An economic culture of trust:
Germanys contribution to a European strategy
by Werner Abelshauser, in: Mitbestimmung. Das Magazin der Hans-Böckler-Stiftung 8/2004, S. 48-51.
Germanys social system of production has
been the target of escalating criticism and has had to endure a painful
examination of its sustainability. Doubts have
centered on the specifically German principles underlying the
organization of the economy. Persistent mass unemployment since
the 1980s has led to more and more frequent claims that the German
production regime is incapable of adapting to new, innovative product
markets, for which globalization is said to require highly flexible
entrepreneurial decision-making processes. Although faith in the
economic and social superiority of the Rhenish model of
capitalism (Michel Albert) prevailed in the public discussion
just ten years ago, and still does among many experts today, mounting
skepticism prompted speculation about the possible necessity of
retreat, given the political, media-related, and cultural
influences of its American competitor. The clash
between American culture and Europes leading culture, the German
way of doing business, entered a new stage.
Dissatisfaction with the system of industrial relations, whose German
flagshipcodetermination, or the right to participate in
controlling shop-floor conditions and management decision-making
is especially intense. Codetermination is critisized for preventing
quick decisions by senior management, and with the organization of
businesses at the intercompany level, where excessive coordination by
the associations leads to restraint of competition and overregulation
of the labor market. Dissatisfaction also extends to corporate
governance, which seems to be handicaped by workers participation
at least in large enterprises and in heavy industry. Even where
experts systematically consider the comparative institutional
advantages of different production regimes (e.g., varieties of
capitalism) and not infrequently endorse the German version, the
discussion usually lacks economic analysis.
The judgment on what the German economy benefits from codetermination
vacillates between two oddly indecisive, but by no means contrary,
assessments. The first one emphasizes the irenic function of
codetermination, its calming and mediating influence, which serves
Germanys social system of production in the same manner that a
functioning welfare state does. This view thus manifests at least
fifty years of positive experience with industrial democracy but avoids
a clear statement about its economic value. The second
assessment, often readable between the lines of well-meaning
commentary, amounts to an assertion that codetermination in the waning
industrial age islike the welfare statethreatening to
become obsolete because its core functions are intimately linked with
the industrial economy and will therefore go down with it. This
opinion rests on the basic assumption that the western world stands at
the end of an era whose foundations were laid in the Industrial
Revolution of the late eighteenth century and whose distinctly German
traits have produced a system of industrial governance unique in the
world. These two judgments, if they pertain at all, do not
describe the economic function of codetermination but rather, at best,
one of its most obvious effects.
Codetermination is certainly anchored deep in the peculiarities of the
German path to todays economy, but definitly has more in common with
the German origins of the new economy than with the traditional
patterns of industrialization. In the race to modernism, Germany is
well known to have been one of the stragglers, which had to develop
their own institutions and organizations in the nineteenth
century in order to catch up with the pioneer, Englandor
better, leapfrog ahead of it. Although a legal framework for
workers committees to exercise codetermination rights was first
established in an amendment of the Prussian Mining Law (1905), this
innovation in industrial relations had its breackthrough rather in the
science based New Industries. At that time more than half
of all machine-building companiesone of the New
Industrieshad taken this step, and two thirds of them had rated
the influence of the committees positively. The Weimar Republic
then introduced rights of codetermination at all three levels of
interest intermediation: on the shop floor, with the Works Councils Act
of 1920; at the sectorial level, with the Central Joint
Labor-Management Board of Economic Planning and Regulation (ZAG); and
at the national level, with the Provisional National Economic Council
conceived of in Article 165 of the Weimar constitution. The
contentious situation surrounding each of these achievements
underscored their political character and social mission, at least more
so than they highlighted the necessity of codetermination as a matter
of corporate policy and business economics. In post-1945 occupied
Germany, too, this preeminence of the sociopolitical dimension marked
the British insistence on granting employees equal voice on the
supervisory boards of the iron and steel industry.
Although the importance of stable, cooperative labor relations became
readily apparent to most entrepreneurs during the long 1950s, and
although codetermination was one of the essentials for long-term
productivity gains, growth, and competitiveness, the orthodox liberal
persuasion continued to dominate the economic theory of industrial
relations. Indeed, it still does, with codetermination seen as a
strengthening of bargaining power and, hence, of the unions
monopoly on the market. If a union can behave like the holder of
a monopoly, it will try to maximize the wages of its members, whereas
all the affected company can do is choose the employment level at which
it earns maximum profit. From this perspective, the consequences
are prices rises and misallocations of resources. As long as
codetermination seemed suitable for preserving the precarious balance
of the social question in industrial society, dyed-in-the-wool liberals
were quite able to accept it for the sake of social peace and the
stability that codetermination was evidently able to bring to labor
relations. From this angle, too, however, it follows that the end
of industrial society and the declining importance of material
production mean that codetermination loses sociopolitical
legitimacy. It was created as a means of industrial
stabilization, and as such, its effect seems to reach as far as the
epochal significance of the Industrial Revolution itself, which has
long since ceded its rank to the new paradigm of the Second Economic
Revolution.
Against this backdrop, codeterminations economic value really
boils down to the degree of importance that long-term cooperative labor
relations have in the economic process of value creation, or more
precisely, the level of transaction costs. Such relations are
evident in the way that employees and their interests are
organizationally tied into the company. To ensure that they are,
and to forge cooperative labor relations, employers may be prepared to
pay the employees higher wages than is customary or to give broad
guarantees of job security. Employers thereby enable themselves
to invest in the basic and continued training of their employees.
