In his essay, "Beneficial Constraints: on the economic limits of rational voluntarism", Wolfgang Streeck persuasively argues that the economic performance of an economy is enhanced where there exist effective, socially-embedded constraints on self-interested, rational economic action. This claim is stronger than the conventional acknowledgment by economists that unfettered markets will sometimes generate "failures", such as the underprovision of public goods. Rather, Streeck insists that even the mundane, routine transactions of a market economy -- buying and selling goods, hiring workers, working in a labor process, etc. -- will not be effectively carried out if they are governed by unconstrained, individualistic rational economic action. In the absence of trust, legitimacy, responsibility and other forms of "obligation" market interactions will generate highly suboptimal levels of economic performance. Streeck describes this corrective to the conventional understanding of economists as a "Durkheimian perspective to economic action." I would like to add a Marxian flavor to Streeck's Durkheimian cake.
I want to explore two general problems with Streeck's Durkheimian economic sociology. Neither of these constitute serious criticisms on the positive claims Streeck makes, but rather attempt to identify certain respects in which his arguments are incomplete. The first concerns the problem of genuinely antagonistic interests at stake in the social conditions for "good economic performance". The second concerns the implications of the problem of knowing whether given constraints are beneficial or damaging.
Antagonistic Interests and "Good Economic Performance
Streeck's Durkheimian view is represented graphically in Figure 1. Societies vary in the degree to which market interactions are constrained by institutional regulations and normative arrangements.(1) At one extreme is an ideal-type world of highly atomized markets lacking any effective regulatory institutions with very weak normative constraints. Such an economy generates very low levels of economic performance. Opportunism is rampant, the noncontractual bases of contract are weak, trust is in very limited supply, prisoner's dilemmas and collective action failures abound. At the other extreme is an economy with massive institutional regulations and pervasive normative constraints. This too would, in general, produce low levels of performance because of excessive inflexibilities which block adaptiveness.(2) What is needed is some intermediate level of constraint, sufficient to create a cohesive, well integrated society, but not so strong as to undermine the efficiency-enhancing properties of market competition. This level of constraint can be referred to as the social optimum for enhancing comprehensive economic performance.(3)
In this Durkheimian world, if the institutions of a society fall to the left of the optimal level of constraint, it is in everyone's interests to try to create new institutional solutions. This might require enlightenment, since people may be duped by ideologies of laissez-faire and believe, incorrectly, that a further unfettering of the market is the solution to problems of poor economic performance. Furthermore, as Streeck points out, it is often a very tricky business to deliberately engineer the deepening and expansion of such normative/institutional regulation, since if institutions are designed exclusively for the purpose of enhancing the normative foundations for high economic performance they will be unlikely to accomplish this goal. Nevertheless, it is in nobody's real economic interests to operate to the left of the socially optimal level of institutional constraints.(4)
This Durkheimian vision is certainly an improvement over the standard neoclassical economics view of market economies. However, it shares with standard neoclassical models the implicit assumption that there are no classes with fundamentally antagonistic economic interests within these economies.(5) The key criterion for evaluating the outcomes of an economy is "economic performance", not the extent to which the material interests of different classes are realized. The possibility that the optimal level of institutional constraint (let alone the qualitative form of such constraints) might be systematically different for different categories of actors is not entertained.
Let us suppose, for argument, that there exist fundamental antagonisms of this sort between capitalists and workers. This opens up a potential wedge between the level (or form) of normative/institutional constraint that is optimal for overall economic performance and the level (or form) of such constraints that are optimal for the interests of capitalists as illustrated in Figure 2.(6) If capitalists were exclusively concerned with total economic performance, of course, the two curves would overlap. But they are not. They are concerned with the rate of profit (and related economic issues like growth, market share, etc.). The conditions which maximize profits, even long-term profits, will in general be different from those which maximize comprehensive economic performance, at least if things like "quality of life", negative externalities paid by consumers, and economic security are included in the concept of economic performance.(7)
The model in Figure 2 argues that the optimal level of normative/institutional constraints which maximizes comprehensive economic performance will generally be greater than the optimal level for realizing the interests of capitalists. This means that, contrary to the pure Durkheimian assumption, capitalists will prefer a level of normative and institutional constraint to the left of the social optimum. But note: if the curves in Figure 2 are drawn approximately correctly, then if capitalists were faced with the binary choice of having a level of institutional constraint set at the social optimum for total economic performance or at the minimal level of highly atomized markets, they would prefer the social optimum (i.e. in Figure 2, the social optimum level of institutional constraints corresponds to a higher level of realization of capitalist interests than does the extreme left hand part of the curve). This is the kind of choice posed in many sociological discussions of these issues: the Hobbesian state of nature (pure atomization) of unregulated "free" markets governed by pure economic rationality is compared to an optimally cohesive and integrated society. Capitalists would certainly have their interests better served in the latter. However, in real social worlds the alternatives are not binary and capitalists would generally prefer an intermediate level of constraints. There is thus a basic conflict of interests between capitalists and those who would gain from the social optimum.
