulating social system needs

to adapt to new challenges created by various processes of globalization, global interdependencies and global concatena-tion While systemic failures are the most salient new chal-lenges, other global problems such as environmental decline, depletion of resources, and poverty need to be addressed, too

● A second transformation concerns the recurrent ‘dream of a

strong state’ (Hofmann 2008) which has been renewed by the ongoing crisis and the role of the nation-state as savior of last resort While this role was forced upon the nation-states for fear of system failure – and only a few nations took advantage

of it – a more sober look at the capacities of the nation-state reveals that the dangers of over-extension and involvement in micro-management of economic aff airs loom large

● Thirdly, political governance of capitalism then means to

transform the lessons learnt from history and from the ongoing crisis into rules and principles for a balanced combination of self-governance of a self-referential economic system and con-textual guidance by a variety of political actors and regulatory institutions What makes this a daunting task is the complexity

of global capitalism on the one hand and the fragmentation and diff usion of political authority in global contexts on the other Concerning governance of capitalism, the supreme – and suffi cient – role of the nation-state defi nitely is history As long as there is no global correlate to the nation-states’ regula-tory powers global capitalism will be volatile and disruptive

However, the strengths of democracy as a mode of governance extend beyond the confi nes of the nation-state and should be taken into account in devising modes and models of global governance in general and political governance of capitalism

in particular

2 On the political economy of

global capitalism

In his classic study on ‘the economic institutions of capitalism’

Oliver Williamson has suggested regarding the fi rm not just as a

pro-duction unit but more basically as governance structure (Williamson

1985: 13) This idea can be extended to the market and to capitalism

in general In particular, if the frame of reference is not just

transac-tion costs but a broader conceptransac-tion of ‘governance costs’, that is, the

costs of creating and maintaining order in social relations, then

vari-eties of capitalism can be evaluated according to perceived costs and

benefi ts of specifi c governance modes In practice, such an

evalua-tion presupposes criteria of ‘good governance’ and an analysis of the

core components of the various governance regimes

The legitimacy of capitalism hinges on its capability of being seen

to be embedded in democracy For this reason Chinese capitalism

may be successful but it is in no way legitimate Varieties of

capital-ism diff er in their propensity to accept public scrutiny of private

transactions as soon as there is an imbrication of public and private

components of economic aff airs In this chapter we will look at some

dimensions of this convergence of private and public aspects which

sustain the need for reconfi guring the governance of capitalism

A comparative institutional assessment of varieties of capitalism

of course cannot be done here Instead, we will focus on a few of

the hinges which connect capitalism and democracy as governance

modes of complex functional subsystems of society A kind of

guide-line will be the ongoing global crisis since it exhibits major

conse-quences of an unhinging of a territorially defi ned democracy and a

globally performing capitalist economy The most salient problem

arenas connecting capitalism and democracy are (1) the defi nition of

public goods, (2) the relation between public and private authority,

(3) the enforcement of private accountability, and (4) the emergence

of systemic risk

Without proper and reliable contextual conditioning and

regulatory frameworks, global capitalism tends to act out its internal

dynamics, morphing, we will argue, into a systemic risk itself

2.1 PUBLIC AND PRIVATE GOODS

The distinction between private and public goods, already alluded

to by Adam Smith and mainly elaborated by Paul Samuelson

(Samuelson 1954) has expanded into a broad array of diff erent kinds

of goods: private and public goods, pure public goods, impure public

goods, common goods, club goods, complementary goods, mixed

goods and other variants While these distinctions are helpful in

pro-viding categories for diff erentiating production modes, cost-benefi t

relations, exclusion and inclusion in consumption forms and so on,

in practice the borderlines between the various types increasingly

have become blurred and superseded by issues of governance and

regulation

Samuelson’s formal criteria for defi ning public goods have been

jointness in consumption (non-rival consumption) and

nonexclud-ability from consumption (if the good is there, like clean air or public

security, then nobody can be excluded from consuming it) The most

important eff ect of separating public and private goods has been to

reinforce the received view that public goods ought to be produced

or provided by public institutions, that is, by governments It is not

the distinction between public and private goods that is the problem,

we contend, but the almost automatic coupling of public goods with

public production/provision of these goods Randall Holcombe

succinctly states two counter-arguments:

First, many public goods are successfully produced in the private sector,

so government production is not necessary Second, many of the goods

government actually does produce do not correspond to the economist’s

defi nition of public good, so the theory does a poor job of explaining the

government’s actual role in the economy (Holcombe 1997: 1)

Since this book’s topic is governments’ (and other institutions’)

role in the economy in general and in governing capitalism in

par-ticular, the consequences of distinguishing private and public goods

are highly pertinent

Any variety of capitalism, even market fundamentalism, has to

accept that it is the polity which decides on types and scopes of public

On the political economy of global capitalism 13

goods It is, therefore, politics which defi nes the limits of all other

arenas of society Malkin and Wildavsky have concluded from this

argument that any good can be considered a public good and that all

public goods ‘are public because and only because society chooses

to put the goods in the public sector instead of the private sector’

(Malkin and Wildavsky 1991: 355) The institutional prerogative

of politics derives from the competence-competence of politics,

although even this principle is moderated by the complementary

principle of subsidiarity

So, in actual fact a debate is going on about defi ning the limits of

public goods in favor of privatization, and the limits of privatization

in favor of public responsibilities The period after World War II

until the dissolution of the Bretton Woods agreements in the 1970s

has seen a dominant role of politics in rebuilding, supporting and

governing the economy (‘Golden Age of Keynes’) This

conspicu-ous role for polities in setting rules and limits to economic

activi-ties has been gradually dissolved with the advent of ‘liberalization’

of markets during the 1980s: ‘Since then the political climate has

fostered deregulation, with politicians supporting light-touch rules

and assembling meta-governance systems that assess performance

of regulators in terms of business interests rather than those of the

consumer’ (Hutter and Dodd 2008: 4)

