Political governance of capitalism a reassessment beyond the global crisis

Political Governance of Capitalism

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Political Governance
of Capitalism
A Reassessment Beyond the Global Crisis

Helmut Willke
Professor of Global Governance, Zeppelin University,
Friedrichshafen, Germany

Gerhard Willke
Chair of Economics, University of Applied Sciences,
Nuertingen, Germany

Edward Elgar
Cheltenham, UK • Northampton, MA, USA
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© Helmut Willke and Gerhard Willke 2012
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system or transmitted in any form or by any means,
electronic, mechanical or photocopying, recording, or otherwise without
the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA

A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2012935331

ISBN 978 1 78100 618 4
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire
Printed and bound by MPG Books Group, UK

01

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Contents
List of abbreviations
List of figures

vi
viii

1
2
3

4
5
6

1
11
51
73
119
163

Exposition – capitalism as systemic risk
On the political economy of global capitalism
On systemic features and contradictions of capitalism
On governance of capitalism as global political economy
On global capitalism and the future of democracy
Outlook – capitalism in a global knowledge society

References
Index

179
199

v

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Abbreviations
ABS
AIG
Attac
BIS
CC
CDO
CDS
CMBS
CSR
ECB
EEAG
FSB
G-20
HRE
IIF
IMF
INGO
LTCM
LTMF
OTC
PPP
RA
RMBS
SEC

SIV
SPE
SPV
TAN
TNC
WB

asset-backed securities
American International Group, the world’s largest
insurer
Association pour une taxation des transactions
financières pour l’aide aux citoyens
Bank for International Settlements
corporate citizenship
collateralized debt obligation
credit default swap
commercial mortgage backed securities
corporate social responsibility
European Central Bank
European Economic Advisory Group
Financial Stability Board
Group of Twenty
Hypo Real Estate
Institute of International Finance
International Monetary Fund
international non-governmental organization
Long Term Capital Management
Longer Term Management Fund
over the counter (trades)
public-private partnership

rating agency
residential mortgage backed securities
Securities and Exchange Commission
structured investment vehicle
special purpose enterprise
special purpose vehicle
transnational advocacy network
Transnational Corporation
World Bank

vi

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Abbreviations

WEF
WHO
WTO

vii

World Economic Forum

World Health Organization
World Trade Organization

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Figures
1.1
3.1
4.1
5.1

Views on free market capitalism
Market capitalism and reactions to disturbances
Global context for governing capitalism
Four scenarios for the evolution of the global financial
system
5.2 SWOT analysis of contemporary democracy

9
60
82
122
128

viii

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1.

Exposition – capitalism as
systemic risk

What if capitalism were to collapse? Many critics of capitalism do
not realize that there is no viable alternative to capitalism after the
demise of socialism; there are only alternatives within market capitalism. Varieties of capitalism span a broad range from market fundamentalism to welfare capitalism, and these varieties correspond
to varieties of democracy (Hall and Thelen 2005; Willke 2009a). As
a specific governance regime for the economy, capitalism is based
mainly on self-organization and self-governance of markets, supplemented with varying institutional arrangements to safeguard the
proper functioning of the market. However, at the same time global
capitalism has become a systemic risk, and the global financial crisis
should be regarded as a ‘normal accident’ within an untenable architecture of global finance. This paradox of capitalism – presenting
a systemic risk because of and in spite of its achievements – is the
base-line for this book.
Even market fundamentalists do not doubt that markets require
legal institutions, political frameworks and cultural patterns in order

to function as markets. The details of the relations between politics
and economy, of the political preconditions of a market economy
and of the architectures of a political economy are, of course, contested. But it seems evident that a positive, self-reinforcing relationship between capitalism and democracy depends on reining in the
self-destructive tendencies of an unfettered market capitalism by
defining rules for public goods (Malkin and Wildavsky 1991), rules
for accountability (Held 2004; Keohane 2003), rules against ‘predatory’ abuses of market power (Shiller 2009) and rules for coping
with economic and financial globalization (Roubini and Mihm 2011;
Stiglitz 2007: 269 ff.).
The global crisis of 2007 onwards has destroyed the myth of the gloriously self-regulating ‘free’ market. But what would be a more adequate description of the range and role of ‘free’ markets? Ironically,
1

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contrary to the epithet of ‘neo-liberalism’ it is the proponents of
classical liberalism who have given answers to this question which
still appear to be valid today (Willke G. 2003). The centerpiece of
their argument is that the market cannot produce its own preconditions – for example rule of law, the institution of private property
or prevention of monopolies – and therefore it needs the regulatory
powers of polities.

