Introduction
Based on a timely reassessment of the classic arguments of Weber, Schumpeter, Hayek, Popper, and Parsons, this book reconceptualizes actually-existing capitalism. It proposes capitalism as an impersonal procedural solution to the problems of spontaneously coordinating public institutions that enable durable market-based wealth generation and social order. Few countries have achieved this. A novel contribution of the book is that it identifies a practical sequence of economic and institutional shortcuts to real capitalism.
The book challenges current orthodoxies about varieties of capitalism and relativist recipes for economic growth, and it criticizes culturalist and incrementalist viewpoints in institutional economics. It calls on the social sciences to help in constructing dynamic and prosperous open societies of the twenty-first century by reclaiming older ideas of ‘social economics’. Better and faster solutions will emphasize crisis-induced change, rational leadership, ideological persuasion, institutional engineering, rules-based market freedom, and the universalistic formal-procedural impersonality of optimal regulatory systems.
Chapter 1 - Institutional capitalism
A common fallacy of our time is that because the institutions of the more advanced countries evolved over many generations so too must the developing countries follow their own evolutionary path and slowly create institutions that match their special needs and values. Any effort to shortcut the evolutionary process, goes the argument, will be a recipe for disaster. The error of this view lies in the conviction that there are no universal truths about institutions, that a society only sets itself such institutional tasks as it can solve through original experimentation and learning, and that the task only presents itself when the social conditions for its solution already exist. The argument advanced in this book is that if an institutional solution has been tried and tested, knowledge of it can be used to advantage by other societies. With appropriate knowledge, motives, resources, opportunities and leadership, it is possible to compress the evolutionary process by imitating the successful institutional systems. Contemporary societies in transition to capitalism have no need to rediscover by a long and costly route of trial and error the institutions that enable durable prosperity and dynamic social order. The term ‘capitalism’ is used unusually in this book to describe a particular kind of institutional system found in the more advanced societies, one which has arisen as a solution to the problem of coordinating the institutional subsystems of market regulation, law, public administration, and political representation. This is a general solution manifested in rules about institutional procedures, rules about the functions of key institutional subsystems, and rules about the formulation and enforcement of rules. It is quite different from the everyday temporal and conjunctural solutions that must continually be found to resolve problems of context, such as new regulations for new markets or new methods for managing a public service. Rather it encompasses overarching principles that enable modern society to coordinate its institutional forces in such a way that the everyday tasks can be accomplished most effectively without threatening the survival and further evolution of the system. I will examine the institutional nature of capitalism, and priorities of institutional change in a capitalist direction, themes which have a long history in the social sciences. I draw on the scholarship of Weber, Schumpeter, Hayek, Popper, and Parsons, among others. In contrast to many present-day social scientists, these writers expressed considerable intellectual confidence in capitalism and had a keen sense of the policy dimensions of capitalist transitions. In exploring and adapting their work I have aimed for a composite and favourable analysis of capitalism’s institutional architecture and the methods of its construction. Two insights emerge, which can be the building blocks of ideas that communicate the nature of capitalist transition to the agents of change.