The historical evidence is sustaining the point that the

distinc-tion between public and private goods is misleading insofar as it

presumes that public goods are to be provided by governments In

theory and in practice, private markets can produce public goods

and conversely, governments can decide to retreat from the

pro-duction of public goods and leave their propro-duction to private and

deregulated markets In our context the crucial point appears to

be that the diff erence between public and private goods is mostly

irrelevant for the government’s role in the economy and its

deci-sions to intervene in economic aff airs For example, the production

of the public good ‘computer software’ (Holcombe 1997: 7 f.) may

take place without any government intervention at all, whereas the

production of a ‘hamburger’ – plainly a private good as private can

be – is regulated by some hundreds of legal provisions, rules and

specifi cs from hygiene to nutritional standards, making it a heavily

publicly supervised good

On the other hand, a few services and provisions, for example

railway infrastructure or public safety, should be considered public

not just by defi nition but by the very nature of economic activities

which may be ruined by competition: ‘the paradox of public

trans-port, of course, is that the better it does its job, the less “effi cient” it

may be’ (Judt 2009: 9)

The democratic interfaces of capitalism denote those elements of

capitalism which connect capitalism as economic governance mode

with democracy as political governance mode Classical items are

the institution of property, the right to engage in contracts,

enforce-ment of contracts, and the public provision of legal security for every

citizen More sophisticated items, based on the classical ones, are

those components of capitalism which can be classifi ed as

precondi-tions for a democratic, that is, egalitarian and non-discriminatory

variety of capitalism Here, we are entering opaque and contested

ground Obviously, the criteria of equality and non-discrimination

must be limited to the conditions of entering economic activities,

while the results of economic activities may vary considerably But

then, grossly diff erent outcomes resulting in grossly diff erent leverage

and economic power may infl uence the conditions for building and

managing fi rms, the conditions to shape market conditions and

con-tractual relations If this argument is taken seriously, then the

institu-tions of freedom of property, freedom of contract and legal security

need to be elaborated for the case of modern, global capitalism

The institution of private property arguably is the core democratic

institution of capitalism since it provides at least a minimal level

playing fi eld: everyone is entitled to possess private property The

fact that even China has elevated this entitlement to the rank of a

constitutional right shows the two sides of property On the one

hand it is indeed the core precondition for a capitalist organization

of economies and markets, so even China has to formally guarantee

private property if it wants to take advantage of the dynamics and

entrepreneurship propelled by a capitalist mode of economy On

the other hand economic practice and political reality of private

property may vary immensely; they are even compatible with factual

political despotism

For modern Western democracies the perennial problems with

property have become acute with the ongoing global crisis One

problem is particularly salient: the problem of defi ning the limits

and responsibilities of private property The German constitution,

for example, explicitly states a ‘social obligation’ of private

prop-erty, whereas the idea of market fundamentalism would mark the

On the political economy of global capitalism 15

opposite end of a dimension reaching from unlimited freedom to

socially bounded responsibility A somewhat strange interpretation

of ‘social obligation’ is given by a group of American billionaires

who have amassed vast fortunes within the rules of a quite

unre-stricted market capitalism, and in 2010 decided to give away half of

their wealth to charitable foundations

The limits of property are closely related to an incursion of

public-good aspects in the scope and uses of private property If

ordre publique is a public good, and if a democratic public order

implies excluding illegitimate uses of power in private aff airs and the

illegitimate infl uencing of political decision-making, then massive

amounts and concentrations of private property obviously pose a

grave problem From the Fugger banking dynasty in the 15th and

16th centuries or the 19th-century US oil barons’ immense fortunes

and equally immense infl uence on politics to Berlusconi’s abuse of

private media power for public purposes there is no dearth of cases

to illustrate the potential of private property to jeopardize public

goods

The democratic interfaces of capitalism have become more

rel-evant and more acute with the unfolding of a global economic crisis

which has reinforced the nation-state’s role as lender and guarantor

of last resort In democracies this pits private/corporate failures and

profi ts against collective responsibilities and losses – presumably an

inequitable distribution of costs and benefi ts The crisis also

juxta-poses the limited reach and regulatory power of the nation-states

against an economy with global impact and with plenty of options

for its fi rms to choose a more amenable environment if the economic

policies of a nation-state become too burdensome In spite of the

obvious limitations of the nation-states, political actors, including

parts of the electorate and mass media, indulge in recurrent ‘cyclic

dreams of a strong state’ (Hofmann 2008), virtually disregarding the

massive consequences of globalization

The task at hand appears to be to defi ne a new balance between

public and private goods which refl ects the markets’ powers of

self-organization and self-governance on the one hand and the demands

of public reason and public responsibilities on the other The

pre-ceding decades of globalization in general and the ongoing crisis in

particular have taught a sobering lesson: There are quite a few areas

where privatization has done no harm or has even been benefi cial for

customers (telecommunication, postal services, energy, trains and

so on); a few areas such as air traffi c safety or transportation

infra-structure have had mixed results; but there is no ground for

categori-cal either-or dichotomies It mostly remains a question of politicategori-cal

