A Reformed European Model
Social Capital as Competitive Advantage
Thesis presented to the Faculty of Arts of the
University of Zurich for the degree of Doctor of
Philosophy
by
Michael Leicht
of Trun, GR
Zurich, 2000
3
Contents
C
ONTENTS
3
L
IST OF
F
IGURES
5
P
REFACE
6
I
NTRODUCTION
8
P
ART
I:
C
OOPERATION
,
S
OCIAL
C
APITAL AND
S
OCIAL
I
NTEGRATION
10
1.
S
OCIAL
D
ILEMMAS AND THE
P
ROBLEM OF
C
OOPERATION
11
Modelling Social Dilemmas
13
Solving Social Dilemmas
16
2.
T
HE
M
ORAL
F
OUNDATIONS OF
L
IBERALISM
20
The Evolutionary Approach and the Moral Sense
22
Limits to the Evolutionary Approach and the Need for Constructivism
28
Moral Learning and Social Justice
31
Summary of Moral Sources of Social Capital
39
3.
T
HE
N
EED FOR
F
EDERAL
P
OLITICAL
I
NSTITUTIONS
42
Megalothymia, Amour-Propre and the Need for Political Institutions
42
Personalism and the Principles of a Federalist Polity
47
4.
S
OCIAL
C
APITAL
C
ONCEPT
,
P
RODUCTION
,
D
ISTRIBUTION AND
D
EPRECIATION
50
The Concept of Social Capital: Its Origins From Karl Marx Onwards
51
Excurse: The Structure/Agency Problem
61
Social Order, Cooperation Virtues and Transaction Costs
67
Production of Social Capital
71
Distribution of Social Capital
79
Depreciation of Social Capital
80
5.
S
OCIAL
I
NTEGRATION
89
Markets, Civil Society, the State and Culture
89
Social Capital as Precondition to Capitalism and Democracy
95
P
ART
II:
G
ROWTH
T
HEORY AND
E
MPIRICAL
R
ELEVANCE OF
S
OCIAL
C
APITAL
99
1.
G
ROWTH
T
HEORY
100
Growth Theory and Social Capital
102
2.
P
REVIOUS
E
MPIRICAL
S
TUDIES AND OWN
A
PPROACH
104
3.
D
ESCRIPTION OF
V
ARIABLES
109
4.
R
ESULTS AND
I
NTERPRETATION
115
P
ART
III:
H
OW
C
AN
W
E
F
OSTER THE
A
CCUMULATION OF
S
OCIAL
C
APITAL IN
E
UROPE
? 124
1.
T
HE
E
UROPEAN
M
ODEL OF
S
OCIETY AND
T
HIRD
W
AY
P
OLITICS
125
4
Globalisation and Varieties of Capitalism
125
Beyond Left and Right
130
2.
T
HE
F
UTURE OF
S
OCIAL
C
OHESION IN
E
UROPE
-
A
C
OUNTERFACTUAL
S
CENARIO
137
3.
S
OCIAL
P
OLICY
A
CTIONS ON THE
N
ATION
S
TATE
L
EVEL
144
Social Welfare and Competitiveness
145
Reform of the Welfare State
149
The Unemployment Problem
153
4.
A
CTIONS AT A
E
UROPEAN
S
CALE
163
Economic and Monetary Union
167
European Social Policy
181
European Anti-Discrimination Measures
188
European Regional and Cohesion Policy
194
A Federal Europe
198
P
ART
IV:
A
N
I
NTERNATIONALLY
C
OOPERATIVE
E
UROPE
212
G
LOBAL
P
LAYER
EU 212
G
LOBAL
G
OVERNANCE AND THE
N
EED FOR A
W
ORLD
S
TATE
217
C
ONCLUSION
229
L
ITERATURE
232
5
List of Figures
Figure 1: Prisoner's Dilemma ... 14
Figure 2: Assurance Game ... 15
Figure 3: Chicken Game ... 15
Figure 4: Moral Sources of Social Capital... 39
Figure 5: Different kinds of social capital... 60
Figure 6: Types of Organisation and Social Capital... 74
Figure 7: The Pyramid of Cooperation ... 93
Figure 8: Social Capital as Precondition for Capitalism and Democracy ... 97
Figure 9: Social Capital in the Input/Output Process ... 103
Figure 10: Structural Equation Model for a Growth Model ... 109
Figure 11a/b: Social Capital and Economic Growth 1990-1998... 116
Figure 12: Varieties of Capitalism ... 130
Figure 13: Relationship between Social Protection and Economic Performance ... 146
Figure 14: Social and European Integration... 164
Figure 15: Federal State or Confederation? ... 210
Figure 16: Typology of the Main Players in World Politics... 213
6
Preface
The idea for this book grew slowly towards the end of my studies for a Lizentiat in economics
at the University of Zurich in 1996. There I had to struggle with the supremacy of the alloca-
tive efficiency of the market. Which implies translated to politics the privatisation and aboli-
tion of the state. Having been already a convinced European since I can remember, I have de-
cided to challenge my self and to start studying European politics at the College of Europe in
Bruges, Belgium. At that time I have met in two summer schools scholars of personalistic
thinking, too. The Bruges experience and the encounter with personalism have left traces. I
have completed my Masters in European Politics in 1997 just when the Treaty of Amsterdam
was signed. Back at home in Zurich and starting to work at the Sociological Institute of the
University of Zurich I was for a while more interested in questions of social development.
What is the importance of the social glue for economic growth? Economists think that they
can explain everything in the social world with their approach. But might it not be that they
are missing some important elements?
During supplementary lectures in political philosophy in Zurich I have learned more about the
importance of values and norms. During a research stay at Swisscore in Brussels in May 1998
I have started to integrate the European dimension into my work. There I got in contact with
people from the Commission (Cellule de Prospective, DGV, etc.) and from the European Par-
liament (Institutional Affairs Committee, Social and Employment Committee, etc.). At the
European University Institute (EUI) in Florence a year later in May 1999 at another research
trip I had the chance to meet some of the most distinguished scholars working on questions of
reform of the European welfare state. I also had the occasion to present parts of my work at
the Robert Schuman Centre of the EUI in Florence, at the Research Department of the World
Bank in Washington, as well as at the European and the combined German, Austrian and
Swiss sociological congress.
During most of the time of my work, including a Summer School on advanced quantitative
methods, I was financially supported by the Swiss National Science Foundation, to whom I
own my gratitude. They sponsored a research project on the empirical relevance of social
capital for economic growth in the 1990s (under the direction of Prof. Bornschier). I was there
research assistant, first for nine months and than during the prolongation for another four
months. In between I had a job for seven and a half months as assistant of Prof. Bornschier.
7
Pivotal for my dissertation was, of course, first of all Prof. Bornschier who could be con-
vinced to give support to this transdisciplinary work, including philosophy, sociology, politics
and economics. He always supported me in a friendly way despite some periods of differ-
ences in opinion. But different impulses are important which I also got especially from Prof.
G. Kohler. I think, having completed this project, I have also managed to settle down with a
new world view. Other people who have helped me at various points in my work are: Bruno
S. Frey, Ian Gough, Otfried Höffe, Elmar Holenstein, Ferdinand Kinsky, Martin Rhodes, Bo
Strath, Vesna Thomse, Wolfgang Wessels and Patrick Ziltener. Finally, I should not forget
my father who always encouraged me to push ahead with my thesis.
Zurich,
September
17,
1999
Michael
Leicht
8
Introduction
Unemployment, social exclusion and a welfare state which has reached its limits are signs of
a deep crisis of our European society. But at the same time we are living in a post-ideological
world of politics were the limits of debate are set by arguments about effectiveness in public
policy. Important for politics of the `radical centre' is whether there has been a decline in so-
cial cohesion and how civil society and politics are interrelated. Thus in a time of deep sea-
change of the social fabric and the need for a new political organisation we may learn from
Alexis de Tocqueville that the two are only two sides of the same coin:
,,In the long run political society is nothing else than the mirror image of civil so-
ciety." (von der Gablentz, 1997).
Hence the problems we are facing today demand solutions for which the nation state is not
anymore adequate. Solutions must start already at a smaller level and must go often beyond
the reach of the nation state. Therefore the need for a `reformed European model'. For starting
to think about such a reformed model Tocqueville is also a good starting point for other rea-
sons. He saw man as being a social animal living in community.
,,La société communale existe chez tous les peuples, quels que soient leurs usages
et leurs lois; c'est l'homme qui fait les royaumes et crée les républiques; la com-
mune paraît sortir directment des mains de Dieu (Tocqueville, De la démocratie
en Amerique, 1835: S. 1.58; Chapter 5; quoted in a handout of Prof. E. Holen-
stein, SS 1999, Swiss Federal Institute of Technology Zurich).
This means that the natural communities, in which men originally lived, are the starting point
for our analysis. Unfortunately, these days we have lost this communitarian view. Society dis-
integrates into atomised individuals. Hence we need two things: First, a new social science
which takes account of people's conntectedness and relatedness. Therefore we need new in-
tellectual tools which must capture the person in his/her embeddedness and connectedness in
his/her community.
1
In part I we will try this by developing the concept of social capital. In
part II we will give empirical evidence that this broadening of view is of relevance for eco-
nomic development and personal well-being. Finally, in part III we will start thinking about
how we can change the European polity in order that we will have more social capital in the
1
In the following we will always use the male form for the third person singular, but this won't exclude women.
They are always included in this meaning.
9
future. Social capital is a good worthwhile to pursue for its own sake. But it is also of eminent
importance to prevent social breakdown on the one hand and on the other hand can it become
a crucial competitive advantage in a globalising world economy.
10
Part I: Cooperation, Social Capital and Social Integration
The major goal of society is to foster mutually beneficial cooperation among its members.
Society should integrate. But presently we see more a disintegration, fragmentation and at-
omisation of our social fabric. Only the individual counts. What gets lost are the necessary
connections between people; the connectedness and embeddedness. Persons are embedded in
communities. In the following we will try to capture with the concept of `social capital' the
major aspects of cooperation and connectedness. On the one hand we will focus on the moral
feelings coming from within the person. Norms of justice, trust, civic engagement and toler-
ance facilitate mutually beneficial cooperation. On the other hand can social structure help to
enforce cooperation among people who don't always behave morally. Moral norms are seen
as having evolved evolutionary. For man being dependant on other human beings it seems
plausible that an innate moral sense and a genetical predisposition for moral learning will
have developed to help humans to live together in fruitful collaboration. By including moral
and political motivations and constraints in our analysis we will go a crucial step further than
normal libertarians do. They normally restrict their view on rationally maximising individu-
als, property rights and free markets. We are convinced that it is essential to broaden the view
and to go beyond the present day `shrink liberalism'. Social connecteddness and embedded-
ness of persons is crucial for a well integrated society. Working together is easier in a com-
munity blessed with a substantial stock of social capital.
We will start this part with the analysis of the problem of cooperation. How does cooperation
evolve? Social capital is the crucial cooperation resource. It has a double character. Social
capital is a moral resource on the one side, and captures social and political structures which
foster cooperation on the other. What are the sources of morality? We will start by looking at
the evolutionary and biological base of morality moral sense theory. Then we will discuss
the limits of the evolutionary approach and present some of the most prominent rationalist
moral thinkers Aristotle, Kant, Habermas and Rawls.
Voluntary cooperation based on innate moral rules might not always be successful. But since
human beings are different from other animals in the way that they have culture and reason,
they can modify their genetically controlled behaviour. This opens the realm of constructivist
political intervention. But how should political institutions be organised? The best way for
political intervention is when the polity is based on federalist principles. Thus with a view to
European institutions we will discuss the philosophy and principles of federalism. Having un-
11
derstood the various moral and institutional sources of social capital we will show the origins
of the concept `social capital' in social science literature from Karl Marx onwards. Subse-
quently we will also discuss production, distribution and depreciation of social capital. To
close part I we will show the major elements of social integration and the crucial role social
capital plays as precondition to capitalism and democracy.
1. Social Dilemmas and the Problem of Cooperation
The problem of how cooperation among actors can emerge lays at the centre of this study. It
is the old problem of the origins of social order and how social cohesion can be sustained.
The question of where the cooperative norms, underlying social capital, come from is a ques-
tion that is in some way coextensive with the field of sociology. But also economics has with
game theory a highly developed theory of the origins of cooperative norms. Cooperation oc-
curs when actors adjust their behaviour to the actual or anticipated preferences of others,
through a process of coordination so that all sides end up better off than they would otherwise
be. Therefore cooperation must be distinguished from harmony of goals and mutuality of in-
terests. Cooperation implies adjustment of goals. But on the other hand cooperation is some-
thing different from competition and conflict (zero-sum game) where one wins at the expense
of another.
Sometimes the pursuit of self-interest guided by the invisible hand leads to the spontaneous
emergence of cooperative systems. These are the benefits of a working market system. Adam
Smith asserted in his `The Wealth of Nations' (1776) that the invisible hand of self-interest
`frequently' leads men to promote the interests of others.
,,Every individual is continually exerting himself to find out the most advanta-
geous employment for whatever capital he can command. It is his own advantage,
indeed, and not that of the society which he has in view. But the study of his own
advantage naturally, or rather necessarily leads him to prefer that employment
which is most advantageous to the society
[Each individual is] led by an invisible hand to promote an end which was no part
of his intention. Nor is it always the worse for society that it was no part of it. By
pursuing his own interest he frequently promotes that of the society more effec-
tually than when he really intends to promote it." (Smith, 1776/1961, I, 475, 477,
478).
His famous canonical example is the one of the Butcher-Brewer-Baker.
12
,,It is not from the benevolence of the butcher, the brewer, or the baker that we
expect out dinner, but from their regard to their own interest. We address our-
selves, not to their humanity but to their self-love and never talk to them of our
own necessities but of their advantage." (Smith, 1776/1961, I, 18) (quotations
from Reisman, 1998).
Economists in modern times have refined this idea into a more precise theorem that can be
worded as follows: Given a number of ideal conditions, optimising behaviour on the part of
individuals and firms under pure competition leads to an efficient (Pareto-optimal) social out-
come (Hirshleifer, 1988: 467).
2
What makes the invisible hand metaphor so powerful is the
idea of simultaneous micro and macro realities: the reality in the mind of each individual is
not the same as the reality that emerges when many individuals interact. At one level we do A
for reason B, while at another level A serves purpose C (de Wall, 1996: 28).
3
The conse-
quence of this thinking is that a beneficent order can be established itself without conscious
direction as the unintended consequence of self-love. Such an order is based on spontaneous
process (Reisman, 1998: 358).
But the basic problem of cooperation is that the pursuit of self-interest by each leads often to a
poor outcome for all. We are therefore in situations where `the invisible hand theorem' of
Adam Smith is not working. David Hume gives in his `A Treaties on Human Nature' (1740) a
good example for the problem of collective action, and the unfortunately poor outcome for
everybody.
,,Your corn is ripe today; mine will be so tomorrow. This profitable for us both
that I should labour you today, and that you should aid me tomorrow. I have no
kindness for you, and know you have as little for me. I will not, therefore, take
any pains upon your account; and should I labour with you upon my account, in
expectation of a return, I know I should be disappointed, and that I should in vain
2
Economic efficiency requires that the marginal rates of transformation between goods must be equal for all
producers, that the marginal rates of substitution in consumption must be equal for all consumers and that the
marginal rates of transformation in production is equal the marginal rates of substitution in consumption. The
market price serves to bring about the conditions of efficiency by meditating all the individuals' productive and
consumptive decisions. Thus in a free-market economy, the forces of supply and demand will bring about a set
of equilibrium prices that lead individuals to meet the conditions of efficient production, efficient consumption,
and efficient balance of production and consumption (Hirshleifer, 1988: 468f).
3
For example, sex serves reproduction, yet animals engage in it without the slightest notion of its function. They
are not driven by any desire to reproduce, only by sexual urges (as are humans most of the time).
13
depend upon your gratitude. Here then I leave you to labour alone; You treat me
in the same manner. The seasons change; and both of us lose our harvests for want
of mutual confidence and security." (cited in Putnam, 1993b)
Although in most situations all parties would be better off were they to cooperate. But in the
absence of an overarching authority to enforce appropriate behaviour, clear mechanisms to
ensure commitment, or incentives and motivations individuals will tend not take the risks of
cooperation. This is the tragedy of the commons, the logic of collective action, public goods,
the prisoner's dilemma. In all these situations everyone would be better off if everyone would
cooperate. In the absence of coordination and credible mutual commitment, however, every-
one defects. None achieve the gains from cooperation and all are worse off.
Modelling Social Dilemmas
The problem of cooperation and the study of social dilemmas has been formalised in game
theory. Social dilemmas are situations in which individual rationality leads to collective irra-
tionality. That is, individually reasonable behaviour leads to a situation in which everyone is
worse off than might have been otherwise. All social dilemmas are marked by at least one de-
ficient equilibrium, i.e. there is at least one another outcome in which everyone would be bet-
ter off (Kollock, 1998: 183, 184). The most severe social dilemmas are characterised by a
dominant strategy that leads to a deficient equilibrium. It is the strategy that yields the best
result for an individual regardless of what others are doing. This is the case in so called Pris-
oner's Dilemma. But besides the Prisoner's Dilemma there is a whole range of other dilem-
mas. Two-person social dilemmas (Prisoner's Dilemma, Assurance, Chicken) and multiple-
person social dilemmas (public goods dilemmas and common dilemmas).
In the Prisoner's dilemma situations the pursuit of self-interest leads to an inferior outcome
for everyone. The classic example involves two prisoners who are separately given the choice
between testifying against other or keeping silent. Each has two choices, namely cooperate or
defect. Each must make the choice without knowing what the other will do. No matter what
the other does, defection yields a higher payoff than cooperation. Lacking a confession, the
authorities will be able to convict the prisoners only of a minor infraction. With a confession
from either, on the other hand, conviction on a major count is guaranteed. Keeping the pris-
oners out of communication with each other, the district attorney offers to let either of them
off for turning state's evidence - provided that he confesses, while the other does not! The di-
14
lemma is that if both defect, both do worse than if both had cooperated.
What defines the Prisoner's Dilemma in general is the relative value of the four outcomes.
The best possible outcome is defecting while one's partner cooperates (designated DC). The
next best outcome is mutual cooperation (CC) followed by mutual defection (DD), with the
worst outcomes being the case in which one cooperates while one's partner defects (CD).
Thus, in a Prisoner's Dilemma, DC > CC> DD > CD. This can be visualised with an ordinal
pay-off matrix. In Figure 1, along the left margin the rows show the possible choices of per-
son A: `cooperation' vs. `defection'. Across the top are the same choices for person B. Within
each cell the ordinal pay-offs in the matrix are the following: the first number indicates A's
pay-off, the second, B's pay-off. The asterix indicates the dominant equilibrium.
4
B's choice of strategy:
A's choice of strategy:
Cooperation
Defection
Cooperation
2, 2
0, 3
Defection 3,
0
1,1*
Figure 1: Prisoner's Dilemma
Two other important games can be created by switching the relative value of the outcomes. If
mutual cooperation leads to a better outcome than unilateral defection (CC > DC > DD >
CD), the situation is known as an Assurance Game. Table 2 gives an example, again with or-
dinal pay-offs and indication of the dominant equlibria.
4
In the language of game theory, the strategy-pair `defect, defect' is called Nash solution for this game. It is an
equilibrium since, once the choices are made, neither party has any motive to change his action. Each is doing
the best he can for himself, given the decision of the other (Hirshleifer, 1988: 284).
15
B's
choice
of
strategy:
A's choice of strategy:
Cooperation
Defection
Cooperation 3,3*
0,2
Defection 2,0
1,1*
Figure 2: Assurance Game
A common misunderstanding is that the Assurance Game presents no dilemma and leads in-
evitably to mutual cooperation. In fact, cooperation is not always a dominant strategy. If the
person believes the partner will defect, the best the person can do is to defect as well. In other
words the Assurance Game has two equilibria: mutual cooperation, which is an optimal equi-
librium, and mutual defection, which is a deficient equilibrium. The key issue in the Assur-
ance Game is whether we can trust each other. This game has received much less attention
than the Prisoner's Dilemma Game, although it is very often the more accurate model than the
Prisoner's Dilemma of many social dilemma situations.
A third two-persons game is created if mutual defection yields a worse outcome than unilat-
eral cooperation (DC > CC > CD > DD). This is the Chicken Game, named after a famous
film scene where two youths drive their cars towards each other (or towards a cliff). The first
youth to turn away is `chicken' and loses face, while the other youth basks in the glory of his
courage. However, if neither youth turns away, they both end by dying the worst outcome.
If both turn away, the sting of being chicken is not as great since both drivers lost their nerve.
B's
choice
of
strategy:
A's choice of strategy:
Cooperation
Defection
Cooperation 2,2
1,3*
Defection 3,1*
0,0
Figure 3: Chicken Game
There are two equilibria in the Chicken Game unilateral defection and unilateral coopera-
tion. If driving toward each other, you are sure the other person will lose their nerve and
swerve, you are best off driving straight ahead, but if you believe the other person will not
16
swerve, you are better of swerving and losing face rather than your life.
5
Now such social dilemma exist also in cases of more than two persons. Such multiple-person
dilemmas are most of the time even more sever. In the case of provision of public goods, an
individual is faced with an immediate cost that generates a benefit that is shared by all. The
individual has an incentive to avoid the cost, but if all do so each is worse off. In the social
trap of the tragedy of the commons the individual is tempted with an immediate benefit that
produces a cost shared by all. In the commons dilemmas the problem is the non-excludability
of a joint resource, too, but unlike public goods, they are subtractible (i.e. rival consumption).
Both types of social dilemmas show externalities, behaviour of a person affecting the situa-
tion of other persons without the explicit agreement of that person. They lead to uncompen-
sated interdependencies (Kollock, 1999: 185-191).
Solving Social Dilemmas
Facing the many social dilemma situation in everyday life the evolution of mutually benefi-
cial cooperation is not easy. Thomas Hobbs argued in `Leviathan' (1651) that government is
needed to enforce cooperation. And that before governments existed, the state of nature was
dominated by the problem of selfish individuals who competed on such ruthless terms that life
was ,,nasty, poor, brutish, and short". But there are also other ways to foster cooperation.
Generally speaking there are three categories of solutions to social dilemma situations (Kol-
lock, 1999: 192): motivational, strategic and structural solutions. These categories are based
on whether the solutions assume egoistic actors and whether the structure of the situation
(`the rules of the game') can be changed. For this reason, many of these strategic solutions are
limited to repeated two-person dilemmas.
Motivational solutions assume that actors are not completely egoistic and give some weight to
the outcomes of their partners. Therefore, first of all, social value orientations is important.
For us a cooperation orientation is important, i.e. an individual behaves so as to maximise
5
Unlike the Prisoner's Dilemma, neither the Assurance nor the Chicken Game has a dominant strategy. In the
latter two games the partner's choice is crucial in determining one's best outcome.
17
joint outcomes. This will be our main approach followed in this book. How can we motivate
people so as to take the interests of others into account as well and find a cooperative solu-
tion? Therefore we will show the importance of cooperation values, like justice, trust, civic
engagement, and tolerance. But besides this other values orientations are possible: to maxi-
mise the relative difference between oneself and the partner/competitor outcome (a competi-
tive orientation), to maximise only the partner's outcome without regarding one's own out-
come (altruism) or maximising own outcome without any concern for the partner's outcome
(individualism).
6
Most individuals are either cooperators, competitors, or individualists. In
this regard the formation of social value orientation becomes important and hence socialisa-
tion and education. But more about the formation of cooperation virtues later. Additional fur-
ther motivations to solve social dilemmas are communication and group identity.
Strategic solutions assume egoistic actors and no change to the structure of the game. They
rely on the ability of actors to shape the outcomes and hence behaviour of other actors. Most
important is reciprocity. Axelrod (1984) identifies three requirements for the emergence of
cooperation. It is important that individuals are involved in an ongoing relationship, they must
be able to identify each other, and they must have information about how the other person has
behaved in the past. Than, Tit-for-Tat, to cooperate on the first interaction and thereafter sim-
ply reciprocate whatever the partner did on the previous round. The effect of Tit-for-That is to
transform a repeated Prisoner's Dilemma Game into a repeated Assurance Game. Playing
against an individual using Tit-for-Tat means that the only long-term possibilities are mutual
cooperation and mutual defection. In theory there is no hope of exploiting this strategy in any
kind of sustained way.
But one weakness of Tit-for-Tat is the danger of getting into counterproductive feud. The
other weakness is that no advantage is taken of a `sucker' who is willing to cooperate even
when his partner does not. Therefore a variant strategy has been devised, known as `Pavlov',
to overcome these drawbacks. In simplified terms, it involves occasional foraying expedi-
tions. If the game has degenerated into a feud, A will initiate a cooperative move, and if B
reciprocates, he will continue to cooperate in the following round. If, however, the game has
settled down into continuing rounds of cooperation, A will try an occasional defection. If B
turns out to be a sucker and still cooperates, A will repeat his defection. Otherwise he will re-
6
Other more exotic orientations are sado-masochism, martyrdom, etc.
18
turn to co-operation. Thus there will be both more appeasement and more aggression under
`Pavlov' than under straightforward `Tit-for-Tat' (Brittan, 1995: 42, 43).
Axelrod (1984: 110-123) gives the following four advises for how to do well in an iterated
Prisoner's Dilemma: a) Don't be envious. b) Don't be the first to detect. c) Reciprocate both
cooperation and defection. d) Don't be too clever. The key point in his fourth piece of advice
is that it is important for one's partner to clearly understand what strategy one is using. His
first piece of advice is essentially a warning against playing the Prisoner's Dilemma Game as
if it were a zero-sum game. That is a game in which one's interests are completely opposed to
one's competitors (e.g. chess, competitive sports, mortal combat). In a zero-sum game, using
one's partner as a standard of comparison is useful, as anything that works against one's com-
petitors necessarily helps oneself. However, trying to beat one's partner or being envious of
their success can lead to trouble in a mixed-motive situation such as the Prisoner's Dilemma.
Trying to beat your partner can be self-defeating if it results in mutual defection. Therefore
with Tit-for-Tat you don't beat your partner but you do well on average, encouraging mutual
cooperation. This is a hard lesson to learn for many individuals, since the competitive think-
ing is so strong in our culture. Very often we only think in terms of zero-sum game, get even
into acting like in war and forget the dynamic dimension which most often allows room for
mutual benefit.
The choice of partners is another important strategic element. Therefore cooperate on the first
interaction and continue until the first defection from one's partner, at which point it is time
to exit the relationship. Whereas some degree of forgiveness (i.e. a willingness to give a part-
ner who had defected before a second chance) is most often even more successful. The strat-
egy used in selecting one's partner can be more important than the strategy that is used in the
actual Prisoner's Dilemma Game. Therefore it is best to follow an Out-for-That strategy, re-
sponding to defection not with defection, but desertation. Finally, in multi-persons games
group reciprocity is very important for the emergence of cooperation. The belief in future re-
ciprocal exchange between members moderates the temptation to defect and encourages co-
operation.
Structural solutions aim at either modifying the social dilemma situation or at eliminating it
all together. Iteration and identifiability helps to reinforce those features that are prerequisites
for strategic solutions. Structural solutions might also try to change the fundamental pay-off
structure and increase efficacy. In multi-persons dilemma people very often don't make an
19
effort because they think their contribution is not important and has no effect. If a dilemma
situation can be changed in such a way that individuals can have noticeable effect on the out-
come that is they can make an efficacious contribution cooperation rates can be increased.
Sometimes drawing boundaries, reducing the nonexcludability of collective goods, or reduc-
ing group size to make sanctioning easier, helps.
Large numbers increase the probability of defection and reduce the feasibility of sanctioning
defectors. But on the other hand will a larger number of players be better, since it provides
more opportunities for exchanges and side-payments. Another problem of Prisoner's Di-
lemma with a large number of people is that the building up of social capital, of trust rela-
tions, is difficult. More intimate relations make behaviour more predictable and thus close off
some of the fears that create difficulties among strangers. Consider, for example, why indi-
viduals in a burning theatre panic and stampede to the door, leading to desperate results. Ana-
lysts of collective behaviour long considered this to be prototypically irrational behaviour, but
it is essentially N-person Prisoners' Dilemma: each stampeder is actually being quite rational
given the absence of a guarantee that anyone else will walk out calmly, even though all would
be better off if everyone did so. However, in the case of the burning house, we never hear that
everyone stampeded out and that family members trampled one another. In the family, there is
no Prisoner's Dilemma because each is confident that the others can be counted on
(Granovetter, 1985: 490).
Finally, sanctions are important to reward cooperators and punish defectors. Thus even large
scale cooperation becomes possible. Sanctioning works best using the `donky psychology' of
carrot and stick. Positive reward in case of cooperation and negative ones in case of defection,
but always starting with the carrot (Kollock, 1999: 192-206).
When the pursuit of individual rationality leads to collective irrationality we are really facing
social dilemma situation. To overcome successfully such dilemma situations as often as pos-
sible is the ultimate aim of cooperation. Therefore the motivational orientation and the trans-
formation of incentive structures is important in order to solve social dilemmas. A greater fo-
cus on the Assurance Game instead of always trying to capture everything with the Prisoner's
Dilemma, or even worse the zero sum game logic, might be a first step. Assurance Games do
not eliminate the challenge of cooperation, but they change our focus in many ways. Trust-
worthiness, trustfulness, and all related factors become more important. The fundamental flaw
of game theoretical answers to social dilemma situations is that they normally don't take an
20
actors embeddedness in community norms or social value orientation into account. Normally,
people are not so totally atomised, rational, selfish utility maximises, like economists assume
with their `homo oeconomicus'. Human beings enter into economic exchange by bringing
with them a host of previously existing social norms that strongly influence their willingness
and ability to cooperate. Indeed, there is a lengthy debate associated with Durkheim and Po-
lanyi which argues that market exchanges itself is dependent on the existence of prior social
norms (Fukuyama, 1997: 94).
These social norms, embedding an actor in his social context, is what we are interested in in
the following and what we mean by moral foundations of liberalism.
2. The Moral Foundations of Liberalism
At the end of the twentieth century it seems as if liberal democracy is the only viable eco-
nomic and political order left for advanced societies after fascism and communism have lost
out as possible alternatives in the process of cultural evolution (Fukuyama, 1989). But under
the influence of neoclassical thought the focus of liberalism became reduced to free markets
economics, to market fundamentalism as George Soros puts it.
7
But in this way the moral and
political dimension got lost. In a market society the whole of society is based upon market
principles. Anything can be bought and sold. In a capitalist society you believe there is a price
for everything. But where do you find the heart in a heartless world?
8
7
Fukuyama attacks in his famous article `The End of History' (1989) the `Wall Street Journal school' of deter-
ministic materialism. Their intellectual weight is such that not a single respectable contemporary theory of eco-
nomic development addresses consciousness and culture seriously as the matrix within which economic behav-
iour is formed (Fukuyama, 1989: 7).
But to be honest we must admit that most economists who want to subordinate politics under the logic of the
market have been aware of their limits. Cf. e.g. Downs, the father of modern public choice theory, in his 1962
article `The Public Interest: Its Meaning in a Democracy'. And in recent years James Buchanan - the man who
suggested to think of the state as a market (Buchanan, 1954) - has started to warn not to forget the moral dimen-
sion, the ethical preferences (Buchanan, 1994: 133).
8
The search for the heart of a heartless world can be seen as laying at the origins of the socialist project. Marx
argues that we are living in a society which is created by humans but which is not humane - alienated. Religion
21
For market fundamentalists does the evolutionary process of the market, with its survival of
the fittest, solve the problem of justice in social life. With liberalism having lost its political
and moral foundation it is no wonder that movements, like the communitarians, gain easily
ground. They stress the lacking elements: community spirit and moral.
9
To break into the
logic of `la pansée unique'
10
of monistic market liberalism and to try to complement it by its
missing moral and political dimension will be the goal.
Rejecting the homo oeconomicus as the sole model for human behaviour and seeing man as a
zoon politicon - a social and moral animal - is the first critique of market liberalism. Man is
not only an egoist. This view might be right in maybe 80 percent. But in 20 percent or so our
actions are guided by other motives than pure self interest. Actions motivated by our moral
conscious will be of interest for us in the following. We will look at the biological and cul-
tural base of morality. Some like Smith and Darwin think that man has an innate moral sense
and is guided by universal sympathy. Others, like Kant and Rawls, see the need for moral
learning. Finally, there are those, like Hobbs and Hegel who fear that man's ambitions make
him a dangerous creature which must be checked by the state and the rules of law. This will
lead us to analyse the importance of political institutions, the second lacuna of market liberal-
ism. Finally, the new view can be summarised in the concept of social capital. By social capi-
tal we mean the ability of people to cooperate and hence good quality social relations. Coop-
eration depends on the one hand on norms and moral (internal restrictions) and on the other
hand on external restrictions by the social and political structure. Next we will first look at the
necessary moral restrictions.
was for Marx the opium of the people. But he thought that the values inherent in religion can be humanised
(Giddens, 1998).
9
In America libertarians have found rescue to other moral foundations: fundamentalistic evangelism and/or So-
cial Darwinism.
10
Prof. B. De Giovanni, then chairman of the Committee on Institutional Affairs of the European Parliament and
member of the Group of the Party of European Socialists, denounces the present situation as the dictate of `la
pansée unique' (personal interview, Brussels, 27/5/98).
22
The Evolutionary Approach and the Moral Sense
The Biological Base of Morality
Man is by nature a moral being. The base of morality seems to lay in natural evolution. Living
together with others gave him an advantage. The ability and the tendency to construct asso-
ciations, and to seek security within them, are products of natural selection found in members
of species with better survival chances in a group than in solitude. The advantages of group
life can be manifold, the most important being increased chances to find food, defence against
predators, and strength in numbers against competitors. But for such living together morality
is of essential help. Therefore universally, human communities are moral communities. A
morally neutral existence is as impossible for us as a completely solitary existence.
11
But also other animals show signs of morality. Aiding others at a cost or risk to oneself is
widespread in the animal world. The warning calls of birds allow other birds to escape a
predator's talons, but attract attention to the caller. A chimpanzee stroking and patting a vic-
tim of attack or sharing her food with a hungry companion shows attitudes that are hard to
distinguish from those of a person picking up a crying child, or doing volunteer work in a
soup kitchen. The difference between man and animal is not so much a fundamental one, than
more a question of degree (de Waal, 1996: 10, 12, 210). Therefore we will first focus atten-
tion on those aspects which we have in common with animals and than look at what detracts
us from the evolutionary perspective - which is mainly the human intellect and language, the
basis of culture.
11
Liberal philosophers, like Hobbs, Locke and Rousseau have another starting point. For them man in the `state
of nature' is as an isolated individual (Fukuyama, 1999: 151,165). For example according to Rousseau
`l'homme naturel' has lived in simple, uniform and isolated conditions (Rousseau, 1755/1997: 88). He was
`good' until he became socialised. A modern sociobiologist, like de Waal (1996), sees man from its beginning as
a social animal living in the `social cage' with natural inequalities, but also with an innate moral sense. Already
Rousseau recognised natural inequalities but to a lesser degree. In his book `Discours sur l'origine et les fonde-
ments de l'inégalité parmi les hommes' (1755) he distinguishes two sorts of inequalities - natural and socially
constructed inequality. He explains how education, the division of labour and property rights increase socially
constructed inequality.
23
Ethology suggests us that it is hard to imagine human morality without the following tenden-
cies and capacities found also in other species:
- Sympathy-Related Traits: Attachment, succorance, and emotional contagion. Learned ad-
justment to and special treatment of the disabled and injured. Ability to trade places mentally
with others: cognitive empathy.*
- Norm-Related Characteristics: Prescriptive social rules. Internalisation of rules and anticipa-
tion of punishment.*
-Reciprocity: A concept of giving, trading and revenge. Moralistic aggression against viola-
tors of reciprocity rules.
- Getting Along: Peacemaking and avoidance of conflict. Community concern and mainte-
nance of good relationships.* Accommodation of conflicting interests through negotiation.
* It is particularly in these areas - empathy, internalisation of rules and sense of justice, and
community concern - that humans seem to have gone considerably further than most other
animals (de Waal, 1996: 211).
Right and Wrong Since Gilgamesh
Accepting the natural and biological base of morality it is no wonder that question concerning
right and wrong have bothered mankind during all ages and in all cultures. In the `Epic of Gil-
gamesh', dating back to the third millennium before our time, we find the following warning
to Gilgamesh, the great king of Uruk:
,,But do not abuse this power, deal justly with your servants in the palace, deal
justly before [the god, the sun] Shamesh" (Gilgamesh, 1972: 70).
The same demands the Mahabharata in Indian culture. Rulers should protect their people with
all their means (Asanusasana Parva, Section XXXII, 167-170). And in Chinese culture,
Mengzi (-372 to -282), the `second genius' and successor of Confucius, has developed the
idea that each man has his self dignity. Everyone has a sensible sense for justice and the in-
24
born capacity to distinguish between good and bad. Rulers have therefore the moral duty to
respect their people.
12
The idea of man having a moral sense has gained prominence in 18th century Scottish
enlightenment. Anthony Ashley Cooper, duke of Shaftsbury and founder of the liberal Whig
party has tried to explain ethical principals, without referring neither to religion nor to reason.
Human nature is his starting point and the empirically observable social impulses. We feel
what is just. David Hume follows Shaftesbury. The innate moral sense is the starting point of
morality. It is the second guiding principle besides self-love. Man is seen as a social being
capable to share feelings with others. He is embedded in a community. And it is sympathy
which allows moral actions. Adam Smith has stressed this fact in his `Theory of Moral Senti-
ments' (1759) as well and made it the starting point for his reflections on political economy.
Adam Smith and the Importance of Sympathy
`The Moral Sentiment' was first published in 1759, and its sixth and the last edition appeared
in 1790, shortly before Smith's death. `The Wealth of Nations' appeared in between these
dates - in fact in 1776. To some the two books `The Moral Sentiments' and `The Wealth of
Nations' have appeared to be in tension with each other. In the `Moral Sentiments' Smith as-
cribes our action to sympathy. In his `Wealth of Nations' he ascribes them to selfishness. This
contradiction on the first sight has been called `the Adam Smith problem'. But actually, it is
not so much of a contradiction. It seems more that Smith thought people would behave self-
ishly in economic matters and that this would be for the benefit of all in most of the times. But
in the field of social and political affairs he advocated altruism and public-spiritness. In `The
Moral Sentiments' Smith investigates the sympathetic part of human nature and in `The
Wealth of Nations', he investigates its selfish part. But it is important to see the consistency
and complementarity of the two views. The fact that `The Moral Sentiments continued to be
republished even after `The Wealth of Nations' has been completed must be taken as a sign
that Smith still sticked to the importance of moral sentiments (Sen, 1994: 1-3). Man is driven
12
All men have a heart xin, which does not allow them to accept suffering of others. Who does not have the
feeling of right and wrong, is not a human being. The feeling of sympathy is the starting point of humanity ren
(Roetz, 1992: 322).
25
by a selfish desire to `better his condition'. But man is also seen as having a basic propensity
for benevolence.
,,How selfish soever man may be supposed, there are evidently some principles in
his nature, which interest him in the fortune of others, and render their happiness
necessary to him, though he derives nothing from it, except the pleasure of seeing
it." (Smith, 1759/1976: 9)
Smith sees different reasons for going against the dictates of self-love, including inter alia the
following:
Sympathy: ,,The most humane actions require no self-denial, no self-command, no
great exertion of the sense of priority, [and] consist only in doing what this exqui-
site sympathy would of its own accord prompt us to do."
Generosity: ,,It is otherwise with generosity, [when] we sacrifice some great and
important interest of our own to an equal interest of a friend or of a superior."
Public Spirit: ,,When he compares those two objects with one another, he does not
view them in the light in which they naturally appear to himself, but in that in
which they appear to the nation he fights for." (Smith, 1759/1976: 191).
His sympathy with his fellow man is a check to his self-interest. Sympathy, developed in per-
sonal contact, is the force which ensures social integration.
,,Justice [...] is the main pillar that upholds the whole edifice. If it is removed, the
great, the immense fabric of human society [...] must in a moment crumble into
atoms." (Smith, 1759/1976: 86).
13
Darwinism and the Moral Sense
Later in the 19th century Charles Darwin took the same view in his the `The Descent of Man'
(1871). Man is explicitly seen as a social animal capable of spontaneous sociability and
guided by a moral sense (Darwin, 1871: 97-127).
,,Any animal whatever, endowed with well-marked social instincts, would inevi-
tably acquire a moral sense or conscience, as soon as its intellectual powers had
become as [...] well developed as in man (Darwin, 1871: 98).
And, like Smith, he sees also the importance of sympathy.
13
Smith quotations taken from Sen, 1994 and Reisman, 1998.
26
,,Sympathy [...] forms an essential part of the social instinct, and is indeed its
foundation-stone" (Darwin, 1871: 100).
For Darwin this moral feelings are innate, too. This contrary to his fellow man John Stuart
Mill, (and to Rawls as we shall see later). Darwin differs from this view. For him it is no
question that the social feelings are instinctive or innate in the lower animals, and why should
they not be so in man? (Darwin: 1871: 98). It is important to insist that the moral sense is in-
nate. This because an utilitarist, like Jeremy Bentham, argues that moral decisions simply
based on intuitive feelings can be easily misused. Feelings can't be questioned rationally. We
think on the other hand that the innate moral sense finally leads people to revolt if their self
dignity is not respected. And in accordance with the evolutionary view we assume that hu-
mans have a genetical innate propensity to live together in community. Living together and
helping one another increases the survival chances of every group member. For such living
together a moral sense and a propensity for moral learning would be very helpful.
The Evolution of Morality
The mathematical models of population genetics suggest the following rule in the evolution-
ary origin of altruism: If the reduction in survival and reproduction of individuals owing to
genes for altruism is more than offset by the increased probability of survival of the group
owing to the altruism, then altruism genes will rise in frequency throughout the entire popula-
tion of competing groups. To put it as concisely as possible: the individual pays, his genes
and tribe gain, altruism spreads (Wilson, 1998: 65). This is the so called `kin selection theory'
or `kinship altruism'. A helping tendency may spread if the help results in increased survival
and reproduction of kin. From a genetic perspective it does not really matter whether genes
are multiplied through the helper's own reproduction or that of relatives. The other explana-
tion is the one of reciprocal altruism. That is helpful acts that are costly in the short run may
produce long-term benefits if recipients return the favour. It is the strategy of Tit-for-Tat we
have seen before.
Reciprocal altruism is a lot more complicated than simultaneous coopera-
tion. There is the problem of the first help act - a gamble, since not every partner necessary
follows the rules. Finally, there is hard-core altruism. It is altruism genuinely independent of
personal reward or reciprocation. The most celebrated example of hard-core altruism is the
27
Kantian golden rule.
14
In the following we will not rest with the gene-centric sociobiologists view. With its sole fo-
cus on genetic selfishness it is reductionist and misses ultimately to take into account morality
which lays at the core of being human. In a moral community, it matters not just what I do to
you and what you do to me, but also what others think of our actions. Perceptions become a
major issue. For this reason Adam Smith introduced an imaginary impartial spectator capable
of evaluating social events with sympathy and understanding. Our actions are mirrored in the
eyes of the spectator in the same way that everything we do is reflected in the response of our
group.
Imagine that you have put your life at risk to save little John, who was playing on the railroad
tracks. Within hours, the entire village will know what happened because people take careful
note of social events around them. Your standing as a fine and trustworthy person will imme-
diately go up one or two notches, which may help your contacts and your business. It is not
little John who is doing you a return favour, but the community as a whole. It rewards behav-
iour that improves the quality of life. If all community members keep an eye on how each one
of them responds to others in need, they will quickly learn who is likely to help and who is
not. Once doing good is appreciated at the group level, it does not need to be rewarded on a
Tit-for-Tat basis to yield benefits.
Theories of moral evolution need to assign a significant role to such outside attention, hence
concern themselves with the community level. Although Darwinian at their core, they thus
begin to transcend the exclusive focus on the individual by taking as their subject the way
conflicts of interest are resolved and societies are constructed. If each individual tries to shape
its social environment and receive feedback about how these efforts affect others, society be-
comes essentially an arena of negotiation and give-and-take. The origins of human sociality
and the beginnings of a social contract lay here.
Leaving the reductionist camp of moral genetics and allowing for interaction with the envi-
ronment and learning we get a more accurate description of how morality evolves. The mind
14
Piliavin and Charng (1990) give a review of recent research into altruism. The altruistic impulse does exist.
But to what extent this altruism is encoded in the genes, inculcated through socialisation, or based on social
norms needs further research.
28
does not start as a tabula rasa, but rather as a checklist with spaces allotted to particular types
of incoming information. Predispositions to learn specific things at specific ages are wide-
spread, the best human example being language acquisition. Human morality shares with lan-
guage that it is far too complex to be learned through trial and error, and for too variable to be
genetically programmed. Possibly we are born with a learning agenda that tells us which in-
formation to imbibe and how to organise it. We could then figure out, understand, and even-
tually internalise the moral fabric or our native society. This is moral ability. Does this make
morality a biological or a cultural phenomenon? It seems more that the question of nature and
nurture can only partially be disentangled. The same is true of relatively simple processes,
such as the effect of light on plants. If a plant in a sunny spot grows taller than one in the
shade, it is not because of either genetics or the environment, but both (de Waal, 1996: 12, 17,
24, 33-36, Brittan, 1995: 41). Besides the genetics of moral sentiment (`moral instinct') the
development of moral consciousness is a product of the interactions of genes with the envi-
ronment/culture (`moral learning'). Moral learning leads us to Kant and Rawls.