This book will pursue the argument that revisiting capitalism after
the global financial and economic crisis means assessing capitalism
before the next crisis. The next crisis, however, will not be a crisis of
capitalism but a crisis of governance, or more to the point, a crisis
of the relation between capitalism and governance and, thus, a crisis
pertaining to the governance of capitalism.
The crises inherent in the deployment of capitalism have always
nurtured the suspicion that capitalism is not only running the
periodic risks of boom and bust but that capitalism as an unfettered
economic regime is a systemic risk threatening the collapse of society
as a whole. Karl Marx perceived the devastations of 19th- century
Manchester capitalism as evidence of a built-in propensity to selfdestruction. In 1910 Rudolf Hilferding published a scathing criticism of financial capital, again focusing on the ‘general conditions
of crises’ (Hilferding 1981 (1910): part IV). A century later, Nouriel
Roubini and Stephen Mihm, among others, expound global financial capitalism as a crisis-prone economy, maintaining that ‘capitalism is crisis; it introduced a level of instability and uncertainty that
had no precedent in human history . . . [T]he rise of a small coterie of
incredibly powerful, opaque financial firms has generated a far more
unsettling problem . . . [it] created a system that is extraordinarily
vulnerable to systemic risk’ (Roubini and Mihm 2011: 46 and 210).
Indeed, in view of the global financial crisis and its continuing effects on economy, international trade, trade imbalances or
public debt, the question is whether Schumpeter’s conceptualization of market competition as a process of ‘creative destruction’
(Schumpeter 1975) is but a euphemism and needs to be reinterpreted
as creating destruction on a grand scale. As long as ‘capitalism’ actually was a distributed system of nationally defined and delimited
spaces, a combination of Schumpeter’s creative destruction and
Ricardo’s comparative advantages, even serious crises were limited
to regional or national levels. The 1990s saw a series of national economic, financial and currency crises which sent shock waves over the
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3

globe but seemed to be solvable, temporary and necessary to correct
bad economics and bad economic governance.
This complacent interpretation of economic crises appears to have
outlived its appeal with the global financial crisis and its aftermath.
The challenge now is to devise ways to steer between the Scylla of
capitalism as systemic risk and the Charybdis of missing alternatives
to capitalism. This book will argue that any viable way out of this
conundrum must involve a revised and reconsidered role of political governance of capitalism. Capitalism has become a global force,
sustained within a network of economic, financial, technological
and regulatory interdependencies and, at the same time, deprived in
some crucial respects of the moderating powers of the nation-state.
Political governance of capitalism, therefore, needs to be configured
as a multi-level system comprising national, regional and global
levels. This kind of governance is more exacting and more difficult to
achieve than previous models of political-economic regimes because
it has to tackle the fundamental problem of balancing national egotisms and global public goods – which do have repercussions on the
welfare of nations. And it has to come to grips with an increasingly
pressing antinomy between a democratic mode of political governance (as exemplified by most OECD nations) and an authoritarian
mode of politico-economic governance (as exemplified mainly by
China and Russia).
It turns out that capitalism is a systemic risk for two reasons. As
economic operational mode it is plagued by internal contradictions

that threaten to undermine the very preconditions of its own functioning. As part of a politico-economic constellation capitalism is
coupled with democracy (an apparently ideal combination promising the end of history, Fukuyama 1992) but in reality opening up
a battle zone of continuous conflict between differing rationalities.
Whereas democracy builds on the principle of equality, the ‘axial
principle of equality’ (Bell 1976b: XVII) – one person one vote –,
capitalism’s driving force is difference (as inducement for exchange),
resulting in vast differences of wealth, influence and authority. As
providers of jobs, taxes and other incentives large corporations,
trusts, foundations, banks and other financial organizations are in
a position to derogate the egalitarian principles of democracy. The
more an ideology of market fundamentalism and deregulation prevails in a democracy, the more the gates are opened for unfettered
collusion between economic and political elites inviting, for example,
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the creation of a huge and unregulated ‘shadow banking system’ or
the revocation of the Glass-Steagall Act by the infamous GrammLeach-Bliley Act of 1999, thus abolishing the barriers against devastating internal conflicts of interest in huge financial conglomerates
(Roubini and Mihm 2011: 74 f.).
In addition, a regulatory focus on single firms and their risk behavior is neglecting structural issues and negative externalities of the risk
strategies of single firms. New types of operational risks emanating