decision and practical feasibility whether a domain that used to be

defi ned as a public good should be privatized or not Cases of market

failure abound as do cases of state failure, so there is little reason to

set up either-or principles

The fi nancial and economic crisis of 2007 ff has seen an

unprec-edented scope of fi nancial losses and economic value destruction

in the region of some nine trillion dollars, millions of people losing

their houses, their pensions or their savings, and thousands of fi rms

being driven into bankruptcy The total cost incurred by the global

fi nancial crisis is estimated by the IMF at $11.9 trillion, while

esti-mates of global bank losses currently stand at $3.4 trillion (Evans,

Jones and Steven 2009: 14) At the same time many of the actors

involved in sustaining and deepening the crisis – that is, managers

of banks, mortgage banks, hedge funds, private equity and so on –

have claimed pay and bonuses in the multi-million-dollar range even

during the crisis The apparent imbalance has engendered furious

protests (e.g ‘Occupy Wall Street’) and calls on governments and

‘the state’ to limit managers’ pay and to curb bonuses, to control the

activities of fi nancial institutions, and even to nationalize some

par-ticularly important or ‘systemically relevant’ fi nancial and economic

corporations In this way, the crisis has reopened a Pandora’s box of

questions about the limits of private property, particularly property

and property rights embodied in private fi rms

The trouble with most of the suggested reforms and measures is

that ‘the state’, that is, the ensemble of public institutions, is in no

way better equipped and more knowledgeable to manage economic

and fi nancial aff airs than private corporations State failures are as

likely as market failures and indeed many of the banks and

institu-tions involved in the crisis are public or semi-public organizainstitu-tions,

for example the German State banks or the American mortgage

agencies Fannie Mae and Freddy Mac (the latter being private fi rms

which because of their history and record have enjoyed quasi-public

status)

Doubts about any innate superiority of public control or

manage-ment extend to modes of regulation After the end of the Bretton

Woods era the massive public control of fi nancial aff airs through law

– normative regulation – gradually has been replaced by self-control,

On the political economy of global capitalism 17

self-regulation and a ‘principles-based’ form of public supervision

The global fi nancial crisis has put into question almost all received

approaches and convictions about governing global fi nance and

modes of regulation (Singer 2007) Doubt also extends to the model

of principles-based regulation:

Only last year the advocates of principles-based regulation were on the

ascendant A year later, people are asking whether the failure of

regula-tors, notably the UK Financial Services Authority, to prevent the credit

argu-ment is that the US Securities and Exchange Commission with its highly

rules-based approach was equally unable to prevent the crisis that has

led to the death of the US investment banks that it supervised (Black

2008: 8)

Consequently, the global crisis should not be used as an

argu-ment for or against any applied model of regulation since all actual

models have failed to prevent the crisis – for whatever reasons in

detail Presumably the crisis is not the fault of one of these models

but rather it has been precipitated by a confl uence of multiple factors

including loose monetary policies, overextended credit creation,

fail-ures of credit rating agencies, auditors, mortgage banks and

mort-gage brokers, and insouciant risk-taking by investment banks and

general banks If there is a lesson to be learnt at this stage of refl

ect-ing on the crisis, then it reinforces the idea that neither the market

alone nor any formal state authority in itself is able to establish the

kind of complex and sophisticated regulatory framework necessary

to cope with the opacity, volatility and non-knowledge prevalent in

the operational set-up of global fi nance The lesson means that

polit-ical governance of capitalism must not be misunderstood as simply

shifting regulatory powers from markets to governments

Strong indications to reject a simple dichotomous separation

of public and private goods, including their modes of production/

provision, can be found in many areas beyond fi nancial regulation

Prominent and debated cases are ‘global public goods’ such as global

health (prevention of pandemics), universal primary education,

global climate change, global environmental quality, global supply

of water or fair global trading and exchange (preventing corruption

and other detriments to fair exchange) (Kaul et al 2003; Zedillo and

Thiam 2006) All these cases, and probably many more, demand a

close interplay and cooperation between private and public agents

in a very specifi c sense: There is no choice whether the good can or

should be provided by private or public organizations Instead, the

pertaining goods can and will only be provided if there is serious

cooperation between both sides

A third category of goods, therefore, seems to be more relevant

We have called this type of goods ‘collateral goods’ (Willke 1997:

200 ff ) because these goods cannot be provided by the market nor

by the state alone but only through collaboration of both sides The

invention of ‘public-private partnerships’ (PPPs) corresponds to the

need for the state to involve private organizations in instances where

political actors would like to provide a good but lack the expertise or

access or venues to do so The more specifi c goods, including public

or semi-public goods, are knowledge-based and comprise highly

sophisticated imbedded intelligence and proprietary knowledge

pro-tected by property rights, the more is there a need for public and

private organizations and actors to collaborate

An interesting case in point is international development aid

policies and programs In most developed countries international

development aid is still considered a public obligation However,

ministries and other public institutions increasingly lack not only

access and legitimacy to manage foreign aid, above all they lack the

relevant expertise to accomplish anything In practice, foreign aid is

delivered by private organizations – in Germany for example by the

GTZ (now GIZ) – with close relations to public institutions on the

one hand and with close relations to NGOs and private experts on

the other

Another example would be the ‘health’ or soundness of the global

fi nancial system The system’s validity contains a strong element

of public good – as the global crisis demonstrates – since the ‘real’

economy and with it real fi rms and real jobs depend strongly and

directly on the fi nancial system’s ability to supply liquidity and to

sustain trust in venturing new economic activities Even if there was

a global fi nancial regulator or even if the major fi nancial nations

were able to agree on common rules for fi nancial stability, these

goals could not be achieved without substantial support and

com-mitment of private fi nancial corporations Global fi nance is too

important and too consequential to be left to private organizations,

and it is too complex and sophisticated to be managed by public

institutions Both sides need to cooperate and co-produce in order to

achieve a suffi ciently resilient fi nancial system

On the political economy of global capitalism 19

The gist of the argument of this section translates into a basic

rule for governing global capitalism: Neither market

fundamental-ism nor a ‘strong state’ can be considered viable guidelines Instead,

a useful governance regime needs to feature a ‘requisite variety’

