Governing Capitalist Economies.

Edited by J. R. Hollingsworth, R C. Schmitter, and W. Streeck. New York and Oxford: Oxford University Press, 1994. Pp. 316. $45.00.

The objective of this book is to compare the effects of industrial "governance" in North America, Japan, and Western Europe. The book is premised on the notion that economic action is a special case of social action and, therefore, needs to be coordinated or governed by institutional arrangements [p. 4]. The editors (two sociologists and a political scientist) also wrote papers for the volume as well as organized the conference entitled "Comparing Capitalist Economies: Variations in the Governance of Sectors," upon which the book is based.

The papers in this book challenge neo-classical economic assumptions about the effect of social, legal, and economic factors on economic performance. The editors attempt to demonstrate that government intervention in the form of regulation and coordination enhanced the performance of industrial sectors, i.e., automobiles, chemicals, consumer electronics, steel, dairy, and securities. Specifically they argue that highly regulated sectors outperform their less-regulated counterparts in the world economy. In their words: "Coordination is accomplished through a set of institutions that together form the economy's system of governance." It is the aim of the editors of the book to focus discussion on a consistent definition of "governance" as a process of coordination and regulation of transactions which may be affected by the cultural traditions and value preferences which form the basis for social institutions such as individual trust and social cohesiveness. Furthermore, "governance" is defined broadly to include the nongovernment and nonmarket modes of social coordination that may emerge through family and tribe. This is in addition to such traditional forms of government intervention as constraints on vertical integration. They define a "governance system" as the totality of institutional arrangements--including differing social, legal and economic institutions--that regulate transactions inside and across the boundaries of an economic system.(1) But it has to be noted that at least for economists, the term "governance" is misleading in that it evokes the notion of government management and should be carefully distinguished from the objectives of the authors.

Given the length of this review it is not possible to discuss each of the case studies in detail The book is tightly organized and focused along the lines of the model described in Chapter I in which the key terms and concepts of the book are defined. Therefore, the following focuses on this chapter which is written by the editors.

In the model developed in this book, markets are arenas in which individual or corporate actors hold separate property rights in different resources and voluntarily engage in free, legally enforceable contractual exchanges. Coordination of economic activity is composed of markets, corporate hierarchies, and the state. Markets and corporate hierarchies are seen to provide the "appropriate arrangements for coordinating exchanges among actors if these reflect a sequential or serial type of interdependence--in other words, if the output of one unit is the input of the other." Another mechanism of economic coordination (non-governmental) consists of informal networks which include clans, and community which "facilitate transaction on the basis of mutual trust and confidence sustained by stable, preferential, particularistic, mutually obligated, and legally nonenforceable relationships."

The role of the state is to serve as "a provider of last resort of collective goods that neither markets nor corporate hierarchies nor the informal network of social factors can provide efficiently or reliably on their own, such as fresh air, a stable currency, general education, and protection against wars, crime, worker rebelliousness, political insurgency, foreign armies, and so forth." "In reality, of course, states have assumed a much wider range of roles due both to their unparalleled capacity for supplying authoritative `public' regulation of transactions among economic actors, and to the unrestrained demand for their intervention by a set of aroused and disadvantaged "publics."

Using these pillars, the authors develop the notion of economic governance which may differ not only by countries--reflecting differential institutional legacies and distributions of national political--but also by sectors, in accordance with specific economic, social and technological conditions. The basic unit of the author's comparative analysis is the industrial sector defined as "a population of firms producing a specified range of potentially or actually competing products." The industrial sector is viewed in two ways: first, the locality where exchanges take place; second, the framework within which public policies can be effectively administered. "Sectors can be initiated and sustained from below through the independent actions of capitalists and their trading partners and interlocutors, or they can be created from above through the imposition of boundaries and rules by public authorities. The editors argue "to understand sectoral institutional regimes, we must be sensitive not only to how an array of performance criteria (e.g., efficiency, quality, market share, egalitarian concerns, etc.) shape institutional arrangements but also how institutional arrangements shape sectoral performance." The authors argue that it is the reality of international "capitalist development" that increasingly puts entire local and national socioeconomic systems to competitive tests. As economic theory finds it increasingly difficult to account for cross-national variations in competitiveness, comparative institutional analysis may hold the key for understanding how different industrial orders obstruct or facilitate the efforts of industries to survive in world markets.

The intellectual enterprise involved in this book is to understand the incentives faced by the firm. Yet, the term "subsidy" is not provided as a separate heading in the index although one page reference is cited under the automobile industry. Instead, the book focuses on the government programs which provide benefits to industry and/or reduce their input costs or the costs of collusion, e.g., protection, cartels and tariffs are topics in the index. Indeed, a lot of institutional insights are offered which are important to understand the success of certain sectors. But, the results of the case studies are not surprising: coordination can stimulate development of industrial sectors, indirect and direct cost reductions can encourage short-term growth in the targeted industries, and intervention can be narrowly focused to benefit specific industries. However, we must not lose sight of Hayek's point that the costs of intertemporal discoordination will not remain constant. While Hayek's aim was to discover the set of circumstances or sequence of events that cause failures, the authors of this volume have looked for instances where a high degree of coordination appears to have enhanced economic performance. Having found such instances, one must also consider the sustainability of the government enterprise in that the coordination of activities over time is inherently more costly than the coordination of activities in a given time period. Hayek's examination of the institutions affecting intertemporal coordination and of central-bank policies demonstrated that government can interfere in such a way as to cause artificial economic booms which are inevitably followed by economic bust. Lord Peter Bauer has demonstrated why government-to-government schemes such as those promoted by the World Bank never work. Bauer suggests that what governments should do is to eliminate trade restrictions so that individual entrepreneurs will be free to produce prosperity: this is opposite to the message contained in this book.

The authors' efforts to provide insight in the role of institutions in economic growth is misleading in that the kinds of coordination they describe generally work well to direct economic activity. Moreover, just as one may argue that the results are unique to a specific "governance" institutional and social backdrop, it is dangerous to universalize the success stories. And finally, the authors looked for success of a sector, but obviously could not assess the foregone opportunities that would by definition have occurred in the less favored sectors. Although, the firms selected for development and coordination might not compete head on for sales in product or service markets, they certainly compete in domestic markets for inputs. The resulting reallocations may be small or large, but they would have some effect. While this book offers many important institutional insights, it is biased because the focus is on success stories and the importance of subsidies does not seem to be recognized by the authors. As a consequence, it would be dangerous to draw conclusions about the success of the regulatory state from their analysis. (1.) Relative concepts used in this book include "socioeconomic regime" or "industrial older."