Key Words for Understanding the Germany Economy

We often speak of "capitalism" or "the market" as if they are singular things. We are comfortable talking about how the economy is doing, if "it" is up or down today. And in this globalized world it would seem that it makes little difference if the "it" we refer to is in Berlin or London or New York or Shanghai.

Yet there are huge differences in the varieties of capitalism practiced in these places. Looking beyond the big boards, we find systems wrapped up in their own histories and politics and moral values.

For example,  The Economist recently had an analysis of the huge influence German's distinct system of "ordoliberalism" has had in defining the political economy of post-crisis Europe.

To understand the German form of capitalism, it is helpful to learn a few key words:

Sparpolitik: what we term "austerity," the Germans refer to in a much more positive light as "savings policy," invoking wise stewardship more than miserly witholding. So when the Germans are negotiating with the Greeks these days about getting out of debt, they see Sparpolitik as a value that should be desired as much as an austerity to be endured.

Ordoliberalism: it stumbles over the tongue the way a good German word should. It takes inspiration from the liberalism of the Austrian School in its heyday, with a value on personal liberty and a skepticism of central planning.  That the liberal part.  But the “ordo” part is, as you would suspect, an “ordered” (i.e. regulated) liberalism, largely based on the principles of Mitbestimmung.

Mitbestimmung: ("co-determination") is a system of labor relations that treats labor as stakeholders alongside capital and management; built around "works councils," tiered organizations of employee representatives (blue and white collar) elected by their peers; through works councils labor holds (by law) 50% of corporate supervisory board seats.

Mittelstand businesses, small to medium sized enterprises that are often family or otherwise privately owned, and comprise the export engine of the German economy. Many specialize in high value, high quality engineered products. The Mittlestand have a reputation for honoring a commitment to their employees, embracing the German system of stakeholding and co-determination.

Kurzarbeit ("short work") program provides government subsidies to companies to keep their employees on the payroll but reducing their working hours; in the financial crisis this allowed companies to keep workers, reducing their productivity but allowing them to keep the talent they have built up, to save it for better times.

Solidarität ("Solidarity") is is a value extolled by the political left and right in Germany; the civic virtue that we are all in this together, and that living in a society together requires certain sacrifices for the common good.

Schuld: debt -- and guilt. 

Haftung: liability -- and responsibility

German Works Councils, the UAW, and VW's Stakeholding Culture

Workers at VW's Chattanooga, Tennessee, plant rejected UAW unionization by a vote of 712 to 626, the NY Times reports. This was a blow not only to the union, but to VW management as well. In a stance U.S. auto executives found as foreign as month-long holidays, VW leaders not only did not oppose the organization move, they seemed to welcome it as a way to introduce works councils.

By law and corporate culture, VW takes seriously the German model of "co-determination," with labor treated as stakeholders alongside stockholders. And they have exported this system of labor relations from their home in Wolfsburg to factories around the world.

The practice of co-determination is built around "works councils," tiered organizations of employee representatives (blue and white collar) elected by their peers. At the grassroots level, shop-floor works councils help organize employee schedules and make tweaks in the production line. Two years ago, middle management works councils successfully lobbied VW to have its corporate Blackberry server to stop sending message to employee's devices 30 minutes after their work day ends (and begin again 30 minutes before the next shift).

At the upper level, works council representatives hold half of the seats on the company's supervisory board, which introduces new voices and incentives in boardroom deliberations. VW obviously thinks this approach brings value, as they have implemented the system abroad.

So, with VW supporting the union, how did it lose this crucial vote? Union supporters have pointed out that the vote was much closer than other southern auto plant votes in recent years. And Republican politicians and pro-business groups took an aggressive, to the point of hysterical, public stance against the union (even threatening future expansion of the plant if the UAW won).

In fact, in the quotes I have read, workers are very open to works councils, and see VW as a good employer. The vote, then, should be seen as a commentary by basically satisfied workers on the UAW's confrontational model of labor relations, a perceived affinity for striking over stakeholding.

Paradoxically, U.S. labor laws meant to protect worker rights appear to prohibit the works council model in the absence of a union, thwarting the sort of organization that both labor and management prefer.  

Economic Lessons from Abroad: Workers, Wages, and Inequality

There are many varieties of capitalism, and, given our current travails, we in the U.S. are starting to realize that we may have a lot to learn from other ways of organizing the economy. 

By law, half of the board of directors at German companies are elected by the workers through a system of "works councils." This is a remarkable fact, and introduces all sorts of different incentives into corporate strategy (as compared to a narrow focus on shareholder value).

Adam Davidson, writing in the NY Times Magazine this week, notes the "beneficial constraints" the German system of worker/capital "co-determination" has on manufacturing there.  Similarly, Davidson shows how Harley Davidson has worked with his highly paid and skilled workers to turn around their failing production. He wonders if this would have been possible without experienced union workers.   

(I write about co-determination in my new book, and have blogged about VW's work's councils and their efforts to institute one at their new Chattanooga facility.)    

And it is not just our other OECD countries that have lessons--and cautionary tales--to offer. Levels of income inequality in the U.S. have over the last decades approached the level of developing countries. The Times today reports that middle class consumption is steadily eroding--from hotels to appliances to restaurants, the high-end and the low-end are growing at the expense of the middle. The Harley workers appear to be the exception. This may result in what Alain de Janvry, writing about developing countries, calls a "disarticulated economy," put simply, one in which workers cannot buy what they make, the opposite of the Fordist promise (to pay workers enough to afford the cars they make).       

Brazil in recent years has made great strides in re-articulating its economy, pulling millions into the middle class and stimulating domestic consumption. Perhaps, then, we should look to Brazil as well as to Germany for economic policy ideas.

Distribution of Value in Anglo-American and German Firms (based on Vitols 2004:371)

	Anglo-American (early 1990s)	Germany (early 1990s)	Germany (late 1990s)
labor	62.2%	85.3%	78.4%
credit	23.5%	5.4%	4.3%
government	14.3%	5.2%	6.8%
retained earnings	3.2%	5.2%	7.8%
dividends	15.0%	2.0%	2.8%