Limits to the Evolutionary Approach and the Need for Constructivism
Rationalism in general is the alternative to evolutionary theories. Even when we feel com-
fortably with the idea of an innate moral instinct which has evolved in the evolutionary proc-
ess, we must see the limits of evolutionary logic. Evolutionists are opposed to active interven-
tion into the evolutionary process to improve the state of the world. Malthus, for instance, the
true guru of evolutionary theory and inspirator of Darwin's theory,
15
was opposed to help the
poor at his time. In his `Essay on Population' (1798), Malthus laid the foundations for a the-
ory of natural selection by linking the issue of survival with population growth and competi-
tion for natural resources.
16
His thesis was that populations tend to outgrow their food supply
15
Darwin has struggled more with the moral implications of Malthus evolutionary ideas. As we have seen he
stressed the importance of sympathy. But he could not prevent his theory from being incorporated into a closed
system of thought (so called `Social Darwinism') in which there is little room for compassion. It was taken to its
extreme by Herbert Spencer. According to Spencer the pursuit of self-interest, the lifeblood of society, creates
progress for the strong at the expense of the inferior and existing social stratification reflects a natural hierarchy
of abilities (de Waal, 1996: 11, Fukuyama, 1999: 156).
16
The work's larger philosophical ambition was to dispute the radical progressivism of Godwin and Condorcet,
29
and are cut back automatically by increased mortality. Any help one gives the poor permits
them to survive and propagate, hence negates the natural process according to which these
unfortunates are supposed to die off. Malthus went so far as to claim that if there is one right
that man clearly does not posses, it is the right to subsistence that he himself is unable to pur-
chase with his labour. Malthus did advocate - but without much optimism - voluntary restraint
as a method of reducing population growth. The emphasis of such evolutionary theories is
clearly on adjusting ourselves rather than adapting the world outside us (Sen, 1993a: 134, de
Waal, 1996: 11).
Evolutionary theories also show a strong parallel with post-modernist thinking of politics.
They stress that nothing is constant and everything flows which could also be interpreted in
Hayekian terms of `spontaneous order'. Post-modern thinking with its radical critique of rea-
son seems to undermine at first sight the base for constructivist interventions. But as Richard
Rorty (1998: 96/97) argues are traditional social liberalism and traditional humanism entirely
compatible with criticism of Enlightenment rationalism (of the like Nietzsche, Heidegger,
Foucault, and Derrida do). We can still be old-fashioned reformists even if we give up the
correspondence theory of truth and start treating moral and scientific beliefs as tools for
achieving greater human happiness, rather than as representations of the intrinsic nature of
reality.
The question if we should leave the deprived and the miserable to nature or use public action
to try to help them is of prime importance. In the age of globalisation with the unlimited vic-
tory of the market there are the disciples of market fundamentalism. They think that the mar-
ket mechanism leads us always to the best of all possible worlds. Hayek with his stress on the
`spontaneous order' is falling in this category.
The Hayekian Spontaneous Order and Burkean Conservatism
Hayek is concerned with the effect of the market system on the evolution and stability of so-
ciety. He is interested in markets as examples of human institutions, like language or law,
its immediate aim was to oppose legislation to change the Poor Laws in Great Britain that would make welfare
payments proportional to family size.
30
which have evolved spontaneously without any conscious plan on anyone's part. The market
system is a `discovery technique' which allows entrepreneurs to open up possibilities which
people did not know existed before (Brittan, 1995: 115, 116). Hayek, inspired by the 18
th
cen-
tury conservative Edmund Burke, tries to embed his thinking into an overall theory of cultural
evolution and stresses tradition as a source of morality. With this view he might come close to
some schools of communitarism. For Hayek there are essentially three sources of morality:
instinct, ratio and tradition. Like for instance for MacIntyre, tradition, parochial morals, the
historical evolved community is important. And like MacIntyre he is cultural relativist. Hayek
pledges for a particular altruism which is essential guided by historically evolved tradition.
On the other hand it seems that he is quiet far away of communitarian, or moral liberalism
stressing civic virtues. This because the moral sense, which is for the whole Scottish Enlight-
enment and also for Darwin - the great evolutionist - so important, doesn't count for him.
,,Aber der schwerwiegenste Fehler der älteren Propheten war ihr Glaube, dass die
intuitiv erkannten ethischen Werte, die den Tiefen der menschlichen Brust ent-
stammen, unveränderbar und ewig seien. Dies hindert sie zu erkennen, dass alle
Verhaltensregeln einer bestimmten Art Gesellschaftsordnung zugehörig sind"
(Hayek, 1981: 224, 225).
Hayek is consequently anti-universalist and relativist. And he also refuses the idea that moral
rules could be founded rationally, as Kant and this line of thought does. That is why for him
the whole Enlightenment philosophy of rationalism is discredited.
,,Im 17. Jahrhundert wurde diese Tradition [des Entwicklungsprozesses] gerade
durch die Entwicklung der Philosophie des Rationalismus völlig gestoppt. Die
Entwicklung der Moral ist ein Anpassungsprozess und nicht, wie die rational-
istischen Theoretiker glauben, ein Ergebnis bewusster menschlicher
Entscheidung. [...] Der Inhalt unserer Moralregeln ist nicht eine Schöpfung des
menschlichen Geistes, sondern ein Ergebnis eines Entwicklungsprozesses."
Hayek, 1983: 17, 21, 22).
Hayek is strongly attracted to old Burkean conservatism. Edmund Burke argued that most
workable social rules could not be discerned through a priori reasoning, but rather emerged
on a trial-and-error basis through the continuous evolution of societies. Burke, like Hayek, is
also a cultural relativist. Each society will generate a different set of rules in response to its
own environment and history, which reason is incapable of fully comprehending. For Burke,
the French Revolution, and the Enlightenment project more broadly, represented a human
disaster because they sought to replace these traditional rules with rational ones. But reason is
insufficient to create the moral constraints needed to hold societies together, and so the
31
Enlightenment project would fall apart owing to its own internal contradictions (Fukuyama,
1999: 251).
Burke and Hayek are not wrong by stressing historically evolved traditions. What is problem-
atic is their complete neglect of other sources of morality (innate moral sense and moral learn-
ing). Hence there is no room for constructivist improvement of the world beyond the small
circle of one's family and friends.
Hayek has also an evolutionary view of progress. Progress is seen in terms of fitness. `Opti-
mum' is if you can outmatch all your rivals. But depending on circumstance and chance,
many other alternatives could have come up. Therefore the thesis of evolutionary progression
can at most claim some kind of local optimality - success with respect to a limited class of
alternatives. And there are many virtues and achievements that do not help survival but that
we value. And on the other side, there are many cases of successful survival that we find
deeply objectionable. For example, if a species of vassals - some variant of homo sapiens - is
kept in inhuman conditions by some tribe of tyrants and that species adapts and evolves into
being not only very useful slaves but also dogged survivors and super-rapid reproducers, must
we accept that development as a sign of progress?
We shouldn't approve everything we find and endorse the products of natural selection in an
uncritical way. When, some 2500 years ago, Gautama Buddha left his princely home to seek
enlightenment, he was driven by dismay at the misery of human existence, at the sufferings of
disease, old age, and death. He consciously disapproved the way we have emerged. Therefore
we see the limits to the Social Darwinian/Hayekian view of spontaneous and undesigned pro-
gress. This view undermines the importance of rationally adjusting the world in which we
live. A world view solely based on evolutionary processes deeply limits us because it focuses
on adjusting ourselves rather than the world in which we live. There is the demand for auton-
omy and freedom (Sen, 1993a: 127, 130-132, 136).
Moral Learning and Social Justice
People seem to have an innate moral sense. But sole reliance on these moral feelings is not
sufficient. Further, the problem with the evolutionary approach is that it limits us to accept the
world, with all its misery, as it is. The only thing we can do is to adjust us better to the cir-
32
cumstances. Therefore the need for constructivist political engagement and moral learning.
Learning of rationally founded moral rules is the other way of morality. It complements and
enforces the innate moral sense.
Aristotle's Virtue Ethic
Aristotle stresses in his Nichomachean Ethics the importance of complementing us through
moral learning. Man strives - according to Aristotle - by nature for the good. That is the way
to eudemonia (happiness). Happiness derives from excellence of our potentialities; when the
soul acts according to reason. When we realise our powers and engage in judging, choosing,
deciding, and discriminating, we come to enjoy who we are, because we are in so far as we
are actualised and the realisation of our powers is enjoyable. When we love the exercise of
our characteristic human abilities most of all, we are true lovers of self. Moreover, we are
morally virtuous. The virtuous person, as a true self-lover, has a kind of positive self-regard
and self-confidence. He enjoys himself and his life and does not wish to be different. Finally,
because the self-lover enjoys himself and his life in the way we have described, there is no
reason to think he won't also take pleasure from the exercise of others characteristic human
powers. He has no reason to grunge others their achievements; rather, he is more likely to de-
velop friendly feelings with them. Because of the attitude he has towards himself, we can ex-
pect him to enjoy the pleasures of social fellowship and civic life. The absence of true self-
love (not the bad self-love Aristotle condemns
17
) is, on the other hand, appropriately associ-
ated with nonvirtous conditions, whether those be conditions of continence, incontinence, or
moral vice. Vicious people are self-haters, are full of regret, and can't form stable friendships.
17
"Those who use the term as one of reproach ascribe self-love to people who assign to themselves the greater
share of wealth, honours, and bodily pleasures; for these are what most people desire, and busy themselves
about as though they were the best of all things, which is the reason, too, why they become object of competi-
tion. [...] It is just, that men who are lovers of self in this way are reproached for being so. [...] For if a man were
always anxious that he himself, above all things, should act justly, temperately, or in accordance with any other
of the excellences, and in general were always to try to secure for himself the honourable course, no one will
call such a man a lover of self or blame him" (Aristotle, IX 8 1168b 15-28).
33
A virtuous character in the Aristotelian sense is one who has managed to overcome the weak-
ness of the will, the interfering of nonrational desires. He is a self-lover who enjoys practical
rational activity and has stable feelings of friendship with other self-lover (Homiak, 1997: 9,
21). Excellence is not the product of nature but the result of habit According to Aristotle man
has by nature a natural propensity for moral but he must perfect it through habit.
,,None of the moral excellences arises in us by nature. [...] Neither by nature, then,
nor contrary to nature do excellences arise in us; rather we are adapted by nature
to receive them, and are made perfect by habit.
For the things we have to learn before we can do, we learn by doing so, e.g. men
become builders by building and lyre-players by playing the lyre; so too we be-
come just by doing just acts, temperate by doing temperate acts, brave by doing
brave acts. This is confirmed by what happens in states; for legislators make the
citizens good by forming habits in them.
18
[...] Again, it is from the same causes
and by the same means that every excellence is both produced and destroyed, and
similarly every art; for it is from playing the lyre that both good and bad lyre-
players are produced. [...] For if this were not so, there would have been no need
of a teacher, but all men would have been born good or bad at their craft. This
then, is the case with the excellences also; by doing the acts that we do in our
transactions with other men we become just or unjust, and by doing the acts that
we do in the presence of danger, and being habituated to feel fear or confidence,
we become brave or cowardly. [...] It makes no small difference, then, whether we
form habits of one kind or of another from our very youth; it makes a very great
difference, or rather all the difference." (II, 1103a 19-26).
Aristotle explains that for people to be truly virtuous, they must habituate themselves to vir-
tuous behaviour such that it becomes a kind of second nature that is pleasurable in itself, or if
not pleasurable something that the virtuous man takes pride in.
Kant's Categorical Imperative
After the middle of the 18th century the British Empiricists have an intellectual impact in
Germany. Shaftesbury, Hutcheson, Hume and others are translated. Moral sense theory is
much admired, by Kant among others. In the early writings of Kant it is not yet determined
whether the primary principles of obligations are based on the faculty of knowledge or of
feeling (Korsgaard, 1996: 6/7).
18
Here we have in onset the first element of Rawls' idea of a just society which is built on a `reflexive equilib-
rium'. The well-ordered society fosters moral learning. (c.f. later discussion pp. 35-39).
34
But by working out his view and developing his critical philosophy he decides against moral
sense theory. Based on the autonomy of free will he develops the `golden rule'. An ethical
rule which can be found in the form of `don't do to others what you don't want that it is done
to you' in the New Testament Matthew VII 12 and Lucas VI 31, but also in nearly every
higher developed culture (Höffe, 1996: 74). His categorical imperative, developed in
`Grundlegung zur Metaphysik der Sitten' (1785), demands:
,,Act only according to that maxim by which you can at the same time will that it
should become a universal law (G 421)."
Or which can be worded alternatively:
,,Act so that you treat humanity, whether in your own person or in that of another,
always as an end and never as a means only (G 429)." (quoted in Korsgaard,
1996).
This two maxims can also be reworded in order to show their effect for the public: the behav-
iour of the individual becomes the maxim of the general public. (Cf. e.g. Höffe, 1979: 84-117
for how Kant validates his rule). Even though stressing now the rational foundation of moral-
ity he states in his `Die Metaphysik der Sitten' (1797) that man without moral feelings would
be `morally death' (Holenstein, 1998). And the development of sympathetic feeling can make
following the moral law easier, since sympathy ,,is one of the impulses placed in us by nature
for effecting what the representation of duty might not accomplish by itself." (Kant, quoted in
Homiak, 1997: 32).
Kant even though concerning moral a great idealist is in matters of concrete politics more re-
alistic. He starts in `Zum ewigen Frieden' (1781/1984: 31) with a Hobbsian assumption about
man. Men is seen as a `people of devils'.
,,Das Problem der Staatserrichtung ist, so hart es auch klingt, selbst für ein Volk
von Teufeln (wenn sie nur Verstand haben), auflösbar."
But they can nevertheless achieve a good, republican constitution. Therefore the system of
rules must channel the antagonistic selfish desires in such a way that they offset each other
and promote peace. And subsequently a good constitution can foster moral learning in its citi-
zens.
,,Nicht von dieser [der Moralität] [ist] die gute Staatsverfassung, sondern vielmehr
35
umgekehrt von der letzteren allererst [ist] die gute moralische Bildung eines Vol-
kes zu erwarten." (1781/1984: 31).
Jürgen Habermas' Ethics of Discourses
Habermas takes up the Kantian question of how moral rules can be founded and generalised?
But he broadens the horizon. Whereas Kant has developed an essentially subjectivist concep-
tion of moral reasoning with his categorical imperative, Habermas stresses the intersubjecitve
dimension. The ethics of discourses, developed by Karl-Otto Apel and Jürgen Habermas,
builds upon the idea that only those moral rules can be accepted which are approved by all
people concerned in a free discourse. Morality is not anymore grounded in an individual,
autonomous subject which recognises by the power of reason the supremacy of moral rules,
like it was for Kant. For Habermas the supremacy of a moral rule must be validated in the
free, intersubjective discourse of all subjects concerned. In the free discourse the best argu-
ment will develop the powerless authority of the better argument and will be recognised by
all. Thus, morally acting individuals are embedded in a communicative group. This is the con-
text of the lifeworld (Horster, 1995: 67-73). It is in this horizon of intersubjective communi-
cation that moral learning takes place.
Rawls' Just Society
This century John Rawls lays foundations for moral and political liberalism with his `Theory
of Justice' (1971), further developed in `Political Liberalism' (1993). The basic problem of
`Political Liberalism' is that reason produces a plurality of answers to how we should live. In
modern democratic society a plurality of incompatible and irreconcilable doctrines - religious,
philosophical, and moral - coexist. Free institutions themselves encourage this plurality of
doctrines. The problem is how a stable political order is possible under conditions of a plural-
ity of reasonable, but incompatible, doctrines? It is no longer a society united in its basic
moral beliefs but in its political conception of justice, and this justice is the focus of an over-
lapping consensus of reasonable comprehensive doctrines. It is an overlapping consensus that
can be endorsed by the main religious, philosophical, and moral doctrines that endure over
time in a well-ordered society. Communitarians, like Etzioni, would call this overlapping con-
sensus `the community-of-community'.
36
Rawls generalises and carries to a higher order of abstraction the traditional theory of the so-
cial contract as represented by Locke, Rousseau, and Kant. The theory developed offers an
alternative systematic account of justice that is superior, or so he argues, to the dominant utili-
tarism. The theory that results is highly Kantian in nature. Orthodox Lockean liberalism,
stressing only individualism, property rights and market economy, is transformed into a social
liberalism, making the improvement of the living conditions of the poorest the ultimate goal
(`difference principle').
Rawls, like Aristotle, Kant and the empiricist tradition, starts from the assumption that man is
more than a crude egoist. Man is a social and moral being. The moral feelings are a normal
feature of human life. We could not do away with them without at the same time eliminating
certain natural attitudes. Among persons who never acted in accordance with their duty of jus-
tice except as reasons of self-interest there would be no bonds of friendship and mutual trust.
If either of two egoists, for example, deceives the other and this is found out, none of them
has a ground for complaint. Neither accepts the principles of justice so neither has any rea-
sons to complain. Resentment and indignation are moral feelings. They presuppose accep-
tance of the principles of right and justice.
But how do we develop a moral sense? Love, friendship and the sense of justice arise from
the manifest intention of other persons to act for our good. Because we recognise that they
wish us well, we care for their well-being in return. Thus we acquire attachments to persons
and institutions according to how we perceive our good to be affected by them. The basic idea
is one of reciprocity, a tendency to answer in kind.
19
This tendency is a deep psychological
fact. Without it our nature would be very different and fruitful social cooperation fragile. Ax-
19
Putnam (1993: 172) distinguishes two sorts of reciprocity: balanced or (specific) and generalised or (diffused).
Balanced reciprocity refers to a simultaneous exchange of items of equivalent value, such as gifts, while general-
ised reciprocity is in a continuing relationship of exchange which is at any given time out of balance but in-
volves the element of mutual expectations that a benefit granted now should be repaid in the future. Friendship,
for example, can be seen as a relationship that almost always involves reciprocity.
The norm of generalised reciprocity constitutes a highly productive component of social capital. Communities in
which this norm is followed can more efficiently restrain opportunism and resolve problems of collective action
by reconciling solidarity and self interest. An efficient norm of generalised reciprocity is likely to be associated
with dense networks of social exchange, while, conversely, repeated exchange over a period of time tends to
encourage the development of the norm of generalised reciprocity.
37
elrod (1984: 118-120), as we have seen, sees reciprocity, the strategy of Tit-for-Tat, at the
centre of the evolution of human cooperation, too. If we would answer love with hate, or
came to dislike those who acted fairly towards us, a community would soon dissolve. Beings
with a different psychology either have never existed or must soon have disappeared in the
course of evolution. A capacity for a sense of justice built up by responses in kind would ap-
pear to be a condition of human sociability.
We might conclude that the moral sense is partly an innate instinct as seen by Smith and Dar-
win, but can be reinforced in benevolent reciprocal interaction as stressed by Rawls. And for
this reinforcement just social institutions are important. Moral learning takes place in the con-
text of public institutions. It seems plausible that in a well-ordered society moral learning
would follow the order presented. As we have seen, the idea of a just society fostering moral
learning has its roots with Aristotle and Kant.
To sketch the major principles of such a well-ordered society is the goal of Rawls' `Theory of
Justice'. In Rawls' theory life is a game of chance in which nature deals out attributes and so-
cial positions in a random way. No one deserves his greater natural capacity nor merits a more
favourable starting place in society. But it does not follow that one should eliminate these dis-
tinctions. There is another way to deal with them. The basic structure can be arranged so that
these contingencies work for the good of the least fortunate. The natural distribution is neither
just nor unjust. These are simply natural facts. What is just and unjust is the way that institu-
tions deal with these facts. Aristocratic and caste societies are unjust because they make these
contingencies the ascriptive basis for belonging to a privileged social class. Thus, a set of just
institutions is one that mitigates the effects of chance on the positions of individuals in the
social structure, one which fosters meritocracy.
To establish such a set of institutions, individuals must divorce themselves from knowledge
of their own personal attributes and social positions by stepping through a `veil of ignorance'
that screens out any facts that might allow an individual to predict his position and benefits
under a given set of principles. Having passed through the veil of ignorance, all individuals
are in an `original position' of total equality in that each possess the same information about
the likely effects of different institutions on his own future position. The original position es-
tablishes a status of universal equality from which the social contract is written.
38
Rawls argues that the following two principles will be chosen as pillars of a just social con-
tract, and where justice is understood as fairness:
First: each person is to have an equal right to the most extensive basic liberty compatible with
a similar liberty for others.
Second: social and economic inequalities are to be arranged so that they are both
(a) reasonably expected to be to everyone's advantage,
20
and
(b) attached to positions and offices open to all.
These two principles are a special case of a more general conception of justice that can be ex-
pressed as follows. All social values - liberty and opportunity, income and wealth, and the
bases of self-respect - are to be distributed equally unless an unequal distribution of any, or
all, of these values is to everyone's advantage (Rawls, 1971: vii, 3-10, 60, 62, 102, 136-138,
487, 488, 494-495). And which is again nothing else than the first article of the Declaration of
Human Rights from 1789:
,,Les distinctions sociales ne peuvent être fondées que sur l'utilité commune."
[The social inequalities can only be founded on common utility.] (quoted in a
handout of Prof. E. Holenstein, SS 1999, Swiss Federal Institute of Technology).
Society should foster cooperation for mutual benefit. But this creates the problem of how do
we distribute the gains? Therefore we need principles to solve such conflicts. Rawls suggests
that rational individuals acting under uncertainty would agree to the concept of justice as fair-
ness, and inequalities helping the poorest. Such a just society would help best moral learning,
too. Moral learning is important, because Rawls doesn't assume an innate moral sense. Start-
ing point for him are popular ideas of justice. Through abstraction from them universal rules
of justice are generated. `Folk morality' and abstract principles build a reflexive equilibrium.
Important is that social institutions help to cultivate the moral sentiments people have. A just
and well-ordered society would help best moral learning. This because moral learning takes
place in the public place and responds to how you are treated by society. Therefore in a just
society you build up most likely a well developed moral consciousness (Höffe, 1979: 180-
185).
20
This is the so called `difference principle'.
39
Summary of Moral Sources of Social Capital
Have we come closer to answer our initial question of where do we find the heart in a heart-
less world? This question is so important since we are living in a market society where people
think that there is a price for everything and the price is determined not by the intrinsic value
of the asset, but by how much you can get for that asset on a market. Therefore let's summa-
rise the various moral sources of moral liberalism, stressing intrinsic values, the necessary
internal restrictions fostering cooperation and representing social capital. So far we have dis-
cussed more in depth the evolutionary and biological base (Smith, Darwin and Hayek), their
limits and the need for constructivism (Aristotle, Kant and Rawls). Thus the following taxon-
omy of norm-generation represented in the subsequent figure 4, might be helpful in giving a
summary of moral sources of social capital. Originally developed by Fukuyama (1999: 145-
153, 187-193) it is now complemented by some crucial additional elements, like social domi-
nation, ideal free discourse and mystical experience as sources of norms.
Rational
Political:
Self
organised:
Social
engineering
Market
Formal law
Common law
Ideal
free
discourse
Hierarchically
Spontaneously
generated
generated
Social:
Natural:
Structures of domination
Historical tradition
Revealed
religion
Biologically
grounded
norms
Mystical experience
Arational
Figure 4: Moral Sources of Social Capital
Source: Fukuyama (1999: 152, 188) with modifications.
40
a) Hierarchically constructed
The construction is the result of intentional action on the part of a community as a whole, usu-
ally through an institution like the state. Formal institutions like constitutions and legal sys-
tems tend over time also to produce informal social norms. Tocqueville's `Democracy in
America' is a study of social norms such as individualism that resulted from the American
regime's formal commitment to equality. By and large, the left tends to believe that human
nature and culture are relatively plastic, and that norms can be shaped by deliberate manipula-
tion.
Rational: As societies modernise, norms tend to be created less in the lower than in the upper
quadrants, and particularly in the upper left one. The terms that classically have been associ-
ated with modernisation by theorists like Weber, Durkheim, and Tönnies are `rationalisation',
`bureaucratisation', `shift from status to contract', and `Gemeinschaft to Gesellschaft'. This
implies that formal, rational legal authority, often vested in the state, becomes the chief source
of order in modern societies. Therefore in democratic societies, the chief source of institution-
ally constructed social norms is law. And outside the family, education is the next most im-
portant arena for socialisation.
The most extreme form of rational constructivism was undertaken by communist states such
as the Soviet Union. The goal was to create a `new Soviet Man' who would be shorn of self-
ish private interests and oriented towards the good of mankind as a whole. The Soviet Un-
ion's seventy-year experiment ended in a total failure leaving the population, if anything,
more selfish, inwardlooking and atomised.
Do formal laws merely codify existing social practices, or do they play a role in shaping mo-
rality? There are on the one side those who regard formal law as a reflection of informal
norms, and on the other side are those who regard law as critical to shaping norms (Fuku-
yama, 1997: 97-99, 1999: 188).
But constructivists, like Rawls, go further. For them should state-society interactions in a
well-ordered society take place in a benevolent form helping the poorest. In such a setting
moral learning is fostered the most. Already for Aristotle is character forming essential to fos-
ter the necessary civic virtues on which a lively polity depends. He, as Kant as well, stresses
that the just society should foster moral learning.
41
Arational: Marx argues that social norms have been constructed under capitalism to serve the
interests of the bourgeoisie. There are several contemporary versions of this view. Feminists
argue that female social roles are the result of unjust male domination and patriarchy. Many
postmodernists, like Foucault, broaden this critique and argue that all behaviour is socially
constructed, not on the basis of human beings rationally discussing the best forms of commu-
nity life, but on the basis of power and hierarchy. In their usage the term `power' denotes an
agency which has left an indelible stain on every word in our language and on every institu-
tion in our society. It is always already there, and cannot be spotted coming or going. Social
identities and the norms supporting them have no basis in nature or biology, but are entirely
the product of one group seeking to impose its hegemony on another.
Revealed religion is an exogenous source of arational, hierarchical norms. On the right, there
is a strong tendency to think that social norms come largely if not exclusively from religion.
By this view, the principal reason for the changes in social norms is the spread of secular val-
ues throughout society. The cure for the problem of deficient norms is therefore more relig-
ion. (Fukuyama, 1997: 100, 101, 103-106, Rorty, 1998: 94). But to recognise the importance
of religion for norm-generation must not necessarily lead to right wing religious conservatism
and fundamentalism. An alternative might be spontaneous, arational mystical experience.
b) Spontaneously constructed:
Rational: Economics, the study of markets, is primarily concerned with the rules of rational,
spontaneous exchange. In this category belongs game theory with models like Tit-for-Tat as
we have seen. It provides a source of insights into the decentralised, bottom up development
of cooperative norms. The problem is just that many game theorists believe that game theory
is the only source of norms (Fukuyama, 1997: 101, 1999: 152).
Another, more encompassing spontaneous rational approach to norms generation is the `ideal
free discourse' of Karl-Otto Apel and Jürgen Habermas. In the `ideal free discourse' all sub-
jects concerned can freely express their opinion and the best argument will develop the pow-
erless authority of the better argument. Thus, such intersubjectively generated norms are not
only rational in the individual sense, but also collectively reasonable (Rawls).
Arational: Building upon Edmund Burke, Friedrich Hayek and other Austrian economists ar-
gue that social norms are the result of a long-term spontaneous evolution. Therefore the im-
portance of the wisdom of historically evolved traditions. But they stress that this process is
42
not a rational one. Hayek quotes Hume approvingly to the effect that ,,the rules of morality
[...] are not conclusions of our reason." By taking this position, Hayek seeks to debunk the
rational constructivism he sees as the core of the socialist project.
21
With the model of English
common law in mind, Hayek argues that social norms are not generally legislated through a
formal political process, but are rather the result of the repeated interactions of individuals
seeking to achieve common aims (Fukuyama, 1997: 101, 102).
Norms rooted in nature are also arational and spontaneous in their character. It is about the
biological base of sociability which is hard-wired into the genetic code. It looks like as if the
original human condition was one of attended lack of liberty. Like our ancestors, humans tend
to life in close face-to-face groups. But it was in this social cage that our ancestors developed
social feelings like sympathy and empathy (de Waal, 1996).
Human biology creates a predisposition to solve collective action problems, but the particular
norms and meta-norms chosen by a given group of individuals are cultural choice, not a prod-
uct of nature. Just as human beings are born with the ability to learn and use language, the
actual language they acquire depends on the culture in which they grow up.
Finally, there is mystical experience as arational spontaneous source of norms. Confronted
with the fact of `Sein zum Tode' [being to death] (Heidegger) one might think about how to
give meaning to ones limited life.
3. The Need for Federal Political Institutions
Megalothymia, Amour-Propre and the Need for Political Institutions
Unfortunately, the innate moral sense and moral learning are not enough to ensure social inte-
gration and cooperation. Of course, there is Plato who speaks of thymos, which can be trans-
lated as spiritedness, heart or heartiness. In Plato's Republic Socrates describes thymos as that
21
But we think, that having understood that the present social order is the result of an arational evolutionary
process shouldn't mean that there is no room left for constructivist improvement. Path dependency by the past
can lead to long-term persistence of socially inefficient organisations (North, 1990). Therefore there is room to
think collectively in the form of a free discourse about ways of how to reasonably improve the world.
43
it is associated with courage and with the emotion of anger or indignation on behalf of one's
own. thymos builds together with desire and reason the third part of the soul. Socrates sug-
gests a relationship between anger and self-esteem by explaining that the nobler a man is -
that is, the more highly he evaluates his own worth - the more angry he will become when he
has been dealt with unjustly: his spirit ,,boils and becomes harsh" forming an ,,alliance for
battle with what seems just" even if he ,,suffers in hunger, cold and everything of the sort...".
Like this thymos is linked to an innate human sense of justice. Thymos provides an all-
powerful emotional support to the process of valuing and evaluating, and allows human be-
ings to overcome their most powerful natural instincts for the sake of what they believe is
right or just. Another example for how strong the desire for recognition is, is the passion of
feminist or gay rights activists who demand that members of their group be treated with equal
respect by the larger society.
22
The desire for recognition rather than rational utility maximisation lays at the centre of human
motivation.
23
Natural wants and needs are few in number and rather easily satisfied, particu-
larly in the context of a modern industrial economy. Our motivation in working and earning
money is much more closely related to the recognition that such activity affords us, where
money becomes a symbol not for the material good but for social status or recognition. This
universal goal of social approval was also to Adam Smith quiet clear when he explained in
the `Theory of Moral Sentiments':
,,Nature, when she formed man for society, endowed him with an original aver-
sion to offend his brethren. She thought him to feel pleasure in their favourable,
and pain in their unfavourable regard." (Smith, 1759/1976: 116).
,,It is the vanity, not the ease or the pleasure, which interests us." (Smith,
1759/1976: 50) (quoted in Reisman, 1998).
But there is a dark side to the desire for recognition as well. The existence of a moral dimen-
sion in the human personality doesn't mean that there will be always an agreement on the
22
When other people see that we are not living up to our own sense of self-esteem, we feel shame; and when we
are evaluated justly (i.e., in proportion to our true worth), we feel pride (Fukuyama, for precise quotation see
below).
23
Modern motivational psychology assumes that, besides such primary instincts like hunger or sexuality, man
has an important urge for recognition, social contact and curiosity.
44
substantive content of morality. And the moral sense and moral learning is much less devel-
oped in some people than in others. There is no reason to think that all people will evaluate
themselves as the equals of other people. Rather, they may seek to be recognised as superior
to other people. Possibly on the basis of true inner worth, but more likely out of an inflated
vain estimate of themselves. This desire to be recognised as superior to other people is mega-
lothymia (Fukuyama, 1993: 181, 182, Fukuyama, 1995: 162-171, 358, 359) or in Rousseau's
word `amour-propre' (`selfishness').
24
It goes together with a Hobbsian claim to posses every-
thing. Our desire for recognition by others leads to competition and domination. Rousseau
cites the example of Hobbs that there are so many candidates which go for the same race
(Rousseau, 1755/1997: 256).
,,Je montrerois que c'est à cette ardeur de faire parler de soi, à cette fureur de se
distinguer qui nous tient presque toujours hors de nous mêmes, que nous devons
ce qu'il y a de meilleur et de pire parmi les hommes, nos vertus et nos vices, nos
Sciences et nos erreurs, nos Conquérans et nos Philosophes, c'est-à-dire, une mul-
titude de mauvaise choses sur un petit nombre de bonnes (Rousseau, 1755/1997:
256)
Unlike Adam Smith Rousseau doesn't see the benefits of outside attention for moral devel-
opment. For him `amour-propre' and vanity are the seed of all evil.
,,Le sauvage vit en lui-même; l'homme sociable toujours hors de lui ne fait vivre
que dans l'opinion des autres. [...] D'une telle disposition naît tant d'indifférence
pour le bien et le mal." (Rousseau, 1755/1997: 268).
Therefore the mirror of group attention is not a source of moral excellence. He overstresses
the negative side of outside attention and goes even so fare as to locate here the seeds of our
civilisational disease. It might increase scientific knowledge and refinement of arts and let-
ters, but not help to improve morals. Natural man (the noble `homme sauvage') left alone in
his natural environment is self-sufficient and peaceable and follows his `amour de soi', a sim-
ple healthy concern for one's own well-being, restricted by `pitié'.
25
But as man joins together
24
Rousseau distinguishes the natural, healthy `amour-de-soi' (`self-interest') from `amour-propre (`selfishness')
and vanity. This `amour-propre' emerged only with the development of civilisation and the invention of private
property.
25
"La pitié est un sentiment naturel, qui modérant dans chaque individu l'activité de l'amour de soi même,
concourt à la conservation mutuelle de toute l'espéce. [...] C'est elle qui, au lieu de cette maxime sublime de
justice raisonnée; Fais à autrui comme tu veux qu'on to fasse [`golden rule'], inspire à tous les Hommes cette
autre maxime de bonté naturelle bien moins parfaite, mais plus utile peut-être que la précedente. Fais ton bien
45
with others to make up states he degenerates and becomes corrupt. `Amour-propre', an anx-
ious concern for tribute to be paid to one's status becomes the only concern. Sexual jealousy,
the desire for domination and resentment grow up as men come to demand esteem and defer-
ence. As a consequence men begin to compete for precedence and life is tainted by aggression
and spite. Those who have acquired dominance then conspire together to consolidate their
position. They argue that everyone needs a more peaceable and stable society, which can only
be achieved through the apparatus of government. Thus it is that they consolidate the status
quo, but without right or justice and acting only to perpetuate unfair privilege and the oppres-
sion of the weak. Led by the effect of exacerbated `amour-propre' people seek individual as-
cendancy by doing others down. That is his explanation for the observation that `L'homme est
né libre, mais partout il est enchaîné'.
Rousseau presents an alternative approach to how we might achieve a just and legitimate civil
order with his `Le Contract Social' (1762).
26
Everyone should have an equal political standing
regardless of birth or wealth. This work will later have a profound influence on the French
Revolution.
Prior to modern liberal democracy, the struggle for recognition was carried on by ambitious
princes who sought primacy over each other through war and conquest. Indeed, Hegel's ac-
count of the human historical process began with a primordial `bloody battle' in which two
combatants sought to be recognised by the other, leading one ultimately to enslave the other.
Political institutions allow now to stop the Hobbsian `bellum omnium contra omnes'.
The struggle for recognition that formerly had been carried by military means is now pursued
by economic means. Where formerly princes sought to vanquish each other by risking their
lives in bloody battles, they now risk their capital through the building of industrial empires.
Entrepreneurship has replaced the art of war. The underlying psychological need is the same,
only the desire for recognition is satisfied through the production of wealth rather than the
destruction of material values. Early political economist of the Scottish Enlightenment like
avec le moindre mal d'autrui qu'il est possible." (Rousseau, 1755/1997: 150).
26
In the same year he also writes a book on education (`Émile', 1762) where he tries to show how a child could
be brought up free of the aggressive desire to dominate others. Instead that child can be caused to want to coop-
erate with others on a footing of mutual respect. How important mutual respect is and how domination and to
much inequality can lead to sickness shows a medical scientist like Wilkinson (1999) (cf. pp. 151).
46
Adam Ferguson, Adam Smith and James Stuart all hoped that the destructive energies of a
warrior culture would be channelled into the safer pursuit of a commercial society, with a cor-
responding softening of manners (Fukuyama, 1995: 358-360). This a more optimistic account
than given by Rousseau of how to transform the desire for recognition into something socially
appreciable.
To summarise we can recall our view of man which is maybe best described by Pascal when
he said that the angle and the beast coexist in us together with potential humanity (Marc,
1990: 10).
27
Or as Buddha said, wherever there is shadow, there is light. Aristotle nicely links
this view to politics. He begins the `Politics' (I 2 1253 a 31-34) by asserting that man is a po-
litical animal by nature, somewhere between a beast and a god.
,,A social instinct is implanted in all men by nature, and yet he who first found the
state was the greatest of benefactors. For man, when perfected, is the best of ani-
mals, but, when separated from law and justice, he is the worst of all; since armed
injustice is the more dangerous, and he is equipped at birth with arms, meant to be
used by intelligence and excellence, which he may use for the worst ends. That is
why, if he has not excellence, he is the most unholy and the most savage of ani-
mals, and the most full of lust and gluttony. But justice is the bond of men in
states; for the administration of justice, which is the determination of what is just,
is the principle of order in political society."
28
We can conclude that a state is needed to ensure an orderly living together when man neither
follows his moral sense nor rationally founded moral rules on the one side. State institutions
are a check to man's magalothymia, his `amour-propre' and potential gluttony. On the other
side can the state foster moral learning and a fruitful and collaborative living together through
a fair administration of justice. Having understood the need for a state, the next question is
how it should be structured and of which size it should be. Therefore we will develop next the
principles of federalism. We are convinced that a federal European polity will build a corner-
stone of a reformed European societal model and help best the accumulation of social capital.
27
It is the same view as Freud took up in his `Das Unbehagen in der Zivilisation' (1929). Freud argues that we
need to control and renounce our baser instincts before we can build a modern society. Human life - in this view
- is fundamentally dualistic. We soar somewhere between heaven and earth on a `good' wing - an acquired sense
of ethics and justice - and a `bad' wing - a deeply rooted egoism (de Waal, 1996: 17).
28
This position is similar to what Kant concludes in his `Zum Ewigen Frieden' (1795: 8.366-368).
47
Personalism and the Principles of a Federalist Polity
An alternative vision to a Europe under the total dictate of the market logic is the one of per-
sonalistic federalism. Starting point is the person embedded in a community. The person is
not the homo oeconomicus, an atomised individual, purely egoistic and in constant competi-
tion to its fellow men. It is more a person viewed as a social and moral being. This view is
nothing new as we have seen in our previous discussion about moral foundations of liberal-
ism. During the years of crisis in the 1930s, a group of mainly French intellectuals started to
think about the problems of European society. They sought to reequilibrate the opposing ten-
dencies of individualism and collectivism. Their solution was personalism which applied to
the political organisation leads to federalism.
Federalism as Philosophy
Personalistic thinking started to spark around the two journals `Esprit' and `L'Ordre nouveau'
in Paris in the 1930s. The French personalists have been influenced by Max Scheler and were
in contact with Martin Buber and Karl Jaspers, the protestant theologian Karl Barth, the
catholic Gabriel Marcel and Jacques Maritain and the orthodox Nikolaus Berdiajeff. The per-
sonalist-federalist school has been developed mainly by Robert Aron, Arnaud Dandieu, Alex-
ander Marc, Emmanuel Mounier, Daniel Rops and the Swiss writer Denis de Rougemont.
They have build upon the older, social-libertarian thinking of Proudhon and Bakounin. For
them all forms of state organisations are problematic and the more fare away of the people the
worse (anarchism). Small is beautiful and self-determination important. Therefore society
should re-emerge bottom up based upon voluntary cooperation and corporations.
All have been convinced that the individualism which has inspired the Jacobeans has led to an
atomisation of society. An atomised society demanded as counterweight a totalitarian state. `It
is with the powder of individuals that you build the concrete of totalitarian states'
(Rougemont). Man was not seen as an `individual', but as a `person' which means at the same
time free and autonomous but related to others through one's responsibility and engagement.
The uniqueness of each individual has only a meaning when he is related to others (Marc,
1990). It is not by accident that great thinkers like Meng Zi, Smith or Darwin saw man's re-
latedness through his moral sense to others, too.
48
For Rougemont is the idea of federalism more organic than rational in its nature, more dialec-
tical than simply logical. Federalism is not a simple philosophy of `either ... or', but of `not
only ... but also'. Regional, national and European identity, for instance, do not exclude, but
complement each other. The motto of personalism is `neither individualism nor collectivism
but personalism'. Man in his individual and societal dimension stands at the centre. Too much
individualism leads to massification and decay of society. On the other hand do collectivist
ideologies suppress people. Freedom and development of the individual are sacrificed to the
national `race' or social `class'. Collective and individual, unity and diversity are the two
ideal type poles between which federalism tries to find its balance. Both of the two poles are
at the same time unattainable and in constant tension to each other. In Japanese one would
speak in such an ambivalent situation of `amae' freedom in security.
29
Principles of Federalism
The goal of federalist thinkers, like Alexandre Marc or Ferdinand Kinsky, is a federation equili-
brating the opposing poles of unity and diversity (Kinsky 1995). The federation is a non-central
order, a state at different echelon according to the geography of problems. Power must be di-
vided and diffused, so that at the end `the power is everywhere even at the centre' (Marc).
Here we must warn of a misunderstanding. We don't mean by `federalism' what most Anglo-
Saxons understand by it a centralised unitary state. We have more the Swiss and German
meaning of federalism in mind, a view which sees the plurality of regions as cornerstone. The
autonomous region is important for federalism. Here face to face relationships are possible
and local identities and common values important.
According to Rougemont (1947) does federalism presupposes to renounce on any form of he-
gemony or thinking in systems.
30
Federalism does not know any minority problems because
each minority has its own qualitative intrinsic value independently of its quantity. It does not
want to eradicate national idiosyncrasies. To the contrary federalism tries to preserve them.
Federalism is the love for complexity. It is about putting together a `bricolage' (C.-L. Stauss).
29
For a recent outline of federalist, personalist philosophy cf. Kinsky (1998).
30
"Fédérer ce n'est pas mettre en ordre d'après un plan géometrique à partir d'un axe; fédérer c'est tout sim-
plement arranger ensemble."
49
Finally, a federation is not created by a governmental decree from the centre, but by the en-
gagement of diverse persons and groups civil society.
A federal order is based on a combination of the principles of autonomy, cooperation, sub-
sidiarity and participation (Kinsky 1995: 48-55):
· Autonomy: This means neither independence of sovereign states nor dependence of the
lower units of administration, like communities, departments or regions. Autonomy implies a
large degree of self-determination and total self-organisation. For autonomy to work really it
must not only be guaranteed by the constitution, but supply of sufficient financial resources is
equally important. Therefore financial redistribution towards poorer regions is important.
· Cooperation and resolution of conflicts by means of law: Rule of law and not rule of the
strongest, hegemony. This means pursuing one's interest in case of conflict, but respecting at
the same time the autonomy of the partner. Since autonomy is guaranteed discretion and
power politics is limited. Thus there is room for a cooperative combination of egoism and fair
play where tensions are not suppressed, but are an integral part of the whole.
· Subsidiarity and appropriate distribution of power. Problems are solved on the level where
they arise. Accordingly are competencies, decision-making mechanisms and financial re-
sources distributed.
· Participation: The citizens and the member states participate in the decision-making proc-
ess at the federal level. Federalism is only "quasi-contractualism". Decisions are preferably
made at the base, but this is not totally sovereign. There is still the possibility of unilateral
interventions from the top. Decisions are not made by unanimity, that would be a confedera-
tion. They are made by majority voting. But as compensation the member states participate in
the decision-making process. Participation of member states at the federal level is important.
Without it we would have only a decentralised state.
In opposition to the Jacobean tradition where only individuals have a say does federalism not
try to suppress intermediary corporations, civil society and regions. To the contrary their in-
volvement and participation is actively nurtured. Therefore federalist do not only want a sec-
ond chamber representing the member states, but also a third economic and social chamber
representing the interests of the social partners. Lobbying should become like this more trans-
parent and interests which have difficulties to get organised collectively, like the consumers,
would be more adequately represented.
50
In reality, however, federal principles are not always applied. But one must always ask if
there would be better results in a non-federal system. Everyone who knows, for example,
Switzerland should try to imagine Switzerland with its four languages and cultures as a uni-
tary state or as a lose confederation. Switzerland, the `confederatio helvetica', was once a
confederation, like North America. Bot both confederations have been faced with to many
problems which allowed only the transformation into a more effective federation. In general
confederations are because of the unanimity requirement quiet unstable systems. In the long
run they normally have only the options to either dissolve or to fusion further into a federa-
tion. Therefore the federation is the goal to strive for which is developed to a great deal in
Switzerland. Thus Switzerland does not have to Europeanise, but Europe has to Helvetise.
Something already Karl Jaspers recognised after W.W.II when he predicted that Europe had
only two options left: to Balkanise or to Helvetise! We will come back at the end of part III to
the problem of a European federation when we will oppose competition of systems to the ad-
vantages of a federal solution and look for pathways towards a federal Europe.