from individual firms might coalesce to systemic operational risks
and market risks that overwhelm the coping capacities of individual actors of the financial system: ‘The internal risk management
regime – for credit and market risk, operational risk, compliance
risk – needs to meet a more exacting standard. The requirements for
operational resilience for technology systems are necessarily more
demanding’ (Geithner 2004: 4). Obviously, this also increases the
complexities of financial governance to manage systemic risk.
The shifting grounds for regulatory supervision correspond with
a marked change in risk perception within global finance during
the last decade. In the 1990s, major risks derived from aberrant or
criminal behavior of single firms and persons. By 2003, the sources
of risks had shifted to complex (if not outright deceitful) financial
instruments and adverse macroeconomic conditions for the business strategies of financial firms. At present, the systemic effects of
individual risk taking are becoming more accentuated, because the
traditional separation of different types of financial institutions, in
particular the separation between banks, insurance companies, securities and funds, already loosened by the Gramm-Leach-Bliley Act
of 1999 (for the USA) is undermined by a non-transparent concatenation of risk propensities via diffusing effects of structured credit
instruments (Plender 2005) and the creation of a massive shadow
banking system intended to hide major transactions, to enhance lack
of transparency and to cover serious parts of the financial system
under a veil of ignorance by operating outside regular banking
supervision and national regulation. The shadow banking system
‘is a nexus of private equity and hedge funds, money-market funds
and auction-rate securities, non-banks such as GE Capital and new
securities such as CDOs and credit-default swaps . . . On the eve of
the crash, more capital was flowing through it than through the conventional banks’ (Economist 2009: 20 f.).
As the field of options within the financial system is extended into
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5

the abyss of structured derivative instruments and into the labyrinths
of prolonged chains of conditioned events, the chances and risks of
aggregate or even systemic effects of mutual reinforcement, snowballing, leverage and positive feedback loops beyond single firms
loom large. A complex array of options corresponds with chances
of ‘low-probability, high-impact events’ (Kohn 2004). A regulatory
focus on single firms necessarily makes governance blind to systemic
turbulences. These turbulences certainly start with some actions and
decisions of single firms, like kids throwing snowballs, but these
actions then turn into avalanches by setting off chain reactions that
follow the logic of the financial system and defy the motives and
reasons of individual people or firms involved.
When the bubble bursts and the crisis is unfolding, systemic risks
turn into systemically relevant threats of meltdown. Again, nobody
can know for sure what event and what organization/institution
exactly is systemically relevant. The notion covers various aspects:
(1) an organization is ‘too big to fail’, meaning that its failure precipitates the downfall of an entire sector of the financial system; (2) an
organization’s failure would kick off an avalanche of related failures
within the financial system, particularly by destroying the quintessential trust which fuels financial transactions (like interbank loans);
(3) the failure of a sector of the financial system would expand into
the ‘real’ economy, putting firms and jobs at risk, thus impinging

on the social security system and thereby connecting to politically
touchy fields; and (4) an organization’s failure would trigger social
unrest, protest and more violent expressions of deception and insecurity from affected people, thus again connecting to politically
touchy arenas.
The notion of ‘systemic relevance’ implies a responsibility of
politics to prevent a critical state of financial/economic affairs. Its
definition derives less from financial/economic reasoning than from
political judgments of political relevance. Politics finds itself in a
double-bind of unavoidable non-knowledge and non-transparency:
political decision-makers have no way to know the exact financial/
economic implication of a critical situation since even most of the
financial and economic agents involved have no clue of what is going
on – or going wrong; and they have no way of knowing whether or
not political action (such as bailout, guarantees, grants, the creation
of ‘bad banks’ or even nationalization of firms and so on) will solve
the problem or whether the solution will trigger the next crisis.
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Political governance of capitalism