When a conflict of interest of this sort occurs, the actual level of institutional and normative constraints on the market in a society will at least partially be determined by the relative power of contending forces. For simplicity let us just consider the balance of power between capitalists and workers. (For present purposes, "workers" can stand for the set of social actors whose interests are advanced by the social optimum level of provision of institutional and normative constraints on the market). Once we introduce power into the equation, the analysis gets considerably more complicated. The problem is that the balance of power between capitalists and workers is not exogenous to the institutions that generate constraints on markets. In general it would be expected that institutional and social structural arrangements which impose significant normative constraints on market interactions will also tend to increase the power of workers. There are two general possibilities as illustrated in Figure 3. In the lower curve, the relative power of workers rises slowly as institutional and normative constraints are imposed on the market. This means that at the level of such constraints that is optimal for the realization of capitalist interests, the balance of political power is still heavily weighted towards the capitalist class. In the upper curve, other hand, the power of workers rises rapidly as institutional/normative constraints on markets increase, so that at the capitalist optimum the balance of power has shifted strongly towards workers. In such circumstances, workers would be potentially be powerful enough to further push for the elaboration of institutional constraints, perhaps even to the social optimum level. Under this power function, in other words, the capitalist optimum is not a stable institutional equilibrium: it cannot be dynamically sustained since it empowers those actors whose interests are better served by a higher level of institutional constraint.
I do not know which -- if either -- of these power functions is more
realistic. I suspect this depends on a range of other factors not included
in this discussion. But I do think that it illustrates an important source
of complexity that needs to be added to the Durkheimian perspective on
economic systems. The mania for deregulation and the erosion of those institutions
that sustain strong normative commitments and constraints on markets may
not simply reflect a myopia on the part of elites or a lack of understanding
on their parts about the essential role that trust and obligation play
in the effective functioning of a capitalist market economy. The ideology
of the unfettered, unregulated market may be an effective weapon in a battle
over the optimal level of provision of such constraints, a battle driven
by real conflicts of interests and resolved through power. Capitalists
may also, of course, have short time horizons, be vulnerable to "pressure
for detailed cost accounting" (p.206) which lead them to destroy institutional
arrangements that are in their own long-term interests. But I do not think
that this is the main story. Enlightenment of the capitalist class to their
long term interests in a strong civic culture of obligation and trust is
not enough; the balance of power also needs to be changed. The bad guys
need to be defeated.
The problem of uncertainty in identifying of performance-enhancing institutions
Streeck's essay can be viewed as revolving around three interconnected theses concerning the socio-historical process by which "beneficial constraints" are produced:
Thesis 1. Institutions which impose constraints on the market may be socially beneficial (performance-enhancing).
Thesis 2. In general, effective institutions for constraining the market in performance-enhancing ways are not developed for this purpose. Rather, they are designed for other purposes; the performance-enhancing aspects are thus by-products of other goals: "The kind of social embedding good economic performance requires can be built only for reasons other than good economic performance.(8)
Thesis 3. It is often extremely difficult to know at time t whether a particular institutional arrangement will be performance-enhancing at time t+1. There are many examples of social structural and institutional conditions which are quite negative at one point only to turn out to be sources of hidden adaptability, productivity, high performance at a later point in time: small firms in Northern Italy; craft-based apprenticeship systems in Germany; etc. Apparently dysfunctional institutional arrangements may have latent potentials which render them highly functional under altered conditions.
Streeck recognizes that this set of theses generates some deep conundrums for public policy, since he acknowledges that "not all constraining social institutions are economically beneficial" (213). Some constraints may indeed stifle initiative, block beneficial incentives, etc. Ascriptive discriminations of various sorts (racism, sexism and other forms of discrimination), for example, are powerful constraints on labor and credit markets, and yet in general do not produce "good economic performance." Streeck's main message is directed towards free market fundamentalists who seek to shatter all constraints on the market. He wants them to acknowledge that social constraints may be essential and therefore destroying such constraints may be catastrophic even given the objectives of free marketeers.
I am very sympathetic to these arguments. However, the more general conclusion drawn from the analysis -- that there should be a presumption in favor of preserving constraints (i.e. the burden of proof is on eliminating constraints) -- does not really follow from the analysis, at least not unless some additional claims are added. If it is the case, literally, that we have no way of predicting whether a given constraint will be beneficial under changed conditions in the future, this implies that the existing constraint (whether positive or negative now) could just as easily be damaging in the future as helpful. I think it follows from this that if an existing constraint in the present period significantly undermines "good economic performance" now and yet has an equal probability of being beneficial or damaging in the future, then it would seem reasonable to reduce that constraint today since, at least, this will improve things now. The time discounted value on an economic performance criterion will increase if (a) we remove those constraints which are clearly negative under present conditions, if it is also true that (b) there is an equal probability for a current negative constraint to be negative or positive in the future. In order to defend a general social-conservationist prescription (i.e. a presumption against eliminating social constraints on markets), therefore, there needs to be some additional arguments. Several come to mind.