So fare we have analysed intrinsically, morally motivated cooperation and the need for exter-
nally, enforced cooperation by means of the state. And the state is best organised according to
federalist principles in order to maximise self-determination. The two dimensions of the
moral and the political can be captured by social capital
4. Social Capital Concept, Production, Distribution and Depreciation
Society is a cooperative venture of an association of persons for mutual advantage. But in
case of successful cooperation the problem emerges of how do you distribute the gains
(Rawls, 1971: 4)? Therefore you need a moral sense and some guiding moral principles. The
more just cooperation evolves the less force you need. On the other hand can social structure
help to enforce cooperation in the presence of social dilemma situations and of selfish indi-
viduals. Social capital as a general measure for cooperative capacity tries to capture both of
these aspects: the moral dimension of just cooperation (civil social capital) and the necessary
structural component to enforce cooperation by organisational means (government social
capital).
Social capital fostering cooperation reduces transaction costs. Social capital is important for
the emergence of cooperative ventures in the market place and for the functioning of classical
51
hierarchical organisations (like enterprises or the state). But most of all it is essential for net-
work building. Networks have the advantage to be more flexible then rigid hierarchies but
less anarchic than the market. But social structure doesn't determine an individuals action
completely. To the contrary an individual can use social structure - in the form of networks
and connections - to his own advantage. Both the view of the `undersocialised' man of eco-
nomics and the view of `oversocialised' man of sociology are refuted. Persons are seen as be-
ing embedded in communities, having feelings of reciprocal obligations, and are able to use
their personal networks. Social capital takes up a relational perspective and is about a persons
connectedness and embeddedness.
31
In the following we will first look at the relational definition of capital of Karl Marx. This
view has inspired Pierre Bourdieu and James Coleman's attempts to conceptualise social
capital. Understanding social structure's double character as enablement and as impediment
will lead us to the `structure/agency' problem. Social organisation constitutes social capital.
Social justice, trust, civic spirit and tolerance are key values fostering cooperation together
with communication. Subsequently we will analyse how social capital is produced, distributed
and depleted.
The Concept of Social Capital: Its Origins From Karl Marx Onwards
Production is the transformation of inputs in outputs. Inputs are those things which need to be
increased in order to obtain more output by the same method of production. Capital goods are
seen as produced means of production. They derive their value not, as the classics had main-
tained, from the fact that they represent land and labour services spent in the past, but from
their prospective usefulness in the production of future output. A stock of different capital
goods is a capital. The term money capital denotes the sum of money necessary to buy a
specified stock of capital goods (Palgrave, 1987: 327, 330). Physical capital and human capi-
tal facilitate production activity, and social capital does so as well.
31
Granovetter (1985) investigates the extent to which economic action is `embedded' in structures of social rela-
tions.
52
Physical capital is created by making changes in materials so as to form tools that facilitate
production. Human capital is created by changing persons so as to give them skills and capa-
bilities that make them able to act in new ways. Social capital is created when the relations
among persons change in ways that facilitate action (Coleman, 1990: 304, 305). Human capi-
tal is surely necessary to success, but it is useless without the social capital of opportunities in
which to apply it (Burt, 1998: 7). Social capital is capital since the norms and social relations
building it are persistent. Social interaction producing simply a flow of positive externalities
can be termed social labour. Only persistence of the social interaction or of its effects makes it
a stock and capital. (Collier, 1998: 4)
The idea of capital being a social relation goes back to Marx. He writes in his `Das Kapital'
(1867/1976, Appendix, II-III):
,,If we look more closely at the capitalist factory, we will see that not only the
loom, but also money, yarn, and even the capacity to labour all serve at various
points as particular incarnations of the owners' capital. This is because capital is
not a thing, but rather a definite set of social relations which belong to a definite
historical period in human development, and which give the things enmeshed
within theses relations their specific content as social objects. To understand
Capital, one must therefore decipher its character as a social relation."
This statement clarifies Marx fundamental relational approach to social phenomena. For
Marx, as he clarifies in his `Die Grundrisse' (1858/1971: 77) (quoted in Bourdieu and Wac-
quant, 1992):
,,Society does not consist of individuals; it expresses the sum of connections and
relationships in which individuals find themselves."
Ollman (1976: 14) has shown that the relation is the irreducible minimum for all units in
Marx's conception of reality. To see capital as a social relation is part of an encompassing
strategy showing that the economic theory of a market society can be turned back against it-
self to introduce a society which would be based upon different principles. Thus we do better
understand the subtitle of Marx's work `Das Kapital Kritik der Politischen Ökonomie'
[Capital A Critique of Political Economy] (Giddens, 1998).
Pierre Bourdieu has taken up this methodological relationalism in his work. For him social
capital is the sum of the resources, actual or virtual, that accrue to an individual or a group by
53
virtue of possessing a durable network of more or less institutionalised relationships of mutual
acquaintance and recognition (Bourdieu, 1992: 119).
32
In Coleman's view is social capital defined by its function. It is not a single entity but a vari-
ety of different entities having two characteristics in common: They all consist of some aspect
of social structure (e.g. networks and norms), and they facilitate certain actions of individuals
who are within the structure (social structure as enablement). Unlike other forms of capital,
social capital inheres in the structure of relations between persons and among persons (Cole-
man, 1990: 302). To posses social capital, a person must be related to others, and it is those
others, not himself, who are the actual source of his or her advantage. Coleman's conceptuali-
sation of social capital embeds the rational actor in social structure. But his action theoretical
approach neglects the impediment character of social structure which stood at the origin of
the Marxist analysis. Therefore Giddens synthesis of social structure as both as enablement
and impediment seems to be the more balanced view (cf. Giddens theory of structuration, p.
65). In general we see a shift of emphasis away from conceptualising social structure as im-
pediment towards stressing its character as enablement.
These days social capital has become a buzzword. Karl Marx with his view of capital as a so-
cial relation surely stands at the beginning of this kind of analysis. And it is this relational
view which is now also taken up by Ronald Coase when he writes:
,,Economics is the science which studies human behaviour as a relationship be-
tween ends and scarce means that have alternative uses. It is the study of human
behaviour as a relationship. [...] What we are dealing with is a complex interre-
lated structure" (Coase, 1998: 72, 73).
Ronald Burt (1998) adds the network structure or structural holes dimension to social capital.
With respect to consequences, social capital is the contextual complement to human capital.
Social capital predicts that returns to intelligence, education and seniority depend in some part
on a person's location in the social structure of a market or hierarchy. While human capital
refers to individual ability, social capital refers to opportunity. For instance, some portion of
the value a manager adds to a firm is his ability to coordinate other people: identifying oppor-
tunities to add value within an organisation and getting the right people together to develop
32
But unlike the neoclassical definition of capital which stresses the prospective usefulness of capital for the
future, Bourdieu adheres to the old classic theory of value. For him `capital is accumulated labour' (Bourdieu,
1992: 118).
54
the opportunities. Knowing who, when, and how to coordinate is a function of the manager's
network of contacts within and beyond the firm. Certain network forms deemed social capital
can enhance the manager's ability to identify and develop opportunities. Managers with more
social capital get higher returns to their human capital because they are positioned to identify
and develop more rewarding opportunities. Structural hole theory gives concrete meaning to
the social capital metaphor. The theory describes how social capital is a function of the bro-
kerage opportunities in a network. Social capital is the information and control advantages of
being the broker in relations between people otherwise disconnected in social structure. The
disconnected people stand on opposite sides of a hole in social structure (Burt, 1998: 7, 8).
Again an eclectic combination on the theme of structure as enablement and impediment.
Others, coming from different angels have made original contribution as well. What is most
likely is that the concept has been invented multiply and independently from one author.
Maybe the first author who actually used the term `social capital' is Lyda J. Hanifan when she
writes in 1920:
,,In the use of the phrase `social capital' no reference here is made to the usual ac-
ceptation of the term `capital', except in a figurative sense. We not refer to real es-
tate or to personal property or to cash, but rather to that in life which tends to
make those tangible substances count most in the daily lives of people: namely
good will, fellowship, sympathy, and social intercourse among the individuals and
families who make up a social unit. [...]
The individual is helpless socially, if left by himself. Even the association of the
members of one's own family fails to satisfied that desire which every normal in-
dividual has of being with his fellows, of being a part of a larger group than the
family. If he comes into contact with his neighbours, there will be an accumula-
tion of social capital, which may immediately satisfy his social needs and which
may bear a social potentiality sufficient for the substantial improvement of life in
the whole community. The community as a whole will benefit by the cooperation
of all its parts, while the individual will find in his associations the advantages of
the help, the sympathy, and the fellowship of his neighbours." (Hanifan, 1920: 78,
79) (referred to in an e-mail discussion group on the origins of social capital).
In 1977 introduces Glenn Loury (Loury, 1977) the concept of social capital into economics in
an analysis of racial inequality, to describe the social resources of ethnic communities.
33
Loury is the guy who Coleman credits for having invented the term social capital. Actually
Coleman uses social capital for the first time in 1987, gaining larger public attention with his
33
African-American lack the bonds of trust and social connectedness within their own communities that exist
for Asian-American and other ethnic groups.
55
1988 article in the American Journal of Sociology (Coleman, 1988) and with his work `Foun-
dations of Social Theory' (1990) where he deals extensively with social capital, but always
from an action centred approach.
In the meantime Bourdieu offers a definition of its own in his 1980 article (Bourdieu, 1980)
stressing an individuals networks. The network component of Bourdieus social capital con-
ceptualisation is action theoretically grounded. But he gives this approach a new twist by
stressing the unequal distribution of networks, or in other words, of social structural opportu-
nities. He therefore lays the basis for a neo-marxist position of suppression without referring
to the doubtfull economic analysis of exploitation. Network advantages due to family social
capital build the basis of class reproduction (cf. discussion on Social Darwinism, pp. 84-86).
In Germany Ekkehart Schlicht develops his view of social capital (Schlicht, 1984: 62):
,,It is obviously very important for the efficiency of any economic system that
people obey the rules even if unobserved since this saves control costs, and their
desire to appear to themselves as law-abiding citizens is a very important eco-
nomic asset and can be considered as a kind of social capital - one might speak of
`moral capital' just in the same sense as v. Weizsäcker speaks of the `organisa-
tional capital' of a society as embodying the value of the organisational structures
present within an economy."
Volker Bornschier (1988: 367-389, 1989, 1996: 56-62) argues that legitimacy is a source of
success in the competitive world environment. Depending upon the degree to which security,
equality and efficiency are fulfilled social order varies in legitimacy. Bornschier, always hav-
ing the macroperspective in mind, argues that the more legitimate social order is the less re-
sources for suppression are needed. Thus intrinsic motivation of citizens saves external en-
forcement costs. If a state tries to break resistance in a population by means of force, capitalist
firms suffer from two disadvantages. First, they cannot rely any longer on a motivated work
force, and, second, they must pay more for protection. Under such conditions capitalist pro-
duction is clearly not impossible, as we know from numerous historical and contemporary
examples, but such social formations are neither able to attain nor maintain core status in
world production.
Hansjörg Siegenthaler, taking up the communicative paradigm of Habermas, defines social
capital as chances to communicate (1993: 56). It is mainly through communication that peo-
ple become connected with one another. The studies of Piliavin and Charng (1990: 51, 52),
Sally (1995) and of Bohnet (1997) show that - contrary to economic theory - it is important
whether people can communicate or not. In economic theory communication is regarded as
56
`cheap talk'. But it is through face-to-face relations and communication that people develop
trust and a group identity. Experiments show that people are more likely to overcome success-
fully social dilemma situations if they can communicate. Therefore the first condition for so-
cial capital accumulation is chances to communicate. Subsequently values like justice, trust,
engagement and tolerance can develop their potential in fostering cooperation.
We will distinguish between informational capital and social capital. Information capital is
not a replacement for social capital. Social capital includes chances to communicate as a con-
sequence of an individuals connections. But it is more. It also involves selection, classifica-
tion and interpretation of information. Collaborative networks perform this critical screening
and interpretation function. Social capital increases the ability to build and use informational
capital because trustful relationships increase information flows and bring richer meaning to
information (Fountain, 1997).
The works of Robert Putnam (1993a,b, 1995a, 1996), and of Francis Fukuyama (1995, 1999),
by taking up Coleman's definition, have helped the final breakthrough of the concept of social
capital. Social capital has become a catchword. This might be due to the fact that non-
economist can sound like economists. We no longer have neighbours, friends, or sympathetic
colleagues, we have social capital. But at the same time social capital contains an implicit cri-
tique of the type of economic thinking which does not move beyond the assumption that the
social world works solely on the principle that `greed is good' and the accumulation of capital
as monetary wealth. Whereas Fukuyama (1995) essentially equalises social capital with trust
Putnam has developed a broader definition.
34
Putnam sees social capital as a set of horizontal
associations between people. Social capital consists of social networks (networks of civic en-
gagement) and associated norms that have an effect on the productivity of the community.
The key feature of social capital in this definition is that it facilitates coordination and coop-
eration for the mutual benefits of the members of the association (Putnam, 1993).
Social capital can be seen as laying at the centre of the `third way beyond left and right' of
New Labour and politics of the `Neue Mitte'. Social capital tries to connect the individual
with the collective, the economy with society. Since mid 1990s the World Bank has become
34
In his latest book Fukuyama (1999: 16) has taken up a more broader definition of social capital, too. Social
capital is the set of informal values and norms shared among members of a group that permits cooperation
among them.
57
interested in social capital as well. It sees participatory processes and social capital as part of
a new comprehensive development paradigm where social development promotes economic
development. At the same time it is recognised that economic policies that fail to pay atten-
tion to the social dimension may make matters worse. Therefore participatory processes and
the restoration of social capital are important. But also right, i.e. socially sustainable eco-
nomic development can promote social development (Stiglitz, 1999). The World Bank de-
fines social capital as including all norms and social relations embedded in the social struc-
tures of societies that enable people to coordinate action to achieve desired goals.
35
Social
capital is the glue that holds societies together, makes society more than a collection of indi-
viduals, and without which there can be no economic growth or human well-being. Without
social capital, society at large will collapse.
Different Kinds of Social Capital
While social capital in the narrow definition of Putnam was limited to associations having
positive effects on development, recently some of its critics try to include groups that may
have undesirable outcomes as well, such as associations with rent-seeking behaviour (for ex-
ample the Mafia in Southern Italy). Fukuyama (1999: 16), too, warns that the sharing of val-
ues and norms does not in itself produce social capital, because the values may be the wrong
ones. Thus we have carefully to distinguish between functional and dysfunctional coopera-
tion and social capital.
We can speak only of social capital fostering cooperation when as a consequence of the coop-
eration positive externalities are created. If negative externalities for others are the result of
the cooperative venture we must speak of rent-seeking. Functional cooperation is the conse-
quence of social capital, dysfunctional cooperation the result from rent-seeking. Another im-
portant distinction is whether or not a society is blessed with social capital. When the coop-
erative lubricate of social capital is missing the social structure is characterised by anomic
tensions and criminality and violence are the result. On the other hand when there is enough
35
Social capital website of the World Bank (
www.worldbank.org/poverty/scapital/)
. The World Bank has rec-
ognised the importance of social capital for sustainable development and undertakes with its Social Capital Ini-
tiative (SCI) an effort to operationalize the concept and to demonstrate how it affects development. It received
therefore US $ 1 million from the Government of Denmark.
58
social capital the potentially always present latent conflict is moderated and fruitful coopera-
tion possible.
36
Thus one could imagine that endless accumulation of social capital would lead
to utopia. More social capital implies a stronger linking of production to the needs of the
wider social community. Hence through social capital accumulation a humanisation of our
alienated world (Marx) becomes possible.
Social capital in general is the ability of people to cooperate. Cooperation might be externally
enforced through means of political intervention (government social capital) or cooperation
might emerge spontaneously, and free, morally, intrinsically motivated and guided by values,
like justice, trust, civic engagement and tolerance (civil social capital).
37
Such values, norms
and good quality social relations are embedded in the social structure and have thus to a large
extend the character of a public good. Civil social capital is about a social system having lots
of social capital floating around in them (so they'll be more civicly active, etc.). Civil social
capital, helping voluntary cooperation guided by civic spirit and altruism is often crucial for
overcoming social dilemma situation. Sometimes nevertheless enforced cooperation by the
social and political structure is necessary (government social capital). The socio-political
structure subsequently builds the environment that enables norms to develop and shapes them.
Thus government social capital complements civil social capital, but also shapes it. We will
come back to the link between markets, the state and civil society in more detail later (cf. pp.
89-95)
The other view to social capital is social structure as an individual resource and a private good
(personal connections as individual social capital and networks). Individual `social' capital is
the product of market exchanges leaving no externalities. Network theorist, like Burt and
Bourdieu, have focused more on the individual level of social capital. But in Bourdieu's con-
ception and analysis the consequence of these individual networks often show negative exter-
nalities for others (e.g. diminished educational opportunities for bright children without pa-
rental networks) so the boundary towards rent-seeking becomes blurred. But we will remind
that since most social capital is about norms and social relations embedded in the social struc-
36
That involvement and participation in groups can have positive effects is dating back to Durkheim's emphasis
on group life as an antidote to anomie and self-destruction (Portes, 1998: 2).
37
For the terms `civil social capital' and `government social capital' cf. Collier (1998: 15) and for the stress on
the difference between self (group) enforcement and third party enforcement cf. Paldam and Svendsen (1999).
59
ture of society enabling people to cooperate, most of social capital has a public good character
(civil and government social capital). As an attribute of the social structure in which a person
is embedded, social capital is not the private property of any one person or groups of persons
who benefit from it (Coleman, 1990: 315). Social capital inheres in relations between indi-
viduals and groups and, not in individuals per se. Norms and values held by individuals be-
come social capital only insofar as they facilitate action by others. In this respect, they are
context specific. Outside that situation they may be of little or no value. This is the structural
view in which the effects of social capital are clear at the individual level yet cannot be re-
duced to a set of properties individually possessed (Bourdieu, 1986: 256).
38
Very similar along the lines of distinction between social capital as private or public good,
individual resource or collective structure goes the distinction according to the level of analy-
sis. On the micro level networks and associations promote efficient market outcomes by shar-
ing information, aligning individual incentives with group objectives, and improving collec-
tive decision-making. On the macro level social capital tries to be an enabling environment,
fostering cooperation and enhancing the effects of micro level social capital (World Bank,
1997: 81). The following figure 3 might help to better distinguish the different kinds of social
capital.
38
Bourdieu (1972 and later) has a fourfold distinction between financial, human, social and cultural capital. For
him the latter encompasses norms and values, and social capital is simply about the network structure. But we
will submerge cooperative norms, social relations and networks all into social capital in order to make things not
too complicated.
60
Level of analysis Motivation
Effect
Kind of s.c.
macro
external enforcement public, pos. externalities government s.c.
macro/micro intrinsically,
morally
public, pos. externalities civil s.c.
micro self-interest
private,
no
externalities
individual s.c.
micro self-interest
private,
neg. externalities rent-seeking
(or neg. s.c.)
s.c. stands for social capital
Figure 5: Different kinds of social capital
Social capital inheres in the social relation and is about its quality. Linking and connecting
people social capital has a double character as collective structure and individual asset. But
these two aspects are complementary. On the one side connections can be an individual asset.
On the other can the structure created from collaborative efforts represent a public good. This
distinction between social capital as a public and a private good leads over to the struc-
ture/agency problem. But to be clear in the following social capital is for us in short the level
of interpersonal connections (norms and social relations) which enable one to collaborate for
mutual gain (Saguaro, 1998). Social capital is about connectedness, organisiness and belong-
ingness.
39
In our empirical test in part II we will mainly focus on the importance of cooperative norms,
like trust, civic engagement, tolerance and social justice (civil social capital), and the quality
of the political institutions in general (government social capital). Thus later we will leave the
private good aspect of social capital (individual social capital) aside. In part III we will con-
tinue our analysis of social capital as a public good and cooperation resource further. We will
ask how the socio-political structure in Europe can be changed in order that the four key co-
operation values are fostered, i.e. radius and strength of trust, civic engagement, tolerance and
39
This review of the concept of social capital has been subjective and incomplete. Other recent reviews are from
Portes (1998), Woolcock (1998), and Feldman and Assaf (1999)
61
social justice. But before that an excurse on the structure/agency problem, remarks on social
organisation and on production, distribution and deprecation of social capital.
Excurse: The Structure/Agency Problem
Even though the following part on the structure/agency problem might lead on first sight a
little bite astray, it is nevertheless of significance for our topic. Subsequently we will analyse
from the philosophical vantage point potential for constructivist interventions in the social
world. Therefore it is important to clarify to what degree we are socially determined and to
what degree there is contingency and thus room for agency.
As we have seen the concept of `social capital' lays at the interlink between the micro (indi-
vidual) and the macro level (society). Social structure and institutions can be in the worst case
the cause of suppression. But they are also the necessary and legitimate limits to individual
action and help like this the emergence of cooperative relationships (Coleman, 1990: 302 and
North, 1990). But social structure becomes a resource and a capital asset for an individual as
well (Coleman, 1988: 95). In this regard Coleman's and Bourdieu's view on social capital
converge. Both see the possibility to be connected to other persons thanks to social capital.
This dichotomy of social structure as restriction and as enablement opens the debate of struc-
ture/agency. To what degree are an individuals action predetermined by the social and bio-
logical structure and to what degree is an individual free to decide by himself. By social struc-
ture we understand the institutional and cognitive rules which guide our behaviour. Institu-
tions are all state sanctioned rules of the positive law together with the informal norms and
rules upheld in society and the individually internalised norms. Cognitive rules are the rules
of selection, classification and interpretation of information (Siegenthaler, 1993: 15).
The social contract is for political philosopher the mean to establish conditions of agency.
This idea goes back to Rousseau. For him the goal of the social contract is to find a form of
how to join forces in order that everybody is protected, but stays nevertheless as free as be-
fore. From a sociological perspective on the other hand Emil Durkheim was one of the first
who stressed that society has primacy over the individual person. Society exerts social con-
straint over our action. This point of view is expressed in a famous statement:
,,When I perform my duties as a brother, a husband or a citizen and carry out the
commitments I have entered into, I fulfil obligations which are defined in law and
custom and which are external to myself and my actions. [...] Similarly, the be-
62
liever has discovered from birth, ready fashioned, the beliefs and practices of his
religious life; if they existed before he did, it follows that they existed outside
him. The system of signs that I employ to express my thoughts, the monetary sys-
tem I use to pay my debts, the credit instruments I utilise in my commercial rela-
tionships, the practices I follow in my profession, etc. - all function independently
of the use I make of them. Considering in turn each member of society, the fol-
lowing remarks could be made for each single one of them (Durkheim,
1895/1982: 50/51) (quated in Broudieu and Wacquant).
We see the problem of `structure/ agency', of social structure vs. free will is as old as sociol-
ogy is
40
and goes back to the old philosophical problem of freedom of the will (Wallerstein,
1997). Is the will the final instance of human action? Phenomenology sees humans as creative
agents in the construction of social worlds. It is from their consciousness that all being
emerges. Phenomenology assumes a reflexivity of action, situation, and reality.
41
In the terminology of Heidegger `Existentiale' and `Existentielle' are the basic categories of
human action. `Das Existentiale' is the given structure which determines existence. `Das Ex-
istentielle' is the concrete action of a person within that structure (Heidegger, 1926). Heideg-
ger develops his fundamental ontology in `Sein und Zeit' (1926) (for a short version of his
key ideas, to which we refer here, cf. `Was ist Metaphysik?' (1929/1992)). He meditates
about the old metaphysical questions `why is there something and not nothing?'. His leitmotiv
is that the essence of being is existence. You experience existence the strongest by being con-
fronted with `the nothing'. Out of that ultimate fear transcendental existence in the dialectic
of `Existential' and `Existentielles' becomes possible. The basic mood of his philosophy is
dominated by fear. It is about worry (`Sorge') and being to death (`Sein zum Tode').
But that is also the point of departure of the critique of his philosophy. Because of the lack of
a transcendental perspective in his thinking being to death causes fear. Now all the major re-
ligions oppose to this view the perspective of love. Transcendental love and love already ac-
tualised in this world gives a completely different perspective towards existance. Instead of
living a feared live in isolation towards one's death it is fruitfull cooperative live and love
with and within one's social context. Occationally also Heidegger makes this experiance
40
C.f. Simmel (1908) in his formulation of ,,two logically contradictory characterisations" of the human being as
,,a product and content of society" and as ,,an autonomous being".
41
The political philosopher Hermann Lübbe has developed a whole phenomenology of decision making stress-
ing the voluntary and contingent factors of a decision (Lübbe, 1971).
63
when in love with Hanna Arendt. Than love replaces fear as the key to being and existence.
Arendt later develops further this idea in `Vita activa' where being in the world (`In-der-Welt-
sein') becomes central. This view is essentially directed against an isolated, atomised subject
(Thomä, 1998: 8).
Jean-Paul Sartre's (1960/1976) methodological investigations are designed to clarify the rela-
tion between structural conditions and the intentional actions - the `projects' - of individu-
als.
42
1
Sartre's famous dictum - influenced by Heidegger `Existence precedes essence' es-
tablishes the idea that the essence, or meaning of things, is not predetermined by any outside
force. Instead, meaning is constructed by men. The world does not contain any transcendent
meaning, we make up the meaning as we go along, filtering the world through language.
Simone de Beauvoir startes to question whether the role of social conditions in limiting free-
dom might not be more severe than Sartre said it was. Aren't people constrained by the ideas
presented to them? - Sartre thinks that however oppressed circumstances or other people may
render us we will still have some choices of action or inaction (that is what he calls `existen-
tial freedom'), and we must take full responsibility for those decisions (Fillingham, 1993:
89/90).
To the same category belongs methodological individualism, a term coined by Joseph Schum-
peter. It holds that all social phenomena are in principle explicable strictly in terms of the
goals, beliefs and actions of individuals (Wacquant in Bourdieu and Wacquant, 1992: 16). It
is the method most upheld in economics. Most of (micro) economics is about decision theory,
rational choice theory. On the opposing end are adapts of a Marxist or structuralist concep-
tion. They have a more deterministic view of human action. They are concerned with the
42
Sartre's famous dictum - influenced by Heidegger `Existence precedes essence' establishes the idea that the
essence, or meaning of things, is not predetermined by any outside force. Instead, meaning is constructed by
men. The world does not contain any transcendent meaning, we make up the meaning as we go along, filtering
the world through language.
Simone de Beauvoir startes to question whether the role of social conditions in limiting freedom might not be
more severe than Sartre said it was. Aren't people constrained by the ideas presented to them? - Sartre thinks
that however oppressed circumstances or other people may render us we will still have some choices of action or
inaction (that is what he calls `existential freedom'), and we must take full responsibility for those decisions
(Fillingham, 1993: 89/90).
64
`laws of history' (historical materialism) or the `deep structures' (structuralism) that underlie,
generate and sometimes suppress human action.
43
Structuralism started by resurrecting the work of Ferdinand de Saussure, a Swiss linguist.
44
The anthropologist Claude Lévi-Strauss expands Saussure's ideas to talk about culture in gen-
eral. He theorises that within a culture, like a language, all of society, all human relations are
governed by certain overarching rules. It is the study of semiotics, of how signs interrelate.
Michel Foucault further develops this analysis in `Les Mots et les choses' (1966) and
`L'archéologie du savoir' (1969). Foucault doesn't believe in economics as the basis for his-
tory. Discourses, anything written or said or communicated using signs, are seen as the
source. We all know when categories make sense and when they don't. Foucault wants to see
what it is ,,we all know," what that knowledge of how to form categories is, and how it would
have been different in earlier times. (Fillingham, 1993: 92-95, 100). In this way Foucault is
directly challenging Sartre's Humanism and his Existential freedom. The subject disappears
in Foucault's work - until his late work
45
- behind the structure and power of discourses, of
anonymous forces imposing given identities. With Foucault the structuralist/post-structuralist
approach cumulates in `decentering the subject'. At this point we must mention Jürgen Haber-
mas, too. For him discourses have another importance. He sees the possibility of letting one-
self convince in a powerless discourse of the best argument. This consensually build commu-
nicative reason is the basis for deciding how to better the world.
43
Like structuralism, holism - contrary to methodological individualism - belongs to this side, too. We should
not forget unconscious forces either. Or what is the influence of supra-natural forces, like goods or karma, in
guiding our actions? Holism contends that social systems have emergent properties that cannot be derived from
the properties of their component parts and that the social explanation must start from the systemic level (Wac-
quant in Bourdieu and Wacquant, 1996: 16).
44
The collection of sounds and letters that make up, for example, the word `horse' (the signifier) do not in them-
selves have any connection to the animal we see cantering about a field (the signified). The answers to how
meaning works lies not in these sounds and letters, but in the whole system of language. The structure of lan-
guage is the dominant one, and people come into existence through language. Thus one is severely restricted to
think anything outside the rules of one's language. But images are often more powerfull than words and intui-
tion can go beyond what is thinkable in language (Holenstein, 1985).
45
In `Histoire de la sexualité', tomé II et III (1984) the subject with his ability for self-determination regains
space.
65
Pierre Bourdieu continues with his approach structuralist thinking and especially Foucault-
dian analysis. But he is not so much deterministic. Bourdieu's way of synthesis is methodo-
logical situationalism. Methodological situationalism takes the emergent properties of situated
interaction as its core unit of analysis (Bourdieu and Wacquant, 1992). But these situated in-
teractions are limited by `the field'. Bourdieu's `theory of the field' is inspired by structuralist
theory. The power of the signs is such that they can produce and reproduce structures of
domination and hegemony. The consequence is `symbolic violence' and `symbolic domina-
tion'. Ancestral structures, cultural codes, perhaps even in the collective subconscious, are so
strong that they can shape everybody's outlook and all arrangements, public or private. The
signs, the elements of `the field', are in its simplest form the elements of human language, but
include also figures of thinking and actualise themselves through specific ways of acting (`the
habitus').
46
Anthony Giddens (1979) has tried another way to synthesise `structure/agency'. In his theory
of structuration he has introduced phenomenological approaches into structuralism. His the-
ory can be best summarised by the Marx aphorism that ,,Men make history, but not in circum-
stances of their own choosing." Such an approach lets enough room for contingency. Human
beings are always and everywhere regarded as knowledgeable agents, although acting within
historically specific bounds of the unacknowledged conditions and unintended consequences
of their acts. Giddens begins with the assumption that there is a generalised attachment on the
part of actors to the routinised character of social life. Thus the basic unit of analysis for him
is the recursive social practice. `Rules' and `resources' structure social practices and `struc-
ture' is both enabling and constraining. It is agents who bring `structure' into being, and it is
`structure' which produces the possibility of agency. Social change flows from an amalgam of
incremental change, reflexive monitoring (ability of institutions to bring about change by em-
ploying knowledge of how the social world operates) and unintended consequences (Cassel,
1993:1-16).
46
In structural theory, in its strongest form, `the subject' disappears. We don't think, but we are thinked by the
power of language. But Bourdieu is not totally deterministic. He takes into account, as we have seen, the emer-
gent properties of situated interaction. There is room for contingence. Nevertheless we are deeply limited in our
actions by the cultural codes of `the field'. New, post-structuralist thinking now tries to `deconstruct' these cul-
tural codes.
66
James Duesenberry (1960: 233), after hearing the young Gary Becker, commented that "Eco-
nomics is all about how people make choices. Sociology is all about why they don't have any
choices to make." In neoclassical economics the `homo oeconomicus' is normally seen as
completely atomised. He is not connected to other persons. Neither by communication nor
through moral bonds. In sociology - on the other hand - actors are normally not really able to
perform `agency'. An individuals action is completely determined by social structure. The
`homo sociologicus' - does just play his predetermined role in society.
The view of a non-deterministic materialism looks like the best answer to the problem of
`freedom of the will' respectively `structure/agency'. Mental phenomena have their material
base, but are not reducible to this. Changes in the material world lead to changes in the realm
of ideas. But there are changes in the realm of ideas which are not connected to underlying
changes in the material world. Consciousness is an emergent phenomenon (Holenstein,
1985).
47
Subsequently man is not completely predetermined by social structure. Guided by his
free will and initiative he can exercise agency. He is by social structure just restricted in his
possibilities for agency.
48
He can use social structure in the form of networks and connections
for his own benefit. But it seems as if a person has the need to be embedded to a certain de-
gree in a community, too. In that sense connectedness is a precondition for a persons well-
being and efficient agency.
Our view converges with the personalist one. They also reject a simplistic materialistic view
as well as a simplistic idealistic one. They stress in an existentialist fashion the personal rela-
tions between people. Important is `Mitsein', `Für-den-anderen-Sein', `Du', `Kommunika-
tion'. That is also why they reject the Heideggerian version of existentialism. In Heidegger's
view man's existence is lacking any connection with the Other. It is more the view of Martin
Buber stressing the dialogue with the other You (Kinsky, 1998: 27, 35).
47
Max Weber, consistent with his idealistic approach, stresses the impact new ideas of charismatic leaders can
have on the real world. ,,Not ideas, but material and ideal interests directly govern men's conduct. Yet very fre-
quently the `world images ` that have been created by `ideas' have, like switchmen, determined the tracks along
which action has been pushed by the dynamics of interest" (Weber, 1948: 280).
48
Out of tactical reasons it might be useful to assume that everyone is responsible for his own misfortune. Such
a view maximises our energies. But it should not lead to the conservative, Social Darwinist conception that
every individual has the place in society he deserves. There are severe structural barriers creating social injus-
tice.
67
,,Das menschliche Leben hat seinen Absolutsheitssinn darin, dass es seine eigene
Bedingtheit faktisch transzendiert, d.h. dass der Mensch das, dem er gegenüber-
steht und mit dem er in ein reales Verhältnis von Wesen zu Wesen treten kann, als
nicht weniger wirklich sieht denn sich selbst, es nicht weniger ernst nimmt als
sich selbst. Das menschliche Leben rührt an die Absolutheit durch seinen dialogi-
schen Charakter, denn trotz seiner Einzigkeit kann der Mensch, wenn er auf sei-
nen Grund taucht, nie ein Sein finden, das in sich ganz ist und als solches schon
an das Absolute rührt; nicht durch ein Verhältnis zu einem Selbst, sondern nur
durch ein Verhältnis zu einem anderen Selbst kann der Mensch ganz werden. Die-
ses andere Selbst mag ebenso begrenzt und bedingt sein wie er, im Miteinander
wird Unbegrenztes und Unbedingtes erfahren" (Buber, 1971: 101, 102)
Social Order, Cooperation Virtues and Transaction Costs
To remind us social capital includes all norms and social relations embedded in the social
structure of society that enable people to coordinate action to achieve desired goals. Good
quality social relations - social capital - is the glue that holds societies together and makes so-
ciety more than a collection of individuals. Social organisation constitutes social capital, fa-
cilitating the achievement of common goals. Social order is in that sense a prerequisite for
cooperation of people and a competitive advantage.
Economists typically argue that the formation of social groups can be explained as the result
of voluntary contract between individuals who have made the rational calculation that coop-
eration is in their long-term self-interest. By this account, social capital, e.g. in the form of
trust, is not necessary for cooperation: enlightened self-interest, together with legal mecha-
nisms like contracts, can compensate for an absence of trust and allow strangers jointly to cre-
ate an organisation that will work for a common purpose. Groups can be formed at any time
based on self-interest, and group formation is not culture-dependent. But while contract and
self-interest are important sources of association, the most effective organisations are based
on communities of shared ethical values. In this context the acquisition of the four key coop-
eration values of justice, trust, engagement and tolerance is important. To treat people justly,
trust another, be engaged for the public good and tolerant facilitates interaction in the group.
49
49
Social capital and spontaneous sociability is the capacity to form new associations and to cooperate within the
terms of reference they establish. This type of group, spawned by industrial society's complex division of labour
and yet based on shared values rather than contract falls under the general rubric of what Durkheim labelled
organic solidarity (Durkheim, 1933: 181, 182). On the insufficiency of contract to produce organic solidarity see
68
For instance, the size of the pie is not independent of the way the pie is sliced. Norms of eq-
uity may evolve in part to limit the costs of conflict. By contrast, people who are unjust, do
not trust one another, lack initiative and are intolerant will end up cooperating only under a
system of formal rules and regulations, which have to be negotiated, agreed to, litigated, and
enforced, sometimes by coercive means. This legal apparatus, serving as a substitute for co-
operation virtues, entails what economists call transaction costs (Fukuyama, 1995: 27). Hence
the importance of social capital for reducing transaction costs.
Social capital has an important advantage. Thanks to its reduction of transaction costs the
emergence of network structures is facilitated. This transaction cost saving is possible due to
the moral resources. The more juste cooperation evolves, the less conflict are about how to
share the gains of mutual cooperation. Thus saving costs which would arise due to distribu-
tional conflicts (reluctance to engage in further work and decrease of intrinsic work motiva-
tion on the one side and direct costs of conflictual confrontation and external enforcement on
the other). Trust facilitates spontaneous sociability and cooperation. The more people trust
another, the easier it is to cooperate. The same is true for community spirit and civic engage-
ment. The easier each one is ready to engage for the common good, the better functions coop-
eration. Finally, tolerance is important for openness to people, ideas, and influences from out-
side. It is from there where new ideas come in.
50
Innovation needs a kind of creative tension.
And from an economic point of view, discrimination is only justified according to merit. Dis-
crimination according to factors like race, gender, sexual orientation, religion or nationality is
nothing else than rent-seeking. It creates market-distortions and increases inefficiency. Hence
justice, trust, civic engagement and tolerance facilitate cooperation and reduce transaction
costs.
Durkheim (1933: 183).
50
This is a point made strongly by Granovetter (1973). He stresses the importance of `weak ties' to the effec-
tiveness of information networks. It is the deviant individual straddling different communities which is often
responsible for bringing in new ideas. Networks and communities must overlap one another if ideas and innova-
tion are to flow freely.
69
The Network Advantage of Social Capital
Low transaction costs facilitate market relations and the functioning of hierarchical organisa-
tions, but most of all the emergence of networks. Network structures are more flexible than
hierarchies, but less chaotic than the market. Networks are a form of spontaneous order that
emerges as the result of the interaction of decentralised actors, without being created by any
centralised authority. A networked group of people share informal norms and values beyond
those necessary for ordinary market transactions (Fukuyama, 1999: 197, 199).
When knowledge is distributed across a wide range of persons or organisations innovation is
located in the network rather than within individuals or a firm. Thus networks are crucial for
innovation. In this regard it is also wrong to see networked innovation processes as zero sum
depiction, where one win's at the expense of the other. This might be possible. That is why
networks are conflictual. But on the other hand, high-performing networks have learned to
collaborate and to use their information resources collectively. Like this joint gains are possi-
ble. The ability of a well-functioning network exceeds the aggregate ability of the individual
nodes.
This network view of innovation is fundamentally different form the view of economists, es-
pecially from Hayek's view. He stresses the importance of the market as a discovery proce-
dure. Atomised individuals competing against each other can only gain through innovation a
temporary advantage over their competitors. In our view, on the other hand, innovation takes
place in cooperative network structures underpinned by a substantial degree of social capital.
Here we should remember again the difference between informational capital and social capi-
tal. Information capital is not a replacement for social capital. Social capital includes chances
to communicate as a consequence of an individuals connections. But it is more. It also in-
volves selection, classification and interpretation of information. Collaborative networks per-
form this critical screening and interpretation function. Social capital increases the ability to
build and use informational capital because trustful relationships increase information flows
and bring richer meaning to information. Actors in a collaborative network exhibit an effi-
cient form of collective learning. They learn more quickly because of density of interaction
within the network. Learning is of a higher quality because it is subject to discussion and de-
70
bate among counterparts whose perspectives and backgrounds may differ.
51
Such a density of
interaction is made possible thanks to moral resources. The more just you solve conflicts, the
more you trust another, the more you engage for the common goal and the more tolerant you
are the easier it is to cooperate. Collective learning in dense networks together with the mix of
collaboration and competition within the network might foster entrepreneurship and innova-
tion (Fountain, 1997).
Network organisation implies more generally organisational capacity. The importance of or-
ganisational capacity is recognised in the Delors white book on `Growth, Competitiveness
and Employment - The challenges and ways forward into the 21st century' (1994: 71/ 76).
,,Organisational capacity [= social capital] is one of the key components of a
firm's competitiveness. [...] Factor mobility and the capacity to combine factors
effectively and to organise the social consensus [= social capital] [...] are becom-
ing much more important than the initial factor endowment."
52
This quotation is expression of the long European tradition of seeking convergence between
market-oriented policies and a healthy socio-economic environment. Social capital is based
on social order and secures social consensus. Values like social justice, trust, civic engage-
ment and tolerance facilitate cooperation. The stronger these values are in a society the more
51
Thus networks have a huge informational advantage compared to rigid hierarchies. Therefore we understand
why networks are more innovative and why centralised, authoritarian corporations have been failing for the
same reason that centralised, authoritarian states have failed: they cannot deal with the informational require-
ments of an increasingly complex world. It is in this respect that Hayek was right. To control everything a dicta-
tor must have the information necessary to make decisions. This might be not to difficult in an agrarian society
where lords rule over peasants. But as economies develop and become more complex, the informational re-
quirements for ruling increase exponentially. Rulers must relay on technical experts which gain so increasingly
power, simply by threatening to withhold information. An additional difficulty is that most knowledge is local in
nature (Fukuyama, 1999: 195, 196).
52
In the same direction goes a recommendation in a recent report on the competitiveness of European industries
(1996: 22) from the Commission:
,,Intangible factors [human and social capital] enable knowledge-intensive economies to maintain their competi-
tive position compared to resource or labour-intensive economies and to continue to raise living standards in an
environmentally sustainable manner. Dematerialization of the economy involves investing to an ever higher ex-
tent in intangibles."
71
civil social capital there is and the better society is integrated. Social capital connects people
with one another to networks and embeds them into communities.
Production of Social Capital
Social capital, like other forms of capital, accumulates when used productively. But a special
feature of social capital is that it has a double character as a private and public good. Social
capital can be used as an individual asset in the form of personal contacts (individual social
capital). But since most of social capital is about norms and social relations embedded in the
social structure of society enabling people to cooperate, most of social capital has a public
good character (civil and government social capital). As an attribute of the social structure in
which a person is embedded, social capital is not the private property of any one person or
groups of persons who benefit from it (Coleman, 1990: 315).
53
It is not costless to produce social capital. It requires resources - especially time. The amount
of social capital that will be produced is therefore in part a function of the opportunity cost of
time and the expected return from social capital (that is, the extend to which an economic
agent will enjoy the public good that is created). Which group is best suited to producing so-
cial capital depends largely on the scope of the created externality and thus the size of the
group needed to internalise it effectively and avoid free riders (World Bank, 1997: 82). How-
ever, social capital, unlike other forms of capital, can also be produced as a by-product of
other social activities (Coleman, 1990: 317). Most often social capital is not produced in a
deliberate way. It comes about through activities with another purpose. Thus the character of
a `positive externality' of social capital.
Social capital is called `social' because it involves people being social. However it is also so-
cial because it arises from some non-market interaction of agents which nevertheless has eco-
nomic effects. The economic effects are consequently not `internalised' into the decision cal-
culus of each agent by the prices faced in markets, i.e. they are externalities. Social capital is
characterised by a triple involvement with externalities. First, social interaction most of the
time involves externalities. And if they are positive we speak of social capital. When they are
negative we have rent-seeking. Secondly, the social interaction has an economic effect which
53
Cf. previous discussion of the concept of social capital, pp. 52-61.
72
is not mediated through the market. Thirdly, usually, this economic effect is not the primary
purpose of the social interaction but is incidental or unintended. For instance, an amateur
choir is normally joined because of the genuine fun it provides. And just by accident the sing-
ers learn to trust one another (Collier, 1998: 2).
A first source of social capital is culture and religion. Social capital can be based on norms
which have evolved in a long historical process. But such norms can not be changed deliber-
ately in the short term. And there is a danger, relaying to much on culture and religion as
source of social capital, that such community building is of an intolerant stance. Therefore in
such cases is bridging social capital important. In this regard the arts are important. They have
the capacity to introduce audiences to cultures other than their own, thereby promoting toler-
ance. Sometimes already the workplace can be a place for social capital generation. If the
management is not to much focused on shareholder values and is not constantly restructuring
and downsizing the enterprise people can build work-place social capital. This source of so-
cial capital is especially important in a time of increased centrality of work. Stakeholder ori-
ented and team-based management can foster work-place social capital which can have bene-
ficial effects for larger society (Saguaro, 1999). But the major source of social capital lays in
civil society. Civil society is, besides the school and the family, an important place of sociali-
sation.
Tocquevillian Schools of `Habits of the Heart'...
Civil society is the place where you learn the art of association. This was already the view of
Alexis de Tocqueville in his study on `De la démocratie en Amérique' (1840).
54
`Habits of the
heart' (Tocqueville) or civic virtues (Aristotle) are learned from the earliest age on. People
learn the art of association by being involved in local initiatives, by participating in services
54
Tocqueville, an ancient aristocrat, was sceptical about the new age of democracy and equality. The danger of
equality is laying for him in lowering human aspirations. But he claims that the cure for a healthy liberal democ-
racy is requiring its citizens to be politically active. He tells us that there has never been a great nation without a
great people. Besides political participation and an active and free press, he stresses the importance of associa-
tions. For an increased attention to material prosperity may lead to consider political activity a `tiresome' and
`distracting' bother, and so to a dangerous neglect of politics, allowing for the possibility of despotism (Lom,
1999: 15, 28).