A case in point: The bailout of the investment bank Bear Stearns

by the US Federal Reserve in March 2007 was seen as a successful
intervention against the risk of ‘systemic shocks’ from the failure of a
large financial corporation. ‘The bailout was justified on the grounds
that the collapse of Bear Stearns appeared to be driven by marked
illiquidity rather than insolvency . . . Yet, it has been noted . . . that
the Fed did not have first-hand information on Bear Stearns, as this
was outside its supervision. How can a central bank with no supervisory power over investment banks tell whether one such institution
is or is not insolvent?’ (Sinn 2009: 85).
In spite of many remaining doubts, the notion of ‘systemic relevance’ is helpful in configuring the transition points in the relation
between economy and polity. Politics is defined as the functional
subsystem of (modern) societies responsible for making collectively
binding decisions. Politics is in charge of deciding on the range of
public goods – and of providing them. Thus, political action seems
appropriate as soon as a public good (for example systemic stability) appears to be at risk. Although the distinction between private
concern and public interest will remain controversial in most cases,
the distinction itself must be made, and the political system is entitled to define ‘systemic relevance’ along its own operational decision
criteria.
To be sure, there is no guarantee that even legitimate and appropriate regulation will prevent crises: ‘Given the financial system’s
fallibility, regulation is bound to be fallible too’ (Economist 2009:
20). The point here is that capitalism is not a free floating system
but is necessarily embedded in societal contexts in general and in
democratic prerogatives in particular. ‘The case for a governmentled capitalistic approach (and for not allowing the free market to
run roughshod) has seen no more compelling evidence than the
2008 credit crisis’ (Moyo 2011: 141). As soon as the gyrations of
markets impinge on public goods or concerns, as in some instances
they inevitably do, democracy must impinge on capitalism, too.
In this sense, core components of democracy, i.e. legitimacy, participation, accountability and transparency, have repercussions on
the selection of valid models out of a variety of optional forms of
capitalism – including its financial system. And thus, major changes
in the constitution of systemic risk in the global financial system

demand adequate responses from democratic polities (and even
non-democratic ones) which try to regulate global finance: ‘Given
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7

our current knowledge, it is not realistic to expect a single measure of
systemic risk to cater to all purposes; in fact, it is actually dangerous
to do so’ (Borio 2011: 6).
A first step of the following reasoning will be to delineate some of
the democratic interfaces of capitalism, perceived as the contextual
framework providing the ground-rules for separating and recombining public and private goods, public and private authority, public
and private accountability and, increasingly, public and private
risk. An intricate interplay of private and public aspects of major
dimensions of democratic societies exposes the public sphere to
private concerns and interests, including an influx of expertise and
commitment of private actors and organizations promoting specific
common goods such as transparency, accountability, sustainability
or responsiveness. At the same time the interleaving of public and
private is sustaining the embedding of capitalism in societal contexts.
It is by confronting capitalism with the elaborate demands of public

responsibilities that capitalist dynamics impinge on public goods.
When this containment and embedding fails (corresponding to a
failure of politics), as in the global financial and economic crisis,
capitalism becomes a systemic risk – that is, a risk of destroying
capitalist democracy.
The second step in the reasoning of the book is concerned with
globalization as the most important new factor changing the face
of capitalism and reconfiguring the relation between capitalism and
governance. Globalization has created a fundamental incongruence
between a truly global reach of economic and financial transactions
on the one hand and a domestic/national reach of public rules and
regulations on the other, exposing the nation-states’ incompetence
to deal efficiently with a global crisis: ‘Globalisation of financial
markets has systematically and vastly outpaced the development
of their governance: governments have lagged behind in reshaping domestic and international institutions as well as in changing
and adapting policy behavior’ (Sinn 2009: 59). This incongruence
becomes more threatening for the stability and viability of the global
economic and financial system if the proposition is taken seriously
that a poorly governed capitalism is amounting to a systemic risk.
Chapter 3 will address this problem.
The disparity between globalized markets and national political systems brings forth new challenges for a global political
economy. Chapter 4 argues that governing global capitalism remains
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a euphemism as long as the means of governance remain tied to
nation-states. A sober evaluation of the capacity of governance and
self-governance of politics is needed to gain an understanding of the
reach and restrictions of political governance of capitalism. Equally
important are the means of self-governance of capitalism as a system
of self-regulating economic activities. Capitalism, however, is not
self-sufficient but depends on contextual conditions provided by
political systems as the institutions for making collectively binding
decisions. Creating a framework for global capitalism is the most
demanding task of the fledgling institutions of global governance.
In chapter 5 we describe core elements of a governance regime for
global capitalism, connecting the future of capitalism with future
developments of democracy. Essentials of democracy, such as the
components creating input-, output- and throughput-legitimacy,
increasingly are influenced by consequences of globalization and
thus are changing the option space for democracy and for political
governance. The Chinese case of combining political dictatorship
with economic freedom of sorts poses a serious challenge to the
‘Western’ ideal of combining political freedom with economic liberalism. Rising competition between global varieties of capitalism
forces the traditional ‘Western’ model of combining democracy and
capitalism to elaborate its idea of democratic ethics and to specify its
notion of ‘the spirit of capitalism’.
This, we surmise, should be understood as a chance to revise
capitalism and, in particular, to devise more intelligent modes of
political governance of capitalism. The ongoing global crisis has