Chapter 2 - The modern state
I propose Max Weber’s theories as a foundation for a new approach to the study of capitalism and capitalist transition. Weber was born to a German merchant family in 1864. He died in 1920 before completing the writings assembled in Economy and Society (first published in German in 1922), his greatest work. Weber studied law, and he taught political economy at universities in Germany and Austria. Among his collaborators and friends were leading figures of twentieth-century economics and sociology, including Schumpeter, von Mises, Sombart, and Simmel. Weber left his characteristic mark on major intellectual controversies of the period. He was active in German politics, and wrote widely on sociology, economics, politics, law, philosophy, comparative history, and culture. The themes of his scholarship and his opinions on economic policy reflect his engagement in debates on the side of the German Historical School as well as on the side of its main rival, the Austrian School. Today, however, Weber is best known as one of the founders of modern sociology. His economic sociology offered perhaps the most rigorous twentieth-century counterweight to Marxian political economy. More broadly, and in the best sense of the term, Weber was a social scientist. His systematic development of methods and theoretical concepts for the social sciences dealing with social and economic action, rationality, bureaucracy, organization, and power is unmatched by any scholar before or since. Of most relevance in the present context is Weber’s central interest in the nature of ‘capitalism’. My argument grows out of Weber’s emphasis on the impersonal procedural norms of state institutions in capitalist societies. In addition, I present Weber’s theories of capitalism as explanations of the logic of a development strategy favouring (1) the construction of a parametric state with classical liberal economic functions, (2) market expansion as the driving force for legal reforms, (3) the short-run precedence of legal change over administrative and political change, and (4) the short-run precedence of political leadership over political participation. Weber clearly demonstrated, on technical grounds, why bureaucracy must be rationalized and why politics must be democratic in modern capitalism. In the absence of free political representation bureaucracy’s power escapes supervision and feeds on economic irrationalities. On the other hand, Weber’s theories can show why market-led and law-led transitional sequences to capitalism are usually more appropriate in developing societies than bureaucracy-led and democracy-led sequences. In this and the following chapter I will single out Weberian ideas that seem most relevant to the understanding of contemporary transitions to capitalism. Some steps in the analysis build on Weber’s concepts or suggest alternative concepts that fit better with current realities. His best-known essay, The Protestant Ethic and the Spirit of Capitalism (1992), which often misleads people about Weber’s view of the nature and origins of capitalism, is only briefly discussed. Weber himself said that this essay treats ‘only one side of the causal chain’ of capitalism (ibid.: 27). I concentrate on Economy and Society (1978), which can be read as a brilliant though somewhat inscrutable manual for the practitioners of capitalist transitions. My objective is to distil the practical inferences from Weber’s extraordinary vision of ideal state action, a chain of reasoning made up of many elements that are often only loosely held together under seemingly disparate thematic headings, and to reassemble the elements that most tellingly reveal the present-day potential for constructed capitalism.
Chapter 3 - Law and economy
Weber’s theories of capitalism provide compelling support for the argument that policymakers in developing countries should focus their initial reform efforts on economic liberalization and the construction of appropriate legal mechanisms to regulate markets. In the typical conditions of sequenced capitalist transition, the order of priorities gives proportionally less emphasis to building up state administrative and representational capacities. Weber’s relevant writings deal with the intertwined evolution of markets, ethics, and law over long historical periods during which capitalism began to emerge through trial and error in parts of Europe. Yet there are reasons to suppose that the causal chains which Weber observed during the original transitions will be similar during necessarily telescoped phases of contemporary development. The discussion of law in this chapter is relevant to debates on whether formal rules or informal norms and social relations are the foundations of economic trust. Trust between persons with shared morals improves market behaviour and substitutes for the formality of legal organizations. Weber (1978: 320) observed that in modern economies it is hardly ever necessary for partners in exchange to resort to third-party adjudication. Social convention may be ‘far more determinative of . . . conduct than the existence of legal enforcement machinery’. Ethical consensus compensates for the limitations of legal foresight and counteracts the many incentives to circumvent formal rules. However, in a complex social system made up of many organizations, reliable administration of law is the structure on which trust acquires incontrovertible force. Weber said: ‘To the person to whom something has been promised the legal guaranty gives a higher degree of certainty that the promise will be kept’ (ibid.: 667) At issue is the advantage of procedural certainty. In advanced economic and political exchange the source of ultimate trust is law, unambiguously guaranteed by neutral state power. Legal trustworthiness improves the calculability of outcomes in economic relationships: ‘Industrial capitalism must be able to count on the continuity, trustworthiness and objectivity of the legal order, and on the rational, predictable functioning of legal and administrative agencies’ (ibid.: 1095). Maintenance of market freedoms requires something more solid than amorphous social virtues. A modernizing society needs a rule-compliant economy in which contracts can be upheld independently of the personal authority of power holders. Strongly developed interpersonal or communitarian networks based on localized trust tend – especially when overarching frameworks of impersonal law are absent – to begin excluding outsiders in the effort to monopolize economic opportunities. In this way, they become obstacles to economic development. In reliably regulated competitive markets, the nebulous microfoundations of informal trust have less significance. During capitalist transitions, communitarian ethics are typically abandoned as economic actors transit from closed markets to open markets. As producers and consumers move beyond the internal economy and into the external economies, so too are their attitudes toward competition revolutionized.