73
of proximity (starting with the family, to clubs, voluntary organisations, schools, churches,
sport leagues, youth groups, student societies, etc.). Such associations combine fun with ex-
perience in community-building. In close personal contact the civic virtues of tolerance and
engagement can be learnt. Knowing one another bonds of trust can be built. But you also have
to face conflicts and you learn that the more just you deal with people the easier it is to cope
with interpersonal conflicts. In face-to-face relations in the local community you learn the vir-
tues of spontaneous sociability.
Looking at these Tocquevillian schools of `habits of the heart' one must distinguish the di-
verse forms of voluntary associations according to their internal and external effects. Inter-
nally, organisations are believed to have effects on their members in that they socialise them.
They learn the civic virtues of trust, moderation, compromise, reciprocity, and the skills of
democratic discussion and organisation. Externally, organisations create overlapping and in-
terlocking social ties, link citizens with the political system and its institutions, aggregate and
articulate interests, and provide the range and variety of competing and cooperating groups
which constitutes a pluralist society. These so generated weak ties constitute the basis for so-
cial integration (Granovetter, 1973). But organisations vary in the strength of their internal
and external effects (Newton, 1999: 11).
Organisations having as a consequence of their activity predominantly negative internal
and/or external effects for others do not belong to our category of Tocquevillian schools of
`habits of the heart' where social capital is formed. To the contrary they are evil since they
have only the interest of their own members in view. Such organisations promote selfish rent-
seeking (e.g. diverse lobbying groups for particular interests) or, even worse, aggressive be-
haviour towards others. A racist or fascist organisation, teaching their member the superiority
of the white race or the own nationality and socialising them to conformism and authoritarian-
ism, would not be counted as a social capital producing organisation because of its negative
externalities for others. Such socially disruptive organisations start with a closure of the
group. Than increasingly mutually suspicious groups, each operating barriers to exclude the
others, proliferate. Therefore tolerance and social integration are so important. Of course
there are also some more mixed examples of less extreme, like party organisations. They fight
for the interests of their members, but have very often a positive socialising effect, too.
The following figure 6 might help to distinguish those organisation with positive externalities
according to the strength of their (positive) internal and external effects. These are the organi-
sations which are fostering social capital accumulation.
74
Strong external effects
Weak external effects
Strong internal effects
Pluralist organisations
Self-help, support and con-
sciousness-raising groups
Weak internal effects
Cheque-writing organisa-
tions
Small, ad hoc, informal sup-
port and caring groups
55
Figure 6: Types of Organisation and Social Capital
Source: Newton, 1999: 14.
According to Tocqueville it is in voluntary organisations that the civic virtues of moderation,
cooperation, trust, justice, tolerance, and reciprocity are learned. We learn to participate by
participating. Or people who join are people who trust. Networks of civic engagement foster
norms of reciprocity (Ostrom, 1990: 206). Hence there seems to be a chicken-and-egg prob-
lem in deciding which comes first: norms of trust and reciprocity without which networks
cannot be created, or networks which help to create norms of trust and reciprocity (Newton,
1999: 7). Anyway, the larger the stock of social capital the easier to produce additional social
capital. The building up of social capital can become a virtuous circle (or `endogenous' in the
terminology of economists; cf. (Collier 1998: 13) for trying to endogenising social capital).
Social capital is what Albert O. Hirschman calls a `moral resource' (1984). That is a resource
whose supply increases rather than decreases through use and which becomes depleted if not
used. But on the other hand is social capital like a ratchet that is more easily turned in one di-
rection than another; it can be dissipated much more readily than be build up again. We
should also remember that the ethical virtues are developed in habit. We become just by do-
ing just acts (Aristotle, Nichomachean Ethics, II 1103a 19-26).
56
Besides voluntary organisation is the school another major source of social capital building.
How far the art of cooperation is directly thought, to what extent education has an effect
through the experience of acting in groups, and what might be the consequence of the ability
55
With regard to empirical research it is important to keep in mind that also small, ad hoc, informal groups can
be important for social capital formation. While some formal organisations, the cheque-writing ones, have little
internal effect on their members so far as the creation of social capital is concerned, some ad hoc groups seem to
be quiet important in this respect (Newton, 1999: 14).
56
See previous discussion of Aristotle's view on moral excellences developed by habit, pp. 32, 33.
75
to understand abstract ideas such as citizenship, universalism, equality, the common good, the
benefits of cooperation, and the difficult subtleties of peaceful conflict resolution is a matter
of debate (Newton, 1999: 18). But anyway, once behavioural patterns of spontaneous socia-
bility are internalised in the character of a person, you also show it towards strange people in
business relations. Therefore socialisation from the earliest age on is important. Internalisa-
tion of generalised reciprocity norms, beyond Tit-for-Tat, builds the social cement which
binds society together.
... and the Hayekian Critique
Now a libertarian critic like Hayek would stress that we always have to distinguish between
moral in small groups and moral in large groups, i.e. what he calls in `The Fatal Conceit'
(1988) ,,the extended order of human cooperation". According to Hayek it is inevitable that in
this extended order, which evolves in a perfectly spontaneous process, the values of the small
group - altruism and solidarity - have been superseded by the new values of the market
(Schwarz, 1994: 25). You don't deal with your business partner like with friends. But as we
have seen the central advantage of social capital is that - thanks to justice, trust, engagement
and tolerance - it helps to overcome social dilemma situation and reduces transaction costs.
Therefore the virtues of spontaneous sociability are of economic value (Fukuyama, 1995).
Spontaneous sociability is an essential facilitator of a spontaneous market order. In this regard
it is also interesting to note that today social skills are highly valued by enterprises. But where
do you develop such skills? Civil society with its Tocquevillian schools of `habits of the
heart' seem to be good places for the learning of such social skills. Therefore the contribution
of civil society goes far beyond the voluntary work done. Civil society has an eminent impor-
tant socialising role which is directly and indirectly also of economic benefit.
Additionally, being embedded in communities of proximity you have a counterweight to the
hunting-grounds of the markets. Civil society makes society humane and civil. People - inso-
far as they are not completely schizophren - don't behave completely different in the two
realms of civil society and markets. If they have once learned to be tolerant, to be basically
trustworthy towards people, to engage for common goals and to deal justly in case of conflict
they don't change this behaviour completely being in the market place. Therefore small group
moral can be cultivated to a certain degree in large group interactions, too.
76
There is no reason to behave in the sphere of the market quiet different from the behaviour in
civil society, the realm of civic virtue. As Benjamin Franklin states: ,,Honesty is the best pol-
icy". If there might be a dilemma between moral requirements and economic advantage it
seems that restrictions to our behaviour in the sphere of the market are justified.
,,The life of money-making is one undertaken under compulsion, and wealth is
evidently not the good we are seeking; for it is merely useful and for the sake of
something else" (Aristotle, Nichomachean Ethics, I 1095b 6-8).
Therefore it seems better to strive directly for a `good life', a life in which we can develop our
moral excellencies and virtues even if we have to take into account some losses in monetary
terms.
Besides moral learning in personal interaction in community social capital can build on al-
ready established norms and values. Therefore social capital differs from other forms of capi-
tal insofar as it is also created and transmitted through cultural mechanisms like religion, tra-
dition, or historical habits (Fukuyama, 1995: 26).
57
By stressing the importance of moral bonds for successful cooperation we differ from econo-
mists. They typically argue that the formation of social groups can be explained as the result
of voluntary contract between individuals who have made the rational calculation that co-
operation is in their long-term self-interest. By this account, social capital in the form of
moral bonds is not necessary for cooperation. Enlightened self-interest, together with the
proper social structure (legal mechanisms like contracts) can compensate for an absence of
social capital as a moral resource. They only need social capital in the sense of social and in-
stitutional structure.
But while contracts and self-interest are important sources of associations, the most effective
organisations are based on communities of shared ethical values (Fukuyama, 1995: 26) and
personal moral consciousness (moral sense and moral learning). Therefore shared ethical val-
ues, moral sense and moral learning are the essential precondition for spontaneous sociability.
Spontaneous sociability, based on cooperative virtues like justice, trust, civic engagement and
tolerance, is that subset of social capital, civil social capital, we are most interested in. There
is also social capital as social and political structure enforcing cooperation (government social
57
For a complete picture c.f. previous discussion about the moral sources of social capital (institutionally and
spontaneously constructed, rational and arational.
77
capital). But here the ethical dimension is important, too. Enforcement trying to establish jus-
tice, etc. achieves much easier cooperation than do attempts based on domination and exploi-
tation..
There is some evidence that institutions are more effective at enforcing common agreements
and cooperative action when the distribution of assets is more equal and the benefits are
shared more equally. Efficiency and equity go together. Better sharing provides an incentive
for better coordination in managing public goods, which increase productivity for everyone.
A role for government in promoting `desirable' forms of social capital is justified and neces-
sary. This because of the strong positive effects on economic growth of social capital, the
public good nature of most social capital and the danger that an inappropriate development
path can destroy social capital, setting off a vicious circle of social and economic decline (see
subsequent discussion of destruction of social capital). By trying to foster (civil) social capital
accumulation by means of government initiative government itself is part of social capital in
the wider sense (government social capital).
The social and political environment is crucial for creating an enabling environment in which
local organisations are encouraged and people have incentives to participate. Unlike real capi-
tal and in a limited sense human capital social capital can't simply be transferred from one
place to another.
58
It is only possible to foster community building and to empower people.
First of all knowledge about social processes is important. Secondly, the state can play the
role of a moderator in and a catalyst of community building. Beyond correcting market fail-
ures and ensuring the rule of law the tasks of the so-called neo-utilitarian `minimal state'
social liberals argue that the state can actively nurture a stable, progressive, and predictable
environment in which it is possible for a vibrant civil society to emerge and flourish (Wool-
cock, 1998: 157).
With positive state-society synergy active government and mobilised communities can en-
hance each other's efforts. It is the surrounding socio-political context which facilitates or
constrains the emergence of such synergy. Therefore the pre-existing social capital endow-
ment matters in new synergistic relations. It is important to scale them up to enter a virtuous
circle. Then state-society synergy starts to magnify. Such synergy is most easily nourished in
societies where the social structure are egalitarian and the state bureaucracies solid and coher-
58
Human capital can be transferred by transferring educated people and technological know-how.
78
ent (Evans, 1996: 1119-1132). A low level of social capital may account for weak coopera-
tion and, hence, low provisioning of public goods. But then, low social cohesion itself can be
acccountd for by low public provisionning for equity. That is why the evolution of positive
feedback, involving equity and social capital on the one hand, and cooperation and public
goods provision on the other, is so important (Rao, 1999: 82/83).
Direct investment in social capital means direct support to existing and emerging organisa-
tions. In practice, non-governmental organisations and local government may often be in the
best position to do so, given that most civic associations are small and local. Ostrom (1990)
gives examples how self-governing communities can overcome the `tragedy of the commons'.
A group of farmers, possessing a lot of social capital, can supply a common pole resource,
like an irrigation system, without government interference. But the government can moderate
and foster the emergence of such self-help cooperatives and networks. Government interven-
tions is often necessary since the number of actors is too large (problem of collective organi-
sation), repeated interaction fails, there is a strong asymmetry of power of actors involved,
transparency is lacking, etc. Therefore we can't relay on spontaneous processes alone.
The state can help, for example to reduce inequality and foster like this a sense of fairness and
justice through means of the welfare state. This can also happen through increased participa-
tion of workers in their enterprises. And tolerance can be fostered by a non-discrimination
article, a `right of being different' (Höffe), enforced by the state judicial system.
59
Regarding community development it is important to strengthen physical communities. This
because more and more relationships and communities are interest-based rather than place-
based. Therefore we should strengthen our interpersonal relationships with our geographic
neighbours. On the other hand are fleeting encounters also of great value. Besides focusing
only on long-term stable relationships of trust and reciprocity, we should value electric, tran-
sient encounters. They can help us to expand our collective sense of `we', of belongingness,
and shrink our sense of `they' (Saguaro, 1998).
Social capital has various roots. Social capital as private good in the form of contacts can be
the result of the market. But as soon as social capital shows larger positive externalities and
59
After these theoretical remarks on government actions to foster social capital accumulation we will deal in
part III more in concrete with how the accumulation of social capital in Europe on all levels micro, meso and
macro - can be fostered.
79
becomes a public good its sources are more complicated. They can lay in the form of values
in culture. But cooperation virtues are very often internalised in civil society, and certain
norms can be explicitly fostered through state, i.e. welfare state interventions.
Distribution of Social Capital
Although one major facet of macro social capital is the structure of inequality, the distribution
of micro, private, individual social capital can be crucial. The better organised segments of
society may well succeed in affecting economic policy to their own advantage and to the det-
riment of other groups or even to society at large. There is the possibility of dysfunctional so-
cial capital (fostering rent-seeking). Olson (1982) has shown how strong lobbing organisa-
tions can benefit their own members, but can have adverse impacts on economic development
through special interest group influence on policymaking. There can be significant concentra-
tions of social capital in some communities with few ties to other communities. Social capital
accumulation can be segmented along spatial or ethnic lines. Norms and networks that serve
some groups may obstruct others, particularly if the norms are discriminatory or the networks
socially segregated. In principle there is thus no guarantee that enhancing micro social capital
(in the sense of networks) will lead to a more equitable society. Liberals have often sought to
destroy deliberately some forms of social capital, like medieval guilds, in the name of indi-
vidual opportunity.
Southern Italy is, for instance, a region of the world that is almost universally characterised as
lacking in generalised social capital and trust. The Mafia is characterised by an extremely
strong internal code of behaviour, `l'omerta', and individual Mafiosi are spoken of as `men of
honour'. Nevertheless, theses norms do not apply outside a small circle of Mafiosi; for the
rest of Sicilian society, the prevailing norms can be described more as `take advantage of
people outside your immediate family at every occasion otherwise they will take advantage of
you first.' Obviously, such norms do not promote social cooperation and the negative conse-
quences for both government and economic development are clear (Gambetta, 1993).
Having the dark side of social capital in mind, rent-seeking for the benefits of a particular
group and creating negative externalities for others, it is important to stress that reciprocity
norms must be generalised. Cross-cutting groups and tolerance are important. To be most ef-
ficient the values of justice, trust, civic engagement, and tolerance should be spread as wide
as possible. On the other hand might an initially unequal distribution of social capital not be
80
to catastrophic. If we have luck this unequal distribution of social capital does not lead to per-
sisting patterns of rent-seeking. Than a trickle-down effect of social capital and a broadening
of the radius of spontaneous sociability might happen.
This might be similar to what has happened historically when human capital accumulation
started. Initially, when education was an elite privilege, it led to increase inequality of eco-
nomic outcomes. The more the acquisition of education became universal, the more the dis-
tribution of economic benefits became equalised. Although this has not yet been demonstrated
empirically, the same process is likely to happen with micro social capital. The more wide-
spread networks of mutual obligations are, the more likely it will contribute to achieve equal-
ity (World Bank, 1997: 83). And we shouldn't forget that on the micro as well as on the
macro level social justice is a central element of social capital. The more juste cooperation
evolves the less force is needed. Therefore an equitable distribution might reduces societal
conflicts and thus increase social stability and social capital.
Depreciation of Social Capital
Factors which make persons less dependent on one another depreciate social capital. When,
because of affluence persons need each other less, less social capital is generated. Social capi-
tal depreciates if it is not renewed. Social relationships die out if not maintained; expectations
and obligations wither over time; and norms depend on regular communication (Coleman,
1990: 321). For instance because social capital is a public good, the costs of closing factories
and destroying communities go beyond the personal trauma borne by individuals (Putnam,
1993b).
The destruction of social capital has different causes. First of all, an unrestricted market creat-
ing negative social externalities (privatising gains and socialising losses and risks) is a risk for
social order. Unfettered markets are enforced by an ideological shift towards market funda-
mentalism. Today, under the influence of neoclassical economics, liberalism has lost its moral
and political foundation. Classical liberalism seeing man as a moral animal - has become
reduced to free markets economics. And libertarians - market fundamentalist - have found res-
cue to religious fundamentalism and Social Darwinism as moral surrogate (we will deal with
this problem in depth at the end of this chapter, pp. 85-89). Second, there is technological
change. Modern information technology, like Internet or TV, is reducing personal, social
capital generating contact. Third, unemployment is surely a major cause for social disruption.
81
Finally, conservatives see in the breakdown of the family and government intervention rea-
sons for a decline in social capital. Faced with these diverse challenges it is no wonder that
movements, like the communitarians, gain easily ground. They stress the lacking elements:
community spirit and moral. Social capital tries to capture the person in his social and moral
connectedness and to break into `la pansée unique' of monistic market-liberalism.
Technological change, like the Internet, has led to a lack of `face-to-face' communication.
Personal contact is important to establish trust relationships.
60
A major cause of social disin-
tegration is surely unemployment. It is the result of technological change, lacking skills, over-
regulation, an outdated welfare state, and competition from third world countries. The social
costs of unemployment are very high. Unemployment is a major factor predisposing people to
social exclusion. Unemployment is very disruptive of social relations, particular within the
family. But it can also lead to a decline of social responsibility. The observed association of
crime with youth unemployment is not only caused by loss of income. There are strong psy-
chological factors, like a sense of exclusion and a feeling of grievance against a world that
does not give the jobless an opportunity to earn an honest living. In general, social cohesion
faces many difficulties when society is divided between a majority of people with comfort-
able jobs and a minority of unemployed and `rejected' human beings (Sen, 1997: 160-164).
Conservatives stress additionally several other reasons for the disruption of the social tissue.
First of all the breakdown of the family. But whereas we would suggest unemployment as the
major cause for family disturbance Fukuyama (1999) sees the emancipation of women as ma-
jor reason for undermining the traditional basis of the family. Many women have found entry
into the labour force helped by the shift from manufacturing to service economies. The sec-
ond problem - in his view - is the introduction of oral contraceptives which uncoupled sexual
pleasure form the risks and responsibilities of reproduction. But on the other hand we see to-
day not just the emancipation of women but also of gays, lesbians and bisexuals. The future
will show whether this trend leads to a breakdown of the nucleus of society living together
and being socialised in families - or whether we will just see a profound transformation of
what people call `family'. But with a general liberation of sexual norms and the integration of
queer sexuality (gays, lesbians, bisexuals) into the mainstream we might simply see the emer-
60
On the other hand allows the Internet to get in touch and keep in touch with a diversity of people far away.
82
gence of new forms of living together, but nevertheless giving as much if not more emotional
warmth as the traditional monogamous patriarchal family.
Another even hotter debated point about causes of the decline of social capital is the role of
government actions. Conservatives argue that government action might deplete social capital
by undermining and even destroying key institutions of civil society. It is argued that the wel-
fare state, for example, has undermined institutions of private responsibility. In the classical
conservative view state-society relations are seen as an inherently zero-sum game - `as the
state waxes. other institutions wane' (Woolcock, 1998: 157). But Putnam (1995: 671) dis-
agrees with Fukuyama (1995: 313, 314) that big government and the welfare state could be
the cause of civic disengagement. By `crowding out' private initiative, it is argued, state in-
tervention has subverted civil society. He finds - if anything - a positive correlation between
social capital and government size (Putnam, 1995b: 682). Nevertheless we should secure that
potential harm of government to civil society is minimised. Therefore a Social Capital Impact
Analysis (SCIA) might be useful (Saguaro, 1998).
61
Social capital is like a ratchet that is more
easily turned in one direction than another. It can be dissipated by the actions of governments
much more readily than those governments can build it up again (Fukuyama, 1995: 362).
But it is not only that government action can lead under certain conditions to a decline in so-
cial capital. On the other hand is trust in the government and political institutions a main ele-
ment of social capital. It is therefore troubling that citizens of mature democracies lose confi-
dence in their political institutions.
62
At the same time as democracy is spreading across the
world, there is increasing disaffection with it in the heartland's of democracy. The fact of in-
creasing disaffection with, and alienation from, democratic institutions in those countries
where those institutions are most firmly established might be called the paradox of democ-
racy. This might be due to the fact that democracy is just the victim of its own success. It
61
A first step into this direction is Krishna and Shrader (1999). They have developed a field tested set of indica-
tors and methodologies, the social capital assessment tool, measuring social capital in communities designated as
beneficiaries of development projects.
62
The Economist (1999: 35) is reporting empirical findings of a forthcoming book by Robert Putnam, Susan
Pharr and Russell Dalton on `What is Troubling the Trilateral Democracies?', Princeton University Press, 2000.
The indicators for political confidence are declining in 11 countries reported. The only exception are the Nether-
lands.
83
could just be that people nowadays expect more from governments, impose new demands on
the state, and are therefore more likely to be disappointed. After all, the idea that governments
ought to do such things as protect or improve the environment, maintain high employment,
arbitrate between moral issues, or ensure the equal treatment of women or minorities, is a
relatively new one. Or perhaps the disillusionment is a healthy product of rising educational
standards and the scepticism that goes with it. Or maybe it is caused by the media's search-
light highlighting failures of government that were previously kept in the dark (Giddens,
1999, Economist, 1999a: 36). However much confidence in government may be declining,
this does not seem to have diminished popular support for democratic principles so far. But a
further and persistent loss of state sovereignty to the market could lead to a questioning of the
institution of democracy itself.
The efficiency of markets itself may undermine the existence of networks of mutual reciproc-
ity and obligation in the long-term. Large anonymous markets can be more efficient than net-
works because the best buyer or seller may not be part of the network. If the development
path is supported by a solid court system and contract enforcement, anonymous markets will
replace the `named' transactions within networks over time, with gains for all participating
economic agents. If one adheres to a narrow definition of social capital, this will be registered
as a decline of social capital. But in the broader concept the same phenomenon will be seen as
a substitution of one form of social capital (the rule of law) for another (horizontal associa-
tions) (World Bank, 1997: 81). This the optimistic view. But as Stiglitz, senior vice president
and chief economist form the World Bank, warns (1999: 17), there is a problem in the process
of economic development. Countries often regress in terms of social development. Social
sanctions that previously worked well to internalise externalities within a community lose
their potency when labour becomes highly mobile and when communities themselves become
fragile. Social capital may deteriorate, before the country is able to establish the kinds of less
personalised social capital associated with more advanced industrialised countries.
63
63
In a later chapter on social capital being a precondition for capitalism and democracy in advanced industrial
societies we will address this question in more detail. We will stress especially Habermas conceptualisation of
the communicative processes of the lifeworld, producing normative integration of modern society, without being
rooted in historical culture or metaphysical ideas, pp. 96-99.
84
But also for advanced industrialised countries is the danger that an unrestricted market might
destroy social ties and social capital real. The sole pursuit of self-interest destroys moral
bonds. A savage market might risk to erode the fundamental moral and political resources on
which it ultimately depends (Fukuyama, 1995: 11, 350-358; Höffe, 1996: 167; Soros, 1997:
45-58). Unrestricted markets and the pursuit of self-interest have the worrying trend towards
the privatisation of profits and the socialisation of risks and losses. These are the socially
negative externalities of markets destroying their social foundation the stock of social capi-
tal. Excessive `creative destruction' has its price, as already Schumpeter remarked. The gap
between rich and poor widens, flourishing centres of upswing are opposed by centres of de-
cline, violence and destruction. The market is an excellent means of economic development
by permanent production innovations, but also a risk for social order. What accelerates the
development in the economy will easily become an anomie in common life. Creative destruc-
tion and anomie are two sides of one and the same medal (Münch, 1999: 6). It is therefore
crucial to take the depreciation of social capital into account.
In the discussion about environmentally sustainable development the focus is that GDP will
overstate economic gain if output is achieved by depleting natural capital. Similarly, if eco-
nomic growth severs social relations and depletes social capital, `genuine' growth will be
lower than the standard GDP aggregate will suggest. Therefore besides ecological sustainabil-
ity social sustainability of economic growth is important! But therefore it is important that
persons are embedded in communities, that they are free and autonomous but at the same time
engaged with and related to other people through their responsibility. Now religious funda-
mentalism and Social Darwinism are completely opposed to such a view.
Religious Fundamentalism and Social Darwinism
Religious fundamentalism and Social Darwinism are the moral surrogate of the right. But this
attitude is a central threat to social capital. Religious fundamentalism fosters intolerance and
Social Darwinism risks to erode the social link. Fundamentalistic christianism is character-
ised, like any other religious fundamentalism, by the try to upheld a given faith firmly in its
full and literal form, free of compromise, softening, re-interpretation or diminution (Gellner,
1992: 2). This intolerant stance is a major obstacle for cooperation and social integration. Re-
ligion in a tolerant view, on the other hand, can help to foster cooperation and social integra-
tion by creating shared values. Religion is for Søren Kierkegaard, for instance, of its essence
85
not persuasion of the truth of a doctrine, but commitment to a position, which is inherently
absurd (Gellner, 1992: 3). It emerges out of the human need for being rooted in a transcen-
dental order (Luckmann, 1991: 77-86).
But Gellner (1992: 4) is sceptical about the potential of religion to foster community in the
modern world because: ,,religion is linked to the celebration of the community, and in the at-
omised world of modern mass society, there is little community to celebrate, other than possi-
bly the nation state." And Höffe (1996: 141) stresses that political philosophy is always a
non-comprehensive theory. This because it won't found a community on religion. Something
to alien to human reason. And - according to Höffe - it is reason which finally counts and not
something so unpredictable like feelings, emotions or affection. A point already Jeremy Ben-
tham made (Höffe, 1979: 121, 122, 155).
Besides evangelical fundamentalism is Social Darwinism the other moral surrogate of liber-
tarians. Few deny that in the present age of globalisation inequality has widened.
64
The debate
is over whether anything can be done about it. Some call for an activist government to sustain
the middle class and uplift the poor. Others argue for balanced budgets, lower taxes, fewer
domestic programs, minimal welfare, and less regulation. These moves, they contend, would
energise the economy and in that way help the poor. Inequality is thus necessary to move our
economy. Inequality is a `natural', almost inevitable, result of an unfettered market. It is the
necessary by-product of unleashing talent. The skilled soar and the unskilled sink. Eventually,
however, all will gain from the greater efficiency of the free market. The reason such wider
benefits have yet to be delivered is that the market has not been freed up enough. ,,Unleash
the market" and the result would be a ,,rising tide that will lift all boats, yachts and rowboats
alike." An even stronger position would argue that inequality cannot be changed, because ine-
quality is natural. At a deeper level, the debate is about how to understand inequality - what
explains its origins, what explains its growth.
At present some of the Republicans in America try to re-found conservatism on the basis of
Social Darwinism.
65
They think that evolutionary theories are supporting conservative poli-
64
From 1975 to 1995 has income inequality increased in 71.8 percent of all industrialised countries (Commis-
sion, 1999c: 59).
65
Cf. e.g. the article of McGinnis `Darwinism and the Right: The Origin of Conservatism' in the National Re-
86
tics and are necessary to govern a fallen man. Most important they think that Darwinism con-
firms their view of natural inequality. These inequalities are likely to be greatest in the per-
sonality traits, such as intelligence and ambition, that are related to acquiring property. And
intelligence is the trait most conserved through generations. The engine of inequality is buried
so deep in human nature that it is impossible to eradicate. And of course libertarians favour
`The Bell Curve: Intelligence and Class Structure in American Life' of Richard Herrnstein
and Charles Murray (1994).
`The Bell Curve' is a strong statement about natural inequality as the result of free markets.
Herrnstein and Murray argue that intelligence largely determines how well people do in life.
The rich are rich mostly because they are smart, the poor are poor mostly because they are of
middling intelligence. At its base is a philosophy ages old (c.f. e.g. previous discussion of
Malthusian ideas, p. 28): Human misery is natural and beyond human redemption; inequality
is fated; and people deserve, by virtue of their native talents, the position they have in society
(Fischer et al., 1996:11). `The Bell Curve' provides also an explanation for another troubling
aspect of inequality - especially in America - its strong connection to race and ethnicity. The
simple answer of Herrnstein and Murray is that Blacks and Latinos are by nature on average
not as intelligent as Whites or Yellow ones (the most intelligent) are.
What seems to be more likely is that genetically we are quiet similar. This because we all be-
long to the same species Homo sapiens. It is not that there have never existed different kind of
species of man, but they have distinguished in the course of evolution. Human races are not
separate species. They are recent, poorly differentiated subpopulations of our modern species,
Homo sapiens, separated at most by tens or hundreds of thousands of years, and marked by
remarkably small genetic differences. Subspecies represent a taxonomist's personal decision
about the best way to report geographic variation. They are not distinct since all belong to a
single species and their members can interbreed. We might make a reasonable division on
skin colour, only to discover that blood groups imply different alliances. Intense studies have
detected not a single `race gene' that is, a gene present in all members of one group and
none of another. We can measure so much variation among individuals within any race that
we encounter very little new variation by adding another race to the sample. In other words,
the great preponderance of human variation occurs within groups, not in the differences be-
view (1997) and the subsequent debate it has generated.
87
tween them (Gould, 1985: 186-197). The rhesus factor makes, e.g. genetically a larger differ-
ence than the skin colour. And concerning such an important trait, like intelligence, we have
to distinguish carefully between genetically inherited factors and social, environmental fac-
tors.
The major reason aggravating social inequality is inheritance of capital (in all of its forms -
real, human and social) and not genetical transmission of intelligence. This doesn't mean that
we would like to deny the role played of inherited factors for determining intelligence. But it
would be wrong to reduce inequality on genetically inherited traits and forgetting the social
factors as libertarians like to do. The large sums inherited from one generation to the next,
and the subsequent life chances is the first obstacle to a true meritocracy. Market liberalism
still lacks a theory of the just distribution of property rights (Brittan, 1995: 119). Other obsta-
cles to meritocracy are the transmission of human and social capital. The family environment
is essential for the progress in school. Better educated parents can help their children better
and are more ambitious for them.
66
And as Bourdieu shows social manners (the `habitus') are
an important factor in social selection, not to speak of the network advantage of upper class
children (for empirical evidence cf. pp. 141).
We can develop this line of argument further. What inequality and cognitive ability deter-
mines most of all is one's individual social milieu. You could also call it one's social context
or social capital. When we are borne our brains are mostly tabula rasa (a position which an
empiricist like John Locke would support). Now socialisation and inculturation follows simi-
lar lines like language acquisition. Our social behaviour is - like language - to complex to be
genetically predetermined. What is innate is just a learning agenda. As Piaget pointed a child
imbibes the language (and the related cognitive categories) of his social milieu in which he
grows up. Similarly he also learns the social codes of his milieu. A milieu consists of a world
of symbols (language and cultural) which is internalised in the process of a child's develop-
ment. Thus it is no wonder that an upper class child has initially a large cognitive advantage
66
On the other hand are people coming from a disadvantaged background more forced to be innovative. This
because it is their sole way to climb the social ladder. But they have also an advantage compared with children
from `upper class' people. Children who have moved already a large degree socially are used to adapt and to
recreate their cognitive structures. That is another reason why they are often more innovative and get into elite
positions despite rigid class structure. But of course there are many obstacles for them, last but not least anomic
stress might impede them.
88
compared with a working class child. But this difference in apparent intelligence is not a ge-
netic one, but a socially constructed one. This view is supported by Burt. Whereas the human
capital story is that inequality results from differences in individual ability, a network theorist
would suggest that human capital is useless without the social capital of opportunities in
which to apply it (Burt, 1998: 6, 7). And on the other hand social capital is essential for the
development of human capital.
67
Thus we see, inequality is to a large extent not the inevitable result of free markets operating
on natural intelligence, but the aftermath of circumstances (social milieu, learning chances
and inheritance of capital) that can be altered. Theories of natural inequality have for instance
problems to explain why countries with such similar genetic stocks (and economic markets)
as the United States, Canada, the UK, and Sweden can vary so much in the degree of eco-
nomic inequality their citizens experience, not can they sufficiently explain why some indi-
viduals get ahead and some fall behind (Fischer et al., 1996: 9).
But the work of Herrnstein and Murray (1994) can also be criticised on a conceptual level.
The underlying test they use is largely a measure of instruction, not native intelligence. And
they admit themselves (Herrnstein and Murray, 1994: 117) that their measure of intelligence
explains ,,usually less than ten percent and often less than five percent" of the variance in how
people do in life. Concrete that means that intelligence accounts for 10 percent of the differ-
ences among people in earnings, leaving 90 percent of the differences among earners unac-
counted for (Fischer et al., 1996: 12, 14).
Thus Fischer et al. (1996: 16) raise several questions: If intelligence is not single, unitary, and
fixed; if intelligence can be altered; if test scores mismeasure intelligence; if intelligence is
not the major cause of people's fortunes; if markets do not fairly reward intelligence; if pat-
terns of inequality are socially constructed - if any of these arguments holds, `The Bell
Curve'/Social Darwinist/ market liberalism case fails. The social environment and the policies
67
As the study of Coleman (1988) and of other has shown, do children perform better if they have a constrained
and stable network in which friends, teachers and parents are all strongly connected to one another. A small net-
work of interlocked relations constrains action. Constraint from parents and teachers has positive long-term con-
sequences for children, forcing them to focus on their education. However, at some point on the way to becom-
ing adult, the child shaped by the environment becomes responsible for shaping the environment. Constraint,
positive for children, is detrimental to adults, particularly adults charged with managerial tasks (Burt, 1998: 13).
89
that construct that social environment are important. There is room for constructivist social
intervention. More equality of opportunity, equal conditions of agency (`freedom to choose
for everybody') is needed to secure true meritocracy which will help economic development.
This is supply side politics from the left. But since injustice continues to prevail quiet long
lasting a certain levelling of outcome should take place in the form of a redistributive welfare
state, too.
5. Social Integration
Integration of society is important to insure the maximum possible cooperation. Just in a fully
integrated society can the benefits of division of labour and of voluntary exchange be fully
exploited. Social order constitutes social capital. And social capital ensures effective co-
operation. Markets, civil society, the state and culture are different means to foster co-
operation and social integration. They depend on one another. Contrary to the view of liber-
tarians markets are not the only guiding force. The sole pursuit of selfish individuals might
lead in social dilemma situations, where individual rationality leads to collective irrationality,
to Pareto-inferior outcomes. Therefore is social capital of central importance. Social capital is
essentially influenced by values and norms and by the structure of social inequality. It is an
ultimate precondition for capitalism and democracy. The consequence of neglecting social
capital is (religious) fundamentalism and Social Darwinism which both impede social integra-
tion and development.
Markets, Civil Society, the State and Culture
Contrary to market liberalism with its sole focus on markets political and moral liberalism has
a broader and more encompassing focus. The innate moral sense and the ability to learn ra-
tionally founded moral rules are added to the homo oeconomicus together with the need for
rules and institutions. Institutions are needed to foster cooperation and to realise the gains
from exchange (North, 1990: vii). First, markets must be checked by a framework of rules to
prevent a Hobbsian `bellum omnium contra omnes' (Kohler, 1997: 59). Not before a funda-
mental framework of peace is established can the market flourish and mutually beneficial vol-
untary exchanges emerge.
90
Economic coordination is decentralised, emerges as a result of various individual actions, and
is not consciously controlled. In this context we also have to understand the rise of hierarchi-
cal organisations. As Coase (1937) states the firm will emerge out of a sea of market rela-
tions. Firms and the market are alternative means of organising economic activity. But the use
of the marketplace involves costs.
68
These costs help to determine market structure. For ex-
ample, where the cost of buying from other firms is relatively low a firm is more likely to buy
supplies form others than produce the supplies itself. Many tasks conventionally ascribed to
the state could be delivered by the market as well under condition that transaction costs are
zero. If negotiations between private parties were costless, it should not be necessary for gov-
ernments to intervene to regulate polluters or other producers of negative externalities, be-
cause the parties negatively affected will have a rational incentive to organise and buy off the
miscreant. But the problem of applying the Coase-theorem to real-world situations is that
transaction costs are almost never zero. It is usually costly for private individuals to work out
fair agreements with one another, particularly when one is substantially richer or more power-
ful than the other (Fukuyama, 1999: 192). Nevertheless a large degree of social interaction
takes place in the marketplace where the price mechanism ensures voluntary, mutually bene-
ficial exchanges and cooperation. But prices and exchanges alone are not enough.
Granovetter (1985: 481-487) illustrates, for example, how economic action is embedded in
structures of social relations. Individuals do not act or make decisions isolated from a social
context. Concrete personal relations and networks of relations are important in generating
trust, in constituting expectations, and in establishing and enforcing norms. Granovetter chal-
lenges like this Coase and Williamson. By taking up the question from Coase `Under what
circumstances are economic functions performed within the boundaries of hierarchical firms
rather than by market processes that cross these boundaries?' Williamson (1975) develops the
`new institutional economics'. He argues that it is the organisational form of hierarchically
integrated firms that explains the inhibition of opportunism or malfeasance in economic life.
Granovetter (1985: 493-502) opposes by claiming that both order and disorder, honesty and
malfeasance have more to do with the nature of personal relations and networks of relations
between and within firms than they do with organisational form. For instance, many firms,
68
These costs are transactionscosts. They are the costs of writing and enforcing contracts.
91
regardless of size, are connected by interlocking directorates to ensure that relationships
among top executives are numerous and densely knit.
This is just a first example of how social embedding must complement markets. Society is
also integrated by the state, civil society, religion and shared cognitive rules. As we have
stressed already, it is necessary to have a legal infrastructure of market institutions, which de-
fines and protects the conditions of voluntary exchange, that assures the beneficence of the
spontaneous order of the market process. Without the matrix of law, or enforceable titles to
property and the terms of contract, the market process is a spontaneous order no more likely
to be beneficent than that of the Mafia. Indeed, a rudimentary market process may exist with-
out such a legal framework. But such a market is likely to be as often exploitative and intimi-
dator as it is mutually beneficial to its participants. There is no reason to suppose that the un-
planned evolution of legal systems will systematically favour market institutions as systems
of voluntary exchanges. The historical evidence suggests the opposite, with legal rules - the
rules of the game of the market - becoming themselves objects of political predators, and the
legal framework of market institutions being shaped by the requirements of coalitions of col-
lusive interest groups (Gray, 1994: 36/37).
The example of the Dark Ages confirms to Smith that contracts for law and order, like all
other contracts, would simply not be concluded until government had assumed its responsi-
bilities as the guarantor of the public good (Reisman, 1998: 368).
,,Among the barbarous nations who over-run the western provinces of the Roman
empire, the performance of contracts was left for many ages to the faith of the
contracting parties." (Smith, 1776/1961, I, 107) (quoted in Reisman, 1998).
Therefore the state enforced legal system is important. In a democracy state actions are based
on the rule of law. And hereby the ultimate source of law is again not found in law itself. This
would be the legalistic doctrine of `law is, is what is written as law'. But the foundations of
law are found in a universal morality based on reason (Höffe, 1987) and the moral sense. But
the role of politics is more encompassing than simply establishing conditions of agency by
enforcement of the rule of law (this is the classical Hobbsian social contract). This would be
the 19
th
century enforcement state. Politics is also about establishing and stabilising values.
Politics must have the means to influence societal developments. For establishing conditions
of agency which go beyond simple law enforcement the welfare state is of central importance.
The welfare state allows more encompassing agency and hence cooperation by securing pub-
92
lic rights or entitlements to human welfare in general and to minimum standards of well-being
in particular, independent of rights based on property or income. Only the state can guarantee
strong entitlements to people of this sort, though this does not require that it directly provides
the satisfiers in questions it can regulate, legislate, subsidise and in other ways ensure that
other agencies, including private ones, do so (Gough, 1999: 4).
Linked to the realm of values, social welfare and the state is civil society. The state is under-
pinned by civil society. By civil society, we mean that structure of autonomous institutions,
standing between individuals and the state. Civil society the main origin of social capital
is about the neglected nonmarket aspects of social reality. In civil society cooperation is
guided by civic spirit and not by pure self-interest, like in the sphere of the market. Therefore
our view will exclude businesses together with the family from civil society. For us busi-
nesses belongs to the realm of markets and the family is a special category of its own. But
civil society is made up of all the other voluntary, intermediate institutions which are smaller
than the state but larger than the family: voluntary associations, educational institutions,
clubs, unions, media, charities, churches, etc. The main driving force of civil society is civic
spirit and sympathy. Civil society is an expression of man's need to be embedded in a com-
munity.
69
It complements like this the market, based on voluntary cooperation out of self-
interest. Community spirit and sympathy are forces of social integration and build up social
capital. The larger the stock of social capital is the more efficient the state works and the eas-
ier voluntary cooperation is, and subsequently markets flourish more.
The market, the state and the community are different forms of social integration and eco-
nomic coordination. No society will be integrated and coordinated by only one system. All
socio-economic systems are based on a mixture of different coordination principles. One so-
ciety stresses more market exchanges and the price system. Another more the authoritative,
69
By referring to communitarian thought we must distinguish two lines. One of `closed' communitarism, taking
only the needs of a particular cultural group into account and having the tendency of setting the collective needs
of the community over individual interests. On the other side is `open' communitarism which sees the need for
an all-embracing `community-of-the-community' to prevent fragmentation of society into particularistic com-
munities. The role of the individual is seen in a more balanced view, too. Individuals have the need to be em-
bedded in communities, but preserve nevertheless at the same time individual autonomy. Amitei Etzioni, for
instance, can be associated with this line of thought.
93
hierarchical control of the state for redistribution. A third will rely more on spontaneous com-
munitarian solidarity based on reciprocal trust networks (Gough, 1994: 34-36).
The following graph might help to better understand the pyramid of cooperation and the main
forces of social integration:
State -> establishment of conditions of agency
(social contract and welfare state)
and enforced cooperation by the law
Civil Society -> voluntary cooperation
guided
by
civic
spirit
and
sympathy
Markets
-> voluntary cooperation
Firms
guided by self-interest
and prices
Culture
-> shared norms, traditions and
cognitive
rules
fostering
cooperation
Figure 7: The Pyramid of Cooperation
Markets, civil society and the state are the three main pillars for social integration, but they
are all embedded in the overall context of culture. By culture we mean the shared norms, tra-
ditions and cognitive rules fostering cooperation. In processes of intersubjctive communica-
tion common cognitive rules of selection, classification and interpretation of information are
developed (Siegenthaler, 1993: 42-61, based on Habermas, 1981). Thus, the first force of co-
ordination and social integration is language, as stressed by Habermas (1981b: 132). Social
integration takes essentially place in the context of the life world. The life world is the nu-
cleus where communicative processes of understanding occur (Habermas, 1981b: 182-228).
Through communication people can overcome their simply subjectivist view and create a
94
common intersubjective framework of meaning. The position of Habermas concerning cul-
tural integration is explicitly post-metaphysical. The only source of cultural integration and of
creation of common values lays in intersubjective communication. Discursive processes are
the sole source of values in modern society, hoping that the best argument will convince eve-
ryone. There is no room for transcendental values or religion in his view. We would, on the
other hand, stress additional, pre-modern roots of values. Religion, emerging out of the hu-
man need for being rooted in a transcendental order, creates shared frameworks of meaning,
too (Luckmann, 1991: 77-86). It also fosters community spirit (Gellner, 1992: 4).
Now a scholar, like Gellner, is not uncritical concerning social embedding. To much embed-
ding can lead to a dominance of the context, to `totalitarian' or `closed' system. Whereas Is-
lam embeds politics within religion, the Soviet world tired to embed economy, society and
religion within the polity. But we would argue that social embedding is a question of degree
because total dis-embedding leads to social fragmentation which again lays ground for totali-
tarianism. And already the ideal of many enlightenment scholars of a rationally, autonomous
individual, freed from tradition, has its price. `Freedom of thought' is not to have without any
negative side effects. Gellner takes from Kant and Weber, among others, his analysis of the
consequences of this disenchantment and separation of spheres (Macfarlane, 1992: 121, 123).
Weber gives in his `Die Protestantische Ethik und der Geist des Kapitalismus' (1905) an ac-
count of the separation of economics from religion. He saw the rise of capitalism initially
connected with protestant ethic which was part of occidental rationalism. This process of
separation of the spheres of politics, economics, and religion has become the central feature
of the modern world. But it has also lead to the `iron cage of modern rationalism' (Weber).
As a consequence the modern world provides no warm cosy habitat for man. The impersonal-
ity and regularity, which make it knowable are also, at the same time, the very features which
makes it a cold, and morally indifferent world. The open predicament is one where logical
consistency and openness is bought at the price of social and moral inconsistency. We are si-
multaneously strictly rational and open-minded, and totally lost and confused. Within the
modern world there also is and can be no room either for magic or for sacred. There is a clash
between a cold mechanistic controllable world, and the desire for social cohesiveness. There
is a fundamental difference between rational society and bizarre, random culture. As Gellner
puts it: "We live in a cognitively powerful, and socially disconnected world". This insight
95
Gellner partly owes to Ibn Khaldun, who showed that "you could have communal, civic spirit,
or you could have civilisation but not both" (Macfarlane, 1992: 125).
Our position is that there should be room to re-embed people more in society, culture and re-
ligion without having to give up modern civilisation. The argument goes that in the present
world, characterised by large scale social fragmentation, more social embedding and social
capital would be good for the overall civilizational process. Society, including its provision of
public goods, is not founded on self-interest alone. Reciprocity, mutual conern, fair play, jus-
tice, trust and tolerance are fundamental for cooperation. In terms coined by Hirschman, exit
and voice, the standard mechanisms of resource allocation in markets and states, are insuffi-
cient. Loyalty social commitments and norms that create and sustain social cohesion pro-
vides the missing link (Rao, 1999: 77).
Social Capital as Precondition to Capitalism and Democracy
Social liberalism is something different from market liberalism. Unchecked liberalism would
risk to erode the fundamental moral and political resources on which it ultimately depends.