shown the face of an ‘ugly capitalism’, mainly portraying managers
of some large investment banks and hedge funds but also some systemic traits of global finance (for example excessive risk taking and
‘irrational exuberance’). So it seems all the more important to think
about a ‘responsible’ variety of capitalism which acknowledges its
embedding in democracy and which addresses the smoldering global
problems of asymmetries and unjust terms of trade, of predatory
exploitation and wasteful exhaustion, and of social and environmental destructiveness in the interest of its own survival, thus making
a revised capitalism more attractive even in the eyes of the more
sophisticated of its discontents.
There are plenty of discontents. In a survey conducted for
the BBC during June and October 2009, including almost thirty
thousand adults in 27 countries, only 11 percent of respondents
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Views on Free Market Capitalism
Average of 27 Countries, 2009
Don’t know / Not sure /
Depends (15)

[It] works well and increased
regulation will make it
less efficient (11)

[It] is fatally flawed
and a different economic
system is needed (23)
[It] has problems that
can be addressed through
regulation and reform (5)
Source:

BBC World Service 2009.

Figure 1.1

Views on free market capitalism

considered capitalism to work well, whereas about half of the
respondents answered that regulation and reform were needed to
cure capitalism (see Figure 1.1). In spite of continuing predictions of
capitalism’s imminent demise (Kotz 2009: 316), however, capitalism,
including global finance, is recuperating from the serious downturn
of the ongoing crisis. It is another indication of historical evidence
that capitalism is more flexible, dynamic and resilient than its radical
critics like to assume.
Delineating some crucial prerequisites for political governance of
global capitalism means to bring up again the dormant dilemmas of
political economy within an intensifying debate about the relationship between democracy and capitalism (Iversen 2006; Nelson 2009;
Streeck 2010, 2011). This theme will run through the entire book and

will be treated from different angles in the various chapters.
The legitimacy of global capitalism hinges on the ability of
modern democracies to reconcile democratic ethics and a spirit
of capitalism which is based on responsiveness and resilience. In
this sense, revising a variety of capitalism which has become a
systemic risk encompasses three distinctive but related spheres of
transformation.
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Political governance of capitalism
●

●

●

First, global capitalism as a self-regulating social system needs
to adapt to new challenges created by various processes of
globalization, global interdependencies and global concatenation. While systemic failures are the most salient new challenges, other global problems such as environmental decline,
depletion of resources, and poverty need to be addressed, too.
A second transformation concerns the recurrent ‘dream of a

strong state’ (Hofmann 2008) which has been renewed by the
ongoing crisis and the role of the nation-state as savior of last
resort. While this role was forced upon the nation-states for
fear of system failure – and only a few nations took advantage
of it – a more sober look at the capacities of the nation-state
reveals that the dangers of over-extension and involvement in
micro-management of economic affairs loom large.
Thirdly, political governance of capitalism then means to
transform the lessons learnt from history and from the ongoing
crisis into rules and principles for a balanced combination of
self-governance of a self-referential economic system and contextual guidance by a variety of political actors and regulatory
institutions. What makes this a daunting task is the complexity
of global capitalism on the one hand and the fragmentation
and diffusion of political authority in global contexts on the
other. Concerning governance of capitalism, the supreme –
and sufficient – role of the nation-state definitely is history. As
long as there is no global correlate to the nation-states’ regulatory powers global capitalism will be volatile and disruptive.
However, the strengths of democracy as a mode of governance
extend beyond the confines of the nation-state and should be
taken into account in devising modes and models of global
governance in general and political governance of capitalism
in particular.

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2.