(Ashby 1958) of provisions combining public and private concerns

All simple or pure forms of governance are inadequate in the face of

the complexities involved

2.2 PUBLIC AND PRIVATE AUTHORITY

For classical democratic theory the notion of ‘private authority’

would be a contradiction in terms since authority is defi ned as the

legitimate exercise of public power However, there are other forms

of authority, which are not necessarily public ones

The market and its players compose one important arena of

private authority Market governance, Oliver Williamson maintains,

‘is the main governance structure for nonspecifi c transactions of

both occasional and recurrent contracting’ (Williamson 1985: 73)

The authority of the market results from its capacity to regulate vast

constellations of spontaneous transactions (‘occasional contracting’)

as well as large arrays of interrelated contractual relations (‘recurrent

contracting’) It exhibits emergent properties that create – within the

space of the market – common welfare in spite of individual egotistic

behavior It creates order from fl uctuations by coordinating

mul-tiple instances of dispersed knowledge (Hayek 1945) It maintains

– within the space of the market – supreme equality among market

participants, disregarding race, sex, age, religion, beauty, even

nationality, by responding only to variations of demand and supply

as refl ected in price movements

It goes without saying that not everybody can be a market

partici-pant in every respect and under all circumstances On the contrary,

as a rule, market entrance and market power are distributed highly

diff erentially What are and what should be the rules for market

par-ticipation and what transaction modalities should be superimposed

on the market mechanism to constitute a market regime (as one form

of a governance regime) are questions to be answered by political

decisions and not by the market as a mechanism of self-organizing

exchange relations Within the highly ordered governance regimes

of democratic nation-states these transaction modalities are set by

the legislative body, and their practice is controlled by the judicial

branch of government

If there is a body coming close to a global law-maker for the

global economy, then it is the WTO Without going into details,

it is worth noting that a global market regime, as any governance

regime, requires at least three diff erent subsets or levels of

coordi-native arrangements: (1) a mechanism to organize exchange

rela-tions – this is the market mechanism proper; (2) a superstructure to

defi ne the transaction modalities which rule or frame the exchange

mechanism – this is the regulatory framework which enables the

market to operate as a market; and (3) an infrastructure

provid-ing the means and technologies of communication that sustain

and power the exchange mechanism – in the case of a market

regime this is the communication technologies involved in signaling

demand and supply, prices and price movements and the various

technologies of money – money being the communicative medium

of the economy

The WTO is the institution providing the suprastructure for the

global market regime (Suprastructure here means the modes, the

regimes and the components of governance of a complex and viable

politico-economic system The term, therefore, is not equivalent to

the Marxian term ‘superstructure’.) It is not the only one but

decid-edly the most important one Although the institution was created

(as a successor to GATT) by a treaty among nation-states in 1995

and at present comprises more than 150 members, it is on its way

to developing an operative logic and an identity of its own as a

rule-making body which monitors and enforces standards, rules and

regulations concerning international trade It is also on its way to

producing a sort of legitimacy of its own, a procedural legitimacy,

particularly through the procedures of its dispute settlement

accord-ing to the ‘dispute settlement understandaccord-ing’ (DSU) (Stiles 1995)

and an increasing relevance of its monitoring and research functions

(Deere-Birkbeck 2009: 19 ff )

Through globalization the constellation and distribution of centers

of authority have changed considerably In essence, the rise of civil

society in modern democracies and in transnational agenda-setting

has instituted new forms of private authority which derive their

legitimacy and authority from new forms of participation,

involve-ment and expertise Public policy networks and transnational

advo-cacy networks are defi ning and framing issues which become public

On the political economy of global capitalism 21

concerns by way of inducing and convincing public institutions to

take up the issue Complementarily, however, ‘privatised activities

will be driven into a new politicisation’ (Teubner 2008: 3)

Claire Cutler has further clarifi ed important aspects of private

authority She uses the term ‘private authority’ in the sense of

authority exercised by a transnational cooperation of private

organi-zations and other actors in the areas of rule-making, arbitration,

dispute settlement, standards-setting, and organization of societal

sectors For standard political theory the surprising aspect of private

authority lies in the assertion that ‘the cooperation among fi rms is

either given legitimacy by governments or legitimacy is acquired

through the special expertise or historical role of the private sector

participants’ (Cutler, Haufl er and Porter 1999: 3) This argument

highlights a close relationship between the diff usion of authority (in

hybrid forms of public and private authority) on the one hand and a

complementary diff usion of legitimacy on the other

Indeed, the argument shows that the constituent elements of

democratic governance interact closely, are mutually dependent

and – in the optimal case – reinforce each other Private

author-ity, therefore, is a building block for sustaining the production of

collateral goods in cases where the resources of public institutions

are non-existent or insuffi cient to handle the problem This, in turn,

brings up the question of accountability of the involved private

organizations In PPPs private actors participate in setting rules,

implementing programs, providing services and activating

compli-ance – often with considerable impact and reach, considering cases

like development aid agencies and multi-donor programs, the World

Dam Commission, Global Compact, human rights groups including

INGOs such as Amnesty International and international courts such

as the International Criminal Court (ICC) (The ICC, governed by

the Rome Statute, is the fi rst permanent, treaty based, international

criminal court established to try the perpetrators of the most serious

crimes of concern to the international community and thus related to

the global public good of justice.)