(Fukuyama, 1995: 11, 350-358; Höffe, 1996: 167; Holenstein, 1998, Gray, 1999). This is a
view which is also defended by a prominent capitalist like George Soros (1997 and more ex-
tensively 1998). He is opposed to a simple `free-market-decide-solution' as answer to the
question `What kind of society do we want?' He thinks that such a response would undermine
the very values on which open and democratic societies depend. Habermas too, is convinced
that unchecked functional rationality will destroy the lifeworld. A dominance of the logic of
the market and of bureaucracy leads to a `colonialization of the lifeworld' (1981b: 452, 480).
To show the causes and consequences of the destruction of the human lifeworld is the ulti-
mate goal of his `Theorie des kommunikativen Handelns' (1981). The subsystems of control
of the market and of bureaucracy should not be allowed to dominate the processes of commu-
nication which are at the centre of normative societal integration. Therefore it is important
that modern societies have by the democratic political system the means for value creation
and the necessary instruments to influence societal developments.
Liberal democracy ultimately depend on social capital. And by social capital we try to capture
on the one hand social structure and inequality; and on the other hand moral norms and val-
ues. This values are rooted in the moral sense and the ability of moral learning (which is
96
shaped by the social structure), but also to a certain degree in premodern cultural habits. That
is why liberalism is not entirely `modern'. The framework of a liberal society constituted a
liberation from the constraints of a traditional culture that inhibited the development of entre-
preneurship and constrained the open-ended accumulation of material wealth. But liberalism
in its Hobbsian-Lockeian form is not self-sustaining and needs the support of aspects of tradi-
tional culture that do not themselves arise out of liberalism. Liberal democracy works best as
a political system when its individualism is moderated by public spirit, so too is capitalism
facilitated when its individualism is balanced by a readiness to associate. If democracy and
capitalism work best when they are leavened with cultural traditions that arise from nonliberal
and noneconomic sources, then it should be clear that modernity and tradition can coexist in a
stable equilibrium for extended periods of time. Trust, for example, is not the consequence of
rational calculation. It arises, besides repeated interaction, from sources like religion or ethi-
cal habit that have nothing to do with modernity. The most successful forms of modernity, in
other words, are not completely modern. (Fukuyama, 1995: 350-352).
Habermas, taking up the concept of `reflexive modernisation' from Beck and Giddens, goes a
step further. He is convinced that postindustrial societies have depleted the reserves upon
which former industrialisation has build, besides nature especially cultural and social capital
originating from premodern societies. Therefore modern societies have reached their limits.
Habermas sees a process of reflexive modernisation of halfmodern societies. Halfmodern so-
cieties have still depended upon social and cultural capital from premodern times. (As we
have seen in Fukuyama's view this can be a quiet long lasting and successful combination).
Therefore modernity becomes radicalised through reflexive processes. It is now through the
process of communicative integration that the necessary normative preconditions of social
integration of modern societies are created. Completely modern societies do not depend any-
more upon norms and traditions from premodern times. Through communicative processes,
resulting from deliberation in the framework of liberal democracy, modern societies can pro-
duce themselves the necessary normative integration and social glue (Habermas, 1998: 229-
231).
70
70
But reflexive modernisation leads to another kind of modernity. It is not any more the old modernity built
upon the enlightenment theorem that the more you know about your environment the better you can control it. In
a reflexive society the intrusion of knowledge into the environment of action it describes can change that envi-
ronment of action. That means that as we incorporate knowledge about ourselves into our actions we actually
97
But anyway, it is more likely that a successful market economy, rather than being the cause of
stable democracy, is codetermined by the prior factor of social capital (see figure 8). If the
latter is abundant, than both markets and democratic politics will thrive (Fukuyama, 1995:
356). This is a position which goes back to Emil Durkheim. He argues that market exchanges
presupposes noneconomic social norms that dictate, for instance, that buyers and sellers will
negotiate peacefully rather than, for example, pulling out guns and trying to rob and murder
each other. And Max Weber argues that utility maximisation is itself a historically condi-
tioned social norm (Fukuyama, 1999: 148).
Moral
Better Functioning of
Institutional
(innate and learned)
the Political System
Stability
Social
Capital
Social Structure
Better Functioning of
(especially structure of inequality)
Markets
More Wealth
Figure 8: Social Capital as Precondition for Capitalism and Democracy
The concept of social capital makes clear why capitalism and democracy are so closely re-
lated. The innate moral sense, moral learning (depending on the social structure and espe-
cially on the structure of inequality) and the culturally determined values - on the one side -
together with the structure of inequality and other propensities of social structure - on the
other side - determine social capital. More social capital fosters a better functioning of the po-
litical system and of the market system. In a prospering economy the political system works
better. A stable political system on the other hand fosters economic development.
A healthy capitalist economy is one in which there will be sufficient social capital in the un-
derlying society to permit business, corporations, networks, and the like to be self-organising.
In default of this self-organising capability, the state can step in to promote key firms and sec-
tors, but markets, almost always work more efficiently when private actors are making the
decisions.
change the world which that knowledge originally described. There is therefore not a stable knowledge envi-
ronment. And that is why in a highly reflexive world there are so many new unpredictabilities (Giddens, 1999).
98
That self-organising proclivity is exactly what is necessary to make democratic political insti-
tutions work as well. The same propensity for spontaneous sociability that is key to building
durable businesses is also indispensable for putting together effective political organisations
(Putnam, 1993b). If society is not to become anarchic or otherwise ungovernable, then it must
be capable of self-government at levels of social organisation below the state. Such a system
depends ultimately not just on law but on the self-restraint of individuals. Therefore the moral
sense and moral learning is important. Otherwise a strong and coercive state is needed to keep
each other in line. Conversely, the `withering away of the state' Karl Marx envisioned could
conceivably arise only in a society with an extraordinarily high degree of spontaneous socia-
bility, where restraint and norm-based behaviour would flow from within rather than having
to be imposed from without (Fukuyama, 1995: 356-358).
Having stressed the importance of social capital for capitalism and democracy we must warn
of a misinterpretation. Conservatives are right to emphasise the value of intermediary associa-
tions, but they misunderstand the potential synergy between private organisation and the gov-
ernment. Social capital is not a substitute for effective public policy but rather a prerequisite
for it and, in part, a consequence of it. Social capital works through and with states and mar-
kets, not in place of them. Wise policy can encourage social capital formation, and social
capital itself enhances the effectiveness of government action (Putnam, 1993b).
Let us remember why it is so important to stress the moral and political foundation of liberal-
ism. This because fundamentalistic christianism or crude Social Darwinism - the alternative
and the moral surrogate of libertarians - seem to us not to be the proper base. To the contrary
they are a major obstacle to social integration and a break to economic development. On the
other hand is social capital - the social glue of central importance for economic growth dur-
ing the 1990s.
99
Part II: Growth Theory and Empirical Relevance of Social Capital
One is tented to say that economic growth is not everything, but without growth everything is
nothing. You can start dreaming about a stable utopic autarchy à la Morus or have the com-
munities of some American Indians before coming into contact with Western civilisation as
focal point. But human history tells you that the main thrust took another way. Already the
first high cultures in ancient time didn't start to flourish until they have reached a sufficient
level of material well being. This is even true for Buddhist monks or Brahmin priests who live
off the things others give to them. It seems as if material well being is a necessary, even
though not sufficient condition for development. Therefore it is no wonder that Sachs (1999:
22) has defined in the Global Competitiveness Report competitiveness as the medium-term
capacity of a country for economic performance, taking into account its starting level of in-
come.
71
Capitalism is the system which has produced most wealth, most of the time for most of the
people. The rise of modern economic growth coincided with the emergence of capitalism. Our
modern capitalist-enlightenment civilisation is build upon the quest for `more', the will to go
beyond the `frontier'. Hence we understand the importance of `An Enquiry into the Nature
and Causes of the Wealth of Nations', which is also the title of the famous book of Adam
Smith (1776). Smith thought that ,,peace easy taxes and a tolerable system of justice" would
do the work, leaving man to follow his urge to ,,better one's condition" by ,,truck, bater and
exchange". Letting market forces work ,,the process of creative destruction" (Schumpeter)
will do his work.
But as we have seen in part I this market driven process takes place in a moral and political
context. Already Adam Smith was ultimately sceptical that the ends sought by the bourgeois
seeking to "better their conditions" were based on the illusion that wealth could buy happi-
71
Jacquemin and Pench (1997: 13) from the Competitiveness Advisory Group to the President of the European
Commission have a slightly different definition of competitiveness. They look at the different indicators for eco-
nomic performance and differentiate according to the level of analysis. On the enterprise level it is about profit-
ability, market share and productivity (quality adjusted). On the industry level again productivity is important,
together with market share (relative growth) and specialisation (high-tech-low-tech). Finally, on the macro level
it is about the standard of living/ productivity, cyclical stability, international trade performance (trade balance,
world market share, foreign direct investment) and employment (job creation).
100
ness (Smith, 1759/1976: part VI, quoted in Fukuyama, 1999: 255). And Schumpeter clearly
understood that excessive `creative destruction' has its price. The market is an excellent
means of economic development by permanent production innovations, but also a risk for so-
cial order. What accelerates the development of the economy will easily become an anomie in
common life (Münch, 1999: 6). Therefore the social context, the cooperative ability embodied
in social capital, is of double importance. Social capital facilitates on the one hand innovation
and the emergence of network structures and thus economic performance. On the other does it
secure social cohesion.
1. Growth Theory
In the following we will show that the moral and political context - social capital is of em-
pirical relevance for economic growth. Unfortunately, most of growth research has neglected
this context so far. The origins of modern quantitative study of economic growth lay with
Simon Kuznets. Later Robert Solow developed an accounting framework for measuring the
main factors in economic growth. His starting point is the production function. The growth in
output could be apportioned among the underlying factors, that is growth of the capital stock,
of labour input, and of the state of technology. The shares of labour and capital are measured
as part of the national income accounts. But technical progress cannot be observed directly. It
is calculated as the residual element after the observable causes of growth are measured, and
subtracted. Technological progress is then calculated as the difference between observed
growth rate in output per worker, minus the change in capital per worker multiplied by the
share of capital in output. This is the so-called Sollow-residual, which has been at the centre
of growth and productivity analysis for the last three decades. Economists interpret the Solow
residual as the part of economic growth due to technical progress. But in fact, it is really a
measure of our ignorance, since it is calculated as the part of growth that is not really ex-
plained by observable factors.
Subsequently Solow developed further his ideas by analysing the relationship of saving, capi-
tal accumulation, and growth. This model, introduced in 1956, continues to be the main
framework of analysis in growth theory. In the simplest version of the Solow-model, output
per capita is an increasing function of the capital-labour ratio and the state of technology, sav-
ing equals investment, and the rate of population growth is assumed to be constant and ex-
ogenous. In the steady-state equilibrium, capital, labour, and output, all grow at the same rate,
101
given by the exogenous rate of population growth.
Recent studies of economic growth have suggested that the role of capital is larger than meas-
ured by the Solow growth framework. Human capital (investment in worker skills) is typi-
cally introduced in new growth theories. The concept was initially developed by T.W. Schultz
and Gary Becker and incorporated into conventional growth theory by Robert Lucas. The ba-
sic idea of this new research is that capital investment creates positive externalities. Human
capital accumulation is viewed as increasing the stock of knowledge. This knowledge is seen
as having a public good character. It is assumed to `spill-over' freely to all firms (and some-
times across countries, too). One firm gains, for example, some new experience, and the other
firms in the vicinity could benefit from that knowledge. Such learning spill-overs may help to
explain why high-technology companies tend to cluster in specific areas, like Silicon Valley
near San Francisco. Or there might exist `educational externalities' by interacting with edu-
cated persons. If these positive externalities are large, there are significant implications for
economic theory. Such an economy might not reach a steady-state growth rate. Rather,
growth might become self-sustaining (or `endogenous'). Numerous models incorporating
R&D activities and the production of `ideas' have been developed, with those of Paul Romer
being among the most prominent ones (Sachs and Larrain, 1993: 556, 557, 561-571 and
Gemmell, 1998: 129-134).
The new theory of endogenous economic growth had also an impact on trade theory. It laid
the founding stone to transform the static theory of comparative advantage towards a more
dynamic trade theory, which takes growth potential created by trade into account. The main
argument goes that lowering trade barriers will speed up the rate of economic growth and de-
velopment in the long run by allowing developing nations to absorb the technology developed
in advanced nations at a faster rate than with a lower degree of openness (Salvatore, 1995:
335). This argument is also true for high industrialised countries where free trade fosters
knowledge diffusion.
The main weakness of the old and new growth theory is, that they completely neglect the so-
cial, political and institutional framework within which capital accumulation takes place. A
more appropriate approach to growth and development should start by looking first at the
constant factors, like climate and geography, which have an influence, but cannot be changed.
Sachs and Werner (1997: 187) give empirical evidence that landlocked and tropical countries
have a natural disadvantage. Second, we have to take into account the distinctive values struc-
102
ture of a society, which is not constant but changes only very slowly. Max Weber was one of
the first who pointed to the importance of values for economic development. In his seminal
work `Die Protestantische Ethik und der Geist des Kapitalismus' (1905) he showed that the
Calvinist idea of predestination and calling led to a strong work ethic. This work ethic, with
material success being taken as sign for being selected by god, subsequently fostered capital-
ist development. Other cultures have fostered the creation of other values, but with neverthe-
less similar effects. For instance scholars of Asian studies point to the benevolent effect of
certain Confucian values for economic development.
At the next level the social and political structure must be taken into account. On the level of
external relations it is a country's position in the world system. And - very important the
internal social structure of a country: structure of inequality and the political institutions.
Douglas North is one prominent scholar who has pointed to the importance of the institutional
framework for economic development (e.g. North, 1990). It does matter, for example,
whether there is a kleptocratic dictatorship or whether there is rule of law. Social capital tries
to capture main elements of social structure. Finally, there is endogenous growth theory with
its focus on knowledge accumulation and spill-overs and neoclassic growth theory with its
limited focus on the optimal saving rate and the accumulation of real capital.
Growth Theory and Social Capital
In conventional growth theory social capital is neglected. Although there are first signs to rec-
ognise the importance of social structure. Robert Lucas, a founder of `rational expectations'
economics, acknowledges that ,,human capital accumulation is a fundamental social activity,
involving groups of people in a way that has no counterpart in the accumulation of physical
capital" (Putnam, 1993b). Social capital capturing significant elements of social structure,
norms and values, however, needs to be brought back in to renovate classical postwar growth
theory. Growth theory was initially limited to the optimal saving rate and the accumulation of
real capital in an economy and subsequently incorporated human capital into endogenous
growth theory. But in the 1980s the sociologists Pierre Bourdieu (1980) and James Coleman
(1988) have advanced the idea of social capital. The latest equipment and most innovative
ideas in the hands or mind of the brightest person, however, will amount to little unless that
person also has access to others to inform and to cooperate for collective, mutually beneficial
103
action.
Social capital is an input into the development process together with other forms of capital
and inputs. Nature and labour are original input factors, whereas capital is a derived, pro-
duced input factor (physical or produced capital, human capital and social capital). Capital is
a leverage factor. It increases the productivity of the other input factors. Hence it derives its
value from its future usefulness. However, social capital is also an output of this process a
feature it shares e.g. with human capital. Education is worth pursuing for its own sake, and a
well-educated population is an important outcome of successful development. Likewise,
many people would agree that a just and tolerant society, with its citizens trusting each other
and being civically engaged is worth having independent of its effect on future economic
growth.
Inputs: Production:
Outputs:
Nature environment
Labor
Transfor-
goods
Quality of
Capital: Physical Capital
mation
Life
Human
Capital
education
Social Capital
justice, trust, tolerance,
civic
engagement
Figure 9: Social Capital in the Input/Output Process
Human and social capital thus share the attribute that they are simultaneously a consumption
good and an investment. The critical difference is that education can be embodied in one in-
dividual and can be acquired by one individual regardless of what others do. By definition
social capital can only be acquired by a group of people and requires a form of cooperation
among them (World Bank, 1997: 82).
104
2. Previous Empirical Studies and own Approach
In this section we will briefly present previous attempts to measure social capital before we
outline our own approach. Fedderke and Klitgaard (1998) provide a good overview of exist-
ing studies on economic growth and social indicators. They show how social, political and
economic indicators are linked by webs of association. Economic growth is linked to levels of
political and civil rights, the stability of political order, and the efficiency of public institu-
tions. All three of these classes of variables are systematically linked with one another. And
the most general characterisation of such links is that they are benevolent, with `goods things
moving together'.
Although various manifestations of `social capital' have been invoked in numerous studies
since the late 1970s the most extensive empirical research and coherent theoretical advances
have come in the late 1980s and 1990s from two distinct literatures within the so-called `new
sociology of economic development', namely ethnic entrepreneurship studies (at the micro
level) and comparative institutionalist studies of state-society relations (at the macro). The
classic intermediary position is, of course, the de Tocquevillian one, represented most com-
pellingly in the work of Putnam, `Making Democracy Work' (1993), in which a vibrant civil
society acts to reconcile the `passions' of the micro level and the `interests' of the macro.
Designating the comparative institutionalist work as `macro' is done mainly for heuristic pur-
poses; this work, unlike the true macro-sociological work of Braudel, Wallerstein, or
Bornschier, is perhaps more accurately identified as operating at the intersection of the macro
and meso levels (i.e., the social ties crossing the public-private divide), but we find the later
term cumbersome. For our purposes, `the macro level' is simply short-hand for the formal
business, political and social organisations of society together with its main value structure
(Woolcock, 1998: 161, 162, 192, 193, 199).
Studies analysing microlevel social capital focus on the role networks and associations play
for the development process. Social capital has also been used extensively in studies of: fami-
lies and youth behaviour problems, schooling and education, community life (in physical and
`virtual' settings), work and organisations, democracy and governance and in general cases of
collective action problems. The idea of social capital also trades under the name of `intangible
assets', `social energy', `social capability', `sociability', `moral resources' and `(weak) ties'.
Woolcock (1998: 193-195) gives an extensive overview over the existing, but steadily grow-
ing literature.
105
The study of La Porta et al. (1997) belongs to this section of microlevel social capital. They
measure the importance of social capital, understood as trust, for the performance of large or-
ganisations. This is important since it highlights an important intermediary step in the causal
chain of `more social capital is leading to more economic growth'. Data on government per-
formance, participation in civic and professional societies and importance of large firms sup-
port the hypothesis that trust promotes cooperation. Furthermore, trust is lower in countries
with dominant hierarchical religions, which may have deterred the formation of `horizontal
networks of cooperation' among people.
Studies focusing on macrolevel social capital try to analyse by direct estimation the impact of
specific components of social capital, like inequality, trust, democracy, etc. (civil and gov-
ernment social capital) on growth and investment. One of the earlier empirical macrolevel so-
cial capital studies is from Bornschier (1989).
72
He shows the importance of legitimacy, a
component of social capital, for economic success. He suggests that comparative economic
success is influenced by the politically produced social order. Depending upon the degree of
legitimacy social order is either the product of voluntary interaction of intrinsically motivated
people or must be enforced by means of coercion. A multiple regression model, covering 18
Western countries over the postwar era, shows that legitimacy, understood as relative absence
of mass political protest, has a positive impact on growth.
Putnam's already mentioned work `Making Democracy Work' (1993) is another important
contribution to the field of macrolevel social capital. He analyses the 20 in 1979 new estab-
lished regional Italian governments. Some of the new government proved to be dismal fail-
ures - inefficient, lethargic, and corrupt. Others have been remarkably successful, however,
creating innovative day care programs and job-training centres, promoting investment and
economic development, pioneering environmental standards and family clinics - managing
the public's business efficiently and satisfying their constituents. What could account for
these stark differences in quality of government? Government organisation is too similar from
region to region for that to explain the contrasts in performance. Party politics or ideology
makes little difference. Affluence and prosperity have no direct effect. Social stability or po-
litical harmony or population movements are not the key. Instead, the best predictor is one
72
Cross country empirical analysis of the importance of social variables for economic development started al-
ready in the 1960s, cf. e.g. Adelman and Morris (1965).
106
that Alexis de Tocqueville might have expected. Strong traditions of civic engagement - voter
turnout, newspaper readership, membership in choral societies and literary circles, Lions
Clubs, and soccer clubs - are the hallmarks of a successful region.
The study of Knack and Keefer (1997) supplies further evidence to date that trust and civic
cooperation have significant impact on aggregate economic activity. But they do not agree
with Putnam (1993) who suggests that dense horizontal networks reinforce trust and civic
norms. Knack and Keefer find that horizontal networks as measured by membership in
groups are unrelated to trust and civic norms (controlling for education and income) and to
economic performance. But they find that trust and civic norms are stronger in nations with
higher and more equal incomes, with institutions that restrain predatory actions of chief ex-
ecutives, and with better-educated and ethnically homogenous populations.
What is common to both recent empirical cross-country social capital studies (La Porta et al.
1997 and Knack and Keefer 1997) is that they focus exclusively on trust and civic engage-
ment. The other facets of (civil) social capital, social justice and tolerance, and one might add,
the quality of the political institutions (government social capital), are neglected. For both of
the studies mentioned the World Values Survey (WVS) is the principal data source. The WVS
contains survey data on thousands of respondents from 31 countries.
73
In our analysis we will
go a step further, by looking at additional facets of social capital and by broadening the data
set by including indicators from the World Competitiveness Report (WCR). By merging the
two surveys we create a data file comprising 49 countries (most of them OECD countries,
plus several NICs and a few LDCs).
The WCR combines objective indicators with subjective survey data. The objective indicators
are compiled from various national and international organisations, including the World
Bank, GATT, OECD, etc. The subjective indicators are based on a survey among 12'000 se-
lected executives in all 33 countries covered by the Report. Every year nearly 2'000 com-
73
Some groups, for example, city-dwellers and the better educated, are oversampled in some countries of the
WVS. Therefore Knack and Keefer (197: 1255) have used a weight variable provided in the data in computing
country-level means. But as Phil Keefer wrote me in an e-mail do their results not depend on whether they have
used weighted or unweighted variables. The correlation between weighted or unweighted country means is, for
example, for their trust variable 0.99. Therefore we do not weight our WVS data. This makes sense especially
because we will also work with data from the World Competitiveness Report were we have also a biased sam-
ple.
107
pleted questionnaires are returned. The subjective survey is of such importance because it
asks about the perception of a country's competitiveness by members of the international
business community who actually make the decisions in that country.
The research design follows cross-sectional empirical growth models of the type introduced
by Barro (1991) and later further developed (Barro, 1997 and Sala-I-Martin 1997). In empiri-
cal growth models one typically controls for the level of development (measured by GDP per
capita) and the per capita stock of human capital. The goal of our study is to explain eco-
nomic growth during the 1990s with the stocks of real, human and social capital at the begin-
ning of the 1990s. Such an approach tries to minimise the statistical problems of endogeneity
or simultaneity. The serious problem with cross-country growth regressions is that the right-
hand-side variables are often not exogenous, but are jointly determined with the growth rate
(Mankiw, 1995: 303). But by measuring performance subsequent to the measurement of the
stocks of real, human and social capital the problem of endogeneity can be reduced.
Innovative is the suggested measurement of social capital. The aggregated stock of social
capital is somehow an indicator for the prevailing norms, attitudes and institutions in a society
in general. Our data show that there are substantial differences across countries. And these
differences in cooperative norms and institutions have as we will demonstrate below an
impact on economic growth. That will be the core finding of our study.
Besides an attempt to measure social capital we also take a new approach to measure human
capital. Contrary to most of the previous empirical work, which takes enrolment ratios as
measure of the stock of human capital, we have constructed our own measure of the stock of
human capital. Testing various human capital variables from the WCR on their importance for
economic growth, three variables have shown to be highly correlated with growth: `compul-
sory education' i.e., effectiveness of compulsory education system in meeting the demands
of a competitive economy , `economic literacy' i.e., level of economic literacy among the
population and `computer literacy' computer literacy generally among employees. Using
the statistical technique of factor analysis they show to be highly correlated with each other
and load strongly on one factor (factor loadings of 0.94). With the help of factor scores we
then produce a proxy variable for the stock of human capital. This so constructed human capi-
tal variable turns out to be a significant predictor of growth (significance level: p less than
5%). This approach is different from previous research which looked primarily at enrolment
ratios (of secondary or higher education). Enrolment ratios as predictors of growth are nor-
mally only slightly significant or not at all.
108
At the methodological level our approach distinguishes itself from conventional empirical
economic growth research by using factor analysis. With this technique we can circumvent a
serious problem of empirical growth research. Construct variables are produced by saving
factor scores of those components with the strongest loading. As Mankiw (1995: 304-306)
reminds us, multicollinearity the strong correlation among all the right-hand-side variables
poses serious problems in interpreting cross-country regression results. Our method consists
of applying first a factor analysis with that bunch of variables which have shown to be highly
correlated with each other on the one hand and with growth on the other hand. With our
procedure the information of many more variables can be included into the analysis despite
multicollinearity among them. This combination of factor analysis and regression models
leads to structural equation models. If the WVS/WCR would provide more cases we could
have worked with AMOS-structural equation software to estimate the parameters. Neverthe-
less we can summarise the basic idea behind our approach in the following chart, showing
graphically a structural equation approach for growth models:
109
...
...
... ...
... ... ...
A rectangle stands for an observed variable, a predictor for the latent construct symbolised by an oval
(the construct is created by means of factor analysis); downward flashes stand for factor analysis, up-
ward flashes for regression, and double flashes for intertcorrelation.
Figure 10: Structural Equation Model for a Growth Model
3. Description of Variables
The WVS provides, for example, a battery of 18 variables that can be used to measure trust.
They range from general questions, like variable 94: `Generally speaking, would you say that
most people can be trusted or that you can't be too careful in dealing with people?' to more
specific ones asking about trust in specific institutions, like the church (V 272) or the social
Human Capital
Real Capital
Social Capital
Trust
Civic
Engagement
Social
Justice
Political
Institutions
Compulsory
Educcation
Computer
Literacy
Economic
Literacy
Tolerance
Trust in the Social Securit System
Trust in the Parliament
Growth
GDP p.c
Relation between
Humand and So-
cial Capital ?
Relation between
Real and Social
Capital ?
Relation between
Human and Real
Capital ?
110
security system (V 282). We have constructed our proxy for trust by analysing first one by
one the importance of each trust variable for growth.
GROWTH98 = GDPSH590 + HUMANCAP + test variable
GROWTH98:
Average annual real GDP growth 1990-1998 (98: IMF estimates),
IMF World Economic Outlook May and October 98.
74
GDP90PC:
Real GDP per capita at 1985 international prices from Summers R. and A.
Heston, `The Penn World Table' (Mark 5.5).
HUMANCAP:
Factor score of a factor analysis of compulsory education (variable 8.09 of
the WCR91), economic literacy (variable 8.17 of the WCR91) and com-
puter literacy (variable 8.20 of the WCR92; this variable was introduced
for the first time in the WCR92).
Test Variable
Various test variables for trust, civic engagement, tolerance, justice and
political institutions from the WVS90/91 and the WCR89-94.
Having a total of just 49 cases there are too few degrees of freedom to introduce all variables
(in total we have tested more than 100 variables) at the same time. But testing the influence of
only one specific variable on growth, by controlling for the level of development and the
stock of human capital (which are both always highly significant) we have no problems with
the degree of freedoms. Here we partly disagree with Mankiw (1995: 306) when he states:
,,including only a subset of variables does not help matters much. It just means that the results
of the study are contingent upon what variables the study chooses to exclude". Both of our
control variables the stock of real and human capital are highly significant predictors of
growth. Of course sometimes it would matter for the significance level if we would include
additional variables in the regression as well. But we think the way we have chosen takes into
account the problems of multicolinearity and degrees-of-freedom and tries to balance them in
a pragmatic way. We think that making extreme tests of robustness makes no sense because
than no or only very few variables turn out to be robust (Sala-I-Martin, 1997: 178/179). When
74
We don't work with GDP per capita as dependant variable since we are interested in the actual output pro-
duced by an economy. The output produced is our ultimate measure of success. GDP per capita is influenced to
much by factors like participation rate in the work force, age structure, retirement age, etc. which vary substan-
tially from one country to another. Therefore we understand why our results become less significant when we
use GDP per capita instead of overall GDP growth as dependent variable.
111
you restrict your research in a first step to a simple measurement model, like the one we ap-
ply, you can handle the degree-of-freedom and the multicollinearity problem without loosing
too much information, because you control for the stock of real and human capital (two of the
most important variables for growth).
Having done this for over 100 variables clustering around the five areas of trust, civic en-
gagement, tolerance, justice and political institutions, we aggregate the significant variables
by means of factor analysis to a higher order construct proxy variable.
75
The following vari-
ables are the result of this:
TRUST1/2:
Factor scores of a factor analysis of trust related variables from the WVS.
The scores of the two factors with the highest loading (eigenvalue of
38,9% and 16,3% respectively) are considered. These factors measure trust
in the church (V 272), the military (V 273), the educational system (V
274), the police (V 278), the parliament (V 279), the civil service (V 280),
major companies (V 281), the social security system (V 282), and compa-
triots (V341). The variables are originally coded from 1=trust a great deal
to 4=no trust at all in the WVS.
CIVIC:
Factor scores of a factor analysis of variables related to civic engagement
from the WVS measuring belonging to voluntary organisations, like youth
organisations (V 28) or doing unpaid work for the church (V38). Very im-
portant is also the variable `none' (V54) measuring when you don't do any
unpaid work for a voluntary organisation. All three variables load on the
same factor. The variables are coded 1=mentioned belong to or do unpaid
work, 2=not mentioned.
TOLERANCE1/2: Factor scores of a factor analysis of tolerance related variables from the
WCR. The scores of the two factors with the highest loading (eigenvalue
of 66,2% and 25,9% respectively) are considered. They measure whether
foreigners are treated equally in all respects (variable 2.39 from the WCR
75
We didn't create so far an aggregate index of social capital, for instance by means of factor analysis. This is
because factor analysis deletes each case when there is only one information missing for this case (list-wise dele-
tion). And remember a social capital index would be the second order factor analysis of originally about 40
variables. So there are many blanks and to few cases would be left.
112
92), whether women have similar career opportunities as men (variable
8.38 from the WCR 92), the extent to which the country facilitates integra-
tion of professional women in the workforce (two years average WCR
90/91, variables: 10.19 and 8.21) and the degree of equal opportunity, the
extent to which an individual can get ahead irrespective of background or
sex (three years average WCR 89-91, variables: 10.19, 10.20, 3.57). Vari-
ables are scaled from 0=low to 100=high.
SOCJUSTICE 1/2: Factor scores of a factor analysis of justice related variables from the
WCR.
The scores of the two factors with the highest loading (eigenvalue of
48,3% and 29,7% respectively) are considered. They measure serious
crime rates in 1990: number of murders and violent or armed robberies re-
ported per 100'000 inhabitants (variable 3.56 from WCR 92), addiction:
how significantly employees' productivity is reduced by abuse of alcohol,
drugs or other addictive substances (three years average WCR 89-91, vari-
ables 5.39, 5.43, 8.48 respectively) (scale: 0=to a significant degree to
100=not an important problem), and income distribution in 1989: percent-
age of household incomes going to the lowest 20% and to the richest 20%
(variables 8.39 and 8.40 from WCR 93).
JUSTICE:
Confidence in the administration of justice (three years average, variables
10.04, 10.04 and 3.51 from the WCR 89-91) (0=little to 100=high) (rule of
law and administration of justice stand somehow in opposition to `so-
cially' constructed justice).
POLINST1/2:
Factor scores of a factor analysis of variables related to the quality of po-
litical institutions. The scores of the two factors with the highest loading
(eigenvalue of 54,2% and 24,2% respectively) are considered. They meas-
ure: effectiveness of fiscal policy: extent to which corporate investment
and entrepreneurial activity is encouraged (variables 3.31 and 3.32 from
the WCR 91), improper practice: extent to which government regulations
prevent improper practices in the public sphere (variable 3.56 from the
WCR 91), corruption: extent to which the country prevents corruption
(variable 10.22 from the WCR 90), top income taxes: top percentage mar-
ginal tax rate on personal income (three years average for the years 1988-
1990; variables 5.30, 5.32 and 3,24 from the WCR 89-91), work disincen-
113
tives: extent to which taxation and social-security systems encourage the
will to work (two years average; variables 6.05 and 6.07 from WCR
89/90), government responsiveness: responsiveness of governments in
adapting legislation to new economic realities (two years average; vari-
ables 6.11 and 3.59 from WCR 90/91), regulatory environment: extent to
which government rules, regulations, bureaucracy hamper efficient and
profitable conduct of business (three years average; variables 6.19, 6.21
and 3.12 from WCR 89-91), government economic priorities: extent to
which government policies favour investment and growth rather than in-
come redistribution (three years average, variables 6.21, 6.23 and 3.37
from WCR 89-91) (scale of the variables: 0=low to 100=high).
In order to make the link with the study of Knack and Keefer (1997) we also consider their
variable constructs denoted with the suffix KK; all data are from their data appendix (1997:
1285). Knack and Keefer use the World Values Survey and include countries from both sur-
vey waves (we only work with countries included in the second survey 1990/91 when refer-
ring to the WVS)
76
:
TRUSTKK:
`Generally speaking, would you say that most people can be trusted, or
that you can't be too careful in dealing with people?'. The trust indicator is
the percentage of respondents replying `most people can be trusted' .
CIVICKK
Strength of norms of civic co-operation is assessed from responses to a
question about whether each of the following behaviours `can always be
justified, never be justified or something in between.' a) claiming govern-
ment benefits which you are not entitled to, b) avoiding a fare on public
transport, c) cheating on taxes if you have the chance, d) keeping money
that you have found, e) failing to report damage you've done accidentally
to a parked vehicle.
GROUPSKK:
Density of associational activity (average number of groups cited per re-
spondent in each country from the following list: a) social welfare services
for the elderly, handicapped, or deprived people; b) religious or church or-
76
But the difference is small. Only Tambov is included in the 1981 survey and not in the 1990/91. And Knack
and Keefer remark, that the correlation between the two surveys is very high.
114
ganisations; c) education, arts, music, or cultural activities; d) trade un-
ions; e) political parties or groups; f) local community action on issues like
poverty, employment, housing, racial equality; g) third world development
or human rights; h) conservation, the environment, ecology; i) professional
associations; j) youth work (e.g. scout, guides, youth clubs, etc.).
OGROUPSKK: `Olson-groups' is a measure for groups with redistributive goals. It counts
total membership in above groups d, e, and i which were deemed most rep-
resentative of groups with redistributive goals.
PGROUPSKK: `Putnam-esque' groups involve social interactions that can build trust and
cooperative habits. Groups b, c, and j from the above list were identified as
those groups least likely to act as distributional coalitions, as being the
most Tocquevillian or `Putnam-esque'.
115
4. Results and Interpretation
Dependent Variable: GROWTH98
GDP90PC
HUMANCAP
TRUST1
TRUST2
TRUSTKK
CIVIC
CIVICKK
GROUPSKK
OGROUPSKK
PGROUPSKK
R2
Adj. R2
N
-0.417*
(0.030)
0.673*
(0.001)
0.887*
(0.000)
0.253
(0.139)
0.840
0.800
39
-1.017*
(0.001)
0.321
(0.196)
0.332
(0.172)
0.481
0.395
29
-0.800*
(0.010)
0.774*
(0.007)
0.607*
(0.012)
0.517
0.414
31
-0.856*
(0.003)
0.397
(0.124)
0.030
(0.872)
0.424
0.328
29
-0.811*
(0.004)
0.492*
(0.042)
0.496*
(0.026)
0.459
0.357
26
-0.787*
(0.005)
0.537*
(0.025)
0.522*
(0.011)
0.133
(0.538)
0.538
0.415
26
Standardized beta coefficients are reported. Significance levels are in parentheses, * = significant at
5% level.
116
Dependent Variable: GROWTH98
GDP90PC
HUMANCAP
TOLERANCE1
TOLERANCE2
SOCJUSTICE1
SOCJUSTICE2
JUSTICE
POLINST1
POLINST2
R2
Adj. R2
N
-0.915*
(0.000)
0.643*
(0.000)
0.310*
(0.016)
0.217
(0.146)
0.729
0.686
32
-1.005*
(0.000)
0.656*
(0.000)
-0.171
(0.176)
-0.282*
(0.048)
0.741
0.687
26
-1.049*
(0.000)
0.532*
(0.006)
0.275
(0.151)
0.626
0.582
32
-0.849*
(0.000)
0.402*
(0.018)
0.348*
(0.010)
0.228
(0.228)
0.722
0.677
32
Standardized beta coefficients are reported. Significance levels are in parentheses, * = significant at
5% level.
Figure 11a/b: Social Capital and Economic Growth 1990-1998
Looking at the results in Figure 11a/b we observe, first of all, that incomes converge, condi-
tional on the other variables. Initially poorer countries grow faster the catch-up effect. The
estimated coefficients are all highly significant and imply, due to their negative coefficient,
convergence. Furthermore, initial human capital appears to have in almost all equations sig-
nificantly positive effects on growth. These results confirm previous empirical studies on eco-
nomic growth, like Barro (1997: 17-22) or Sala-i-Martin (1997). But in contrast to earlier
studies, we work with a measurement construct for human capital composed of compulsory
education, economic and computer literacy. Our proxy for human capital turns out to be a
highly significant predictor of economic growth. Traditional empirical growth researchers
have often worked with enrolment ratios, or average years of schooling. But these indicators
for secondary or higher education are far less significant than our construct. Before discussing
the results for social capital in detail we must mention that excluding the human capital vari-
117
able would increase normally the significance of the social capital variables. This is a finding
which Knack and Keefer (1997: 1263) have already reported.
77
Looking now at the significance of the different facets of social capital (trust, civic engage-
ment, tolerance, social justice and political institutions), we observe that most of these vari-
ables are significant predictors for economic growth. The first factor of our factor analysis of
trust related variables TRUST1 shows a highly significant effect on growth.
78
I.e. more trust
in compatriots and in different institutions - the social security system, the civil service, the
parliament, the educational system, major companies, the church, the police and the military
is a positive predictor for economic growth. Due to WVS coding of e.g. 1 = trust a greate deal
and 4 = no trust at all we innitally get a negative sign for TRUST1 in Table 11. But to make
life easier and present the results in a more common sense version, we multiply them by the
factor 1. Thus, the new, corrected results reads as follows: more TRUST1 is good for
growth. The same transformation of results has been done for the variables TRUST2 and
CIVIC. Our results can be compared with the findings of Knack and Keefer (1997). They use
a trust variable TRUSTKK measuring `general trust'. General trust in people TRUSTKK is
different from our trust variables TRUST1/2. We look at trust in specific institutions, they
look at general interpersonal trust. However we think it is legitimate to look at both.
TRUSTKK is significant in their study, looking at economic performance from 1980-1992.
We cannot reproduce their significant finding for growth in the 1990s. In our analysis
TRUSTKK is no longer significant, even at the 10% level (sig. 0.172). The countries included
in both studies are more or less the same, since we are both using the WVS data base. Unlike
Knack and Keefer, we have also included Eastern European countries. This does however not
explain the difference, because when we run the regression only with OECD countries the
significance is reduced even further (sig. 0.472).
In general, distinguishing between OECD and non-OECD countries does not influence
whether our test variables are significant or not, with the sole exception of POLINST1. This
variable loses significance when looking only at OECD countries (sig. 486). Normally, filter-
77
When secondary enrolment is omitted from the regressions, TRUSTKK and CIVICKK coefficients rise, as
explained in their Section II that social capital influences human capital accumulation.
78
The first factor is so important because it has an eigenvalue of 38.9%, i.e. it explains 38.9% of the total vari-
ance explained by each factor. The second factor, TRUST2 has an eigenvalue of 16.3%.
118
ing for OECD countries only influences the amount of variance explained (R2), sometimes
increasing, sometimes decreasing it.
Our second trust variable (TRUST2) is not a significant predictor of growth. But this is not
questioning the importance of trust for growth because in our previous factor analysis the fac-
tor loading was much stronger on the first in comparison to the second factor (eigenvalues of
38.9% and 16.3% respectively).
Concerning trust variables we must mention the very high amount of variance explained by
the first regression model (R2 0.840, adj. R2 0.800). These are astonishing values when com-
paring them with R2 of traditional empirical growth research. Barro (1997:13) obtained an R2
of around 0.50 for his regressions for per capita growth rates (including variables like per cap-
ita GDP, average years of school attainment for males in secondary and higher schools, life
expectancy, fertility rate, government consumption ratio, rule of law index, terms of trade
change, democracy index and inflation rate). Knack and Keefer (1997: 1261) do not reach a
higher R2 than 0.60 for their regressions either (testing for per capita GDP, primary and sec-
ondary school enrolment, investment goods prices, and trust and civic norms).
Our variable for civic engagement CIVIC is a highly significant predictor of growth. CIVIC is
composed of a variable measuring belonging to youth organisations and doing unpaid work
for the church. In the simple growth regression these two variables of the set of possible indi-
cators for civic engagement were the only variables being significantly related to growth by
controlling for human capital. If we relax the controls in our model, i.e., not controlling for
human capital, many more variables become significant (doing unpaid work for political par-
ties, in local communities, in women's groups, welfare services, etc.). This indicates that the
level of human capital covaries substantially with civic engagement. The third component of
CIVIC, measuring the absence of doing any unpaid work for a voluntary organisation, is very
important .
Again, when we try to test the importance of Knack and Keefer's (1997) variables for growth
in the 1990s we obtain results quite different from the ones they found. Knack and Keefer
conclude that norms of civic cooperation (CIVIC) are significant predictors for growth from
1980-1992. But we find that this does not hold for growth in the 1990s (with a slightly differ-
ent model specification). Furthermore, they analyse the importance of the density of associa-
tional activity (GROUPSKK). Their conclusion is that group membership is not a significant
predictor for growth. We find in our analyses that their GROUPSKK is significantly related to
119
growth in the 1990s. Knack and Keefer find that membership in `Olson' groups is not signifi-
cantly related to growth, however in our analysis `Olson' groups turn out to be beneficial for
growth. Also our findings concerning `Putnam' groups (PGROUPSKK) differ from Knack
and Keefer. In our analysis they are not important predictors for growth. We agree with their
conclusion that ,,our data on groups do not permit us to convincingly distinguish between so-
cially efficient and inefficient memberships and activities" (Knack and Keefer, 1997: 1274).
But, contrary to Knack and Keefer, our results would suggest that associational activity
(GROUPSKK), and especially membership in `Olson' groups trade unions, political parties,
and professional associations, i.e., OGROUPSKK would add to growth.
Tolerance seems to be another important factor for growth. The first factor of our factor
analysis of tolerance related variables (foreigners, women, professional women, and equal
opportunity) is a statistically significant predictor of growth, the second is not. But again, this
is not so much a problem, since the first factor explains already an overwhelming part of the
total variance (eigenvalue of 66.2% in comparison to 25.9%).
Puzzling is the finding for social justice. Indicators for crime, drug abuse and income distribu-
tion seem individually and jointly to be statistically significant predictors for growth, but
compared with common sense they have the wrong sign. It seems at first glance as if more
crime, addiction and inequality would foster growth in the 1990s. But at least the indicator for
confidence in the administration of justice is not very far from insignificance (sig. 0.151) and
turns out to become very significant once we exclude the human capital variable (sig. 0.003).
On the other hand the indicators for crime, drug abuse and income distribution (and subse-
quently also the construct SOCJUS1/2) become insignificant once we exclude HUMANCAP.
This is a remarkable result, because normally significance strongly increases and not de-
creases once one does not control for the level of human capital. The puzzling finding men-
tioned needs more discussion (see below).
First, looking in more detail at the effects of the distribution variables the following two scat-
ter plots (figure 12a and b) might be informative. They show graphically the negative correla-
tion between equal income distribution and growth. We have already found out this with our
regression analysis. But very revealing is to look at the relationship again, this time using a
quadratic fit curve (figure 13a and b).