On the political economy of
global capitalism

In his classic study on ‘the economic institutions of capitalism’
Oliver Williamson has suggested regarding the firm not just as a production unit but more basically as governance structure (Williamson
1985: 13). This idea can be extended to the market and to capitalism
in general. In particular, if the frame of reference is not just transaction costs but a broader conception of ‘governance costs’, that is, the
costs of creating and maintaining order in social relations, then varieties of capitalism can be evaluated according to perceived costs and
benefits of specific governance modes. In practice, such an evaluation presupposes criteria of ‘good governance’ and an analysis of the
core components of the various governance regimes.
The legitimacy of capitalism hinges on its capability of being seen
to be embedded in democracy. For this reason Chinese capitalism
may be successful but it is in no way legitimate. Varieties of capitalism differ in their propensity to accept public scrutiny of private
transactions as soon as there is an imbrication of public and private
components of economic affairs. In this chapter we will look at some
dimensions of this convergence of private and public aspects which
sustain the need for reconfiguring the governance of capitalism.
A comparative institutional assessment of varieties of capitalism
of course cannot be done here. Instead, we will focus on a few of
the hinges which connect capitalism and democracy as governance
modes of complex functional subsystems of society. A kind of guideline will be the ongoing global crisis since it exhibits major consequences of an unhinging of a territorially defined democracy and a
globally performing capitalist economy. The most salient problem
arenas connecting capitalism and democracy are (1) the definition of
public goods, (2) the relation between public and private authority,
(3) the enforcement of private accountability, and (4) the emergence
of systemic risk.

Without proper and reliable contextual conditioning and
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regulatory frameworks, global capitalism tends to act out its internal
dynamics, morphing, we will argue, into a systemic risk itself.

2.1 PUBLIC AND PRIVATE GOODS
The distinction between private and public goods, already alluded
to by Adam Smith and mainly elaborated by Paul Samuelson
(Samuelson 1954) has expanded into a broad array of different kinds
of goods: private and public goods, pure public goods, impure public
goods, common goods, club goods, complementary goods, mixed
goods and other variants. While these distinctions are helpful in providing categories for differentiating production modes, cost-benefit
relations, exclusion and inclusion in consumption forms and so on,
in practice the borderlines between the various types increasingly
have become blurred and superseded by issues of governance and
regulation.

Samuelson’s formal criteria for defining public goods have been
jointness in consumption (non-rival consumption) and nonexcludability from consumption (if the good is there, like clean air or public
security, then nobody can be excluded from consuming it). The most
important effect of separating public and private goods has been to
reinforce the received view that public goods ought to be produced
or provided by public institutions, that is, by governments. It is not
the distinction between public and private goods that is the problem,
we contend, but the almost automatic coupling of public goods with
public production/provision of these goods. Randall Holcombe
succinctly states two counter-arguments:
First, many public goods are successfully produced in the private sector,
so government production is not necessary. Second, many of the goods
government actually does produce do not correspond to the economist’s
definition of public good, so the theory does a poor job of explaining the
government’s actual role in the economy. (Holcombe 1997: 1)

Since this book’s topic is governments’ (and other institutions’)
role in the economy in general and in governing capitalism in particular, the consequences of distinguishing private and public goods
are highly pertinent.
Any variety of capitalism, even market fundamentalism, has to
accept that it is the polity which decides on types and scopes of public
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goods. It is, therefore, politics which defines the limits of all other
arenas of society. Malkin and Wildavsky have concluded from this
argument that any good can be considered a public good and that all
public goods ‘are public because and only because society chooses
to put the goods in the public sector instead of the private sector’
(Malkin and Wildavsky 1991: 355). The institutional prerogative
of politics derives from the competence-competence of politics,
although even this principle is moderated by the complementary
principle of subsidiarity.
So, in actual fact a debate is going on about defining the limits of
public goods in favor of privatization, and the limits of privatization
in favor of public responsibilities. The period after World War II
until the dissolution of the Bretton Woods agreements in the 1970s
has seen a dominant role of politics in rebuilding, supporting and
governing the economy (‘Golden Age of Keynes’). This conspicuous role for polities in setting rules and limits to economic activities has been gradually dissolved with the advent of ‘liberalization’
of markets during the 1980s: ‘Since then the political climate has
fostered deregulation, with politicians supporting light-touch rules
and assembling meta-governance systems that assess performance
of regulators in terms of business interests rather than those of the
consumer’ (Hutter and Dodd 2008: 4).
The historical evidence is sustaining the point that the distinction between public and private goods is misleading insofar as it
presumes that public goods are to be provided by governments. In
theory and in practice, private markets can produce public goods
and conversely, governments can decide to retreat from the production of public goods and leave their production to private and
deregulated markets. In our context the crucial point appears to
be that the difference between public and private goods is mostly