Taking ‘global public goods’ seriously means acknowledging the

crucial role of private authority for the simple reason that there is no

global government able to provide the goods Global ‘public’ goods

necessarily are collateral goods, dependent on the participation,

expertise and resources of private actors, organizations, networks,

social movements, foundations and so on, in policy arenas without

a central and viable political institution able to manage the problem

at hand

Tony Porter and others have distinguished four sources of

author-ity beyond traditional democratic institutions:

supranational authority (the migration of policymaking capacity to

international institutions); private authority (involving business

asso-ciations and practices); technical authority (involving scientifi c and

technical expertise) and popular authority (involving the mobilization

of political commitments by non-governmental organizations and social

movements) (Porter 2002: 1)

Of course, these sources of authority are also relevant at national

and sub-national levels At the global level they acquire special

status and importance because they are apt to fi ll the vacuum

gener-ated by missing classical political suprastructures, if they succeed in

evolving into complex hybrid mixtures to create novel modes of

gov-ernance If seen against the backdrop of political democracy, these

novel modes necessarily appear wanting the classical ingredients of

legitimacy From a diff erent perspective, however, they constitute

additional pillars of participation in decision-making by providing

diff erent avenues for deliberative processes and for incorporating

distributed expertise in organizing highly complex and sophisticated

problem arenas

The contribution of forms of private ordering through private

authority primarily lies in providing novel derivative forms of

output-legitimacy Experts and expert organizations participate in

highly complex, demanding and opaque problem arenas when public

authority is insuffi cient or incapable of managing the problem

Combining both modes of authority is not meant to blur the

dis-tinction between public and private authority Rather, it establishes

a third hybrid mode of exercising authority in specifi c cases when

neither private authority nor public authority alone can get the job

done because, basically, private authority lacks power and public

authority lacks expertise Cases of this sort derive from two major

dynamics: globalization (with its diff usion of political/territorial

authority) on the one hand and the emergence of a global knowledge

society (with its diff usion of epistemic/expert authority) on the other

The debate on private authority which is triggered by the

imbri-cations of (classical) government and new forms of governance

highlights a crucial criterion for viable forms within varieties of

On the political economy of global capitalism 23

capitalism As soon as private authority becomes a legitimate form of

authority and thus participates in constituting governance regimes,

its proponents, that is, fi rms and corporations in particular, also

assume responsibilities for the ‘private ordering’ of social systems

This consequence has produced a barrage of – mostly misdirected

– declarations and confessions of ‘corporate social responsibility’

(CSR), corporate ethics, corporate citizenship and other

magnani-mous paper tigers with little practical relevance and meaning besides

window-dressing (Willke and Willke 2007, 2008) Still, the basic idea

of a specifi c ‘corporate responsibility’ is valid if limited to a realistic

view of the ‘sphere of infl uence’ of corporations

This means that corporations remain economic entities and have

no business in becoming political actors The aspect of the

politi-cization of corporations is expressed by the notion of corporate

citizenship (CC) CC indeed insinuates an understanding of the role

of corporations as citizens, implying membership in a territorially

defi ned community, constituting a political legal entity with rights

and duties Since the right to vote is the core privilege of a citizen,

it would be hard to deny this right to corporate citizens Active

par-ticipation in society includes the right to vote and the right to hold

offi ce; it entitles the individual to take part in the process of

collec-tive will formation Matten and Crane clearly see, however, that this

form of citizenship is not suitable for corporations: ‘At fi rst glance,

it is somewhat hard to make sense of something like “corporate

citi-zenship” from this perspective, particularly since social and

politi-cal rights cannot be regarded as an entitlement for a corporation’

(Matten and Crane 2005: 170)

If this principle is accepted then the corporation enacting private

authority still has ways to extend its range of responsibilities beyond

mere economic aff airs Since it is typically embedded in global

networks, production chains or strategic alliances, the (global)

cor-poration has a say in confi guring the rules and principles of these

arrangements Problems of delineating responsibilities and of defi

n-ing duties for corporations arise mainly in delimitn-ing a company’s

‘sphere of infl uence’ Since with globalization the boundaries of a

corporation are no longer coincident with ownership of corporate

capital, it is ‘diffi cult to identify the legal and offi cial reach of the

fi rm – and thus the limits of its responsibilities’ (Haufl er 2010: 107)

It would be futile to make a company responsible for everything

happening on the globe But where exactly begins and ends its

‘sphere of infl uence’, that is, the domain where it is able to infl uence

processes and outcomes? As a rough guide, Klaus Leisinger writes,

‘political, contractual, economic, or geographic proximity to human

rights abuses is an important criterion for determining the sphere

of infl uence’ (Leisinger 2006: 13) But this only shifts the burden of

interpretation from ‘sphere’ to ‘proximity’ The best specifi cation

yet, also favored by the Global Compact, seems to be to focus on

a fi rm’s infl uence on its employees If corporations were willing to

sustain and support their employees in respecting human rights,

being environmentally conscious and defying corruption, that is,

complying for example to the (US) Foreign Corrupt Practices Act of

1977, a major step would be taken in realizing the goal of responsible

corporations (Dine 2008)

This interpretation is consistent with the principle of subsidiarity

and a functionally diff erentiated separation of spheres of infl uence

And it coincides with Michael Walzer’s ‘defense of pluralism’ which

establishes a ‘complex equality’ of diff erent autonomous spheres of

justice (Walzer 1983) that must not be amalgamated into one diff use

and nondescript overarching ‘social responsibility’: ‘There must be

social responsibility at critical points, but we cannot aff ord to

over-use this resource lest we fi nd ourselves with too little of it left when

we need it most’ (Phelps 2009: 8)

