If ever a scholarly claim for Anglo-American exceptionalism received empirical support, it was during the ascendant New Right administrations of Margaret Thatcher and Ronald Reagan. During the 1980s, these governments embarked on a systematic and comprehensive project of fiscal retrenchment, financial and labor market deregulation, and erosion of the Keynesian assumptions that had underpinned postwar economic and social policy. The ideological bases of the New Right agenda have been examined in detail, as have the policies attempted in their name (Cooper, Kornberg, and Mishler 1987; King 1987; Hoover and Plant 1988; Jordan and Ashford 1993; Marsh and Rhodes 1992; Palmer and Sawhill 1984; Palmer 1986; Campbell and Rockman 1991; Heclo and Salamon 1982). But theories of political economy have yet to be satisfactorily applied to these two cases. This chapter employs recent work in the study of the relationship between organized interests and the state to cast light on features of the policies pursued in the 1980s.

The United States and Britain were not the only two countries that swung electorally to governments espousing neoliberal principles. A bourgeois coalition government came to power in 1976 in Sweden, ending over six decades of social democratic hegemony, while in the early 1980s coalition governments with a similar ideological complexion came to power in Germany, the Netherlands, and Denmark. But the impulse toward retrenchment and deregulation under these administrations was never strong, perhaps surprisingly so given the neoliberal rhetoric that preceded their arrival in power (for the German case, see Esser 1986).

This book is about the interplay of institutions, technology, and contracting. Though it is an example of the “new institutional economics,” there was no such well-defined approach when we started this project twenty years ago. In part, this accounts for the book's long gestation. Much of the scholarship on which we rely is the product of research undertaken by others in the new institutional economics over the last two decades. Like those scholars, we had to venture beyond the literatures in economics and history into political science and sociology to answer the questions that we posed. We hope that our work is better for these intellectual excursions.

The genesis for this book was Alston's Ph.D. dissertation. Our collaboration on this topic began in 1980 when Ferrie was an undergraduate in one of Alston's courses. He wrote his undergraduate thesis (which received the Wells Prize in Political Economy) at Williams College on the topic of paternalism and social security in the United States. In the course of our collaboration we had various detours, the most significant being Ferrie's completion of a doctoral dissertation in economics on an unrelated topic. Though the journey to complete this book has been a long one, we believe that the book is better for it – each time we returned to the project, we revised and added new material, often with the benefit of comments from colleagues and the appearance of new findings from scholars working in the field.

The internationalization and integration of capital markets has been the most significant change in the political economy of the industrialized countries over the past three decades. From the Great Depression to the Bretton Woods period, capital markets developed largely within national boundaries. Yet the past three decades have witnessed historically unprecedented growth in cross-border capital movements that have surpassed those of the late nineteenth century, often thought of as a golden age of international finance. Moreover, since World War II, the integration of capital markets has been far more rapid and complete among the industrialized countries than has the integration of markets for goods and services. No other area of the economy has been so thoroughly internationalized as swiftly as have capital markets since the 1970s.

The consequences of such rapid and fundamental change have begun to unfold in a number of countries. More highly integrated capital markets may erode governments' ability to use monetary and even fiscal policies to stimulate the economy. At the same time, newly liberalized capital markets and the growth in foreign investment opportunities may alter the balance of power between relatively immobile labor and capital with a credible “exit option,” potentially with significant consequences for domestic institutions and policy outcomes.

The purpose of this essay is to describe the recent internationalization of capital, and to explore the implications for the industrialized countries of the Organization for Economic Cooperation and Development (OECD).

It is by now a widely accepted view that the sea changes in advanced capitalist economies of the past two decades, above all the increasing internationalization of these economies, have constricted the policy options of the governments of these societies (e.g., see Scharpf 1991). Economic internationalization is assumed strongly to favor market solutions and thus to be particularly unfavorable to policies traditionally promoted by social democracy and organized labor. In the case of social policy, trade unions and social democratic parties expressed fears that steps to further economic integration, such as the Europe 1992 initiative or North American Free Trade Agreement (NAFTA), would result in pressures to reduce welfare state provisions to the lowest common denominator. Indeed, significant rollbacks in provisions in countries as different as Denmark and New Zealand have been linked to the impact of changes in the international economy and these countries' integration into it (Marklund 1988; Castles 1996). By contrast, Garrett and Lange (1991) have argued that the constriction of political choice has been overstated and that in expenditure policies in particular there are still significant differences between governments of the left and right. Similarly, Moene and Wallerstein (1993a) argue that, although many aspects of the Norwegian and Swedish social democratic models have suffered in the new economic environment, the social policy provisions appear to be highly resistant to change.