irrelevant for the government’s role in the economy and its decisions to intervene in economic affairs. For example, the production
of the public good ‘computer software’ (Holcombe 1997: 7 f.) may
take place without any government intervention at all, whereas the
production of a ‘hamburger’ – plainly a private good as private can
be – is regulated by some hundreds of legal provisions, rules and
specifics from hygiene to nutritional standards, making it a heavily
publicly supervised good.
On the other hand, a few services and provisions, for example
railway infrastructure or public safety, should be considered public
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Political governance of capitalism

not just by definition but by the very nature of economic activities
which may be ruined by competition: ‘the paradox of public transport, of course, is that the better it does its job, the less “efficient” it
may be’ (Judt 2009: 9).
The democratic interfaces of capitalism denote those elements of
capitalism which connect capitalism as economic governance mode
with democracy as political governance mode. Classical items are
the institution of property, the right to engage in contracts, enforcement of contracts, and the public provision of legal security for every
citizen. More sophisticated items, based on the classical ones, are

those components of capitalism which can be classified as preconditions for a democratic, that is, egalitarian and non-discriminatory
variety of capitalism. Here, we are entering opaque and contested
ground. Obviously, the criteria of equality and non-discrimination
must be limited to the conditions of entering economic activities,
while the results of economic activities may vary considerably. But
then, grossly different outcomes resulting in grossly different leverage
and economic power may influence the conditions for building and
managing firms, the conditions to shape market conditions and contractual relations. If this argument is taken seriously, then the institutions of freedom of property, freedom of contract and legal security
need to be elaborated for the case of modern, global capitalism.
The institution of private property arguably is the core democratic
institution of capitalism since it provides at least a minimal level
playing field: everyone is entitled to possess private property. The
fact that even China has elevated this entitlement to the rank of a
constitutional right shows the two sides of property. On the one
hand it is indeed the core precondition for a capitalist organization
of economies and markets, so even China has to formally guarantee
private property if it wants to take advantage of the dynamics and
entrepreneurship propelled by a capitalist mode of economy. On
the other hand economic practice and political reality of private
property may vary immensely; they are even compatible with factual
political despotism.
For modern Western democracies the perennial problems with
property have become acute with the ongoing global crisis. One
problem is particularly salient: the problem of defining the limits
and responsibilities of private property. The German constitution,
for example, explicitly states a ‘social obligation’ of private property, whereas the idea of market fundamentalism would mark the
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opposite end of a dimension reaching from unlimited freedom to
socially bounded responsibility. A somewhat strange interpretation
of ‘social obligation’ is given by a group of American billionaires
who have amassed vast fortunes within the rules of a quite unrestricted market capitalism, and in 2010 decided to give away half of
their wealth to charitable foundations.
The limits of property are closely related to an incursion of
public-good aspects in the scope and uses of private property. If
ordre publique is a public good, and if a democratic public order
implies excluding illegitimate uses of power in private affairs and the
illegitimate influencing of political decision-making, then massive
amounts and concentrations of private property obviously pose a
grave problem. From the Fugger banking dynasty in the 15th and
16th centuries or the 19th-century US oil barons’ immense fortunes
and equally immense influence on politics to Berlusconi’s abuse of
private media power for public purposes there is no dearth of cases
to illustrate the potential of private property to jeopardize public
goods.
The democratic interfaces of capitalism have become more relevant and more acute with the unfolding of a global economic crisis
which has reinforced the nation-state’s role as lender and guarantor
of last resort. In democracies this pits private/corporate failures and
profits against collective responsibilities and losses – presumably an