In a similar vein a diff erentiation of constituencies along the lines

of subsidiarity and pluralism off ers ways of specifying

responsi-bilities instead of positing utopian demands Corporations have an

organized and contractually legitimate infl uence on their employees

and, therefore, can be held responsible for using this infl uence in

appropriate ways In relation to the nation-state and its institutions,

what is appropriate is defi ned by the law of the land In relation

to other stakeholder groups, e.g customers, local communities or

business partners, additional rules may come into play These rules

cannot derogate or substitute the law but they can supplement the

law and even raise the level of responsibilities or standards according

to the contractual discretion of the parties involved

A second rule for a contemporary mode of political governance

of capitalism follows from this line of argument: The

responsibili-ties of capitalist corporations extend beyond their shareholders into

their ‘sphere of infl uence’ The rule does not make corporations

ubiquitously ‘socially responsible’ nor does it transform them into

corporate citizens Instead, it attaches responsibilities to their core

On the political economy of global capitalism 25

functions (such as manpower management, fi nancing, and relations

with suppliers) whose ‘responsible’ execution is in the corporation’s

own long-term interest, thus establishing a basic reciprocity of action

and responsibility

2.3 PUBLIC AND PRIVATE ACCOUNTABILITY

In a classic view of democracy a single basic line of accountability

connects the government as temporary sovereign and the

elector-ate as ultimelector-ate sovereign: the next election Things become more

complicated with the rise of highly disaggregated and distributed

forms of order, governance and sovereignty Democratic legislative

bodies can act perfectly legitimately but still grossly miss the mark

of accountability if it is measured in a less formal and more

substan-tively demanding manner Being accountable means that agents (a

person, an organization, an institution) are held responsible for their

actions on account of a set of measures or indicators The

interna-tional career of accounting and accountability has gained

momen-tum in the private sector with the need for comparable and common

sets of accounting standards across the board and across the globe

New ideas and forms of accounting can help to alleviate the

defi cits of accountability of many global actors and institutions As

David Held observes, in global governance

cul-ties: the power imbalances among states as well as those between state

and non-state actors in the shaping and making of global public policy

Multilateral bodies need to be fully representative of the states involved

in them, and they are rarely so In addition, there must be arrangements

in place to engage in dialogue and consultation between state and

non-state actors, and these conditions are only partially met in multilateral

decision-making bodies (Held 2004: 369)

Global public policy networks are well positioned to expand the

range of mechanisms for creating accountability Benner et al name

fi ve forms that are particularly important for global governance

net-works (but the forms can be applied generally): accountability via

professionals and peers, via public reputation (‘blame and shame’),

via the market (costs and benefi ts), via fi scal and fi nancial

account-ing and via legal justifi cation (Benner, Reinicke and Witte 2004:

199  f.) All these forms refl ect the insight that an accountability

relationship implies that a formal or informal principal evaluates

the performance of an agent and that the principal ‘has the ability

to impose costs on the agent’ (Keohane 2003: 139) Accountability

derives from accounting, and accounting only makes sense if there

are consequences following from the accounting results The

ques-tion then is who is in a posiques-tion to ‘impose costs’ on an actor or

insti-tution in global governance for failing to fulfi ll their responsibilities

or to meet their obligations

Looking at diff erent kinds of accountability, therefore, means to

bring into play diff erent kinds of resources for imposing costs The

major case for classic democracy, of course, is voting, that is,

estab-lishing the voter as sovereign principal to decide on his/her

govern-ment as his/her agent for political aff airs The voter is in a position

to change the government if the majority of voters so decides In

global contexts the constellation is more complex and

heterogene-ous because the one focal addressee of accountability, a global

government, is non-existent Alternative ways of imposing costs on

incumbent actors and institutions, therefore, are becoming all the

more important

Surprisingly, global policy arenas and their regimes exhibit an

abundance of resources and means of infl uencing decision-making

in the various fi elds Benner et al.’s fi ve forms of accountability

succinctly point to these resources Legal accountability arguably

is the form closest to classical government since law and the legal

system of democracies are subsystems and derivative institutions of

politics Although amazingly many and diverse international,

trans-national and global courts exist, it cannot be said that there is a

specifi c law-making institution for the suprastructures of the global

market economy Instead, a diverse conglomerate of ‘hybrid law’

(Teubner 2002) and ‘soft law’ (Alexander, Dhumale and Eatwell

2006: 10) is emerging to constitute some of the rules and

proce-dures for the global market Global contexts therefore readily lend

themselves to what is called ‘legal pluralism’ in legal theory and

sociology of law

There is no global democratic law-making process Rather a

mul-titude of diff erent rule-making processes are coalescing into a global

hybrid law without a regular primary legitimacy However, there are

many instances of secondary or derivative legitimacies, ranging from

a formal ‘chain of legitimacy’ in the case of international treaties

On the political economy of global capitalism 27

among democratically legitimized parties, to traditional forms of

legal legitimacy as in the case of lex mercatoria (Mertens 1997) or

in the case of approved institutions of arbitration (for example the

International Court of Arbitration of the International Chamber of

Commerce or the London Court of Arbitration)

The New York Convention on the Recognition and Enforcement of

Foreign Arbitral Awards (1958) stipulates that national courts cannot

review the judgments of arbitrators on core issues To give one indication

of the scale of this private governance practice, the Secretariat of the ICC

Court had received 10,000 requests for arbitration by 1998, more than

two-thirds of them since 1976 (Scholte 2004: 35 f.)