120
Table 2a/b: Income Distribution and Growth, Linear Curve Fit
Income Distribution 1989, % of income going to the poorest 20%
12
10
8
6
4
2
A
nnual
per
cent
c
hange o
f r
eal G
D
P
, 1990-
1998
8
6
4
2
0
-2
USA
TUR
THA
SWE
SUI
SIN
RSA
POR
OAN
NZL
NOR
MYS
MEX
KOR
JPN
ITA
IRL
IND
IDN
HUN
HOL
HKG
GER
GBRFRA
FIN
ESP
DEN
CAN
BEL
AUS
Income Distribution 89, % of income going to the highest 20%
70
60
50
40
30
A
nnual
per
cent
c
hange o
f r
eal G
D
P
, 1990-
1998
8
6
4
2
0
-2
USA
TUR
THA
SWE
SUI
SIN
RSA
POR
OAN
NZL
NOR
MYS
MEX
KOR
JPN
ITA
IRL
IND
IDN
HUN
HOL
HKG
GER
GBR
FRA
FIN
ESP
DEN
CAN
BEL
AUS
121
Table 3a/b: Income Distribution and Growth, Quadratic Curve Fit
Figure 13a and b suggest that the relation between income distribution and growth seems
more likely to be a quadratic one than a linear one. This is also confirmed by descriptive sta-
tistics. Whereas a linear curve fit leads to an R2 of 0.018 for the income share of the 20%
poorest, a quadratic curve fit leads to an R2 of 0.053. This distinction between linear and
quadratic fit is even larger for income shares of the richest 20%. Whereas a linear curve fit
leads to an R2 of 0.086, a quadratic fit function leads to an R2 of 0.260. Thus, based on de-
Income Distribution 1989, % of income going to the highest 20%
70
60
50
40
30
A
nnu
al
p
er
cent
c
hang
e o
f r
ea
l G
D
P
, 19
90
-199
8
8
6
4
2
0
-2
USA
TUR
THA
SWE
SUI
SIN
RSA
POR
OAN
NZL
NOR
MYS
MEX
KOR
JPN
ITA
IRL
IND
IDN
HUN
HOL
HKG
GER
GBR
FRA
FIN
ESP
DEN
CAN
BEL
AUS
Income Distribution 1989, % of income going to the poorest 20%
12
10
8
6
4
2
A
nnual
per
cent
c
hange o
f r
eal G
D
P
1990-
1998
8
6
4
2
0
-2
USA
TUR
THA
SWE
SUI
SIN
RSA
POR
OAN
NZL
NOR
MYS
MEX
KOR
JPN
ITA
IRL
IND
IDN
HUN
HOL
HKG
GER
GBRFRA
FIN
ESP
DEN
CAN
BEL
AUS
122
scriptive statistics, we should choose the quadratic specification. Looking at table 3a and 3b
we see that giving the poorest more (say 6% instead of 3%) is beneficial for growth. It is just
excessive egalitarianism which is bad for growth. On the upper end of the income scale we
observe the mirror image. Higher income shares for the richest is stimulating growth (say
45% instead of 35%) but excessive inequalities are bad for growth. What seems to be impor-
tant is the right balance. Neither excessive egalitarianism nor excessive inequalities seem to
be the right track. It is more a decent degree of inequalities, creating work incentives, without
destroying social cohesion.
Second, concerning the relationship between crime and drug abuse on the one hand and eco-
nomic growth on the other we must question our own results since they are sensitive upon
whether we include human capital or not into our regression. Crime and drug abuse create
costs. Economic costs of crime and drug abuse arise when crime and drug abuse causes soci-
ety to divert time, energy and resources from more productive resources. Cost of crime in-
clude property losses, medical costs and pay losses due to injury, costs of public and private
efforts made to prevent and reduce future crime rates, costs of the criminal justice system, in-
tangible costs as those resulting from shattered lives and from lack of full participation in life
because of fear of crime. Drug abuse can lead to a deterioration of human capital and loss of
family attachments and subsequently to poverty (Kaestner, 1998). Crime and drug abuse harm
economic development in one way or another.
Another, more dynamic explanation for the seemingly negative correlation between social
justice and growth would argue that the present period is characterised by rapid structural
transformation. The shift towards information technologies and other new growth sectors ac-
celerates overall economic growth. But as we already quoted Schumpeter at the beginning of
this part excessive ,creative destruction` has its price. A widening of inequalities goes along
with economic growth. The market is an excellent means of innovation and economic devel-
opment, but also a risk for social order. What accelerates the development of the economy can
easily become an anomie in common life. Creative destruction and anomie are two sides of
one and the same coin (Münch, 1999:6). Thus we understand why economic development
might go along with anomie in common life. But this does not mean that crime and drug
abuse are good for development. It means just that the economy progresses despite surround-
ing anomie. And this fact is difficult to disentangle statistically.
The dynamic of growth clusters might also provide an additional explanation for the paradox
relationship between inequality and growth. It might happen that due to fundamental changes
123
in technology a new growth sector is created. Incomes in the modern, more efficient sector
are higher. Thus as in earlier times of structural transformations, inequalities rise initially as
more people are employed in better paid jobs of the modern sector. Inequality will not decline
until a substantial amount of people works in the modern sector and thus a levelling of in-
comes can start again (Bornschier, 1983: 13). Since the new information technology sector
started to take off in the 1980s it is understandable that initially due to this structural trans-
formation inequalities increase together with economic growth. Another reason for the in-
crease in inequality is that low skilled workers in industrial countries are more and more in
competition with workers from third world countries. On the other hand are the rich capital
owners gaining in a world of global capital mobility. With growth and inequalities rising
some people lose at least in relative terms. Thus, an increase in societal tensions anomie -
becomes understandable. Increases in inequalities can go together with increases in crime and
drug addiction.
Finally, a sound institutional framework turns out to be important for growth. Political institu-
tions do matter and they are significantly related to growth. Effectiveness of fiscal policy, im-
proper practice, corruption, top income tax, work disincentives, government responsiveness,
regulatory environment, and government economic priorities are important variables for this
construct and are, individually and jointly, significant predictors for growth. This holds at
least for the first factor (eigenvalue of 54.2%) of our factor analysis of policy related vari-
ables. The second factor is not significantly contributing to growth, but it does not explain so
much more of the variance in our institutional variables set either (eigenvalue of 24.2%), so
we do not have to worry.
We can summaries our empirical evidence on the importance of social capital for economic
growth in the 1990s as follows. All major facets of civil and government social capital - trust,
civic engagement, tolerance and the quality of political institutions have a statistically sig-
nificant positive impact for economic growth, controlling for the level of real and human
capital. Only with regard to `social justice' does the relationship not seem to be so straight
forward. `Creative destruction' is good for economic development but can become a risk for
social order.
124
Part III: How Can We Foster the Accumulation of Social Capital in
Europe?
Looking at the international political economy of the 1990s we see an American economy as
strong as never before. Since the beginning of the 1990s the US economy has seen uninter-
rupted growth one year after another. Information technology is transforming the way Amer-
ica does business. This is revealing new opportunities for growth and helping companies to
lower their costs. Many analysts speak already of a `new economy' which works according to
new rules. Compared with a few years ago, the economy can henceforth grow faster without
risk of inflation. The proof lies in the current combination of rapid growth, low unemploy-
ment and barely visible inflation. At the centre of the American model stand flexible markets
for labour and capital. They help the fast unfolding of the potential of the new information
technology revolution and a shift of employment towards the service sector. Europe on the
other hand is lagging behind. Both in terms of economic growth and employment. Structural
unemployment has even become something like a `European disease' (Becker). Now what
could become a competitive advantage for Europe?
Historically we have the legacy of having started two horrible wars which have put the world
into fire. But then, thanks to the project of European integration and the welfare state, Euro-
peans have developed a unique tradition of peaceful cooperation and settlement of conflicts.
A violent conflict between two nation states has become unthinkable in Western Europe. The
welfare state has additionally pacified nation states internally. Violent class struggles are
transformed into a democratic struggle respecting a basic political consensus. Thus the coop-
erative capacity of social capital could become a central competitive advantage for Europe in
the global competition. Social capital creates network advantages which are important for the
effective use of information technologies. Sociability is a precondition for service delivery.
Thus social capital lays at the centre of social foundations of postindustrial economies. In part
II we have shown the empirical evidence of the importance of cooperation values like trust,
civic engagement, tolerance and justice. Therefore we will now focus on the question of how
we can foster the accumulation of social capital in Europe?
To start thinking about the practical implications of social capital is so crucial because, after
the lengthy theoretical analysis, we shouldn't forget what Richard Rorty says: ,,Disengage-
ment from practice produces theoretical hallucinations" (Rorty, 1998: 94). In this part we will
125
try to build a bridge between the discussions on competitiveness and on social policy in
Europe. This is the line of argument persuade by third way politics. Crucial for the future will
be the transformation of the classical welfare state into a social investment state fostering
community building and social capital accumulation.
After having showed how the needs of the people can be reconciled with the demands from
capital, how social welfare and competitiveness can go together, we will sketch out a counter-
factual scenario of what might happen if we don't care enough for social cohesion in Europe.
We will better understand how in the positive sense social capital can become a competitive
advantage and on the other hand when it is missing how its absence nurtures anomic social
conditions and rises the threat of authoritarianism. Therefore we will subsequently analyse in
detail how social capital accumulation on all levels can be fostered. Recognising that social
capital, and especially civil social capital, is partly the product of cultural norms and civil so-
ciety we will nevertheless focus our attention on political, welfare state interventions. This
because the decline of social capital is to a large extend the consequence of unchecked mar-
kets, unemployment, and an ideological shift to market fundamentalism, neglecting the need
for moral and political foundations of capitalism.
On the national level social capital accumulation is about the reform of the welfare state and
solving the unemployment problem. On the European level it is about social consequences of
EMU, European social and anti-discrimination policy, European level redistribution through
regional and structural funds and the construction of a federal, cooperation fostering European
polity.
1. The European Model of Society and Third Way Politics
Globalisation and Varieties of Capitalism
Michel Albert's book on `Capitalisme contre capitalisme' (1991) made the discussion of va-
rieties of capitalism popular. There are at least two distinct forms of capitalism the Ameri-
can and the European model. Whereas American style capitalism is focused on individual
achievement, short-term profits and shareholder values, the European style capitalism stands
for embeddedness in larger groups, long-term perspective and stakeholder values. Albert ar-
gued that the European or Rhinian model is economically as well as socially superior to the
126
American one. Within two generations after the second world war Europeans have catched up
and are now trying to challenge American hegemony. But the European model has come un-
der pressure in recent times. Two digits unemployment figures and low economic growth are
signs of strain in the European model.
But is it at all possible to speak of a genuine `European' model as opposed to an `American'
or `Japanese/Asian' one? We think yes, since Europe seen from the outside has more in com-
mon than divides it. This is very much true, for example, of public expenditure on social pro-
tection as a percentage of GDP. 22 percent average in EU-15 on the basis of 1990 data, ap-
proaching 35 percent in some Northern European countries, as opposed to 15 percent in the
USA and less than 12 percent in Japan. Such a view does not rule out a further intra-European
differentiation. Ferrera (1998), for instance, distinguishes four different `social Europes'.
79
A `societal model' as opposed to society as a whole - might be properly defined as the pre-
dominant basic consensus at a certain point in time as well as the institutional arrangements
created to settle conflicts between leading values. The principles that determine social struc-
ture leading values on the one hand, social, economic and cultural power on the other en-
ter into a compromise within the societal model. This compromise mitigates tensions between
the universalistic demands of freedom, equality, and brotherhood
80
and particular power posi-
tions. By doing this the societal model links the three spheres of normative theories, politico-
economic regime and technological style (Bornschier, 1996: 3, 8, 11).
Since our main focus is on the social dimension, on social cohesion and the glue that holds
society together, we suggest to focus on the different welfare regimes in Europe and America.
Mostly we will leave aside the other elements of a societal model basic consensus, norma-
tive theories, politico-economic regime and technological style. A welfare regime is only a
part of a more encompassing politico-economic regime. Esping-Andersen has developed the
79
He distinguishes in macro-institutional terms European social protection systems with respect to rules of eligi-
bility, benefit formulae, financing regulations and organisational-managerial arrangements. The four `families'
are the Scandinavian, the Anglo-Saxon (UK and Ireland), the Bismarkian (Germany, France, the Benelux coun-
tries, Austria and Switzerland), and Southern European countries (Italy, Spain, Portugal and Greece) (Ferrera,
1998: 83-85).
80
Bornschier (1996: 29-39) has a slightly different conceptualisation. He sees a triple strive for efficiency,
equality and security inherent in the social structure of the West.
127
`three worlds' typology of welfare capitalism. Recently he has extended his analysis of wel-
fare capitalism (Esping-Andersen, 1999). A welfare regime refers to the ways in which wel-
fare production is allocated between state, market, and households. Labour markets, the fam-
ily and the welfare state build up a welfare regime. Depending upon the degree of commodifi-
cation, modes of stratification and solidarities he distinguishes a liberal (the Anglo-Saxon na-
tions), a conservative (Continental Europe) and social democratic welfare regime (basically
the Nordic countries) (Esping-Andersen, 1999: 4, 73, 74).
The European societal model blends somehow social democratic and conservative welfare
regimes as opposed to the liberal American one. A high degree of universalism of beneficiar-
ies, quiet comprehensive risk coverage, egalitarianism and much higher benefit levels than in
the US are characteristics of it. According to Delors (1996: 26), the European construction, as
well as the European model of society rests on the three pillars of competition, cooperation
and solidarity.
What we stress is the specific European approach to the problems of the unfolding of a new
societal model. Bornschier (1996) sees in his diachron, historical analysis a decay of the
Keynesian societal model. Characteristic for the Keynesian societal model of the post-war
period was the mixed economy and the automobile as symbol of the technological stile of the
date. With Friedman, Reagen and Thatcher during the 1980s Keynesian thinking and policies
were replaced through supply side policies. The power of the state was weakened at the ex-
pense of the market in the name of economic efficiency. The economy got deregulated, liber-
alised and increasingly globally integrated through free trade and capital mobility. During the
1990s new information highways (internet, satellites, fibre optics, etc.) accelerate the building
up of the technological infrastructure for globalisation. Information technology and an in-
creased importance of the service sector lay ultimately foundations for a post-industrial soci-
ety. Thus to a large extent societies are confronted with similar challenges.
As advocate of a specific European solution to the social problems of our time it is important
to asses the strength of impact of globalisation on national economies and welfare states. The
external trade of EU-15 in goods (excluding trade between the members of the Union), ex-
pressed as a percentage of GDP, is now virtually the same as it used to be about 35 years ago,
namely around 10 percent. This figure is very similar to the one of the US. True, EU member
countries have become much more open, but this is almost entirely due to the increase in in-
tra-EU trade which now accounts for almost 70 percent of the total trade of an average EU
128
member (Tsoukalis, 1998: 9).
81
Globalisation sceptics normally look on these numbers. Some,
like the OECD (1997: 93-122), Slaughter and Swagel (1997) from the IMF or Fligstein
(1998), think that the major cause of change lays in technological change and the continued
shift from manufacturing to services in advanced industrial societies. Thus globalisation does
not necessarily require Anglo-American policy proscriptions. Instead the problems of ad-
vanced industrial societies can be traced back to recent developments in their national econo-
mies and polities.
Some other people, without being hyper-globalisers, think that globalisation had a bigger im-
pact. They stress that the current globalisation is qualitatively different from earlier phases of
industrial restructuring and encompasses more than the global integration of markets for free
trade in goods. Foreign Direct Investments (FDIs) have become the new vehicle for trade.
FDIs have grown twice as much as trade over the last decade. And trade has grown twice as
fast as global income. Services have emerged as the biggest contributor to the GNP of the EU.
And at the same time they become increasingly integrated into the world economies division
of labour. Last but not least, financial capital is much more mobile than either goods or la-
bour. The Bank of International Settlement estimates that daily short-term international capi-
tal movements between countries amount to 1000 billion Euro.
82
The effects of economic
globalisation are mainly transmitted through the financial market (Tsoukalis, 1998: 16)
Already Cameron (1978) and Katzenstein (1985) argued that the rise of the welfare state is
linked to economic globalisation. Increasing openness of national economies has meant grow-
ing economic insecurity. This insecurity fuelled demands for larger welfare spending as a
form of insurance. Welfare states emerged in line with the growing openness of economies
and facilitated the consequent process of socio-economic adjustment. Rodrik (1997) has taken
up this view recently, too. But at the same time enforced competition of systems made the sat-
isfaction of these demands ever more difficult. As a consequence labour had to bear an in-
creasing share of the costs that are associated with openness. Such a development might
threaten in the long term social cohesion and lead to a deepening of social fissures. Now
81
The high degree of EU's self-sufficiency in trade terms is expected to increase further as a result of enlarge-
ment.
82
Dr. H.G. Krenzler, Special Adviser and former Director General of the European Commission, DGI. Speech
given on March 6 1997 at the College of Europe Bruges Forum.
129
Rodrik's empirical evidence is not uncontested. Iversen and Cusack (1998) see a much
smaller impact of globalisation on labour. For them, like for Slaughter and Swagel (1997) and
Fligstein (1998), the major cause troubling welfare systems is continued deindustrialization.
We will deal later with the welfare state and its reform in more detail. Here we will just stress
that in our view the European welfare state is seen to be crucial for securing social cohesion
and producing social capital in the age of globalisation. Our argument is that globalisation
connected with technological change needs social capital to be socially sustainable. Social
capital is by creating good quality social order - a competitive advantage in the international
competition for mobile capital. Further it does help the emergence of network structures,
which help the unfolding of information technology. Social capital is also important in the
raising service sector. Sociability is a precondition for effective service delivery. And finally,
social capital facilitates to smooth out structural adjustment. Social capital is the key coopera-
tion resource, linked to values, norms, networks and properties of social structure, which al-
lows this. Thus its overall beneficial effect for economic growth does not surprise (cf. previ-
ous part II).
We think that there should be enough room for policy interventions and further European in-
tegration can secure and increase the room of manoeuvre of politicians. European re-
regulation can, for instance, reduce harmful tax competition eroding the needed financial base
of welfare systems. But we must recognise that times have changed since the so-called
Golden Age for European economies. Until the early 1970s, European integration was based
on a symbiosis between external liberalisation and the strengthening of the economic role of
the state on the domestic level. So to say `Keynes at home and Smith abroad'. But during that
time integration was essentially limited to trade in goods. This symbiotic relationship started
to break down in the years of stagflation. The single market programme has further weakened
the state. It lead to a substantial transfer of power from the state to the market, reinforced by
international developments, while being consistent with the prevailing economic ideology.
Related transfer of powers from the nation-state to European institutions has been weak
(Tsoukalis, 1998: 11). Therefore the next task of European integration will be to secure gov-
ernance beyond the nation state, to secure political closure after markets have opened up new
spaces.
We argue that a distinct European approach is possible in the age of globalisation. Part of this
approach is to foster through intelligent policy initiative the accumulation of social capital.
More social capital can become a competitive advantage. Varieties of capitalism are a matter
130
of fact. Partly due to institutional and cultural pathdependancy by the past,
83
different imple-
mentation of new solutions according to the local context (interaction of the old social struc-
ture with the new imported solution often creates something completely new), and - what we
would like to stress most - due to different political responses. Globalisation is no excuse for
policy inaction. That would be crude economic determinism of market fundamentalism. Poli-
tics cannot be replaced by the market, although the latter does impose constraints, while also
offering opportunities. Besides structural forces there is room for political decisions contin-
gency. Even under conditions of strong international competition there is no reason to expect
convergence to only one, the American model. Persisting difference is possible in global capi-
talism. What we will see in the future is the unfolding of various kinds of postindustrial socie-
ties.
Outside Pressures (Globalisation)
Contingency of Policy Reforms
Varieties of Capitalism
Path dependency by the Past (Institutional and Cultural Legacy)
Figure 12: Varieties of Capitalism
Beyond Left and Right
Since socialism has disappeared largely from the face of history, the division between left and
right can't be as all-embracing as it used to be. Because that division was founded around the
idea that conservatism resists progressivism. Progressivism meant taking control of history. It
meant producing a society beyond capitalism. Well if there is no society or no economy be-
83
This means that existing institutional arrangements heavily determine, maybe even overdetermine, national
trajectories. More concretely, the divergent kinds of welfare regimes that nations built over the post-war dec-
ades, have a lasting and overpowering effect on which kind of adaptation strategies can and will be pursued
(Esping-Andersen, 1999: 4).
131
yond capitalism, then of course the division between left and right can't be as large as it used
to be. Thus the division between left and right might diminish but it will not disappear. This
because of a genuine division in value outlook and more specific a re-definition of right and
left around responses to globalisation (Giddens, 1999).
If you are left-of-centre, first of all you believe in social justice. And most will still agree with
the Marxian analysis of capitalism. A capitalist society depends upon the accumulation of
capital and the whole society is based upon market principles and the believe that there is a
price for everything. What gets lost is the heart in such a heartless world. In practical terms
leftist people want to make differences between people smaller, not larger. The means is a
democratisation of society in order to better integrate everybody. You refute the idea that so-
ciety can be reduced to isolated individuals. Persons are embedded in communities. Important
is the social glue and social capital which holds society together. Protection of the vulnerable
and weak is a major driving force for you. An active government can help to achieve an in-
clusive society where everybody has the freedom to choose, where there is equal opportunity
for all and not just opportunity for some - equal conditions of agency leading to meritocracy
(this modern supply side egalitarianism). Many people on the right reject the very idea of so-
cial justice as Hayek who simply said social justice is not a coherent idea.
The difference between left and right becomes clearer when you look at actual policy re-
sponses towards globalisation. A new far-right is emerging. It is hostile to globalisation. It
couples economic protectionism to cultural protectionism, where cultural protectionism is de-
fined in racist or xenophobic terms. We need to stop immigration, or return immigrants to
their home countries. We need to protect the individual identity of the local culture, and so on.
Globalisation is destructive. The old left has sometimes a similar view as the right by saying
that globalisation is destructive. Therefore you need to opt out and reinforce the welfare state.
The modernising left takes the phenomenon of globalisation for real. But it rejects the xeno-
phobic far-right response as well as the neoliberal response of abolishing the welfare state and
politics all together. The goal of a modernising left is not the creation of a gigantic global
market place, where markets can work unchecked. Globalisation is understood as a good
force bringing enormous opportunities with it as long as it is checked by political counter
power. As Giddens (1999) stresses a political response to globalisation is needed which val-
ues social justice and solidarity but recognises the reactions of the new global order and ar-
gues that this must involve both a modernisation and reconstruction of politics. When it is
132
possible to gather widespread support for such a strategy, it becomes politics of the radical
centre. Which simply means that a society supports taking radical, innovative measures in re-
lation to profound problems. The goal of Third Way politics is to look for a broad coalition of
interests which make intelligent reforms possible. It should be tried to bring about a mutually
enforcing relationship between social cohesion and economic performance. Like this we
might enter into a virtuous circle improving the lot of everyone. A more cohesive society is
growing faster.
A radical policy shift, combining social cohesion and economic performance in a symbiotic,
virtuous relation, will depend on the creation of new political coalitions. The dividing line
between traditional left and right has become increasingly blurred. Thus the central question
for a renewed social democracy is how to develop left politics which takes a positive, proac-
tive approach to globalisation and can unite winners and losers. Fewer and fewer people think
you can simply say, well if government can't solve our problems, then markets can solve our
problems. You can see all around you that markets create problems, and not just resolve them.
Just look at the last Asian, financial crisis or at Russia where also capitalism seems to have
failed, or America, the champion of free markets, with living standards for significant parts of
its population below those of a developing country. That is why markets need an institutional
framework. The main parameters of Third Way politics are a reconstruction of government,
civil society, the economy, the welfare state, an ecological reform and a transformation of the
global system (Giddens, 1999).
We need more government not less. But there are many ways of reconstructing public space.
There is a decline of trust in government therefore government must be brought back in touch
with people's everyday needs. Therefore decentralisation and direct democracy are important.
Adaptability and efficiency are important not just for enterprises but for government too.
Where the nation state becomes too big to deal with the small problems, and too small to deal
with the big problems (Daniel Bell) a double process of decentralisation below the level of the
nation state and a federating of states above the level of the nation is important. And in this
regard the EU is important. By taking over some central tasks formerly conducted by nation-
states and securing like this a general framework, the EU allows at the same time for more
regional autonomy. A new region might opt out of a nation state, but nevertheless continue to
keep the same money, foreign policy, etc. This would be the vision of a Europe of Regions.
We will come back on this issue at the end of this part, when we will speak about the perspec-
tives of a federal Europe, pp. 201-214). Government must help refurbish civic culture and to
133
foster social capital. A new mixed economy must find a balance between de-regulation and
regulation, on a local, national and global level. At the same time must the money for welfare
be spent more effectively. In a society of freedom, individual responsibility must be balanced
with collective responsibility which welfare systems provide. Last but not least an ecological
reform should help not just to protect the environment, but also generate jobs and growth. The
famous example here is the eco-tax which puts a price on polluting the environment, and gen-
erates like this enough tax resources in order that social charges can be reduced, fostering
employment.
That a new approach to politics is need has been understood by many. June 8, 1999 the Brit-
ish Prime Minister Tony Blair and the German Chancellor Gerhard Schröder have made a
common declaration on the fundamental principles of `The Third Way/ Die Neue Mitte'. It is
seen as a way to renew social democracy and to recombine in a new way the needs of people
with the demands of capital.
"Fairness and social justice, liberty and equality of opportunity, solidarity and re-
sponsibility to others these values are timeless. Social democracy will never
sacrifice them.[...] [But] we need to apply our politics within a new economic
framework. [...] Adaptability and flexibility are at an increasing premium in the
knowledge-based service economy of the future. [...] The essential function of
markets must be complemented and improved by political action, not hampered
by it. We support a market economy, not a market society. [...] Modern social de-
mocrats are not laissez-fair neo-liberals. Flexible markets must be combined with
a newly defined role for an active state. The top priority must be investment in
human and social capital." (Blair/Schröder, 1999).
Third way politics tries to form a new synthesis beyond, rather than between, left and right.
Their vision of the Third Way amounts to `neither-nor'. That is to say, neither state socialism
nor libertarian conservatism. Positively, it is communitarian, and negatively, it finds the third
way by avoiding two familiar errors the belief that political control inevitably improves
upon the random and chaotic operations of the market, and the belief that it never does. It
goes along with transforming social structure impeding agency of people towards creating an
enabeling environment for everyone.
Critics from the left of this new middle ground thinking argue that the tendency towards the
political middle and median voter causes new problems of legitimacy. By only focusing on
134
the centre the interests of large segments of society are disregarded.
84
There is no doubt that
also other alternatives to the `best case' scenario of Third Way politics - virtuous relationship
between social cohesion and economic performance are possible. The search for a broad
based consensus for reforms, including transnational business, might simply be the result of
factual power relations. The room of manoeuvre for welfare state reforms depends upon the
constellation of actors. Regime competition and deregulatory pressures strengthen financial
capital and multinational corporations (MNCs) and other firms with cross-border reach. On
the other hand are trade unions, and more generally all those who can not threaten to `exit' the
country the poor and unskilled relatively weakened. Thus, in the `trap of globalisation'
can a weakening of welfare state regimes through consensus based reforms be the conse-
quence of the actual power constellation. This line of argument takes into account that the
state and trade unions combined have never the power to push the yield of investments much
under that what alternative investments outside their regulatory reach would offer (Scharpf,
1999: 38).
The contradictions of capitalist democracy have been discussed already since a long time.
Habermas (1973) has warned already more than two decades ago that `late capitalism is in a
crisis of legitimacy' since the state must increasingly take the interests of capital into account.
But these interests are not universiable and thus do not correspond with the needs of people.
Welfare state reforms based on such a forced compromise might not always make everybody
happy, but at least they continue to secure (minimal) social cohesion. This might be the result
when transnational re-regulation, strengthening the political say of the economic weak, is not,
or only, partially successful.
The worst case might happen when we don't reach a consensus for modernisation and reform.
We will stay looked in the present status quo with all its problems. This because in a two third
society of insiders, living a more or less comfortable life, with one third of excluded outsid-
ers, forces for change are not so strong. `Insiders' are much more numerous than `outsiders',
and they also have a more powerful political voice. Hence the strong resistance to change
(Tsoukalis, 1998: 14). Such a political stalemate might even lead in the farer future to a fur-
ther polarisation with devastating negative consequences. In the next chapter we will look in
more detail at such a scenario.
84
Matthew Browne, LSE.
135
Ralf Dahrendorf (1998) sees the danger of an authoritarian threat. But strangely, he does not
like Third Way politics (Dahrendorf, 1999) - the most promising strategy, even though he is a
long time advocate of stressing the importance of social cohesion and finding the right bal-
ance between economic development and social solidarity.
85
The main deficiency in his view
is a lack of liberty. The notion of `liberty' is not central enough in the discussion about the
Third Way. But Dahrendorf's critique must be based on a misunderstanding since the explicit
goal of the new social market economy is to build a new balance between risk and security - a
society of `responsible risk takers'. The idea of Third Way politics is not to restrict individual
freedom. To the contrary, as already pointed out, supply side egalitarianism implies activation
strategies and equal conditions of agency, more bluntly `freedom to choose for everybody'.
Here lays the difference between Third Way politics and neoliberalism/neofeudalism.
Whereas people supporting the Third Way want equal opportunities for everybody, neoliber-
als are happy when there is simply enough liberty and opportunity for some. This difference
goes down to the famous distinction between negative and positive freedom of Isaiah Berlin.
Neoliberals think that opportunity for some is enough to keep the economy growing and a
growing economy might ultimately create enough opportunities for the poor too, in order that
they can help themselves. This might go well for an extended period of time, but there is the
danger that increases in inequalities can lead to class polarisation and social closure. Such a
development will become a central threat for the whole of society. In a scenario about the fu-
ture of social cohesion in Europe in the next chapter (pp. 139-146) we will develop this in
more detail.
Inequality in starting conditions is not good in economic terms neither. Since hierarchies
make only sense when they are actually found on unequal achievement, inequalities should be
according to merit. This is also the only viable way from a normative point of view.
86
Supply
side egalitarianists want real equality of opportunity and meritocracy and are opposed to a
closure of the social system by granting only some privileged groups opportunities at the ex-
85
Cf. e.g. his work on the modern social conflict (1992). The difficult relationship between economic growth
and chances of life lays at the origin of the modern social conflict. But there are sometimes lucky strategic
changes which help to improve at the same time claim and supply (Dahrendorf, 1992: 37). To bring about such
changes is the goal of supply side egalitarianism of Third Way politics.
86
Ultimately all inequalities should be communicatively justifiable if they are not simply based on outdated
norms of suppression.
136
pense of others.
87
When inequality is not anymore justified by unequal merit the legitimative
base of the system erodes and the market economy degenerates into a `Casino Capitalism'.
The difference between the old and the modernising left is what kind of equality they want.
The old left wanted to ensure through an elaborated welfare state equality in outcomes. There
is no doubt that such large scale redistribution is related with losses in efficiency. The new
modernising left now stresses more supply side equality. Equal opportunities also depend
upon redistribution. But they have the double advantage of fostering directly economic effi-
ciency through meritocracy and nevertheless create at the same time legitimacy (but most
likely at a lower price than through ex post redistribution). Ex post redistribution should be
reduced and concentrated on the really vulnerable.
Marketability for all is part of a competitive solidarity fighting social exclusion. Welfare
should be like a trampoline to put people back on their own feet. Modern social democrats
want to transform the safety net of entitlements into a springboard to personal responsibility.
All social policy instruments must improve life chances, encourage self-help and promote
personal responsibility. In a radically reformed welfare state the social investment state
would welfare be understood as a productive factor and functional for wealth creation.
But at the same time the goal of Third Way politics is to find a new balance between the eco-
nomic and the non-economic in the life of the society. An inclusive society must provide for
the basic needs for those who can't work, and must recognise the wider diversity of goals life
has to offer. More and more people are looking both for meaningful work and opportunities
for commitment outside of work. If society can upgrade and reward such commitment and put
it on a level with employment, it can create both individual identity and social cohesion. The
main goal of third way politics is the revival of civic liberalism, civic culture and social capi-
tal (Giddens, 1998: 99-128, Hombach, 1998: 59-93, Blair/Schröder, 1999). Therefore the ac-
tive involvement of government in the economy makes sense.
Indeed conventional poverty programs need to be replaced with community-focused ap-
proaches, which permit more democratic participation as well as being more effective. Com-
87
Of course, supply side egalitarianists recognise that total social engineering might lead to total failure. It is
well known that the try to create heaven on earth might actually lead to hell on earth. But ultimately the differ-
ence between left and right lays in value priorities and thus on what you concentrate your political energies.
137
munity building emphases support networks, self-help and the cultivation of social capital.
88
Only a welfare system that benefits most of the population will generate a common morality
of citizenship. Social liberals are convinced that the state can actively foster a vibrant civil
society. This view goes beyond correcting market failures and ensuring that the rule of law.
With positive state-society synergy active government and mobilised communities can en-
hance each other's efforts.
We have seen that the main pillars of the European model of society are competition, coop-
eration and solidarity. Despite globalisation there should be enough room for different varie-
ties of capitalism, depending upon political decisions. Social policy can become functional for
wealth creation. A social investment state fostering social capital stands at the centre of Third
Way politics and a reformed European model. This the optimists perspective. But unfortu-
nately things can go wrong, too. Therefore next a counterfactual scenario is developed of
what might happen if we do not care enough for social cohesion in Europe.
2. The Future of Social Cohesion in Europe - A Counterfactual Scenario
Economic and Monetary Union will bring us the unleashing of the full potential of market
forces when the disciples of market liberalism are right. The market, freed from impediments,
will bring growth and finally prosperity for all. The rising tide will rise all boats. This the op-
timists scenario. But this view is not uncontested. If we don't care enough for social cohesion
a completely different scenario might happen in Europe.
Unchecked markets and the sole pursuit of self-interest leads to the worrying trend towards
the privatisation of profits and the socialisation of risks and losses. The single market and
economic globalisation, coupled with technological change put a premium on skills and on
the flexibility and mobility of factors of production. Thus, capital tends to gain more than la-
bour and professionals more than unskilled workers. Inequalities are further increased through
concentration processes due to spill-overs and economies of scale. Innovation and `creative
destruction' increases inequalities. Economic development is a permanent danger for social
order. What might be good for economic growth can have its price in the form of social costs.
88
Cf. e.g. the proposal of a publicly financed voluntary right to be usefull scheme, p. 155.
138
Additionally, inheritance of capital (real, human and social) of the rich has the tendency to
cement social inequalities over generations. Thus in the worst case we will see a reversal to
neofeudalistic structures.
In order to counteract such tendencies all European states have started after the second world
war with the building up of a welfare state. The welfare state should ensure social mobility
through equality of opportunity in education. Equal access to education is one of the most im-
portant aspects for equal conditions of agency (Sen) (supply side egalitarianism or more
bluntly `freedom to choose for everybody'). But besides this health and initial venture capital
for all would be important as well.
During `first modernity' (Beck, 1997: 24, 25) the redistributive welfare state was a main pillar
of the stabilising political framework of the nation state. At least temporally a social compro-
mise could be found. Now with completion of Economic and Monetary Union at European
level and economic globalisation at world level old borders are broken up and the national
regulatory framework is crumbling. Competitive pressures from the outside put the welfare
state under strain. Additionally, besides these outside pressures the welfare state faces large
challenges from within: ageing due to demographic transformations, productivity slow down
in the fast growing service sector, etc. Now not only a welfare state in crisis, but also techno-
logical change (benefiting initially only a small, high skilled elite but leading in the case of
unskilled labour to structural unemployment), emerging competition from third world coun-
tries for capital and work, and a shift of taxation from mobile capital to immobile labour leads
to rising inequalities. With regard to unemployment and social cohesion we should also not
forget the negative consequences of the Maastricht austerity process and the Amsterdam sta-
bility pact. Both pledge to an overrestrictive macro economic policy raising unemployment
and forcing increased geographical mobility due to the abolition of alternative stabilisers.
The less skilled, youth, and single-parent families are becoming high-risk groups almost eve-
rywhere. There are signs that losers are forming into long-term socially excluded strata the
new underclass of the unemployed or working poor in the two speed-society (Esping-
Andersen, 1999: 10). Lacking social mobility might lead to the emergence of a hereditary cast
system.
89
The lion's share of intergenerational upward mobility has been due to changes in
89
The voices warning against such a trend (Lind, 1995 and Rorty, 1998) are the loudest in the US were inequal-
ity has risen the most and social mobility was not higher to offset this trend (Gottschalk, 1997, Aaberge et al.,
139
occupational structure (more white-collar jobs) rather than greater openness (Erikson and
Goldthorpe, 1992). Also with regard to education, all evidence suggests that patterns of class
recruitment have changed very little (Shavit and Blossfeld, 1993). Goux and Maurin (1997)
show for France that social origin does matter later in life. Individuals with identical levels of
education begin with more or less the same social level, but there is room for their careers to
be very different, depending on whether they come from the upper or the lower strata of the
society. Additionally, it seems as if there exists a specific form of family social capital, which
protects the sons form the highest social classes against downward mobility.
The liberal theory of industrialism once postulated that competition will lead to a decline in
the significance of ascription relative to achievement and an increase in social fluidity. But
this does not seem to hold in Western capitalism at the end of this century (Breen, 1997).
Neofeudalism and the erosion of the social link are the consequence of social polarisation and
closure.
When unchecked markets continue to destroy values and people have been treated to often
unjust they lose orientation. Sennett (1998) shows how the new capitalism leads to a corro-
sion of character. The demands for flexibility unroot people and create a feeling of `shift'.
Community is not possible without a minimum time of settled residency and persisting per-
sonal reciprocity. Everyone who engages more for the public good, an ethic or ideal beyond
what is required by market forces will be punished immediately (Kohler, 1999: 20-22).
The loss of orientation is enforced by the process of globalisation. Not only through its de-
mands for flexibility constantly reshuffling people, but also because of a sense of hopeless of
many people vis-à-vis this process. Globalisation simply imposes them radical changes with-
out giving the people concerned a say in. The forces of economic globalisation are stronger
than the nationally organised democracies. Thus people lose the power to influence develop-
ments. They are not anymore subjects of this process, but simply become their objects
(Dahrendorf, 1998: 52). In such a situation, when there is lacking a perspective for the future,
the dangers for extremism, intolerance and fundamentalism rise, either way right or left wing.
Democracies are in danger when people don't like them anymore for the values they stand for
self-determination, justice and solidarity (Kohler, 1999: 21). Sovereignty is legitimized
1998). Although inequality contributes to greater efficiency by providing incentives, it also militates against
efficiency by increasing the degree of inequality in inherited rewards (Breen, 1997: 437).
140
through the electoral process. Thus any threat to a government's sovereignty implies a threat
to the effectiveness of democracy itself. Although individuals may vote, the power of that
vote in shaping public policy has decreased with the decline in sovereignty and will continue
to do so. Ultimately, a persistent weakness and failure to exersise sovereignty will lead to a
questioning of the institutions and processes of democracy itself (Reinicke, 1998: 69). Then
we are not anymore at the end of all ideologies, but in a Weimar-like period where the au-
thoritarian threat might come back out from the could.
Around that time the poor, unskilled prols will realise that suburban white-collar workers -
themselves desperately afraid of being downsized - are not going to let themselves be taxed to
provide social benefits for anyone else. Highly mobile capital has already left the country a
long time ago for a safe tax heaven. At that point, something will crack. The losers electorate
will decide that the system has failed and start looking around for a strongman to vote for -
someone willing to assure them that, once he is elected, the smug bureaucrats, tricky lawyers,
overpaid bond salesman, and postmodernist professors will no longer be calling the shots. For
once such a strongman takes office, nobody can predict what will happen. One thing that is
very likely to happen is that the gains made in the past forty years by coloured people and
homosexuals, will be wiped out. People will wonder why there was so little resistance to his
evitable rise. Why was it only rightists like Pat Buchanan in America who spoke to workers
about the consequences of globalisation? Why couldn't the Left channel the mounting rage of
the newly dispossessed (Rorty, 1998: 85-91)?
90
Thus we understand why Dahrendorf (1998: 52), too, warns that if we don't care enough
about social cohesion globalisation might bring us an authoritarian 21
st
century. The people
from the Cellule de Prospective, the in-house think tank from the Commission, see the possi-
bility for large scale social upheavals as a consequence of increasing inequalities, fiscal aus-
terity and a dismantling of social protection, too (Commission, 1999c: 37-39). But they think
that such social tensions or mini-revolutions might not last for a long time. In their view the
positive energy still prevalent will quickly lead to the convention of a European augora. This
will restore calm and social peace by establishing a `right to be useful' for everybody. This
90
It might have been due to the fact that the left has wasted its energies with thinking up ever more abstract and
abusive names for `the system' and how to overcome capitalism instead of piecemeal reforms and ways to rec-
oncile the demands of capital with the needs of the people.
141
would be the finally positive outcome of such large scale social upheavals. But one might eas-
ily imagine that a decrease in social cohesion and subsequent rise in social atomisation and
tensions might lead to quiet long lasting authoritarianism. A durable right-ward shift and
maybe, not so severe, an authoritarian democracy might become longer lasting features of 21
st
century society. Such a development will surely threaten European integration, including
purely economic integration.
We should not forget the lessons from the `first globalisation' which took place at the end of
last century. In mid-nineteenth century England a far-reaching experiment in social engineer-
ing was started. Its objective was to free economic life from social and political control. And
it did so by constructing a new institution the free market. In the past, economic life had
been constrained by the need to maintain social cohesion. Markets were embedded in society
and subject to many kinds of regulations and restraints. Initially the experiment of free mar-
kets was a success. It allowed Britain to grasp hegemony. Britain's leadership was associated
with the globalisation of markets. Liberalism spread around the European continent. But lib-
eralism did not satisfy human needs. It provoked strong counter-reactions.
Its main features were first identified in rather prophetic fashion by Karl Marx and Friedrich
Engels in the `Communist Manifesto' (1848). The nineteenth-century incarnation of the
global capitalist system was subesequently destroyed by the First World War. After the end of
the war, there was a feeble attempt to reconstruct it, which cam to a bad end in the crash of
1929 and the subsequent Great Depression. The liberal international economic order perished
violently in the wars and dictatorships of the 1930s (Williamson, 1997, Soros, 1998: xxi,
Gray, 1999: 1-7). The increase in inequalities which went along with the `first globalization'
were not sustainable in the long run. They provoked the rise of violent counter-ideologies in
the form of fascism and communism. In order to prevent a similar erosion of social cohesion
and the subsequent threat of a raise of authoritarianism this second globalisation must become
socially sustainable.
Having understood the dangers of erosion of social cohesion it is no wonder that at the World
Economic Forum 1999 in Davos the world leaders have been doubtful. "The most important
challenge at the transition into the 21st century [is] finding the right balance between the
forces of the market and the needs of people. [...] Competitiveness and social cohesion are not
natural enemies. [...] What we need is globalisation with a human face or, as expressed in the
theme of [the World Economic Forum] Annual Meeting this year, `Responsible Globality'"
(Schwab, 1999) "If we do not invent ways to make globalisation more inclusive, we have to
142
face the prospect of a resurgence of the acute social confrontations of the past, magnified at
the international level. Responsible globality will have to mean not only a financial infrastruc-
ture that works, or accepted global norms of corporate governance. It will have to mean also a
`value-added' globalisation that takes into account the different ways America, Europe and
Asia set their priorities and create a common denominator of shared social and ethical val-
ues." (Schwab and Smadja, 1999).
The opening up of markets must follow again a political closure. Markets free people from
traditions and show them new opportunities. Markets are based on self-interested exchanges
and follow the logic of functional integration. But than must the political system `close'
again. Politics must create common values and secure social integration.
91
Again, the raise of
fascism is a negative example where political closure was not successful. The challenge today
is to find a new closure of the political system beyond the nation state. That is the post-
national constellation which demands a post-national democracy (Habermas, 1998). Such a
transnational democracy, based on a collective identity beyond the nation state, should have
the political means to influence societal development at the European level. Following Eco-
nomic and Monetary Union European scale re-regulation is needed.
The dialectic of opening through market forces and closure through the political system is
part of the normativ-constructivist approach (Rawls, Habermas, Höffe, etc.). Values and po-
litical institutions must be created in order to stabilise societal development. It is about think-
ing about inspiring images of new developmental models. I.e. the growth path must be
switched to one increasing social capital instead of depleting it. Economic flexibility must be
combined with social solidarity. This social liberal approach is opposed to the classical liberal
approach which recognises only the need for an enforcement state. Such a minimalist en-
forcement state is only about law and order and how to secure property rights under condi-
tions of inequality. End finally the ultimate point of debate is about the security of property
rights.
What we see today in the age of globalisation is an enormous concentration of capital and
property rights in the hands of a few rich. Now the question is not about abolishing property,
as socialism initially envisioned, but about its just and efficient distribution. The inheritance
91
Politics is a forum of debate where ideally the communicative power of the best argument should win and
establish by the subsequent consensus new values.
143
of huge amounts of property, together with inheritance of human and social capital, results in
social closure and a hereditary cast system. In many Western countries do fewer than five per-
cent of the population control more than half of the property.
Of all industrialised societies is inequality the worst in the United States. Averaged across all
households is after-tax income one-fifth higher in real terms in 1999 than in 1977. But most
of this reflects the good fortune of the richest one percent of American households. The riches
twenty percent of Americans now account for more than half of all the income earned by in-
dividuals. And wealth is distributed even less equally. The wealthiest one percent of house-
holds owns 39 percent of the nation's wealth. Wealth is now more concentrated among the
richest than at any time since the Great Depression (Economist, 1999b: 52). But inequalities
are raising further in many other countries, too. From 1975 to 1995 has income inequality in-
creased in 71.8 percent of all industrialised countries (Commission, 1999c: 59).
From the goal of a classless society (the ultimate goal of socialism) should equality of oppor-
tunity be secured. Supply side egalitarianism implies equal conditions of agency. Inequality
can only be justified, from a normative as well as from an economic point of view, according
to merit. Therefore redistribution is needed. And not just so much as to stabilise the social
system against a potential revolution (this is the minimalist neoliberal/neofeudalist strategy),
but to secure total equality of opportunity, assuring economic efficiency and inequalities ac-
cording to merit. The welfare state, as compromise of the democratic class struggle, should
ultimately break the reproduction of poverty over generations, and thus the class problem.
This goal can be reached through a social citizenship, guaranteeing all citizens against en-
trapment (Esping-Andersen, 1999: 182). The European social model should allow for equal
opportunity for all and not just for opportunity for some. This would be the ultimate accom-
plishment of the French Revolution.