Chapter 4 - Development in disequilibrium
This chapter outlines a theoretical framework for understanding institutional change during capitalist transitions. A central argument will be that the reciprocal conditioning of economic and institutional change is frequently a discontinuous rather than incremental process. Recurrent instability is a feature of both institutional and economic life during capitalism’s development. The economist, Joseph Schumpeter, gave a strong sense of this when he described the ‘jerks and rushes’ of industrial progress and its associated ‘social and cultural’ transformations.
Chapter 5 - Carriers of change
When motivated policymakers in developing countries set out to achieve a capitalist transition they need knowledge of the capitalist institutions that can be emulated, and knowledge of sequences and dynamics of institutional change. How is such knowledge created and how is it made available in the world? Can leaders and citizens in the developing countries be persuaded to take the capitalist path? What resistance will be encountered? What cognitive capacities are required? This chapter applies positive ideas about the agencies of change to a critique of approaches that emphasize interest-group, cultural, or cognitive constraints on reform. The objective is to restore two interlinked cognitive and volitional variables – ideology and rationality – to the centre of the analysis of capitalism and capitalist transition. The major political and economic systems of the world in the past century were shaped, for better or worse, by the ideas of intellectuals who knew the power of ideology and realized the potential of rationality. Hayek, for one, understood that ‘ideology may well be something whose widespread acceptance is the indispensable condition for most of the particular things we strive for’. Ideology is ‘the indispensable precondition of any rational policy, but also the chief contribution that science can make to the solution of the problems of practical policy’ (Hayek 1982: vol. 1, 58, 65). I will argue that ideology must be cognitive, rational, and scientific in order to motivate capitalist policy. Good policy, also, needs to be rationally formulated and implemented. Since these requirements of the transition to capitalism assume a preexisting level of knowledge of capitalism, it will be important also to take a hard look at how the social sciences interpret capitalism. Some summary definitions of the basic terms – ideology and rationality on one hand, and interest and culture on the other – will serve to introduce the argument. The Oxford English Reference Dictionary explains ‘ideology’ simply as ‘the system of ideas at the basis of an economic or political theory’. To this could be added that ideology aims to influence the attitudes and beliefs of a population with the intention of maintaining or changing the political or economic orientation of the social system. Ideology communicates belief in the relative legitimacy, justice, or effectiveness of a theoretical or empirical system of means to ends, such as could be applied to state policy. My understanding of ‘ideology’ is close to Mannheim’s definition of utopia, although Mannheim (1960: 184) understood utopianism as the opposite of ideology: ‘Ideas which later turned out to have been only distorted representations of a past or potential social order were ideological, while those which were adequately realized in the succeeding social order were relative utopias’. I understand ideologies to be cognitive rationalizations of concrete reality for ideal purposes. In contrast, Elster (1983: 141) describes ideology as ‘a set of beliefs or values that can be explained through the position or (non-cognitive) interest of some social group’. It is easy to agree that ideology is a biased belief, a disposition towards one opinion or interest rather than another. Yet ideology can be a true expression of socialscience data, founded on fact and logic. It can also be detached from the values or interests of the group or the individual. As a cognitive innovation rational ideology may be hostile to capitalism, or a carrier for the stock of knowledge favouring capitalist transition. ‘Rationality’ as it relates to policy is the effort to calculate optimum means to the end. One thinks rationally by applying a scientific style of reasoning to the decision. Weber said that ‘rational technique’ is ‘a choice of means which is consciously and systematically oriented to the experience and reflection of the actor, which consists, at the highest level of rationality, in scientific knowledge’ (Weber 1978: 65). Rationalism aims for precision in the estimation of the outcomes of an action, in order, as far as is reasonably possible, to control experience.