1. Temporal structure for building benevolent constraints. One way of defending the conservationist stance is to argue that it takes much longer to build effective social constraints on markets than to destroy them. This is especially the case if one believes in a relatively strong version of thesis 2 above: namely that economic performance itself cannot be part of the motives for generating economic performance enhancing arrangements. If it is true that "economic performance may or may not ensue [from social constraints on markets], but they cannot be the purpose." (216). What this means is that in general it is much more costly to make the error of destroying a performance-enhancing constraint than in maintaining a constraint that is a drag on market performance: it is more costly because of the very high costs and long time lag in correcting the mistake.
2. The value of diversity Perhaps the real issue is the value in sustaining institutional variety and diversity in the settings for economic practices. The problem with the mania for deregulation and freeing up the market is not just that it destroys social infrastructure, but that it generates homogeneity in the social infrastructures of production. Heterogeneity has adaptive advantages even when there are some settings within such diversity that have negative effects (excessive rent-seeking, pareto suboptimalities, deadweight losses, etc.). This is like a biodiversity argument for ecology.
3. The value of incrementalism When social constraints are identified which appear to have negative effects on "economic performance", they should be not necessarily be maintained unchanged out of a belief in their potential for future benevolence, but they should also not be smashed abruptly. Changes should be slow and incremental to allow for creative-adaptive responses and learning by the actors within those embedded relations.
4. The high marginal value of maintaining weak constraints in
a world with few constraints. The arguments for deregulated, unfettered
markets might have persuasive power under conditions of highly manipulated
market transactions with massive rent-seeking and inefficiencies. But we
live in a world which is already highly commodified and marketized, where
the constraints are in general already quite weak. The presumption in favoring
of retaining constraints, therefore, is not an abstract presumption for
all times and places, but specifically in a social context where constraints
are already approaching the socially-tolerable minimum.
1. It is, of course, a considerable simplification to treat this problem primarily as one of the level of institutional/normative constraint rather than the kind of constraint. The qualitative properties of the constraints on market interactions may matter more than the sheer degree of constraint. Nevertheless, in order to keep the graphical representation of the argument simple, in this commentary I will generally refer only to the levels of constraints. I do not believe that the central argument of this paper is affected by this simplificastion.
2. If, following the arguments of Jens Beckert, we characterize the problem of social embeddedness of economic practices in terms of the conditions for soliving problems of cooperation, uncertainty and innovation, then the atomized economy has substandard performance primarily because of failures of cooperation and high levels of uncertainty, while the hyper-regulated economy has substandard performance because of failures of innovation.
3. "Comprehensive economic performance" is meant to identify a broad, multidimensional evaluation of economic outcomes, not simply a narrow "bottom line" definition of efficiency or productivity in terms of market-registered rates of profit. Thus, for example, when firms are able to impose negative externalities on citizens in the form of pollution or other public bads, this would constitute a negative component of comprehensive economic performance even if this increased growth and profits. Similarly, relatively intangible things like the quality of life, job security, and work satisfaction should be treated as components of comprehensive economic performance
4. I realize, of course, that it is highly contentious to talk about "real economic interests" as being objectively given. All that I mean by "real economic interests" in this context is the package of toil, income and leisure that constitute the trade-offs people face in the market.
5. More precisely: Streeck's analysis is silent on the question of class divisions and how this relates to the problem of "good economic performance" and "beneficial constraints."
6. It is also possible that the optimal level of institutional and normative constraint on the market for the interests of workers (defined as a subset of noncapitalists) might be different from the level which maximizes comprehensive economic performance. I will not consider this possibility in these comments.
7. It is important for the argument at hand that comprehensive economic performance not be identified simply with profitability, bottom-line productivity, or even competitiveness. If it is, then the distinction between the interests of capitalists in profits and growth and comprehensive economic performance dissolves. What is good for General Motors becomes, definitionally, what's good for America.
8. There are three possible forms of the thesis concerning the motivations behind the existence of performance-enhancing constraints on markets: Strongest form of the thesis: if an institutional constraint on the market is to be performance-enhancing, the performance-enhancement cannot be even present as a motive for the development and maintenance of the institution; the institution must be entirely a by-product of other motives. Intermediate form: performance enhancement cannot be the primary motive, but it can be a secondary motivation for the institution; Weakest form: performance enhancement cannot be the exclusive motivation for the institution, but it can be one of the motivations. Streeck is somewhat ambiguous in his exposition over which of these properly specifies his views. The expression "only for reasons other than good economic performance" in the quoted passage suggests something rather close to the strong form, but his willingness to entertain policy discussions about the artifactual creation of such institutions, or at least the deliberate maintenance of them, suggests something closer to the weak form.