This broadening of the base for construing rules and regulations

amounts to what Julia Black calls a ‘decentred understanding of

regulation’ (Black 2002) International courts and global policy

net-works of regulators, judges and other offi cials superimpose elements

of a global law beyond the reach of national governments and thus

create components of a new world order (Slaughter 2004)

In this way new forms of law have become a serious resource for

imposing accountability on actors and institutions in global policy

arenas Conspicuous cases, of course, are people accused of war

crimes and crimes against humankind brought before the ICC at The

Hague In economic aff airs the WTO has instituted a complex

archi-tecture of ‘global law’ regulating important aspects of world trade in

products, services and property rights This rule system also contains

elements of ‘good governance’ for corporations and thus rules for

the governance of capitalism by sustaining rules and principles for

acceptable/recommendable economic behavior of fi rms (Hilf 2001)

Verifying empirically the relevance of these rule systems remains

inherently problematic since we cannot know how many actors/fi rms

conform to the norms because of the norms, while the perpetrators

like Enron, WorldCom, Nick Leeson or Bernard Madoff get all

the attention Judging from the case load and the decisions of the

Dispute Settlement Procedures of the WTO, however, it is safe to say

that the global law of the WTO has a major impact and importance

for providing basic rules and common understandings for governing

the international trade part of global capitalism This leaves much to

be desired but it is a promising beginning, sustaining the hypothesis

that it is not only possible but advantageous for most participants to

establish rules for governing global capitalism

Financial accountability is a somewhat diff erent and less

suc-cessful story On the one hand, Basel II, Basel III and Solvency II

are global (though not universally accepted) frameworks for

safe-guarding the fi nancial solidity of banks and insurance companies by

means of capital requirements, risk assessment and transparency

Regulation is based on instructive discourses between regulators

and regulated instead of trying to enforce rigid norms The

regula-tory models of Basel II or Solvency II establish a cognitive mode of

public supervision of private activities in which the risk models and

internal control frameworks of fi nancial corporations are evaluated

by means of equally sophisticated ratings and risk models of the

reg-ulators (Sinclair 2005; Strulik and Willke 2006) On the other hand

the (US) Sarbanes-Oxley Act, for example, is positing a strong

rules-based form of regulating listed fi nancial institutions, promising a

mode of fi nancial accountability the law cannot provide, because in

the language of market-driven fi rms the law leads to formal obliging

instead of substantial adherence

Even the highly sophisticated and sensible rules of Basel II have

proven to work in a pro-cyclical way during the ongoing fi nancial

crisis (Lall 2009) The reason for this is an aspect of accounting

regarding the value of assets The currently dominant model of

‘fair value’ accounting is referring to current market prices of assets

instead of some kind of original or conventional price that is

deter-mined on the basis of an estimate of its intrinsic or underlying value

Fair value or mark-to-market price means to determine the value

of an asset on the basis of its currently traded market price The

problem with ‘fair value’ appears to be that this method of

account-ing tends to accelerate downward spirals in asset prices, exacerbataccount-ing

the loss of confi dence in a crisis:

Critics have drawn attention to the pro-cyclicality of marking banking

assets to volatile and less-than-liquid market prices and, in reply,

defend-ers of fair value accounting have argued against shooting the harbinger

of bad news While fair value accounting has exposed poor pension

schemes, on other settings it may hinder negotiations, fail to give

breath-ing space to distressed institutions and is highly destabilizbreath-ing (Power

2008: 10 f.)

Apart from these critical aspects, fi nancial accountability is

remain-ing a major instrument to secure fi nancially responsible behavior

of organizations in general and fi nancial fi rms in particular Note,

On the political economy of global capitalism 29

however, the limited scope of the responsibility involved It pertains

to shareholders and investors (in a broad sense) whose return on

investment is directly related to the fi nancial performance of the

fi rm Excluded are all other stakeholders, mainly the organizations’