In this chapter, we examine the politics of social policy in the contemporary era. We focus on two questions.

Many claim that postindustrial politics is becoming classless. The erosion of materialist and collectivist values favors new social movements, “libertarian,” ecological, or neopopulist parties at the expense of traditional laborist or Christian democratic mass politics. Socialist parties seem particularly vulnerable given their identification with a now vanishing working class. Political success today, it appears, means cultivating a diversified appeal or, alternatively, opting for a particular niche.

This scenario is said to be driven by vast structural changes, such as the declining salience of the capital-labor conflict, accelerated social differentiation, women's economic independence, and educational and job upgrading. In heterogeneous and highly mobile societies, the meaning of class should disappear altogether, and the working class, once the flagship of redistributive collectivism, will be destined to conduct a rearguard defense of past victories. New disadvantaged strata, such as contingent workers, single mothers, long-term unemployed, and welfare dependents, appear too amorphous to coagulate into a viable collective force. The post-war “Fordist” politics were designed around the life conditions of a prototypical standard (male) worker who is now in the minority Postindustrial politics, in contrast, will mirror a society of highly differentiated working lives and families.

How credible is this portrait? Manual workers are obviously declining, and jobs, skills, and occupations are steadily being upgraded. Similarly, the revolution of family structure and women's economic position is beyond doubt.

European integration over the past decade has been a polity-creating as well as a market-deepening process. First, and most obviously, the Single European Act (1986) and the Maastricht Treaty (1993) are part of a process of market integration in which a wide variety of nontariff barriers have been reduced or eliminated. Second, perhaps less obviously, these institutional reforms have led to a single, though diverse, polity – a system of multilevel governance that encompasses a variety of authoritative institutions at supranational, national, and subnational levels of decision making.

Our point of departure is that economic developments during the past two decades – internationalization of markets for goods and especially capital, decline of traditional industry and industrial employment, pressures toward flexible specialized production, decentralization of industrial relations, declining international competitiveness, and high levels of long-term unemployment – have led to fundamental reorganization of political authority in western Europe.

The failure of Keynesian economic policy over the past two decades was not simply the failure of a particular set of macroeconomic policies, but the failure of a mode of policy making that was distinctly national. Neocorporatist class compromises and consensual incomes policies that underpinned Keynesian economic policy in many advanced capitalist societies in the postwar decades involved national bargains among interests aggregated at the national level. The perceived failures of those policies led to a debate about the efficacy of the national state.

The study of comparative political economy is at a crossroads. The conceptual foundations for the field were laid during the late 1960s and early 1970s just as the “golden age” of postwar capitalism was peaking. However, the industrialized economies have experienced dramatic changes during the past two decades. Are the concepts on which we have long relied still adequate for organizing our understanding of the political economy? How might they be extended or revised to explain economic and political developments today?

The object of this chapter is to provide some tentative answers to these questions with special reference to western Europe. In the first section, I identify the conceptual approaches represented in the “first” and “second” waves of work that laid the groundwork for the field. Building on the insights of this literature, I then attempt to develop a conceptual framework for analyzing the changes taking place in contemporary political economies. In the third section, I use this framework to identify the most central developments in the political economies of Europe during the 1980s and 1990s. Finally, I explore how we might use such a framework to understand the adjustment paths that firms and nations are now following.

In general, the field of comparative political economy concentrates on two central issues: how to explain patterns of economic performance and policy across nations. To such questions, economics has long supplied a variety of answers that figure with growing prominence in the literature of political economy.

Introduction

Because social insurance had great appeal across the nation, it was harder to fight than programs aimed narrowly at reform in agriculture and Southern agriculture in particular. But even after the threat to paternalism raised by the Social Security Act had been defeated, the federal government remained interested in pursuing policies like those of Federal Emergency Relief Administration (FERA) described at the start of Chapter 3 that addressed rural poverty specifically. Though the fight to exclude agriculture from social insurance programs had been won by the South in 1935, the federal government sharpened its focus on rural poverty in 1937. The Farm Security Administration (FSA) represented intervention in Southern labor relations to alter the relative economic power of landowners and laborers, and then to leave them free to contract among themselves.