After this gloomy scenario of what might happen if we don't care enough for social cohesion
we should ask what can be done to prevent it from happening. First of all, it should be clear
that globalisation is nevertheless an opportunity and not a threat. Free trade is most of the
time and free capital mobility quiet often beneficial for growth and welfare. Therefore it is
important not to fundamentally disrupt the process of globalisation but to assure on the world
level a framework of regulations securing minimal ecological and social standards and the
stability of the international financial system. More on that in the last part on the need for a
world state. On continental or national level again it is not about protectionism and de-linking
144
the nation or `Fortress Europe' from the rest of the world. The strategy should be one of di-
rectly compensating those who do not share in the gains from globalisation. Therefore the
welfare state and social capital accumulation the stock of norms and social relations foster-
ing cooperation - is important. And since social capital and social policy are productive fac-
tors such investments have a pay-off in the long term through higher growth and competitive-
ness in a globalising world economy.
In part I we have seen that social capital is partly a product of traditional cultural norms and
civil society, but can also be generated through intelligent policy interventions. On the other
hand are unrestricted markets, externalising social costs, supported by an ideological shift to-
wards market fundamentalism, a kind of liberalism which has lost its own moral and political
foundations, and unemployment major reasons for the depreciation of social capital. There-
fore we will next look at how the accumulation of social capital in Europe can be fostered. In
this regard civil society, stakeholders and a new quality in industrial relations are important.
But most of all are political interventions needed. On the regional and national level it is
about the reform of the welfare state and at the European level about European social policy,
non-discrimination, redistribution and the establishment of a cooperation inducing federal
polity.
3. Social Policy Actions on the Nation State Level
The process of globalisation has an important effect on labour markets and welfare policies.
This is where European societies have differentiated themselves from other advanced indus-
trialised countries. Defending and adjusting the European model to a rapidly changing eco-
nomic environment is still very much the task of national governments. In terms of social pol-
icy and the regulation of labour markets, subsidiarity remains the name of the game. These
makes at present also sense since the European labour market is highly fragmented, largely
because of linguistic and cultural barriers, but also with regard to the level of development. It
is mainly the task of national governments to find answers to the new social question in
Europe high unemployment, growing inequalities and exclusion. But there is an important
European dimension to this, too. We will deal with that in the next chapter. But in the follow-
ing we will concentrate on nation state social policy actions to foster social capital accumula-
tion.
145
Since a major reason for decline of social capital is unemployment new incentives to work,
education and job creation stand at the centre. New labour market policies should build on
activation policies and community building and go like this beyond simple deregulation and
passive income support. However intelligent welfare state interventions can foster social capi-
tal accumulation, too. But external and internal pressures have put strain on social policy. A
comprehensive reform has to take place. Welfare state systems should become more incen-
tive-compatible, and encourage risk taking. The welfare state should transform into a social
investment state functional for wealth creation. Thus next we will first show how social wel-
fare and competitiveness can go together. Then we will outline the major routes of reform of
the welfare state, and analyse the unemployment problem more in-depth.
Social Welfare and Competitiveness
The relationship between social welfare and competitiveness is a very controversial one.
From the mid-1970 the view was advanced by supply-siders, monetarists, theorists of institu-
tional sclerosis, and moral critics of welfare dependency that welfare states undermine the
competitiveness of advanced economies. They are `leaky buckets'. This was the opposite
view to the postwar Keynesian view where the welfare state was seen as a necessary element
of a capitalist economy securing sufficient demand and social peace. It was during this post-
war period that the welfare state was developed and extended in most European countries. In
Germany the Ordoliberal school of thought (led by Walter Eucken) advanced the implementa-
tion of the `soziale Marktwirtschaft' under Ludwig Erhard. In Britain Sir William Beveridge
helped to work out blueprints for the new British welfare state. All this was part of a larger
move of abandoning passive, 19
th
century laissez-faire state. After a backlash towards unregu-
lated markets during the 1980s, the welfare state gained new importance during the 1990s
again. But this time the discussion focuses on how to reconcile social justice and economic
efficiency.
The effects of welfare states on competitiveness is via three routes: via their fiscal effort, via
the effects of specific social programmes and via their welfare outcomes. This is a complex
issue and we will discuss only a few of the possible links. Opponents of the European social
model normally argue that high levels of social spending and taxation harm growth and prof-
its. But firms are influenced by the full range of costs labour, energy, raw materials, trans-
146
port, as well as taxes and by collective provided subsidies and services. Taxes are only one
and not the major factor firms take into account when deciding where to locate new plants or
offices. In all there is no consistent cross-national evidence linking welfare state spending and
taxation to competitiveness. Some studies find a positive link, some negative and some no
link at all (Gough, 1999: 11). Atkinson (1995: 175-177) provides an overview of econometric
studies of the relationship between social protection and economic performance.
Landau (1985) Korpi (1985)
Weede (1986) McCallum and
Blaise (1987)
Dependent
variable (I)
GDP growth
GDP growth
GDP growth
GDP growth
Determining
variable (II)
soc sec share
soc sec share
initial soc sec
share
initial soc sec
share
Relationship
(III)
positive positive negative positive
Significance
(IV)
not
sig
sig sig sig
Castles
and
Dowrick
(1990)
Weede
(1991)
Nordström
(1992)
Hansson and
Henrekson
(1994)
Personn and
Tabellini (1994)
(I) total
factor
productivity
growth
labour pro-
ductivity
growth
GDP growth private sector
total factor pro-
ductivity growth
GDP growth
(II) initial
soc
sec
share
initial soc
sec share
initial soc
sec share
soc sec share
soc sec share
(III) positive
negative
negative negative
negative
(IV)
sig sig sig not
sig sig
Note: `soc sec share' means `social security expenditure as a percent of GDP'; a `positive' relationship
suggests an increase in social security's share of GDP has a beneficial consequence for the depend-
ent variable, and vice versa. Source: Atkinson (1995: 175-177).
Figure 13: Relationship between Social Protection and Economic Performance
147
It seems as if the relationship between social protection and economic performance is unde-
termined. Therefore the design of social policy does matter, but not in the simple ways that
the supporters of minimal government think. Since there is contingency of policy reforms, as
we have seen in the chapter on `varieties of capitalism' (pp. 127-132), we do better under-
stand the seemingly undetermined relationship between social protection and economic per-
formance. The effects of a welfare state cannot be understood in isolation from the political-
institutional framework in which it is embedded. The effect of social policy on competitive-
ness is contingent on the institutions of the nation state and its place in the global economy.
Despite liberalisation of international markets, there has so far no convergence to a single in-
stitutional framework taken place. This because property, markets and firms are `embedded'
in wider social relationships. And these forms of embeddedness differ across the world
(Gough, 1996: 225 and Gough, 1999: 14).
General social policy actions are defined by Marshall as the use "of political power to super-
sede, supplement or modify operations of the economic system in order to achieve results
which the economic system would not achieve on its own [...] guided by values other than
those determined by open market forces" (Marshall, 1975: 15). In addition to different forms
of regulation of labour markets, intended to guarantee a certain minimum of conditions for the
protection of employees, and social security which has both an insurance and a redistributive
dimension, social policy also includes education and training, housing and health.
92
Social
policy might differ to the degree to which it tries to correct market failure and to the degree to
which it stresses redistribution.
Political views, of course, differ substantially about the role of government in social policy.
Social policy lays at the very centre of the ideological divide between left and right. But there
is near unanimity that investment in human capital is crucial to competitiveness. For example,
improved adaptability in the labour market has positive effects on economic performance.
And we should not forget the social capital and social welfare state dimension, too. Children
from impoverished backgrounds living in areas of crime and social dislocation where most
teachers would choose not to live perform less well at school. Social class and parental inter-
est are the most important influences on educational success. So social security, urban, hous-
92
Esping-Anderson (1999: 4) calls this encompassing view welfare regime, including besides the welfare state
the labour market and the family.
148
ing, and health policies can be indirectly very productive. They may foster social and human
capital accumulation and prevent like this, that a country gets trapped in a `low skills equilib-
rium', in which the majority of enterprises is staffed by poorly trained managers and workers
and produce only low-quality goods and services. By driving down labour costs deregulation
may enhance short-term performance competitiveness (cost-cutting), but at the expense of
longer-term structural competitiveness (high quality value-added) (Gough, 1999: 12).
Lastly we must discuss the impact of welfare outcomes on competitiveness. Take health and
crime as examples. More unequal nations suffer from higher absolute levels of mortality and
ill-health, notably infectious diseases, accidents, suicide and deaths from `other injuries'
among younger men. In Britain, which stands out in Europe for its escalation of inequality in
the 1980s, virulent new forms of TB have emerged and the death rate for men in their 30s
witnessed an unprecedented rise between 1982 and 1992 (Gough, 1999: 12). In America,
characterised by some of the most marked inequalities in the Western world, the situation is
even worse. African-Americans have a lower chance of reaching a mature age than the people
of China, Sri Lanka, or the Indian state of Kerala, even though American blacks are more than
20 times richer in terms of per capita income than, say, Indians in Kerala. And mortality dif-
ferentials are not connected only with death from violence, as one might first think (Sen,
1993b).
A medical scientist, like Wilkinson (1999), confirms this. The crucial determinants of popula-
tion health and of health inequalities in most of the developed world turn out to be less a mat-
ter of medical care or the direct effects of exposure to hazardous material circumstances, as of
the effects of the social environment as structured by social hierarchy, in other words psy-
chosocial factors. Indeed, it is not the richest of the developed countries, but the most egalitar-
ian, which have the best health. Absolute levels of health are influenced by relative, not abso-
lute, standards of living. This relationship withstands controlling for variables such as GNP
per capita or median income, absolute poverty, expenditure on medical care and smoking.
The most important reason why more egalitarian societies are healthier seems to be that they
enjoy a better quality of social relations more social capital.
Many studies stress the impor-
tance of social status and of social networks. A more unequal, more hierarchical society in-
creases people's sense of inferiority, shame and incompetence. Inequality is linked to the
chronic anxiety which arises from sources of insecurity involved in processes of social com-
parison. Horizontal alliances or friendships are based on mutuality, reciprocity and a recogni-
149
tion of each other's needs. Social status is on the other hand based on differential access
to resources based on power and coercion regardless of each others needs. Which again cre-
ates shame. Shame, as already Darwin noted, "depends in all cases on [...] a sensitive regard
for the opinion, more particular the depreciation of others." Thus too much social comparison
and shame can make you sick (Wilkinson, 1999).
The argument is that social insecurity and dislocation also have an economic cost. Sickness
absence is expensive. Business operating in high-crime areas incur extra insurance and secu-
rity costs. And the cost of prisons and more general of `guard labour' diverts resources from
the productive welfare system. In the US it has been estimated that `guard labour' work su-
pervision, security personnel, police and prison officers, etc. employs over one quarter of
the total labour force. This is the true unproductive burden of the state. (Gough, 1999: 13). In
the US there have been 1,8 million people in prison at the end of 1998 and there is still every
year an increase in the number. Even though at least the actual growth rate of prisoners in-
mates is declining (NZZ, 17.8.99). And more directly we have to take the direct costs of
crime to victims into account. It seems as if 4 percent of GDP would be a good measure for
the direct costs of crime in western societies, with the exception of the USA (which has a
much higher burden).
93
Welfare state programs guaranteeing reasonable living conditions can
reduce this burden.
Reform of the Welfare State
The welfare state is central for strengthening democratic legitimacy and social capital accu-
mulation. We should not forget that the failure to maintain even minimal assurances during
the Great Depression destroyed the legitimacy of democratic government in Weimar Ger-
many, and put it at risk in other countries. In trying to cope with threatening legitimacy crises,
93
For a more extensive discussion of arguments of compatibility or incompatibility of welfare states and com-
petitiveness cf. Atkinson, 1995 or Gough, 1996. Casey and Gold (1999) focus more on the relation between so-
cial partnership and economic performance. They conclude that both `too little' and `too much' social dialogue
and social protection may lead to sub-optimal performance and that the right balance is a matter of empirical
enquiry within individual national settings. But in short, there is some indication that traditional neocorporatist
structures are associated with poorer performance, and that structures have to adapt.
150
most democratic governments found themselves forced to resort to protectionist policies that
destroyed the integrated world economy of the time. After World War II world markets have
been gradually re-integrating again under American-led international regimes. They were in
fact able to strengthen democratic legitimacy because they allowed national welfare states to
gain economic benefits from international integration while increasing the protection of their
citizens against the `creative destruction' associated with capitalism (Scharpf, 1999: 111,
112). A virtuous circle was possible. International economic integration, and especially Euro-
pean integration, has helped to generate the necessary resources for financing a generous wel-
fare state. But with mobile capital and increased regulatory competition the financing of the
welfare state becomes more difficult (Rodrik, 1997).
Besides these external pressures additional internal pressures have put strain on the welfare
state. New ways have to be found of how to stabilise its main pillars of pension, health and
education systems, unemployment benefits, labour market regulations, the entitlements for the
poor and the disabled and the tax system. Welfare states have generated some of their own
difficulties by helping to improve living standards and life spans. They have created new so-
cial needs that social services were not originally designed to meet, while other problems
stem from the increasingly post-industrial nature of many advanced societies. Population age-
ing, changes in household structures, high unemployment, the negative effects of high tax
rates on employment are internal pressures on social policy programs. Therefore a compre-
hensive reform has to take place along the lines of Third Way thinking, combining flexibility
and security in a new way. In the field of social policy Third Way politics is about market
complementing and enhancing. It is about how to transform the welfare state into a social in-
vestment state advancing social inclusion and employment. This is the idea of positive wel-
fare.
Whereas classic social democracy was mostly concerned with redistribution and economic
security, neoliberals placed competitiveness and wealth generation to the forefront. Now a
reformed welfare state should become an economically `sustainable' welfare state. One which
doesn't destroy its economic base. A dynamic economy is not compatible with a society
where taken-for-granted habits dominate, including those generated by the welfare state.
The new social market economy has to be build on a new balance between risk and security,
on a society of `responsible risk takers'. Effective risk management doesn't just mean mini-
mising or protecting against risks. It also means harnessing the positive or energetic side of
151
risk and providing resources for risk taking. This is the meaning of active risk taking. But
people need protection when things go wrong, and also the material and moral capabilities to
move through major periods of transition in their live. The restructured welfare system should
provide security when entrepreneurial ventures go wrong. Social protection should become a
social investment. Welfare expenditures should be switched as far as possible towards human
and social capital investment (Giddens, 1998: 99-128).
Human capital formation is crucial. On the one hand are new skills important to compete in a
globalised knowledge based economy. On the other is equal access to education a core ele-
ment for securing social mobility. In order to improve equality of chances and meritocracy
one could imagine to drastically increase inheritance tax. Real capital would be taken away
from the old ones who have died in much larger amounts than it is presently happening. This
money would than be invested in the young generation in the form of giving them educational
vouchers, which would allow for free education, including livelong learning. Such a scheme,
if thought to the end, could generate enough resources to give everybody not only access to a
stock of human capital
94
but also some initial venture capital, if he wants to start a new busi-
ness. More innovative enterprises are the driving force of an economy. Therefore free educa-
tion and venture capital for the bright and talented, instead of social closure, neofeudalism
and hereditary cast system should be the strategy of supply side egalitarianism. Since in most
countries over half of the capital stock is owned by less than five percent of the population
nearly everybody would win at the expense of a small minority (which still would have e.g.
more social capital in the form of family networks). Socialism should not try to abolish pri-
vate property but distribute it economically more efficient. The right to posses property must
be gained in a fair struggle in the market place.
Such a proposal, breaking social reproduction of class inequalities, goes along with a new role
for the welfare state. It should become an activating one. It should enable and encourage peo-
ple to take risks, to be entrepreneurial and to be competitive. Social security system should
open up new opportunities and encourage initiative. The imperatives of social justice are
more than the distribution of cash transfers. The objective is the widening of equality of op-
portunity for everyone. Marketability for all is part of a competitive solidarity fighting social
94
In the process of building up human capital can also social capital be generated. Equalising access to universi-
ties can help e.g. to open up elite networks for all able and talented.
152
exclusion. Welfare should be like a trampoline to put people back on their own feet. Modern
social democrats want to transform the safety net of entitlements into a springboard to per-
sonal responsibility. All social policy instruments must improve life chances, encourage self-
help and promote personal responsibility. In a radically reformed welfare state would welfare
be understood as a productive factor and functional for wealth creation. This is also the view
of the Commission. `Social protection as a productive factor' is a key issue for modernising
and improving social protection in the EU (Commission, 1997a and 1999d).
The welfare state needs to strengthen its tax base, something that only families and the labour
market can produce. Therefore we need higher fertility (to offset ageing), more people should
be gainfully employed, and fewer people reliant on social benefits. It would clearly be
cheaper if more people work, and less require passive maintenance. A more flexible labour
market might restore full employment. But therefore it needs more demand. Since we must
count on the tertiary sector to furnish most new jobs, this means demand for services. This
might come from families who have adequate incomes and jobs (maybe more often dual
earner families). But such dual earners need access to affordable social services so as to make
this possible. In this regard the employment multiplier of working mothers is important. It can
be quite substantial, especially in those kind of services that are labour intensive. Encouraging
families to consume more external services is part of a potential win-win strategy. Such de-
mand will doubtlessly grow if costs were lower, but this implies greater wage inequality.
Thus it will become difficult to escape the fundamental `equality-jobs' trade-off. But public
subsidises for low paid employers might bring here relief.
Securing a decent income for everybody, and especially for young families is important. If
young families are to be encouraged to have children, they should surely not grow up in pov-
erty. Here is the aged-bias of many social security system a problem. More resources should
be shifted from old to young. But this is difficult since the median voter is getting older. In
order to ensure everyone against entrapment especially family and labour market induced
risks must be dealt with. Risks associated with martial instability and poverty in childhood
together with inadequate skills are the two major life chance problems. Thus women-friendly
policies on the one hand and education, training and marketable skills on the other are impor-
tant (Esping-Anderson, 1999: 173-184).
Economic activation policies are the one side of the Third Way. But at the same time the goal
of Third Way politics is to find a new balance between the economic and the non-economic,
the wider diversity of goals life has to offer. A good example for combining these two goals -
153
social activation policy fostering social capital - would be a publicly financed voluntary `right
to be useful' scheme. New types of activity beyond the logic of market economy would be
recognised and funded. You don't have to do paid work, if you are doing socially useful
work. These could be all kinds of useful tasks that would not find a buyer in a strict market
economy: services of general interest, party politics, cultural events, work in non-profit-
making associations or services for the poor. But it is up to you to decide for civic engage-
ment. Therefore there is no workfare. Such a proposal would help to reduce the unemploy-
ment problem and generate a common morality of citizenship. Most of the people would opt
just for part-time civic engagement, besides their regular work, and housework and child care.
Citizen money for citizen work fosters initiative, self-help, civic engagement and interest in
the public good. Also the creation of trans-national, trans-local civil society could be explic-
itly fostered (Beck, 1997: 235-238, Commission, 1999c: 39).
The Unemployment Problem
High and persistent unemployment is a central threat to social cohesion. European unem-
ployment rate is at around 10 percent since the mid 1980s, which means 16 million people
without work. This is about the double of the US unemployment rate at present. In this regard
it is interesting to observe that the difference between the growth of unemployment between
Europe and the US occurs mostly in two episodes since 1982. Up to that year joblessness had
increased sharply on both continents as consequence of a restrictive monetary policy and re-
sulting fall in investment, which was unavoidable to halt an inflationary spiral, ignited by two
oil crises. But after 1982 the shortfall and unemployment continued to rise in Europe till
1986, whereas in the US, both fell. The second episode begins in 1992 and extends to the pre-
sent. In both these episodes, the investment rose relative to full capacity in the US but re-
mained stagnant at peak levels in Europe (Modigliani et al., 1998: 5). The rate of job creation
has been much higher in the United States than in Europe over the last two decades, too.
But one first critical remarque must be made here. Simply comparing European unemploy-
ment rates of 10 percent, with the American one of around 5 percent is misleading because, as
Freeman (1995: 172) reports, the ratio of those US men aged 18 to 34 in prison to the labour
force was 3.1 percent in 1993. A percentage much higher than in Europe. Additionally, the
US has a much larger army than European countries have, occupying many people. Security
154
policies create jobs, too, especially for the unqualified. Adding the two figures of men in
prison and in the army to the unemployment rate makes the difference between Europe and
America look much smaller. Nevertheless, 16 million people without work in Europe is a fact
and causes tremendous social harm. Thus, we will look next first on the social costs of unem-
ployment before analysing causes and possible remedies.
The Social Costs of Unemployment
Modigliani et al. (1998: 2) estimate that the loss of output alone represents an immense waste
of resources at some 15 percent or more. But unemployment is such a problem because it is
linked with social costs which go far beyond the loss of current output and fiscal burden of
unemployment benefits. Unemployment is a central threat for social cohesion and causes de-
cline of social capital. In the following we will concentrate on the social costs of unemploy-
ment which are particularly damaging for the long run young unemployed. Sen (1997: 160-
164) surveys some of the major social costs of unemployment.
Loss of freedom and social exclusion: The nature of the deprivation of the unemployed in-
cludes loss of freedom which goes well beyond the decline in income. A person struck in a
state of unemployment, even when materially supported by social insurance, can not exercise
much freedom of decision. Unemployment is a major factor predisposing people to social ex-
clusion. The exclusion is not only to economic opportunities, but also to social activities, such
as participation in the life of the community, which may be quiet problematic for jobless peo-
ple.
Skill loss and decline of human capital: Just as people `learn by doing', they also `unlearn' by
`not doing'. Additionally long-term unemployed might lose cognitive abilities as a result of
the unemployed person's loss of confidence and sense of control.
Loss of human relations and individual social capital: Unemployment can be very disruptive
of social relations, particular within the family.
Psychological harm: Unemployment can cause motivational decline, resignation and mental
agony. It goes together with loss of self-respect, and feelings to be unwanted and unproduc-
tive. As Marx already noted the role of work in human life is not confined just to earning an
155
income. Psychological harm is particularly for young unemployed a problem. Youth unem-
ployment can lead to long-run loss of self-esteem. Indeed, high unemployment can even be
associated with elevated rates of suicide.
Ill health and mortality: Unemployment can lead to illnesses and to higher rates of mortality
(not just through more suicide). This can, to some extent, be the result of loss of income, but
most likely be the result of socio-psychological problems and a lack of self-respect (cf. our
previous discussion of Willkinson's work (1999) showing how inequality makes sick, pp.
150, 151).
Loss of social values and responsibility leading to a decline of social capital: Long term un-
employed can develop cynicism about the fairness of social arrangements. This does not fos-
ter responsibility and self-reliance. The observed association of crime with youth unemploy-
ment is, of course, substantially influenced by the material deprivation of the jobless, but a
part is played also by psychological factors, like a sense of exclusion and a feeling of griev-
ance against a world that does not give the jobless an opportunity to earn an honest living. In
general, social cohesion faces many difficult problems in a society that is firmly divided be-
tween a majority of people with comfortable jobs and a minority often a large minority of
unemployed and `rejected' human beings.
Racial and gender inequality: When jobs are scare, the groups most affected are often the mi-
norities, especially parts of the immigrant communities. Since immigrants are often seen as
people competing for employment (or `taking away' jobs form others), unemployment feeds
intolerance and racism.
Organisational inflexibility and technical conservatism: Technological change is surely a
main reason for unemployment, but there is also a connection that goes the other way the
influence of unemployment in restricting the use of better technology. A situation of wide-
spread fear of unemployment can cause resistance to any economic reorganisation. In con-
trast, when the general level of unemployment is quite low and displaced workers can expect
to find other employment readily enough, reorganisation may be less resisted. Unemployment
can thus contribute to technological conservatism through organisational inflexibility, thereby
reducing economic efficiency as well as international competitiveness.
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Causes and Remedies of Unemployment
Many possible causes have been advanced to account for the high and persistent rate of un-
employment in the EU. They vary somewhat along the political spectrum. On the right, it has
been argued that EU unemployment is primarily the outcome of (i) the absence of the needed
skills (there are jobs but the unemployed are not qualified to fill them), (ii) the large share of
long-term unemployed who lack motivation to seek jobs, and (iii) the crushing burden of
taxes. On the left, European unemployment has been portrayed as the outcome of (iv) a crisis
of capitalism, (v) an excessively rapid rate of technological progress, and (vi) competition
with low-wage countries (Modigliani, 1998: 2, 3). All these arguments contain grains of truth,
but the political quarrel is about which is the dominant factor.
Many initiatives have been taken to reduce this problem. In 1994, the OECD launched the
OECD Jobs Study (OECD, 1994), which contained both an analysis of the issue and a set of
policy recommendations for dealing with it. There the emphasis is on structural factors. In the
OECD view European unemployment is not about specific European cultural background and
norms. If European labour market institutions and European macroeconomic and structural
policies had been in place in other corners of the world, then unemployment would have been
a problem there as well. But the consequence of a sluggish European labour market is that
unemployment rises rapidly with each downturn since the early seventies but falls back only
slowly thereafter. Second, unemployment is predominantly structural even if there are signifi-
cant cyclical components in some countries. Third, high unemployment is usually accompa-
nied by a high share of long-term unemployment. This makes clear why high unemployment
is associated with marginalisation of the unemployed. Fourth, in much of Europe high unem-
ployment also goes together with weak employment for marginal groups in the labour market.
For example, employment rates for young workers and for adults are comparatively low.
Fifth, unemployment rates are disproportionately high for low-skilled workers. This trend has
been linked with trends towards globalisation and technological change. Which of these two
processes has a larger impact is at the moment a matter of debate. But as already mentioned
the OECD (1997: 93-122), Slaughter and Swagel from the IMF (1997) and Fligstein (1998)
suggest that technological change is a more powerful determinant for shifts away from un-
skilled labour than trade with emerging economies. Finally, there seems to be a link between
unemployment and participation rates: where unemployment is high, participation is low.
Thus, the unemployment rate shows only part of the employment problem the rest is hidden
157
in various schemes such as early retirement, invalidity, etc., but also in people being discour-
aged from entering the labour force.
As concerns wage development, trends have also differed significantly between the US and
Europe. At the aggregate level, real compensation rose rapidly in Europe over the last decades
thanks partly to unions - while it broadly stagnated in the US. To some degree this reflects
higher productivity growth in Europe. But the reverse causality is also important. That is,
higher real wage growth forced firms to rationalise and forced low-productive firms and
workers out of work. As concerns relative wages, there has been broad stability in continental
Europe but significant widening in the US and the UK. In the US widening wage dispersion
together with stagnant real wages implied that those at the bottom suffered real cuts in pay.
This development gave rise to the discussion about `working poor', even if poverty in all
countries is linked predominantly to people not being employed at all (Elmeskov, 1998: 29-
54).
Against this background the OECD Job Study proposed a 10 point policy recommendation
focusing on macroeconomic and structural factors:
Set macroeconomic policy such that it will encourage non-inflationary growth. This estab-
lishes an appropriate medium- and long-term framework for policies and prevent excessive
short-run fluctuations in output and employment.
Enhance the creation and diffusion of technological know-how by improving networks of its
development.
Increase the flexibility of working-time (both short-term and lifetime).
Foster an entrepreneurial climate by eliminating impediments to, and restrictions on the crea-
tion and expansion of enterprises.
Make wages and labour costs more flexible by removing restrictions that prevent wages from
reflecting local conditions and individual skills (i.e. high legislated minimum wages).
Reform employment security provisions that inhibit the expansion of employment in the pri-
vate sector (i.e. restrictive employment protection).
Strengthen active labour market policies and reinforce their effectiveness.
158
Improve labour force skills through education and training.
Reform unemployment benefits such that societies' fundamental equity goals are achieved in
ways that impinge far less on the effective functioning of the labour markets (i.e. reduce over-
generous unemployment compensation).
Enhance product market competition so as to reduce monopolistic tendencies and weaken in-
sider-outsider mechanisms while also contributing to a more innovative and dynamic econ-
omy.
These recommendations aim to raise the ability of economies to adjust and to adapt to new
developments, including cyclical variations as well as trends towards globalisation and tech-
nological change, and to increase their knowledge base and innovation capacity .
It is hoped that the spreading of the income scale makes low-skilled labour again attractive
and gives new incentives for human capital accumulation. And low-paid employment may be
a stepping-stone to a better pay, particularly for the young (Elmeskov, 1998: 29-54). But con-
cerns for equity and social justice are a major reason to be reluctant with introducing more
labour market flexibility. To much flexibility might erode social cohesion and social capital.
Social cohesion and social capital are necessary to constrain individual opportunistic behav-
iour. But at the same time high and persistent unemployment is itself likely to seriously im-
pair social cohesion and social capital. Driven by fears of undermining social cohesion, some
countries have emphasised institutions that support the establishment of a social consensus,
like the successful `Dutch model'. This is now also the way which Germany wants to pursue
with its `Bündnis für Arbeit'. On the other side are sceptics who ask how far are deep struc-
tural reforms, implying the destruction of economic rents, through a consensual process pos-
sible?
For the OECD the European unemployment problem is caused by structural factors and needs
first of all more labour market flexibility. But there is a cyclical component in unemployment.
Unemployment is also caused by adverse macroeconomic conditions. Given that wages, and
hence prices, are downward-sticky, restrictive fiscal and monetary policy is surely a cause for
reduction in effective demand and thus destroys jobs. Hence the tight monetary policy as a
response of the Bundesbank to German unification in the early 1990s as well as the monetary
and budgetary squeeze in order to meet the tight Maastricht convergence criteria for EMU
participation are macroeconomic causes of present unemployment. This view is supported by
159
a group of eminent economists, including two Nobel laureates Franco Modigliani and Robert
Solow (Modigliani et al., 1998). They criticise the OECD and the EU's policy approach to
unemployment as expressed in the Luxembourg process of the European Employment Strat-
egy which only focuses on improvement of labour market efficiency. Such a limited view,
restricted to supply-side measures, neglects the role of demand management policy, and
monetary policy in particular. Furthermore, seeing unemployment as the sole problem of la-
bour market rigidities in individual countries, the needed policy cooperation is forgotten.
Therefore what Modigliani et al. (1998: 4) call for is a comprehensive approach combining
supply and demand side measures, and these policies must be coordinated European wide to
have the maximum possible effect. We will come back on the aspect of policy coordination in
the chapter on the European Employment Pact (pp. 174-177).
Another point of critique in the analysis of conventional economists about the causes of un-
employment is the role of the welfare state. Most economist see in the welfare state not the
cure, but a burden and with overgenerous benefits a cause of unemployment. Contrary to this
conservative view shows Scharpf (1999: 116) that the welfare states is not so much of a bur-
den for employment, analysing the relationship between employment and social security
spending for the first half of the 1990s. A country like Sweden, for example, with one of the
most expensive welfare state's in the world, a high tax burden and powerful unions is doing
exactly as well in employment terms as the United States, without any welfare state worth to
mention, about the lowest tax burden in the OECD, and powerless unions. But Continental
welfare states at similar levels of economic development, and with intermediate levels of tax
burdens, are doing so much less well.
Of course employment is not the only thing which counts. In terms of economic growth the
United States have led during the 1980s as well as during 1990s. Average growth from 1980-
1990 in the United States was 2.9 percent, in Sweden 2.3 percent and in Germany 2.2 percent.
The respective figures for the 1990-97 are: United States: 2.5 percent, Sweden: 0.9 percent
and Germany: 2.5 percent (Source World Development Report 1998). Interesting is a com-
parative look for these three countries on aggregate measures of human and social capital
(based on own calculations, cf. part II). Concerning human capital Germany is leading before
Sweden followed by the United States. Trust is the highest in Sweden and the lowest in the
United States. Civic engagement is in Germany higher than in Sweden and the lowest again in
the United States. And tolerance is in Sweden and the United States comparable. Germans are
160
the most intolerant.
The size of the welfare state does not seem to affect employment in sectors exposed to inter-
national competition. The United States is not doing very well in this regard. By contrast, the
Scandinavian countries with very large welfare states, achieve significantly higher employ-
ment ratios than the United States, whereas Germany, with intermediate levels of welfare
spending, has the best employment performance in the internationally exposed sectors of the
economy. The countries with the highest employment levels in the international sectors are
characterised by stakeholder-oriented forms of corporate governance and by cooperative in-
dustrial relations which differs markedly from Anglo-Saxon shareholder model and labour
flexibility.
The general poor employment performance of continental European welafare states during the
last decade cannot be ascribed to a general loss of international competitiveness. But its ex-
planation lays in the sheltered sectors of the economy. It seems as if the cause lays in a poor
performance of `local services' (education, health care, etc.). On the other hand the good per-
formance of the public sector is the main reason for high employment in a country like Swe-
den.
In the United States have low levels of taxation contributed to a very unequal distribution of
incomes which has facilitated expansion of private service employment of high and low
skilled labour. Education and health care are largely privately financed. Thus growing de-
mand of affluent consumers for high-quality education and medicine increased well-paid jobs.
At the same time allowed a deregulated market also the emergence of a large low-wage la-
bour market. The up side of the American model is the dynamic expansion of service em-
ployment at all qualification levels. The down side are the `working poor' (Scharpf, 1999:
119, 124). As the OECD (1997: 50) concludes countries with more deregulated labour and
product markets do not appear to have higher relative social mobility, nor do low-paid work-
ers in these economies experience more upward mobility. Equity concerns about increased
earnings inequality, which is in several continental European countries an important barrier to
implementing more labour flexibility, must be take seriously.
In Sweden or Denmark, by contrast, very high taxes, strong unions and generous benefits in
case of unemployment have reduced income inequality and wage differentials to the lowest
among the OECD countries. At the same time, education and health care are publicly financed
161
and provided. Thus creating employment for well educated professionals as well as decent
paid jobs for low skilled labour. The higher equality in outcome of the Swedish model is a
remarkable result, especially when compared to the US. Aaberge et al. (1998) can not confirm
the traditional defence of high income inequality as being the flip-side of high social mobility.
They compare income inequality and income mobility in the Scandinavian countries and the
United States during the 1980s. The US despite having high cross-sectional inequality, is not
the country with the highest level of income mobility. But the reverse finding does not
emerge either for the Scandinavian countries. They are quiet equal in outcome, but there is
not much social mobility either. The pattern of mobility turns out to be remarkably similar
despite major differences in labour market and social policies between the Scandinavian
countries and the US. But the Scandinavian countries have at least a well developed system of
ex post redistribution.
The obvious down side of the inclusive, egalitarian Swedish model is its dependence on very
high taxes which have become vulnerable to increasing international tax competition for mo-
bile capital and growing tax resistance of mobile professionals. The need for fiscal consolida-
tion and the subsequent cuts in welfare payments in the 1990s has reduced public-sector em-
ployment and increased unemployment to European levels.
The situation and problems are very similar for Continental welfare states. But the difference
to the Scandinavian model is that Continental welfare states are primarily financed through
payroll taxes.
95
The dependence of payroll taxes makes Continental welfare states particularly
vulnerable to any increase in unemployment which increases expenditures and reduces reve-
nues at the same time. Payroll taxes raise the price of labour, too, and reduce like this interna-
tional competitiveness. The main problem of Continental welfare states is their inability to
expand domestic-service employment either in the public or in the private sector. Again, the
Continental employment problem is not primarily a result form a loss of international com-
petitiveness. It affects the sheltered sector only. It is caused not by the size of the welfare
state, but by its characteristic structure and mode of financing. These causes could be reme-
died by institutional reforms that would increase, rather than destroy, the level of social-
95
In Germany, for example, 74 percent of total social expenditures are through workers' and employers' contri-
butions to social insurances. The number in France is 83 percent. By contrast, Scandinavian welfare states are
much more financed from general tax revenues, like in Denmark for 83 percent (Scharpf, 1999: 127, 128).
162
policy support for disadvantaged groups (Scharpf, 1999: 124-133).
But most likely this will not be enough. Therefore Scharpf (1999: 130), like the OECD,
comes to the conclusion that a low-wage labour market for the low skilled must be created. In
order to be normatively acceptable and politically feasible, however, European solutions can-
not allow the emergence of a large underclass of the `working poor'. Hence low-wage jobs,
European-style, should provide nevertheless a decent income. A negative-income-tax could
help here. An idea promoted by economists already since decades. Therefore the welfare state
had to be reoriented. When having no income you would be still supported. But the transition
from welfare to work is smoothed out. Starting to work doesn't mean anymore losing all your
benefits. Instead there will be a partial income support decreasing with income up to a cer-
tain level in order that one gets at the end a decent income well above the poverty line. To
the extent that unemployment could be transformed into subsidised employment in the private
sector,
96
it is hoped that overall fiscal pressures on the welfare state could be reduced. At this
place we want also to remind the proposal of a voluntary `right to be useful' scheme. If you
don't want to do paid work, you can do voluntarily useful work in the general interest, pub-
licly financed (p. 155).
Economists from the Commission, come to the conclusion that an EU strategy has to be built
on the idea that reforms do not imply fully embracing the US model, too. They see a simple
possibility of preserving European peculiarities. For instance, unemployment compensation
and job-security legislation are partly substitutes. Thus, there is the possibility for a `third
way' between full flexibility of the Anglo-Saxon model and the rigidity of many continental
countries. The low employment protection legislation-high unemployment benefits institu-
tional mix of countries like Denmark or the Netherlands had the potential advantage of allow-
ing structural change and labour re-allocation while maintaining an adequate degree of soli-
darity. The main direction of reform will be from support `on the job' (via rigid employment
policy regulation) to support `on the market' (via adequate unemployment benefits or nega-
96
Modigliani et al. (1998: 18/19) have developed a sophisticated Benefit Transfer Program (BTP) which intends
to redirect the funds that the government currently spends on the unemployed so as to give firms an incentive to
employ these people. The BTP gives the long-term unemployed people the opportunity to redirect some of the
benefits to which he is entitled to a voucher that can be turned over to a firm that will hire him. But since the
BTP is voluntary the unemployed will join only if it is to their advantage, i.e. if the wages they would be offered
are higher than their unemployment benefits.
163
tive income tax, training, etc.) (Buti, Pench and Sestito, 1998: 41/42 and Modigliani et al.
1998: 6, 17/18).
Another approach, tried in France and Italy, is the redistribution of existing work by introduc-
ing a 35-hour working week. It is argued that the unfairness of unemployment and a large part
of its social cost is that it has to be born by a small part of the working population. If a certain
amount of unemployment is inevitable, it should be spread about in the form of an all-round
reduction in hours. Experience by previous precedents is mixed, but we have to wait and see
what the results of the French and Italian experiment will be (Artis, 1999: 15). Modigliani et
al. (1998: 7) are even more sceptical about the benefits of worksharing. They are against shar-
ing the burden of unemployment more democratically. They advocate a coordinated strategy
encompassing demand and supply side measures. In their view policy makers should spend
more time on trying to bringing unemployment down, rather than on spreading it more thinly.
We underline that labour markets must be socially embedded. This means to take the new
family and gender balance into account. Local services and the third/voluntary sector should
be developed. Social embedding stresses also good quality industrial relations and stake-
holder values. New labour market policies build on activation policies and community build-
ing and go like this beyond simple deregulation and passive income support. But therefore
there must be room for political intervention, which implies a move from economic austerity
to political economy. Therefore we will turn to European scale actions.
4. Actions at a European Scale
At the beginning of the last chapter we said that defending and adjusting the European model
is still very much the task of national governments. But there is an important European di-
mension to this, too. The EU can be the larger continental framework enabling a favourable
environment for national actions, e.g. as a forum for discussion and exchange of ideas and act
as a catalyst and a legitimiser. The EU can help to foster domestic reforms, set minimum stan-
dards and secure a favourable macroeconomic framework. But the EU also depends on the
member states for the legitimacy of its actions. In the worst case would a substantial decline
of social capital not just negatively affect individual countries, but backfire on the process of
European integration as a whole. Most often is the EU in times of sluggish growth and endan-
164
gered social cohesion a common scapegoat. Thus, there is an important symbiotic relation be-
tween nation states and European Union. Both need each other, but can also enforce each
other.
European Social Integration and European Identity
European integration is part of a broad process of social integration. Social integration at the
European level has various forms. We remind here again of the pyramid of cooperation (fig-
ure 7, p. 94). Figure 16 (below) relates social and European integration. Shared norms and
traditions culture - is the founding stone of cooperation. It embeds and englobes all other
forms of social integration. Translated to questions of European integration it is about the im-
portance of a European identity. On the next level is the through market forces created ex-
tended order of cooperation based on self-interest. In this regard the transnationaly integrating
force of the single European market is important. But crucial for social integration and cohe-
sion is civil society. Voluntary cooperation for the `bonum communis' motivated by Euro-
pean civicness takes place in transnational non-governmental organisations (NGOs). The
third, voluntary sector units the hearts of Europeans. Finally, there is the state - the European
Union - which can foster and enforce cooperation and integration by the means of European
law.
Social Integration
European Integration
State European
Union
Civil Society
Transeuropean NGOs
Markets Single
Market
Culture European
Identity
Figure 14: Social and European Integration
A European identity is the result of a common history. Europe has a common history uniting
European culture. Unfortunately this common history was marked quiet often by terrible
wars. But there are nevertheless many unifing elements. The common legacy of the ancient
civilisations of Greece and Rome. A once uniting belief in Christianity which has influenced
165
history. Charlemagne united in one superstate practically all the Christian lands of Western
Europe at around 800. Renaissance and Enlightenment, capitalism and industrial revolution
made Europe the cradle of Western civilisation and a model for the rest of the world. But its
strength also allowed it to dominate the others. The time of nations building and the rise of
nationalism together with colonialism and imperialism last century and beginning of this are
common European experiences, too. But they have led the seeds for division and for two hor-
rible World Wars. After them Europe had lost its glory and was divided and fragmented. But
the now half a century long process of European integration has given Europe strength back
again. The many challenges Europeans face today unites them through a common destiny.
The European project and its identity is based on two pillars: first, negative, `no more war in
Europe', and second, positive, `How can we create a Europe playing its full part in resolving
the world's great challenges'?
European identity is created and enforced in everyday interactions. The single market with
free movement for goods, services, capital, and people connects everyday millions of Europe-
ans across the continent. Interaction is enforced through transborder cooperation and fusion
and Eurpeanisation of national administrations in Brussels. Last but not least emerging trans-
border media shape a common European outlook. When there is enough exchange and com-
munication amalgamation and cohesion in the form of `we feeling' appears. `We feeling' is
the founding stone of a political community. Therefore institutions have to build on communi-
ties. But they can also help to strengthen old and help to create new communities. European
identity can be deepened through symbols like a common flag, anthem, money or citizenship.
The European citizenship is in this regard an important step forward. The sense of belonging
to the Union and democratic participation are mutually reinforcing. In the future it might be-
come further developed, securing more encompassing civil and social rights. But European
identity and citizenship will never replace national, regional or local bonds. They will com-
plement and strengthen them.
Sceptics now fear that a strengthening of European identity might lead to a new version of
nationalism, this time just on a higher level - `Euro-nationalism' (e.g. Bornschier, 2000b). But
they misunderstand the fundamental fact that European identity is by definition based on the
diversity and plurality of Europe's cultures. To be European means to like not just ones own
national culture, but those of the others the like. For example one might have been grown up
in the German culture, but one might discover a love for Latin and Anglo-Saxon culture as
166
well. Therefore `Euro-nationalism' can never become the kind of devastating nationalism of
former times. It is precisely its counterforce. It is build around the idea of bridging national
cleavages. And as we shall see in a later chapter on European anti-discrimination measures
(pp. 191-197), this drive for tolerance fostering social capital is with the new TEC Art. 13
of the Treaty of Amsterdam explicitly fostered, forbidding all kinds of discrimination.
Besides European identity the other three main elements of social integration are: markets,
civil society and politics. In the following we will analyse the social consequences of the sin-
gle market and monetary union and how it can become socio-politically more embedded. A
socio-politically embedded Economic and Monetary Union by means of European social pol-
icy, European redistribution and concerted European macroeconomic policy would foster
most European scale social capital accumulation. Therefore a federal European polity is
needed. A federation can induce cooperation and prevent excessive competition destroying
social capital.
With continuing European economic integration there is the fear that the elimination of the
remaining barriers to the free movement of goods, services, persons, and capital would lead to
stronger competition among national economic systems and to an excessive deregulation of
labour markets at the expense of workers, in terms of both remuneration and working condi-
tions. To prevent `social dumping' a floor of basic rights and minimum standards would be
needed at the European level. A European social space is expression of the European social
model the European mixed economy. In the age of global business and capital a strong fed-
eral Europe is needed as political counterweight. Only a united Europe can successfully re-
regulate savage markets. Europe needs the ability to act as a global player on an equal footing
with the transnational economic actors.
In the context of the national economy, the distribution of the national pie between capital and
labour is the joint product of market processes and power relations. With the rapid opening of
economic frontiers, this distribution tends to shift against labour for the very simple reason
that capital is more internationally mobile. Precisely the same argument applies to taxation. In
the case of taxation pressures have come from two sides. On the one hand have the costs of
the welfare state steadily increased, due to increasing unemployment, a steadily ageing popu-
lation, and a cost explosion in the health care sector. On the other hand makes international
tax competition and mobile capital the financing of the welfare state increasingly more diffi-
cult. Thereby European actions justify itself by economies of scale and externalities crossing
167
national borders. In other words when an action can be conducted more efficiently on a Euro-
pean level national actions become obsolete. European level interventions are also needed
when a problem affects other member states as well.