Chapter 6 - Models of crisis
Crises in developing countries provide an opportunity for the ideological determination of capitalist transition policy. The objective in this chapter is to identify the main forms of crisis, their causes, and the policy options arising during crises. I focus on two dynamic crisis-prone models of political economy – ‘activism’ and ‘neoliberalism’. A characteristic of activist and neoliberal models is that they do not transit successfully between the Weberian sequences of institutional reform – markets to law, law to bureaucracy, and bureaucracy to democracy – which this book depicts as the ideal path for emerging capitalism in the developing countries. Nevertheless, activist and neoliberal models – and their corresponding crises – will be described here as ‘developmental’. They are not the best methods of transition, but do have potential to generate change in a capitalist direction. Each can be an intermediate mechanism in so far as, for a period of time, an activist or neoliberal model increases the scope or quality of market activity, promotes economic growth, and achieves goals of social development. Three preliminary observations can be made. First, activist and neoliberal ‘developmental’ crises, unlike the Schumpeterian ‘long-wave’ crises discussed in Chapter 4, are in principle more likely to be avoidable. They are similarly ‘structural’, however, in the sense that they reveal an incompatibility between existing institutional forms and the pattern of economic change. Second, each of the progressive policy models – activist, neoliberal, and capitalist – are ideological in Hayekian terms. By viewing them as ‘transition ideologies’ we can compare the relative soundness of their scientific foundations and prescriptive utility. Third, crises in the developing countries, like Schumpeterian crises in the capitalist countries, tend to be recurrent. Crises that repeat at intervals provide recursive opportunities for sequenced institutional change. Development crises are ‘revolving doors’ of opportunity rather than merely ‘windows’ of opportunity for institutional reform. Crises that can help to transform societies are not rare events. The plan for the chapter is as follows. The first section proposes a typology of crises. Its purpose is to classify the kinds of crises that dysfunctional institutions cause, and their comparative transitional prospects. Once the variations in development crises have been identified, it should be easier to assess the knowledge that policy leaders require in order to exploit periodic volatility and propel capitalist transitions forward. The following four sections substantiate the theoretical claims and present an overview of activism and neoliberalism in East Asia and Latin America. The extended analysis of Latin America’s twentiethcentury economic-policy trajectory serves to illustrate several theoretical themes from earlier chapters, including state dysfunctions, government-business relations, and the role of leadership and ideology during policy transitions.
Chapter 7 - The transition sequence
Previous chapters have examined the institutional nature of capitalism and of precapitalism, general dynamics of institutional change, factors of human agency that drive change, and reasons why societies do not make the transition to capitalism. What are the relevant policy lessons? How might motivated and rational technocrats put transition theory into practice? How does the Weberian model translate into workable guidelines for reform? The plan of the chapter is as follows. The first section explores a policy priority sequence. The second section suggests a crisis-induced sequence of opportunities for initiating and sustaining capitalist transition. In the remaining two sections I look in more detail at how reforms might be implemented in the legal and administrative subsystems, and examine the insights that can be gleaned from literature on legal and administrative reform. For capitalist theory to be practically applied by policymakers it is necessary to bring to light and systematize the procedural principles that give shape and consistency to a ‘causal chain’ of market-led and law-led transformations, which lead, in turn, to the modernization of public administration and political representation. I propose a succession of discrete policy regimes of fairly short duration that overcome obstacles to the construction of institutions. The sequence is a mechanism for building state strength. Its key procedural goal is the depersonalization of the state.
Chapter 8 - Making the change
If, as historians state, history is rewritten every generation, it is not typically because subsequent evidence has developed clearly refutable tests of previous hypotheses but because different weights are assigned to the existing evidential material to provide different explanations consistent with current ideology . . . [Even] in the present world, replete with immense quantities of information, the ability of scholars to develop unambiguous tests of complex, large-scale hypotheses that are involved in explaining secular change is very limited. Therefore, competing explanations tend to have a heavy ideological cast.
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