This investment is a must for increased profits, especially under the
conditions created by the rapid structural shift to the
knowledge society. Reduced fluctuation and
intensified motivation among employees compensate for cost inflation.
Asymmetrical distribution of knowledge on the shop floor is another
attribute of production relations in the knowledge society.
Nonmaterial production and the scientifically grounded qualifications
it requires usually depend on expert knowledge, which is difficult to
replace and whose productive use in the work process is not easy to
control. Optimal performance by an employee with expert knowledge
cannot be formulated in precise contractual terms, nor could such
contracts be cost-effectively monitored and enforce. In short,
the situation is a classical variation of the agency
problem. Management is thus steadily losing its ability to
exercise absolute control over the workplace at somewhat reasonable
cost. And when conflict arises, employees possessing specialized
knowledge can damage the company more than could the classical
industrial worker, who had only generalizedand thus easily
replaceableknowledge. If the Leninist maxim of
Trust is good, control is better applied to the
industrial context, the opposite is true under these new
conditions. Moreover, control is the more expensive option.
As a result, management and employees or their respective
representatives share control over the workplace. Profit-sharing
and codetermination provide for the necessary agreement on the utility
function of principal and agent.
Long-term, stable, and low-conflict labor relations have yet another
meaning, particularly in times of rapid structural change. A high
level of qualification and initiative among the employees gives the
enterprise great incentive to make cost-intensive investment in fixed
assets. They also ensure that these investments can be fully used
and amortized. High fixed costs can thereby be turned into low
unit costs. Investments in new technology raise the productivity
of the company, expanding its share of the market and boosting
profits. Adequate employee participation in these profits
strengthens cooperative labor relations.
This is even more relevant for the postindustrial period. The
swifter the advance of nonmaterial production in the twentieth century,
the steeper the rise in transaction costs and, hence, the greater the
need for institutional regulations and conventions for keeping them
low. To be sure, the spark of the new production methods seldom
leapt from New Industry to the rest of Germanys crisis-ridden
economy, marked as it was by the conditions spawned by the two world
wars and economic chaos. After dynamic beginnings under the
empire, nonmaterial production and the conditions for innovative
productivity did not spread to the economy as a whole. In fact,
during the interwar period they even declined relative to what was
happening elsewhere at the same time, notably in the United
States. The pioneer of the Second Economic
Revolution nevertheless held to its course into the
postindustrial age. Once established, the institutional context
did not change more than incrementally, despite all exogenous
shocks. Nor did codeterminationor better, the principle of
cooperative labor relations within the plant. Much the same was
also true for other forms of cooperative labor beyond the plant level
(e.g., ZAG), though in somewhat milder way. Codetermination in
Germany, quite apart from its organizational manifestation in the
Weimar Republic and its perversion under the Third Reich, belongs to
New Industrys institutional arsenal, which has repeatedly
created new organizational frameworks. Admittedly, the legal and
organizational form that emerged for the principle of codetermination
after 1945 was shaped by the political conditions of the times, but it
was consistent with the economic needs of that period.
At the dawn of the twenty-first century, it is almost a truism that the
value of human capital is measured not only in terms of
its own quantity and quality but primarily in terms of a
societys aptitude for sociability, that is, for
trustful cooperation in the economic process. Without it,
cooperation is feasible only by means of formal rules, regulations, and
coercion. The resulting costs (transaction costs) escalate with
the complexity of the tasks that a national economy must perform in
order to be successful on the market (including the world
market). Practically, mistrust thus has the same effect as a tax
on economic activity. From the outset, the purpose of introducing
codetermination in Germany was to minimize these costs. With the
advent of New Industry in the twentieth century, the capacity for
cooperation only gained importance. This sociability helps
explain why the basic features of the German production regime,
including codetermination, have survived all the political catastrophes
of its era.
The high value attached to the economic culture of trust makes it
understandable why new organizational forms of
codeterminationwhether in the iron, coal, and steel industry or
in the Labor-Management Relations Act of 1952were swiftly
accepted despite their controversial beginning. Above all, it
explains their consolidation and practical development beyond their
original legal setting. The new perspective taken in historical
research sharpens the eye for other impacts as well. The origins
of cooperative institutional arrangementsmore narrowly,
codeterminationdo not lie in the rationale of the bygone
industrial age. They are foundations of New Industry, whose
patterns of nonmaterial productivity are becoming ever more apparent as
old industrys share of employment and value creation through
material production dramatically declines. The economic
value of codetermination and other forms of institutional cooperation
does not stem solely from their irenic and sociopolitical function but
also from what they do to contain and reduce production costs and
transaction costs within complex market and production processes.
Of course, this realization does not compel anyone to cling to the
outmoded organizational forms of codetermination. Appropriate
institutional arrangements can surely be cast in other organizational
molds as well. According to the laws of asset
specificity, however, turning to such alternatives entails
considerable cost. Because institutional change cannot be
planned, success would by no means be guaranteed. There are thus
many reasons for the German model of codetermination to continue
developing along path-dependent linesif the
capacity for cooperation that has accrued over the
preceding 50 years or more is not to be written off completely.
As long as this path corresponds to the overall development of the
social system of production, it will not lead to anachronisms of
industrial society. It will instead ensure purposeful expansion
of the institutional groundwork of New Industry right into the heart of
the New Economy.