inequitable distribution of costs and benefits. The crisis also juxtaposes the limited reach and regulatory power of the nation-states
against an economy with global impact and with plenty of options
for its firms to choose a more amenable environment if the economic
policies of a nation-state become too burdensome. In spite of the
obvious limitations of the nation-states, political actors, including
parts of the electorate and mass media, indulge in recurrent ‘cyclic
dreams of a strong state’ (Hofmann 2008), virtually disregarding the
massive consequences of globalization.
The task at hand appears to be to define a new balance between
public and private goods which reflects the markets’ powers of selforganization and self-governance on the one hand and the demands
of public reason and public responsibilities on the other. The preceding decades of globalization in general and the ongoing crisis in
particular have taught a sobering lesson: There are quite a few areas
where privatization has done no harm or has even been beneficial for
customers (telecommunication, postal services, energy, trains and
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so on); a few areas such as air traffic safety or transportation infrastructure have had mixed results; but there is no ground for categorical either-or dichotomies. It mostly remains a question of political
decision and practical feasibility whether a domain that used to be
defined as a public good should be privatized or not. Cases of market

failure abound as do cases of state failure, so there is little reason to
set up either-or principles.
The financial and economic crisis of 2007 ff. has seen an unprecedented scope of financial losses and economic value destruction
in the region of some nine trillion dollars, millions of people losing
their houses, their pensions or their savings, and thousands of firms
being driven into bankruptcy. The total cost incurred by the global
financial crisis is estimated by the IMF at $11.9 trillion, while estimates of global bank losses currently stand at $3.4 trillion (Evans,
Jones and Steven 2009: 14). At the same time many of the actors
involved in sustaining and deepening the crisis – that is, managers
of banks, mortgage banks, hedge funds, private equity and so on –
have claimed pay and bonuses in the multi-million-dollar range even
during the crisis. The apparent imbalance has engendered furious
protests (e.g. ‘Occupy Wall Street’) and calls on governments and
‘the state’ to limit managers’ pay and to curb bonuses, to control the
activities of financial institutions, and even to nationalize some particularly important or ‘systemically relevant’ financial and economic
corporations. In this way, the crisis has reopened a Pandora’s box of
questions about the limits of private property, particularly property
and property rights embodied in private firms.
The trouble with most of the suggested reforms and measures is
that ‘the state’, that is, the ensemble of public institutions, is in no
way better equipped and more knowledgeable to manage economic
and financial affairs than private corporations. State failures are as
likely as market failures and indeed many of the banks and institutions involved in the crisis are public or semi-public organizations,
for example the German State banks or the American mortgage
agencies Fannie Mae and Freddy Mac (the latter being private firms
which because of their history and record have enjoyed quasi-public
status).
Doubts about any innate superiority of public control or management extend to modes of regulation. After the end of the Bretton
Woods era the massive public control of financial affairs through law
– normative regulation – gradually has been replaced by self-control,

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self-regulation and a ‘principles-based’ form of public supervision.
The global financial crisis has put into question almost all received
approaches and convictions about governing global finance and
modes of regulation (Singer 2007). Doubt also extends to the model
of principles-based regulation:
Only last year the advocates of principles-based regulation were on the
ascendant. A year later, people are asking whether the failure of regulators, notably the UK Financial Services Authority, to prevent the credit
crisis is due to a principles-based approach. The difficulty with this argument is that the US Securities and Exchange Commission with its highly
rules-based approach was equally unable to prevent the crisis that has
led to the death of the US investment banks that it supervised. (Black
2008: 8)

Consequently, the global crisis should not be used as an argument for or against any applied model of regulation since all actual
models have failed to prevent the crisis – for whatever reasons in
detail. Presumably the crisis is not the fault of one of these models
but rather it has been precipitated by a confluence of multiple factors
including loose monetary policies, overextended credit creation, failures of credit rating agencies, auditors, mortgage banks and mortgage brokers, and insouciant risk-taking by investment banks and

general banks. If there is a lesson to be learnt at this stage of reflecting on the crisis, then it reinforces the idea that neither the market
alone nor any formal state authority in itself is able to establish the
kind of complex and sophisticated regulatory framework necessary
to cope with the opacity, volatility and non-knowledge prevalent in
the operational set-up of global finance. The lesson means that political governance of capitalism must not be misunderstood as simply
shifting regulatory powers from markets to governments.
Strong indications to reject a simple dichotomous separation
of public and private goods, including their modes of production/
provision, can be found in many areas beyond financial regulation.
Prominent and debated cases are ‘global public goods’ such as global
health (prevention of pandemics), universal primary education,
global climate change, global environmental quality, global supply
of water or fair global trading and exchange (preventing corruption
and other detriments to fair exchange) (Kaul et al. 2003; Zedillo and
Thiam 2006). All these cases, and probably many more, demand a
close interplay and cooperation between private and public agents
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