The history of the FSA provides a clear example of the difficulty the Southern elite faced in preventing federal intervention in the South's system of labor relations, even as the region sought federal dollars. This episode also illustrates the lengths to which the elite would go to preserve the system of paternalistic relations between them and their dependent laborers and the economic benefits the elite derived as a result. The threat that the FSA posed to the South's system of paternalism was the FSA's role as an intermediary between landlords and tenants. But the FSA's exclusive focus on agriculture left it without a broad base of popular support when the Southern rural elite turned to face that threat.

This volume grows out of conferences at the University of North Carolina, Chapel Hill, in September 1994 and Humboldt University, Berlin, in May 1995. It is the tangible result of long-standing and close relations of cooperation between members of the political science departments at UNC Chapel Hill and Duke University. Our desire to understand the dynamic patterns of political governance in advanced capitalist democracies brought us together. We embarked on this joint book project because we shared the belief that the mid-1990s offers a vantage point from which to assess the momentous political-economic changes of the preceding decade and a half.

In the early 1980s, all of us accepted the view that the presence of powerful organized economic interests and social democratic parties successfully created mixed economies promoting economic growth, cushioning economic investment risks, and protecting wage earners through comprehensive welfare states. By furnishing a distribution of life chances acceptable to the vast majority of citizens, such arrangements offered the best prospect for advancing social peace and stable democracy. From the perspective of the second half of the 1990s, we began to reexamine this view and set out to explore the extent to which conditions for economic growth, social peace, and political governance have changed. In discussions over a period of several months, we jointly identified key social conditions, international and domestic economic processes, political institutions, and mechanisms of policy making that amounted to what some may nostalgically call the “golden age” of post–World War II capitalism.

Generic concepts such as market economy, capitalism, or democracy conceal as much as they reveal about the ways scarce resources and life chances are allocated in advanced industrial societies. One message the contributions to this volume bring across loud and clear is the need to pay attention to variation in institutional patterns of political and economic governance across wealthy Western countries. This is an insight that goes back at least as far as Shonfield's (1969) seminal study of the interaction between politics and economics in capitalist core countries during the decades of recovery after World War II. It is still true today.

For us, and for the contributors to this volume, however, the task of characterizing contemporary capitalism at the end of the twentieth century is more complicated than merely reaffirming cross-sectional patterns of political economic variation. Our most challenging task today is to determine how these patterns of variation, locked in through intricate pathways of industrialization and democratization, are shaped by growing global interdependence and domestic political and socioeconomic change. To what extent are capitalist countries and regions maintaining their “path-dependent” trajectories? Are there pressures toward greater institutional and policy convergence? And even if there are, are there also continuing and new sources of diversity? We want, in other words, to explore not only how the earlier diversity is, and is not, changing but also causal processes behind the emerging patterns.

Marc Schaberg's paper is an interesting and useful contribution to the prescriptive project to which this volume is devoted. Schaberg's paper addresses two critically important questions: (1) how precisely has globalization transformed the terrain on which monetary policy operates? and (2) how – in this changed environment – can progressive policy makers nevertheless be expected to influence economic outcomes?

Let me begin by reviewing the principal arguments and policies put forth in the chapter. Schaberg maintains that the globalization and liberalization of financial systems in the OECD has caused monetary authorities to rely on indirect as opposed to direct policy instruments. Globalization and liberalization have also brought about a near convergence in the structure of national financial systems, and it is this structural convergence that has given rise to a convergence in the tools utilized by monetary policy makers. Since, according to Schaberg, the instruments of financial control have been transformed by globalization and liberalization, progressives need to look for new means by which the financial system can be put in the service of a progressive policy agenda. Toward this end, Schaberg proposes that monetary authorities increase their control over the lending activities of banks and nonbank institutions; that a system of differential asset reserve requirements be put in place; and that a tax on financial transactions be imposed. I endorse these policies; the imposition of any or all of them would go some distance toward resolving the concerns that motivate Schaberg's paper.

The author's main contention is that financial globalization has not brought the benefits that were promised by the “current orthodoxy.” Taking this one step further, he argues that financial globalization has had growth-retarding effects. As a policy conclusion, the author suggests that money center countries levy a uniform tax to curb financial globalization at its source.

