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July 26, 2012 2:00 PM A Short Note on Labor and Business Power

By Henry Farrell

A short note on something I’d like to have time to write about at further length someday. There’s a common perception among US lefties that Northern European states like Germany are (or at least were, until recently) the land of milk, honey, and organized capitalism. But actual European social democrats have more complicated feelings about organized capitalism than most of their American counterparts. Helen Callaghan and Martin Höpner have an interesting recent paper on this topic. As they point out, German social democrats used once upon a time to be in favor of organized capitalism, comfortable monopolies and so on. But then – Hitler!

Organized capitalism appears conducive to leftist aims as long as the focus is on its contribution to economic coordination, and this explains the supportive attitudes of the German left up to the early 1930s. However, besides economic coordination, organized capitalism also affects political organization, as German labor leaders learnt painfully during the Nazi period. The radical reversal of attitudes after World War 2 reflects updated beliefs regarding the political consequences of organized capitalism, and the greater weight assigned to political over economic considerations. … Far from being a fleeting phenomenon, Leftist support for competition policy and market-enhancing corporate governance reforms has characterized German party politics throughout the post-war period. … During the “seven-year cartel battle” that led to the toothless competition law of 1957, the SPD supported the liberal ideas of chancellor Ludwig Erhard (CDU), unlike the majority of CDU/CSU representatives. … The joint-stock law reform of 1965, which ended up smaller than intended, featured a similar constellation. … Passage of a company network dissolution act that would have limited bank shareholdering in industrial companies was only prevented by the SPD’s removal from office in 1982. In 1998, during debates over the Control and Transparency Act introduced by Helmut Kohl’s CDU/CSU/FDP coalition, Social Democrats emerged as more favorable to radical corporate governance reforms than the Christian Democrats …. In 2001, during negotiations on the Takeover Act, the SPD turned down CDU demands to strengthen managerial defenses against hostile takeovers.

The logic here is pretty straightforward. Social democrats would like an organized economy in the best of all possible worlds. However, the more organized the economy is in actually existing capitalism, the more political power accrues to big industrialists, and the more likely it is that they will use that power in the political realm in ways that disadvantage labour. Hence, the question of whether or not to favor an organized economy is an empirical one, and under many circumstances, leftists can be vehemently, and entirely consistently, in favor of market competition (albeit for political as well as/instead of economic efficiency reasons).

While I don’t have time to write much on this today, it’s relevant in the US as well as the EU context. Karl Bode has an interesting piece in Ars Technica on Verizon’s cable strategy.

Back in April, you may recall that Verizon stopped selling standalone DSL, taking us back to the stone age of broadband when users were forced to bundle a costly landline they might no longer want. … Verizon has numerous reasons for wanting its DSL services to die off, including the fact that newer LTE technology is cheaper to deploy in rural areas and easier to keep upgraded. But one of the driving forces is that Verizon is eager to eliminate unions from the equation, given that Verizon Wireless is non-union. None of this is theory; in fact, it has been made very clear by Verizon executives. … It’s all an ingenious play by Verizon, though it will have a massive competitive and connectivity impact on the US broadband market that will be studied for decades. What’s most amazing is that nobody (analysts, regulators, or the press) seems to have really noticed what Verizon is up to: turning a massive swath of the country from a marginally competitive duopoly with union labor into an even less competitive and more expensive cable and telco non-unionized cooperative monopoly.

I’m not an expert on telcos, so can’t speak to the accuracy of this analysis. But if it’s right, it suggests a roughly similar logic. Labour unions prefer, ceteris paribus, to deal with large well-established incumbents than a congeries of smaller firms. The organizing costs are lower, and incumbents are more likely to have profits that they are prepared to share in order to guarantee predictability. However, once firms start getting too big, they may be too powerful, in terms both of political and economic clout, for unions to bring to the negotiating table. They can furthermore redefine the market (as Verizon is plausibly doing) in ways that weaken unions and make it harder to organize. This makes me think that there’s more scope for a genuinely left-wing anti-monopoly movement (especially in sectors such as telecommunications, which are vulnerable to regulatory capture) than common perceptions would suggest. I’d really want to re-read JK Galbraith’s work to think this through properly. But since I’m crashing on a couple of deadlines, I’ll leave it for commenters to thresh out …



[Cross-posted at Crooked Timber ]

Henry Farrell is an associate professor of political science and international affairs at George Washington University.