employees, customers, ecological environment or their partners in

(possibly global) production chains who have an indirect interest

in the fi rm but are not fi nancially engaged Any reduction of the

responsibilities of fi rms to an imperative shareholder value principle

indeed is ‘the dumbest idea in the world’ (Chuck Welch) The

ques-tion, then, is why too many fi rms have subscribed to the shareholder

value principle for such a long time – and in many cases still do

The third kind of accountability – market accountability – may

give an answer to that question In some respects the market is

the most inexorable accountant Given competition and limited

resources, the market, like evolution, will eliminate ineffi cient fi rms,

which conforms to Schumpeter’s principle of creative destruction

This kind of accountability puts serious pressure on all organizations

and their management to meet the criterion of the market: prosper

or perish However, market pressure may convert into short-sighted

decisions, for example to restrict attention and goals to increase

shareholder value in the short run and neglect mid-term or even

long-term considerations

A diff erent kind of market accountability comes into play when

market participants, above all consumers/customers/clients exercise

their market power Highlights of this kind of response and pressure

have been consumer boycotts of fi rms supporting South Africa’s

Apartheid regime, actually forcing the demise of the regime in 1994,

or Shell being forced to reverse its decision to sink the oil-platform

Brent Spar in 1995 after violent consumer boycotts, or the present

boycotts of fi rms producing and selling genetically modifi ed food

As it turns out, market accountability can be a very ambivalent

form of enforcing responsibility of fi rms or other organizations,

depending on the range of responsibility in question Here, the

fourth type of accountability, reputational accountability, may be

useful in advocating a broader perspective and correcting

short-sighted variants of market responses Public reputation of actors and

all kinds of organizations, including corporations, NGOs,

founda-tions, research institutes and so on, and even including governments,

appears to become more important and infl uential with the growth

of global communication media, above all the Internet, mobile

phone networks and global TV coverage Robert Keohane indeed

maintains that ‘fi nally, the most general form of accountability in

world politics is reputational’ (Keohane 2003: 150) Probably, this

is an exaggeration, considering the negligible eff ect of a glaring lack

of reputation in world opinion on two George W Bush

administra-tions or the zero eff ect of the EU’s Lisbon agenda of 2000, aimed

at making the European Union the most competitive economy in

the world and achieving full employment by 2010, while promising

some ‘blaming and shaming’ of governments which do not support

suffi ciently the high fl ying goals of the declaration

Still, reputational capital and reputational accountability are

becoming major forces in emerging governance regimes of global

capitalism Complexity and knowledge-intensity of products and

services are the main causes for the growing importance of

reputa-tion as a basis for trust The less people (consumers, customers, users,

clients, patients and so on) are able to judge the quality or value of

a good on their own, the more will they rely on the reputation of

the fi rms providing the goods The more complicated, sophisticated

and complex goods such as computers, software, mobile phones and

cars are becoming (not to speak of services like education, health,

consulting, coaching, wellness, fashion, architecture, cultural events,

gastronomy and travel), the less are ‘ordinary’ people able to

distin-guish valuable goods from ‘lemons’, and the more they are inclined

to refer to the reputation of the organization providing the services

Cracks in the armor of reputation, therefore, do matter, making

rep-utational accountability a powerful weapon of aff ected or concerned

people for infl uencing corporate decision-making

Finally, professional accountability refers to ‘deontologies’, that

is, rules of professional conduct, responsibility and correctness

Professions, that is, professional associations, groups of ‘concerned

professionals’, business communities or communities of practice,

develop codes of conduct and ethical principles (for example for

doctors, scientists, therapists, consultants and accountants) which

specify their duties, often beyond the provisions of law The main

purpose of deontologies is to foster reputation in areas where the

consumers/clients usually are not in a position to judge the

profes-sional quality of the services provided Deontologies also serve to

protect a profession from outsiders and to prevent formal legal

regulation of details

Advanced industrial societies are making fi rst steps in an ongoing

On the political economy of global capitalism 31

transformation into knowledge societies (Willke 2007) Knowledge

societies depend on clear indications of reputation as a simplifying

mechanism for evaluating degrees of professionalism and rankings

of qualities, since ever more people know less about more topics and

therefore need to rely on trust Rating agencies (RAs) are a

reveal-ing case in point Within just a few years they have been recast from

‘the new masters of capital’ (Sinclair 2005) to the major villains of

the fi nancial universe For some 100 years RAs, and in particular

the reigning duopoly of Moody’s Investors Service and Standard

& Poor’s Ratings Group (S&P) – have patiently amassed the only

and crucial resource of a rating agency, that is, reputation based

on highly skilled expertise They have worked hard at creating their

reputation for impartiality and they have profi ted from the fact that

reputation ‘cannot be bought off the shelf Instead, the reputation

of Moody’s and S&P has been constructed over time through a

combination of serving a need by off ering to solve the information

problem between buyers and sellers, and by providing that

informa-tion in a reliable way, thus generating epistemic authority’ (Sinclair

2006: 115)

The pervasive hype of the credit bubble (involving in particular

‘collateralized debt obligations’ or CDOs, over-the-counter

transac-tions and an ensuing shadow banking system, subprime mortgages,

and structured derivatives and other ‘toxic’ products) has misled the

RAs to risk their reputation in dubious procedures and actually lose

their reputation as impartial authorities in evaluating fi nancial risks:

Rating agencies’ triple-A gradings concealed rather than conveyed

risks By advising banks on how to securitize assets, the agencies

co-manufactured “toxic” products ‘and were not in a position to

independently assess them for safety’ (Demortain 2008: 15) Indeed

the agencies risked obvious confl icts of interest in order to

partici-pate in and profi t from the gold rush of the credit bubble (Financial

Stability Forum 2008: 32 ff ; Stiglitz 2009a: 3 f.) The rating agencies

that were supposed to fi gure out the risk for buyers of securities

‘were waist-deep in confl icts of interest Moody’s and Standard and

Poor’s were paid by the same institutions whose securities they were

supposed to be judging’ (Solow 2009: 3) ‘The credit rating agencies

occupy a special place in our fi nancial markets The rating agencies

failed this bond of trust’ (Waxman 2008)

The example shows how long it may take to build reputation,

and how fast it can be lost The asymmetry makes reputational

accountability a preferential means of governing highly complex and

opaque policy fi elds Reputation includes a measure of trust which

‘ordinary’ people without inside knowledge or expertise are

assign-ing to professionals and their organizations In the fi nancial fi eld,

trust, trustworthiness and creditworthiness are tightly connected

Therefore, the reputation of fi nancial fi rms is of paramount relevance

for their ability to engage effi ciently in fi nancial aff airs The ongoing

crisis has provided evidence enough The ‘credit crunch’-part of the

crisis has resulted from a breakdown of reputation spreading from

a few failing fi nancial institutions (such as Lehman Brothers, Bear

Stearns, JP Morgan, Northern Rock or AIG) to virtually the entire

banking system, preventing banks from giving each other credit in

inter-bank-lending

The global fi nancial and economic crisis ravaged most of the

optimism expressed in accounts of private accountability The hype

about private accountability and the nation-states’ all too obvious

readiness to mitigate their own public accountability for (globalized)

economic and fi nancial aff airs have coalesced into a maze of

opaque-ness and mutual blaming Now, after the bursting of the fi nancial

bubble, it appears to be the nation-states’ task to clean up the mess

In the aftermath of the crisis it is imperative to consider a new

con-fi guration for combining public and private accountability or, at

least, to add new elements to a system of combined accountability

Obviously, fi nancial transactions, models and instruments have

become so sophisticated and complex that there are very few experts

who foresee their consequences The invention and use of CDOs is

an infamous case in point The original intent of using CDOs was

to spread risks across fi rms, markets and regions: ‘When the JP

Morgan team had created its original, prototype CDO deals, they

had bundled up loans from a well-diversifi ed pool of companies,

spe-cifi cally to minimize the chance of widespread defaults’ (Tett 2009)

One of the ideas of CDOs was to specify ‘super-senior’ slices of risk

which were supposed never to default However, within ten years

of practice this turned out to be erroneous ‘As a result, few of the

bankers outside the CDOs team knew how the operation worked

“Perhaps there were a dozen people in the bank [CitiBank] who

really understood all this before – I doubt it was more”, one senior

Citi manager recalled bitterly’ (Tett 2009)

If fi nancial experts do not understand the most sophisticated

instruments, then it is safe to assume that regulators understand