Reading this chapter led me to reflect upon several issues. First, the chapter draws attention to the context in which financial flows take place. I see a sharp break in the post-1973 period from the earlier 1948–73 period in many respects, including ideological, political, and economic ones. In the earlier period, Keynesian aggregate demand management was being implemented internationally as well as nationally; the capital flows provided by the U.S. government in the form of aid is a manifestation of this policy. Even though many developing countries were implementing import substitution policies, the funds were primarily used to purchase capital goods from the U.S. Such policies could of course benefit the U.S. to the extent that it kept its privileged position.

In contrast, the post-1973 period, following the first oil crisis, is a time of capitalist crisis in the core countries and the loss of U.S. hegemony. At this time, “monetarism” – effectively a new version of 19th century liberalism – appeared as a new dominant ideology in reaction to the crisis of declining profit rates.

Karl Marx indicated that capitalism required a “reserve army” of unemployed. Without it, workers would force wages up to the point that there would be no profits and the system would collapse. Much of the financial community and its outpost in the Federal Reserve, aided and abetted by a disturbing proportion of the economics profession, seem to accept this Marxian doctrine.

In its modern form it is known as the NAIRU, the “non-accelerating-inflation rate of unemployment.” Adherence to this dismal dogma may not destroy the system, but it robs it of much of its potential for growth while dooming millions of workers unnecessarily to the disaster of joblessness.

Simply enough, the theory, going back some 30 years now to Milton Friedman and E.S. Phelps, tells us that there is nothing to do to get unemployment below its “natural rate.” Efforts to do so by fiscal stimulus or monetary easing might at best bring a very temporary increase in jobs but at the cost of not just more inflation but continuously accelerating inflation. When the attempts to keep unemployment lower are finally abandoned, inflation will settle at its new higher rate, and the only way to get it back where it was is to suffer equal periods and magnitudes of unemployment above the natural rate. What is worse, the dogma tells us, if somehow unemployment slips below its natural rate, the genie of accelerating inflation will be out of the bottle, with all its baleful consequences.

Demand factors in migration

The bulk of international migration from India, whether historically or even today, has been “structured” from the demand side, i.e., the number, the destination, and the exact characteristics of the migrants have been determined by the requirements of the host economies. Central to that structure are a group of formal or informal “agents” who are not independent operators but are dependent on employers from abroad. These agents in turn access groups of workers with appropriate characteristics through a well-established network, often even involving social and kinship connections, resulting in the mass migration of workers from specific locations.

The 19th century migration of Indian workers, from specific locations in Bihar, East U.P., Andhra, and Tamilnadu, to work on plantations in the West Indies, Mauritius, Fiji, and South Africa, was organized through the mechanism of the “indentured” system, where the selected workers were “tied” to a labor contract for a specified period of time through the payment of advances. Much the same kind of a mechanism was used in the post-oil-price-hike period to organize the large migration of workers, this time mainly from Kerala, to West Asia. These workers were drawn predominantly from three districts (Trichur, Malappuram, and Cannanore) with large Muslim populations.

Incidentally, this pattern of migration being structured from the demand side, which entailed a combination of: (1) the number of migrants being “rationed” from the demand side, (2) the migrants being physically selected, and (3) a system of advances to tie them to a labor contract, was seen even in the case of long-distance internal migration to inhospitable terrains like the Assam tea plantations in the 19th century; it was even in vogue for the recruitment of the noncasual (i.e., non-“badli”) segment of the workforce in the Calcutta jute mills.

This is an interesting paper about an important topic, namely, the effects of globalization on developing countries. It first highlights some “neglected” details about TNCs and FDI. The rest of the paper is then spent discussing how developing country governments should respond to these new challenges, concluding that they should continue to try and use industrial policies to restrain the forces of globalization, largely by controlling the amount of technological transfer that such investment provides. The exposition is certainly clear but, at the end of the day, I must confess that I remain largely unconvinced by the arguments.

“The facts, ma'am, the facts.” The author focuses on several “neglected” details about foreign direct investment. First, most FDI occurs across industrial countries, and is thus not much of a benefit to developing countries. Second, a few favored countries have been receiving the bulk of recent FDI flows. Finally, FDI was not very important in investment and development even in these countries. The overall argument is that FDI's role in development has been overstated.

It is certainly true that most FDI occurs across developed countries, but the issue is considerably more complex than this. The text never mentions the words “greenfield” or “acquisitions,” the two categories into which FDI is generally divided because of their different implications for “real” behavior. Greenfield investment occurs when a company comes in and builds a new plant in a country – in other words, its financial investment in a country is supported by physical investment, as measured in the national accounts.