Economic and Monetary Union
The establishment of Economic and Monetary Union (EMU) is the cumulation of European
integration so far and the major single event shaping European political economy during the
second half of the 1990s. It has a profound impact beyond simply introducing a new monetary
regime. Monetary policy has become the exclusive competence of the new European Central
Bank (ECB) and responsibility for the exchange rate is divided between the Council and the
ECB. Policies affecting external trade and the integration of the internal market are already
since a long time a matter of EU competence. But fiscal and labour market policies will con-
tinue to be decided mostly at national level, albeit subject to closer surveillance and coordina-
tion by EU institutions (economic policy and employment guidelines, Euro-11 Council, and
macroeconomic dialogue).
When discussing presentday EMU we should not forget that the architecture of EMU reflects
late 1980s' conventional wisdom. The Maastricht Treaty was crafted at a time when the im-
plications of the rational expectations revolution were being digested at the policy-making
level. The idea is that individuals and businesses form their exceptions about future economic
events in a rational way. In that case will changes in government policy have much less effect
than standard Keynesian models predict. For instance, when government expands its budget,
the expansionary effect might be offset, since economic agents expect a later tax increase to
finance it and therefore start saving already today (Barro-Ricardo equivalence theorem). Even
worse, government interference might distort rational expectation building and thus become
itself the source of a macroeconomic shock. Influenced by ideas of this kind explicit focus of
the central bank on price stability seemed to be the logical conclusion. There have also been
studies showing the superior performance of countries with an independent central bank. But
much has been learned, since, both about theory and the empirical relevance of these princi-
ples. It has not yet been fully taken on board.
The Maastricht Treaty is also politically dated. Political conditions have changed considera-
bly since the late 1980s. Not only does public opinion takes low inflation for granted, it now
168
worries about deflation. Unemployment has proven to be a particularly more stubborn issue
than realised at that time. It has always required both demand and supply-side policies, a di-
agnosis ignored for far too long. With the birth of the stable Euro German concerns seem to
have lost their base for fear. The paradox we are facing today is that the ten-year long tradi-
tion to EMU decided in Maastricht has been devoted to achieve convergence towards a
1980s-style culture of monetary stability, and not to prepare the political operation of a mone-
tary union (Wyplosz, 1999: 1/ 2).
The stability pact, agreed in June 1997 under insistence of the then ruling conservative Ger-
man government, sets out the procedures for surveillance of national fiscal policies together
with stringent ceilings for budget deficits. It strengthens the monetarist austerity framework of
the Maastricht Treaty. The stability pact is with his strict budget requirement the equivalent to
the zero-inflation doctrine of the new ECB. Recognising the unease of many Europeans with
the heavy weighted bias of European integration towards economics and monetarist ideology,
European governments recognised in the Treaty of Amsterdam labour market policies as a
matter of common concern, too. But they couldn't agree to something more than the set out of
procedures for their surveillance. In the following we will try to asses the social consequences
of EMU, the potential of the new European Employment Pact, the new possibilities for Euro-
pean macroeconomic policy and for European fiscal federalism.
Social Consequences of EMU
Persistent unemployment is the top social and economic problem of most European countries.
In this situation they are about to enter into a monetary union. EMU will affect the future evo-
lution of European unemployment. The entrance to EMU had to be achieved under the strin-
gent convergence criteria of the Maastricht Treaty (budgetary stability and price stability).
And in the future the stability pact, limiting budget deficits to 3% of GDP over a business cy-
cle, has to be taken into account.
The theory of optimal currency areas implies that the cost of losing control over the nominal
exchange rate as an instrument for short-term macroeconomic adjustment are smaller when
shocks hit `symmetrically' all participating countries. In general asymmetric shocks are more
likely in the EU than in the US. But there is already a core of countries Germany and those
who maintained closer economic and monetary links with it which shows a high degree of
169
similarity, i.e. symmetric shocks. And it is to expect that with ongoing economic integration
the correlation between business cycles across EU countries will increase. But this contrasts
with the view that EMU will help the unfolding of the single market and, thus, result in higher
specialisation, regional concentration of production and be like this more vulnerable to asym-
metric shocks.
In addition to a common currency area with monetary policy focused on price stability, the
establishment of EMU will also enhance fiscal discipline through the stability pact. Will the
overall result of all this be that the `social', the labour market, is the only variable left for ad-
justment? Sceptics on the other hand fear that harmonisation of labour legislation, going
along with the Social Chapter, could worsen the already badly functioning labour markets of
some EU countries. There is the orthodox economist's view which tries to isolate the econ-
omy from any societal developments. The more socially disembedded the market is the better
it can work. It is the new classical belief in the stabilising effect of the market. Given the
terms of the stability pact, fiscal consolidation may need to proceed in the future in some
countries. How will further fiscal restriction affect European unemployment in the next years?
From a short-term perspective a reduction in aggregate demand is to be expected with nega-
tive effects on unemployment, which might be in the European context of sulggish labour
markets quiet long living. But fiscal consolidation will improve employment prospects in the
medium-term by leading to a more stable macroeconomic environment with economically
sustainable budget deficits. Lower and less volatile real interest rates will foster investment
(private and public) and like this positively influence output and employment prospects. It is
hoped that non-inflationary growth, thanks to stable macroeconomic policies, will positively
influence employment creation in the medium term. But therefore EMU membership should
be accompanied by structural reforms designed to improve competition in goods and factors
markets and, particularly, in labour markets. This the conservative economists point of view
(Vinals and Jimeno, 1998: 83-98).
We should not forget that the strict Maastricht convergence criteria and the stability pact have
put additional pressures on the welfare state besides general concerns for international com-
petitiveness - through its quest to reduce social expenditures. But the channels of influence
run not only from EMU to social policy. It is curtail that social policy can generate sufficient
support and political legitimacy in order to secure purely economic integration cumulating in
EMU. Political considerations dictate that economic union cannot neglect the social dimen-
170
sion of integration (EP, 1994: iii). Even thought this seems to be the case so far with EMU.
The direct impact of EMU on social policy comes about through the interplay of two sets of
influences. First, the effect of the convergence criteria and the subsequent stability pact
price stability and budgetary consolidation - have to be considered. In order to bring the defi-
cit and debt ratios down to the targets of 3% and 60% of GDP respectively, member states
have to engage in budgetary consolidation. This entailed either raising taxes or cutting public
expenditures. Because of the high share of social expenditures in public budgets, it is inevita-
ble that it would have not been affect by such a reduction. Therefore EMU does reduce lee-
way for financing social protection. Similarly, tight monetary policy to curb inflation tends to
push up unemployment. Second, EMU is expected to lead to a more stable macroeconomic
environment and to reduce the costs of monetary fragmentation in a single market. As far as
EMU helps to promote economic growth and employment it generates additional resources
for and diminishes calls on social protection. But which of these two effects dominates will
depend on a number of considerations. For example the degree to which efficiency gains are
in fact attainable. Others will derive from policy choices. In addition, the manner in which
structural change affects the economy, and the effects of external competition will influence
the interplay between the two EMU effects (EP, 1994: iv, vi).
The crucial question for the future of EMU is how to achieve at the same time economic and
social sustainability. What is important is to keep the economic and the social in balance. As
previously spelled out unchecked, unembedded markets destroy the social and moral relations
on which economic development ultimately depends. The convergence criteria and the stabil-
ity pact ensure only sound economic policies, or one is more tented to say - economic auster-
ity. This because of complete neglect of the socio-political dimension. The new single Euro-
pean monetary policy will have as negative side effect a worsening of social cohesion and a
depletion of social capital. With a European-wide monetary policy and national budgetary
policies restricted by the stability corset the only variable left for adjustment in the case of
imbalance is the social, i.e. greater labour market flexibility is demanded. Having lost the ex-
change rate as tool for adjustment and severely restrained fiscal policy, the only two possibili-
ties left are wage flexibility or labour mobility, both putting social cohesion at risk. Wage
flexibility implies larger inequalities, and enforced labour mobility is a danger for social inte-
gration. Social integration or `lebensweltliche Integration' (Habermas, 1998: 125), as opposed
to functional integration, is based on shared norms, values, and identities build up through
171
communication during sustained periods of living together. Constant reshuffling of people
leads to an unrooting and disembedding from their communities.
Not very unlikely might such a development lead to a further division and fragmentation of
European society. The `social' will stay in national competence whereas monetary and eco-
nomic matters are becoming a matter of common European concern. A double division be-
tween economics and the social on the one hand and between the social and Europe on the
other will result as a consequence of this. Economics is outside of society and the society out-
side of Europe. Thus, the present EMU is opposed to basic aspects of the European model of
society. There is no room anymore for macroeconomic policy linking economics with the
wider social concern for full employment.
97
For many present day economists is unemploy-
ment not anymore the consequence of a dysfonctioning of the market, but of unemployability
of a part of workers. Thus they advocate to adopt American style liberalisation and flexibility.
But even the Americans didn't want to restrict macroeconomic policy in such a way as we
Europeans have done it with EMU and the stability pact. The ECB is the most independent
central bank in the world and the stability pact leaves no room for macroeconomic policy
anymore. What might have been good for Germans, with their historically caused fear of high
inflation, must not be good for Europe as a whole. And we should not forget that the German
model has other features, like social dialogue and codetermination to counterbalance a crude
economicism. But somehow the social got lost in the process of creating the present EMU
(Fitoussi, 1999: 25-30) .
98
This is surprising since we have with EMU again the political means to influence macroeco-
nomic development. The once national regulatory framework has lost most of its possibilities
for influence with advanced market integration. We should us the new possibilities which
EMU makes possible as means to pursue the vision of the European model of society. Unem-
ployment is related with social costs far beyond the under-utilisation of the labour force. The
97
Actually to mediate between the three problems of employment, inflation and interest was the ultimate goal of
Keynes `General Theory of Employment, Interest and Money' (1936).
98
There was once with the Werner plan (1970) a blueprint for a socially embedded economic and monetary un-
ion. But the embedding and politics got lost with the monetarists attack on Keynesian thinking and conservative
governments in power during the 1980s and beginning 1990s (cf. Strath, 2000, for an extensive treatment of this
issue).
172
consequence of unemployment for social disintegration and depletion of social capital are
very important, as we have seen in the last chapter, but neglected in conventional economic
analysis.
The European Employment Pact
Unemployment is not just a threat to social cohesion but also to the project of European inte-
gration since losers have the tendency to rally behind nationalist flags. But the EU has not
been completely inactive in the field of unemployment. Despite or maybe better as response
to the neoliberal austerity corset step-by-step a European Employment Pact has been devel-
oped. The 1993 `White Paper on Growth, Competitiveness and Employment' (Commission,
1993) indicated a list of priorities for action on jobs (lifelong education, reduction in the rela-
tive cost of low-qualified work, greater business flexibility to foster job creation) and promo-
tion of economic growth (e.g. Transeuropean Networks in telecommunications, transport and
energy). The European Council meeting at Essen in December 1994 formalised the involve-
ment of the Union. In 1996 Jacques Santer made the proposal for a confident pact for em-
ployment.
During the 1996 Intergovernmental Conference the Nordic members, with a long tradition of
state-supported employment programmes, as well as some traditionally more interventionist
member states, like France and Italy, pushed for concrete EU action in this field. The UK, on
the other hand, sought to `export' to the EU level its doctrine of flexible labour markets as a
cure to unemployment. And Germany and Spain were wary about an EU competence on em-
ployment. The resulting employment provisions in the Treaty of Amsterdam reflect a difficult
compromise between the various national views and are thus very weak (Scappucci, 1998:
260).
Besides broadening the field of social policy the Amsterdam Treaty has for the first time for-
mally introduced employment into the EU Treaty. In TEU Art. 2 the Union sets itself the pro-
motion of "economic and social progress and a high level of employment" as first objective.
A coordinated strategy for employment coordinating member states employment policies is
demanded. And a completely new title VIII dealing specifically with employment is intro-
duced. But to see employment as a `matter of common concern' does not change anything
that employment ultimately remains an exclusive competence of member states.
173
The coordination of national employment policies takes place on the basis of common situa-
tion analysis and employment guidelines which are drawn up by the European Council. Com-
pliance with these guidelines is checked annually through Commission reports and the Coun-
cil can give member states recommendations. The introduction of new labour market surveil-
lance procedures in the EU increases opportunity for reform through peer pressure. Similar to
social policy, `best practice' and information exchange are advocated, but ruling the harmoni-
sation of laws explicitly out (TEC Art. 129.2).
Since employment is such an urgent question the employment title was immediately imple-
mented, not waiting for ratification of the whole treaty of Amsterdam. At a first, special `jobs
summit' in Luxembourg in November 1997 the European Council agreed the `Employment
Guidelines for 1998'. The coordinated employment strategy stresses essentially four ele-
ments: improving employability, developing enterpreneurship, encouraging adaptability in
businesses and their employees, and strengthening the policies for equal opportunity. Espe-
cially concerning the last point of equal opportunity it has identified a gender gap of 25 mil-
lion jobs in the EU as one of the main problems. 25 million fewer women than men are em-
ployed. The Vienna European Council Meeting in December 1998 concluded that equal op-
portunities for women and men are a vital component of the whole employment strategy.
Equal opportunities and employment are now inextricably linked. Equal opportunities for
men and women and one should add regardless of sexual orientation, ethnicity or race, na-
tionality, religion or social origin, following the new anti-discrimination article in the Treaty
of Amsterdam (Art. 13) are now both a matter of social justice and of good economics. In
the next ten years Europe's working age population will begin to shrink in terms of numbers.
Employment growth, so vital to our long-term economic success, will depend on the in-
creased participation of women in the labour market. European states should create the condi-
tions that will enable the economy to benefit fully from the creativity, talents and skills of
women and other discriminated groups in society. Therefore they should help to enable both
men and women to have a greater balance in their working and family lives.
Overall the European employment strategy has still to proof that it is more than symbolic
politics and can actually have a substantive positive impact on national unemployment prob-
lems. It might create expectations which the Union will have difficulties in fulfilling, although
this would simply follow the tradition of high rhetoric and little action set by the EU in the
field of social policy. But nevertheless the EU institutions can provide a framework for dis-
174
cussion of employment policies, and act as a catalyst and legitimiser of policy measures taken
at the national level (Tsoukalis, 1998: 15). This is not an unimportant function. Quiet often it
might be more effective to address long-term issues through concerted European strategies.
Action at European level makes it, for instance, often easier to avoid the more immediate
pressures of the national electoral cycle (Prodi, 1999). But most important would be a relaxa-
tion of the Maastricht austerity corset for fiscal and monetary policy. A coordinated Commu-
nity stabilisation and redistribution policies would be more likely to help. The European Em-
ployment Pact agreed at the Cologne European Summit in June 1999 is not more than a very
first, timid step in that direction. The employment pact is calling for a macroeconomic dia-
logue between the ECB, EU finance ministers and the social partners, together with a further
development of the coordinated employment strategy, and comprehensive structural reforms.
But the problems of the loose form of cooperation of the macroeconomic dialogue are vari-
ous. First, the number of partners is high. This makes informal repeated contacts unlikely.
Second, diversity of opinions due to different `cultures' and different economic and political
conditions. Third, incentives differ among countries both because of possible externalities and
because macroeconomic policy may follow differing channels within the monetary union. The
first problem could be solved by reducing the number of players involved. Bargaining would
become much easier when both governments and the ECB ought to be able to delegate nego-
tiating powers to just one or two persons each who would maintain regular and informal con-
tacts (Wyplosz, 1999: 8). The agreed macroeconomic dialogue is a try of soft regulation, but
most likely doomed to fail when tough economic decisions have to be made. Therefore we are
still far away of Community level macroeconomic stabilisation policies, even though such
measures would be quiet promising.
Possibilities for European Macroeconomic Stabilisation in a Globalised World Econ-
omy
In the monetarist EMU blueprint there is no room for Keynesian stabilisation policies, even
though such policies would be much more effective on a European level than just within sin-
gle European countries. With world-wide integrated financial markets simply pursuing na-
tional macroeconomic policies has no large effect anymore on the economy, if the economy
has not the size of the American one.
175
In the case of free capital mobility and floating exchange rates has fiscal expansion no sub-
stantial effects on a small open economy. Fiscal expansion increases the interest rate. But
higher interest rates prompt a capital inflow and an appreciation of the currency. As long as
the local interest rate is above the world rate, capital inflows will continue to appreciate the
exchange rate. In essence, the expansionary effects of the fiscal policy are offset by the con-
tractionary effects of the currency appreciation. A monetary expansion on the other hand
has an effect on aggregate demand, but it works through its effect on the exchange rate rather
than through its effect on interest rates as it would in a closed economy. Monetary expansion
leads to a decline of the interest rate provoking a capital outflow from the country, as inves-
tors respond to the gap between low domestic interest rates and higher world interest rates.
This capital outflow causes the exchange rate to depreciate and improves the trade balance
(Sachs and Larrain, 1993: 417-419).
Thus, EMU has created new conditions for effective national fiscal policy. Short-term interest
rate becomes again a political variable and is not given by markets. The `national' foreign re-
striction disappears with EMU, whereas the `European' foreign restriction is quiet small,
given especially the limited openness of the European economy. We have seen this during the
time of the Asian crisis where the Euro-zone was well sheltered from outside turmoil and a
heaven of stability. Therefore shielded from the instability of international financial markets
national budgetary policy has its maximal effects. The effects of a budgetary expansion are
not anymore offset through an increase in the national interest rate as in the case of a small
open economy. Now the stability pact wants to prevent excessive fiscal laxism. But it forgets
that other countries benefit double from a fiscal expansion in another country. Once, through
a higher demand in the expanding country and thus more exports to it. Second, through an
increase in competitiveness of non-expanding countries since the inflation will be relatively
higher in the expanding country than in the non-expanding ones. Short, budgetary expansion
in one country leads to a decline of budget deficits in others. Thanks to EMU each country
regains its budgetary autonomy and is beneficially influencing others. But the stability pact
prevents this. Therefore one hardly understands the logic behind the stability pact (Fitoussi,
1999: 30-36).
99
It can only be interpreted as the conscious political decision for another, the
99
There is only the argument of excessive deficit left. But market agents are not very likely to give money to
insolvent countries. Therefore interests for highly indebted, high risk countries will raise (preventing further
indebtment), whereas at the same time the interest rates for less inflationary, less risk countries will decrease.
176
ultra liberal model of society.
Since the EURO-11 countries have renounced their monetary policy to the ECB, fixed on an
anti-interventionist zero inflation policy, and restricted their national fiscal policy by the sta-
bility pact, there is no room left for European countries to pursue stabilisation policies, inde-
pendently or European. With successful European economic integration we see the demise of
the nation state. Once again, it is by conscious political decisions of the part of nation states,
that their traditional economic functions of allocation, redistribution and stabilisation have
been severely weakened in the name of economic efficiency. So far there was no substantial
positive, political integration following negative, market integration. This is a problem be-
cause European stabilisation policy would make sense very much. European stabilisation pol-
icy is much effective than national stabilisation policy. Relaying only on automatic stabilisers
(progressive income taxation generates more taxes in boom phases and less in recessions) is
surely not enough to confront adverse economic shocks.
Policy options for a large economy are quiet different in a globally integrated economy. Un-
like a small economy a large economy has the power to influence both domestic and world
interest rates. In the large economy case, the fiscal expansion is not fully offset. To the con-
trary, it has the power to raise world interest rate through a fiscal expansion. The foreign in-
terest rate rises, and the flow of capital into the home country is somewhat less, so that the
exchange-rate appreciation is smaller. There is less crowding out of net exports in the large
economy case. In this case, the expansionary effect of fiscal policy is not completely offset by
a currency appreciation. Thus, fiscal policy would have the maximum effect when pursued in
a coordinated attempt in Europe to secure enough leverage. Therefore further enforcement of
the framework for coordination of macroeconomic policies is needed, going beyond the non-
binding, on `peer pressure' relying Council guidelines. Monetary policy of a large economy
has an even stronger effect than monetary policy pursued by a single small country. A large
monetary expansion has the power to reduce both domestic and world interest rates (Sachs
and Larrain, 1993: 426-428). Thus, the most successful stabilisation policy would be Euro-
pean wide demand management by the ECB. Again, EMU and monetary federalism actually
liberate member countries from market pressures and create at least in theory the potential
And as the past has proved, European countries could also be responsible without stability pact (Fitoussi, 1999:
35/36).
177
for successful political interventions. But monetarist doctrine, inscribed in the Treaty of
Maastricht prevents this.
The monetarist architects of the Treaty of Maastricht and the stability pact argue that Keynes-
ian stabilisation policy has become obsolete, based on theoretical arguments (rational expec-
tations, problem of timing successful interventions, stability of the macroeconomic frame-
work, etc.) But these are all arguments not ultimately settled in the theoretical debate. On the
other hand is the empirical evidence of the costs of inflation for economic growth weak. Even
a conservative, monetarist economist, like Barro (1997: 95), must admit, based on his own
empirical estimations, that for inflation rates below 20 percent per year the relation between
growth and inflation is not statistically significant. It seems as if in general the costs of mod-
erate inflation are acceptable. Therefore in case of major economic crisis demand manage-
ment makes still sense. And excessive fiscal and monetary austerity is surely accelerating un-
employment. These are the normally forgotten costs of disinflation.
But than comes the second line of defence. It is the argument that most of European unem-
ployment is structural demanding supply side reforms and not cyclical. (Only cyclical un-
employment could be cured by demand management). But also here, as Artis (1999: 7)
writes,
100
the theoretical debate is still open. The OECD estimates (1994), suggesting Euro-
pean unemployment being nearly totally caused by structural factors, are not uncontested.
Therefore you might recognise that labour markets do need to be more flexible to get people
back to work, but until then tight macroeconomic policy can only make things worse. This is
also the view of Modigliani et al. (1998: 5).
Prospects for European Fiscal Federalism
Relaxation of monetarist austerity ideology and strengthening of fiscal federalism would al-
low for using the full potential of European macroeconomic stabilisation policy as an alterna-
tively. No one has any doubt that the Maastricht monetary union is imperfect. European
monetary union operates within a highly decentralised political system and with highly decen-
tralised fiscal policy. Therefore EMU must be complemented by at least greater coordination
100
cf. Staiger et al. (1996) and Ball (1996), NBER Working Papers No. 5477 and 5520.
178
of economic policies. Political union must counterbalance monetary union and secure solidar-
ity and an adequate management of interdependencies. So far feelings of solidarity between
citizens of different EU member states are quiet weak. Thus, governments are relatively un-
willing to engage in European fiscal federalism. But there are already some instruments for
solidarity between member states or in respect of certain groups (young people, the long-term
unemployed, etc.) taking shape mainly through the Structural Funds.
Established monetary unions, like the United States, Canada or Switzerland, all have redistri-
bution at federal level. Fiscal federalism and centralisation can partly offset the loss of ex-
change rates and foster cohesion. Federal solidarity systems (regional transfers through taxa-
tion and social security, and above all unemployment benefits) have automatic stabilisation
effects. Central stabilisation has two major benefits: the insurance pooling of risks and inter-
nalisation of policy spill-overs. Large-scale EU-wide redistribution mechanism is required to
cope with asymmetric shocks. However, member states could not yet agree on a macroeco-
nomic stabilisation role at the Community level.
Lacking Community level stabilisation there is nevertheless still the possibility for the crea-
tion of national buffer funds for eventual stabilisation of an asymmetric shock. The logic is
simple. Instead of drastically increasing the budget deficit in times of recession, and thus
reaching quiet quickly the limits set by the stability pact, you save some money in good times
which than increases your room of manoeuvre in bad times. Finland has made this so far
unique step in Europe in November 1997. It is the result of a tripartite agreement between
government, employers, and employees. Finland has learned its lessons from the breakdown
of the USSR in1990/91. The USSR was the most important trading partner for Finland.
Finland suffered subsequently a decline in GDP of 12 percent, leading to a raise in the unem-
ployment rate from 3.4 to 20 percent. The Fins know that they are also in the future a prime
candidate for an asymmetric shock due to their prime dependence on the timber industry. But
in such a case there is no help to be expected from the ECB, having the European interest in
mind and being forced to follow an anti-inflationary policy. No substantial financial aid is to
be expected from Brussels neither. Therefore the Fins have created two buffer funds them-
selves: one fund in the pension scheme and another in the unemployment insurance scheme.
These funds will provide extra income protection during periods of economic crisis, and will
keep variations in social security contributions under control. To build up these buffer funds,
the social partners agreed that during periods of prosperity both employers and employees
179
will contribute more than is needed to cover social security expenditures, the surplus being
paid into the buffer funds. In times of crisis, however, they will be able to lower their contri-
butions without wages falling (Pochet, 1998: 84 and Fitussi, 1999: 215). Such preventive
buffer funds are best examples of farsighted Keynesian politics.
The creation of more such national buffer funds would be surely a step into the right direc-
tion. Eichengreen (1998: 7) thinks that balancing simply the budget and having in the future a
surplus in boom times will be already enough. Say one percent surplus in good times allows
for a deficit of 4 percent in times of recession. The Commission (1997d) has analysed 24 se-
vere recessions, defined as episodes of negative growth of GDP of 0.75 percent or more, and
found out that output gaps widened on average by 5.5 percent, while actual budget deficits
increased by 3.5 percent of GDP. Thus, a one percent surplus will suffice to accommodate
swings. Therefore it looks like as if during the next years further fiscal retrenchments are
needed to create the necessary fiscal room of manoeuvre to deal with future cyclical shocks.
Either way buffer funds or budget surplus, they are both very important because they can take
pressures away from the labour market for excessive flexibility and mobility lacking Euro-
pean fiscal federalism and stabilisation policies. But collective insurance solutions are always
superior to individual insurance solutions due to the better spreading of risks in case of collec-
tivisation. This might be the reason why in the US as well as in Canada monetary union was
developed first, but soon accompanied by flanking fiscal federalism.
A next step could therefore be the establishment of a solidarity fund in connection with EMU.
The purpose of this new fund, which could for example replace the cohesion fund (already
linked to EMU), would be to finance active employment policies conducted by the member
states. It would be triggered when the unemployment indicators in a country/region diverged
by plus x percent from the Community average. Revenues would be transferred temporarily to
partners confronted by short-term economic difficulties. Thus, the function would be the one
of a shock-absorber for asymmetrical shocks. Later when political circumstances permit it
could be further developed towards a more encompassing solidarity mechanism. Therefore it
has a hybrid nature part stabilisation fund and part solidarity fund. In a sense such a EMU
solidarity fund would be a kind of insurance for national social security systems. The advan-
tage of funding only active policies is that the level of solidarity needs not to be as high as for
passive measures (transfers). In other words, governments and public opinion are more likely
to accept aid measures for training or other `active' measures than for the funding of unem-
180
ployment benefits at European level. Moreover, the stabilisation aspect of the fund ensures
that rich countries/regions would be perfectly eligible to benefit from it (OSE, 1998: 163-
167).
The political momentum for such an EMU solidarity fund might come as an irony from
the strict application of the stability pact. The more tightly the stability pact is applied, the
less capacity EU member states will retain to operate their own automatic fiscal stabilisers.
Lacking both an independent national monetary policy and an independent national fiscal pol-
icy, they will be tempted to ask the EU to do the fiscal stabilisation for them. Strict enforce-
ment of the stability pact could thus lead to stronger political pressure for the transfer of
budgetary authority to the EU level (Eichengreen, 1998: 8).
Today, we are far away of such a situation and the EMU blueprint is one of monetarist auster-
ity. At the centre stands the quest for freeing market forces from unnecessary restrictions.
EMU allows to benefit from the full potential of the internal market. EMU improves the allo-
cative efficiency of the market. So far so good. But besides allocative efficiency the necessary
stabilising and redistributive measures have been forgotten. It is believed that monetary union
will be stable thanks to the stabilising effects of free markets. Which might be quiet mistaken
since in cases of imbalances the social costs of monetary union are quiet dramatic. Lacking
Community level stabilisation and substantive redistribution policies wage flexibility and la-
bour mobility are the shock absorbers of last resort. This will destroy social cohesion.
Economic austerity has already destroyed social capital during the Maastricht convergence
process. But in order to prevent further depletion of social capital EMU must become socio-
politically embedded. The right balance between economic flexibility and social connected-
ness must be found. European economic and monetary policy must develop in tandem with
social and cohesion policies and must be embedded in a proper framework of policy coordina-
tion. In this regard the present European Employment Pact is not more than a step into the
right direction. Its aim is policy coordination. But the coordination of national employment
policies and the whole macroeconomic dialogue is non-binding and can only rely on peer
pressure. Comprehensive reforms must go further in order to secure that the future European
economic system will not be `under-stabilised' against both common and asymmetric shocks.
First, employment must become an equal objective, besides price stability, for the ECB. This
would improve stabilisation. EMU should use monetary policy for macroeconomic stabilisa-
181
tion to combat cyclical unemployment. Second, the requirements of the stability pact for fis-
cal austerity should be relaxed creating room of manoeuvre for anti-cyclical deficit spending.
Third, in order that such nationally pursued fiscal policies can have the maximum possible
positive effects, they must be coordinated at the European level. This means the establishment
of a framework for fiscal policy coordination which goes beyond the present day one relaying
only on `peer pressure'. Ultimately fiscal coordination should lead to European fiscal federal-
ism. Therefore national and European solidarity funds might be important mediating steps.
Fourth, fiscal policies and monetary policy should be coordinated in a macroeconomic dia-
logue, as agreed at the Cologne European summit. But unlike the Cologne project of a talking
club, the macroeconomic dialogue should lead to binding coordination. What is at stake is
about who and how will determine the macroeconomic priorities for the EU as a whole. Fi-
nally, European fiscal and monetary policy should be coordinated at the international level as
well. International stability does not result naturally from sound domestic policies. There are
international spill-overs in the area of macroeconomic stabilisation. In order to make success-
ful international cooperation possible the EU should become a global player (cf. part IV `An
internationally cooperative Europe'). The threat facing the EU today is that in view of mone-
tary union and Eastern enlargement the necessary social and institutional embedding of EMU
is forgotten.
European Social Policy
Economic integration makes social regulations necessary. There are two basic reasons why
social protection should be handled at European level. Firstly, because the process of Euro-
pean economic integration is in itself bound to affect the future of national social protection
systems (free movement of workers, freedom to provide cross-border services, like supple-
mentary pension scheme or European groups of private clinics, or of course, EMU). Sec-
ondly, however different national security systems may be, they are faced with similar prob-
lems (demographic change, control of health spending, unemployment policies, etc.) (Ventur-
ini, 1998: 109, 110).
182
The Acquis Communautaire in the Field of Social Policy
Starting with the Treaty of Rome we see that initially it did not envisage a major role for
European institutions in the field of social policy with the exception of free movement of
workers, the freedom to establishment, and the principle of equal pay for men and women for
equal work. It was the Single European Act (SEA) which has broadened the field of social
policy actions. Especially under the influence of Jacques Delors, then president of the Com-
mission, the European social space was seen as being the necessary complement to the estab-
lishment of the internal market (Ziltener, 2000a). In 1989 the other member states circum-
vented British intransigence by adopting the (legally not binding) Social Charter proclaiming
a whole set of social rights for the European citizens (provisions on freedom of movement,
employment and remuneration, living and working conditions, freedom of association and
collective bargaining, training, information, consultation and participation, and equal rights
for men and women). This Social Charter was subsequently integrated into the SEA in the
form of a Social Protocol (to which the UK was not obliged to follow).
In general the SEA broadened the objective of social policy, already referring in the Preamble
of the SEA to the objective of social policy by stating the aim of `promoting social justice'.
The SEA added two new provisions: TEC Art. 118b is a rather weak provision in line with
the `aspirational character' of the original provisions, which allows the Commission to en-
courage social dialogue at EC level. TEC Art. 118a provides, for the first time, a legal basis
for the adoption of directives to improve, especially in the working environment, the health
and safety of workers. EC harmonisation is to provide minimum requirements for health and
safety of workers. Examples of legislation adopted under Art. 118a are the directive on paren-
tal leave (Dir. 89/391), on pregnant and breast-feeding workers (Dir. 92/85), the so-called
`working-time directive' on the reduction of working hours to 48 hours per week (Dir.
93/104) and on the protection of the health and safety of workers (Dir. 91/383).
The Treaty of Maastricht on the European Union combined the objective of promoting `social
progress' with the strengthening of `social cohesion'. While the substance of the provisions
remained unchanged, renumbering was agreed upon, leading to a new TEC Title VIII `Social
policy, education, vocational training and youth'. Other new provisions of social nature were
included in the new titles on culture (TEC Title IX), public health (TEC Title X), consumer
protection (TEC Title XI) and economic and social cohesion (TEC Title XIV). In the TEU
183
Protocol No. 14 on Social Policy and its annex all member states, with the exception of the
UK, agreed to pursue a broader social policy. Essentially it underlines the wish to implement
the 1989 Social Charter.
After the new wave of Euro-scepticism and the debacle of the Maastricht Treaty ratification,
together with an economic crisis with unprecedented levels of unemployment Delors took the
initiative to present a new White Paper. The White Paper on `Growth, Competitiveness, Em-
ployment The Challenges and Ways Forward Into the 21
st
Century' (Commission, 1994)
tried to preserve some crucial elements of the `European model', while also taking into ac-
count new economic theory, especially recognising the need for greater labour market flexi-
bility. It some how tries to reconcile supply side and demand side measures. In a globalizing
world protectionism does not play any role. Unemployment can only be solved through
higher growth rates, but growth of the US kind which is labour intensive. Emphasis is laid on
continuous education and training in order to help workers to adjust to the constantly chang-
ing requirements of the market. The European welfare states has to adapt, but must be pre-
served. Priority should be given to investment on infrastructure (with emphasis on transeuro-
pean networks in transport, energy, and telecommunication) and R&D. To secure ecological
and social sustainability taxes should shift from labour to environment pollution. The role of
the Union respecting the principle of subsidiarity - is essentially of a forum for debate, a
catalyst for action, and a framework for policy coordination. So to say to foster social capital
accumulation.
Amsterdam and Beyond
Labour's victory in the British elections in May 1997, combined with the challenge of bring-
ing Europe closer to the citizens, led to the formal inclusion of the Social Protocol in the body
of the Treaty of Amsterdam. At the same time, pressure of public opinion pushed the member
states to add specific provisions on employment in the treaty.
101
`Best practice', information
exchange between member states, and the promotion of innovative approaches have gained
importance.
101
cf. our previous discussion of the European Employment Pact.
184
TEC Art. 136 broadens the objectives:
The Community and the Member States [...] shall have as their objectives the
promotion of employment, improved living and working conditions, so as to make
possible their harmonisation while the improvement is being maintained, proper
social protection, dialogue between management and labour, the development of
human resources with a view to lasting high employment and the combating of
exclusion. To this end the Community and the Member States shall implement
measures which take account of the diverse forms of national practices, in particu-
lar in the field of contractual relations, and the need to maintain the competitive-
ness of the Community economy.
A new legal base to adopt measures to combat social exclusion TEC Art. 137.2 is introduced.
In the social action program 1998-2000 there is a list of concrete measures planned. The
European Social Fund (ESF) has started a pilot project, worth 25 Mio. Euro, to investigate
`local social capital'. In member states decentralised social experiments should take place.
New, innovative ways to combat unemployment, to foster social integration, and community
building will be supported. Further European research in the areas of `social networks, trust
and community building in Europe' is financially supported. With regard to equality of man
and woman the Treaty of Amsterdam has broadened the legal basis. TEC Art. 141 demands
now `equal pay for equal work or work of equal value' together with the possibility for mem-
ber states to enact `positive discrimination' measures. Additionally the social dialogue provi-
sions of the social protocol are incorporated into the treaty TEC Art. 138-140. With the Am-
sterdam treaty co-decision procedure with qualified majority voting is extended to the social
policy field (nevertheless keeping the unanimity requirement in sensitive areas like social se-
curity or social protection) (Scappucci, 1998: 249-262; Mallet and Milliat, 1997; Keller,
1997).
A yet unsolved issue falling partly into the social policy chapter is the European company
statute, including provisions for the participation of workers in the management of firms. It
was once suggested by Jacques Delors in 1988 to give the European social space a concrete
meaning. The in itself uncontroversial issue of a European company statute, which would fa-
cilitate cross-border mergers, has shown to be enormous difficult. This because the Commis-
sion has always tried to link it with provisions for workers' participation, respecting existing
national legislation in this area, like the German `Mitbestimmung'.
Discussion has started on how to use the scope in the Amsterdam Treaty for Community ac-
tion to combat social exclusion in order to promote a `Europe for all'. TEC Art. 137 provides
185
for incentive measures to support member states' action to combat social exclusion. The
Commission is looking for projects combating social exclusion and anti-discrimination
through the development of civil dialogue. It tries through financial assistance to foster civil
society actions and its transnational cooperation.
102
These are formidable European measures
to foster social capital accumulation in Europe.
The European Parliament has called the Commission in March 1999 to set in motion a proc-
ess of voluntary alignment of objectives and policies in the area of social protection, modelled
on the European employment strategy.
103
Existing cooperation on the European level should
be deepened in order to assist member states to modernise their social protection schemes and
to formulate a common political vision of social protection in the EU. Based on an exchange
of experience and common policy discussions could something like `social policy guidelines'
be developed, together with a monitoring mechanism in order to identify best practice. Like
this, the EU could also be in the area of social policy a catalytic force. Internationally coordi-
nated solutions benefit from a legitimacy bonus and can eventually even take recurs to the
legal force of EC directives. In case not every member state can be convinced to participate in
this endeavour, the Amsterdam Treaty allows now closer cooperation of just a sub-group of
members.
A step in the direction of closer cooperation of social policy is the last Communication from
the Commission (1999a) on an EU-wide strategy for modernising social protection. It sets out
the major challenges facing all member states in this area. The communication establishes an
agenda for collective reflection on four key objectives: to make work pay and provide secure
income, to make pensions safe and pension systems sustainable, to promote social inclusion,
and to secure high quality and sustainable health protection. It also lays out the context for
social policy actions, member states as well as European.
European economic integration has entered a new stage with the introduction of the Euro.
With EMU there is a new emphasis on sound public finances and more flexible labour mar-
102
Budget line B3-4101 enables the Commission to provide support for actions carried out by charitable asso-
ciations, including civil society organisations such as NGOs, voluntary organisations and foundations.
103
Resolution on the Commission report to the Council, the European Parliament, the Economic and Social
Committee and the Committee of the Regions on `Social Protection in Europe 1997' (A4-0099/99).
186
kets. Expenditure, taxes and social charges should be reformed in order to support employ-
ment and job creation. Central to the development of the European employment strategy is a
recognition that employment and social protection policies are closely linked. Eastern en-
largement is a historical chance but also a challenge. It will be about integrating up to 10 Cen-
tral and Eastern European countries (CEECs) with a combined GDP of less than 4 percent of
the Union's GDP, but with a population of 105 Mio., being the equivalent of 28 percent of the
Union's population, and a markedly different economic structure. Modernisation of social
protection of current member states as well as in applicant countries is important. On the one
side must workers in present member states be socially secured in order to accept new com-
petitors from low-wage countries. On the other side must applicant countries reform their sys-
tems in order to take on the acquis communautaire in this field and to secure their vulnerable
population from the exposure to the competitive pressures of the single market. Most impor-
tant for both sides will be to find the path to rapid growth. Only a growing Western Europe
will create enough demand for exports from CEECs allowing them a decent standard of living
and preventing them to have recourse to social dumping.
More important than just to talk about social policy and to exchange ideas is the establish-
ment of rights. Fundamental rights delineate the foundation of a society. They guarantee the
individuals' self-determination and participation chances. The EU can strengthen European
society and democracy by securing its citizens fundamental rights. In March 1996 a `Comité
des Sages' appointed by the Commission presented its report on the need to recognise a series
of fundamental civil and social rights, and to incorporate them into the Amsterdam Treaty.
The Comité suggested that the EU should first include in the Treaty a minimum core of rights
and at a later stage set in motion a consultation process which would update and complete the
list of civil, political and social rights and duties.
Despite the appeal of the Comité des Sages and wide support the Amsterdam Treaty does not
contain a basic set of fundamental rights in the form of a `Bill of Rights'. Nevertheless it was
a decisive step ahead. The new Treaty affirms the Union's commitment to human rights and
fundamental freedoms TEU Art. 6.1 and explicitly confirms its attachment to fundamental
social rights (Preamble, fourth recital). But rather than listing fundamental rights, the Treaty
of Amsterdam establishes procedures intended to secure their protection. TEC Art. 13, for in-
stance, empowers the Council to take appropriate action to combat discrimination. Will look
at this new anti-discrimination article in the next chapter in more detail. Finally, TEU Art. 7
187
provides that the Council may, in case of serious and persistent breach of human rights, sus-
pend a member state from its Treaty rights. Overall, there is still a high degree of confusion
left (Commission, 1999b).
Protection of fundamental rights is a founding principle of the Union and an indispensable
prerequisite for her legitimacy. Therefore the Cologne European Council agreed to consoli-
date the fundamental rights applicable at Union level in a Charter, a kind of `Bill of Rights' in
order to make overriding importance more visible to the Union's citizens. Until the European
Council in December 2000 a draft document should be elaborated.
104
Finally, the most important question falling under the heading of `European social policy' is
the question whether the EU should introduce an EU-wide social security system. The har-
monisation of European welfare states is extremely difficult as a consequence of the structural
and institutional heterogeneity of existing national solutions, and the lack of sufficient trans-
national solidarity. Such a proposal, or a more modest one of having only a European wide
unemployment insurance, lacks at the moment any serious political support. Richer member
states are not willing to transfer large amounts of money towards poorer member states. Euro-
pean social policy also always faces the question of how to respond to the existing diverse
social circumstances of different economic development. Paying a poor unemployed person in
Portugal the same as someone living in a rich, but expensive urban area like London or Ham-
burg would be unjust taking into account the different costs of living.
Thus, the question is how to promote convergence among the diverse social policies in
Europe. Perhaps the best developed proposal is the `social snake' scheme under which agreed
minimum standards would be gradually raised towards those prevailing in the member states
with the best developed systems of social protection. The goal is to limit the difference be-
tween the most extensive social provision and the least by ensuring that if some member
states increase their provision, efforts would be made to obtain improvements in other mem-
ber states. If necessary, this would include transfers of resources from richer to poor coun-
tries. Although the snake parallel relates to the short-lived monetary system of the 1970s, the
intent of this schemes is to upgrade social provisions, unlike the exchange rate snake which
104
For more details (legal bases, composition of the working group, etc. cf. Annex IV of the Presidency Conclu-
sions, Cologne European Council, June 3 and 4, 1999.
188
could move up or down (EP, 1994: x).
Political efforts are needed to improve solidarity and the sense of citizenship and belonging-
ness to Europe. For instance, even in the US, where social welfare is not so important, three-
quarters of welfare spending is channelled through the federal tier (EP, 1994: xiii). Whether
we will see in the future a similar Europeanisation of welfare with actual entitlements beyond
health and safety regulations - a real European social citizenship - will the future show.
Schmitter (1999) has made such a proposal with regard to combat extreme poverty. The
means for doing this would consist of a Euro-stipendium, i.e. the monthly payment of a stipu-
lated amount of Euros to all citizens whose total earnings correspond to less than one-third of
the average income of everyone living within the EU. Or we could start up financing a Euro-
pean `right to be useful' scheme (cf. previous discussion, p.?). Every European could become
entitled to do, say five years of publicly funded activity beyond the logic of market economy.
Transnational civil society projects could be explicitly fostered. The money to finance these
proposals could come from present EU agricultural subsidies and regional/structural funds.
Before dealing with regional and structural funds in more detail we will have next a closer
look at European anti-discrimination measures.
European Anti-Discrimination Measures
We devote one full chapter to the question of anti-discrimination because we think that in this
area European actions might have the greatest benefits in fostering social capital. A discrimi-
nation-free area as large as possible makes economic sense, too. It might be no accident that
some of the most socio-economically developed countries of Europe, like the Netherlands and
the Scandinavian countries, are very tolerant countries, as well. It is possible to enforce Euro-
pean anti-discrimination measures even lacking the necessary ties of solidarity enabling large
scale fiscal redistribution. The value of variety was recognised as central to the process of
European integration since its beginning. In the following we will first have a look in chrono-
logical perspective on some of the most important measures regarding anti-discrimination,
before looking at future perspectives of TEC Art. 13.
189
Historical Development
While during the 1970's and 80's equal rights for women stood in the forefront, the fight
against racism, hatred of foreigners and discrimination based on sexual orientation is added
during the 90's.
1950 Article 14 of the European Convention on Human Rights (ECHR) (following article 2
of the general declaration of human rights) specifies that in the ECHR proclaimed right and
liberties are valid without any distinction, as for instance sex, race, colour, language, religion,
political or other convictions, national or social origin, relation to a national minority, fortune,
birth or another status.
1957 Article 6 of the Treaty of Rome forbids discrimination due to nationality. Article 119
specifies the principle of equal wage for woman and man for equal work. This is concretised
in directives from on 1975 onwards.
1977 Joint Declaration on Fundamental Rights signed by the European Parliament, the
Council and the Commission
1982 The Commission creates a consultative committee for questions of equal treatment of
women and men and launches the first community action program within this range.
1984 The Commission creates an equal rights commission for the support of its female co-
workers. The European Parliament condemns discrimination of homosexuals on the work-
place.
1986 The European Parliament adopts the first report of its Committee of Inquiry into the
Rise of Fascism and Racism in Europe. The Council, European Parliament and Commission
adopt a Joint Declaration against Racism and Xenophobia.
1988 The European social fund (ESF) tries since its reform to promote equal treatment of
man and woman. The Commission starts to actively promote disabled.
1989 The Community Charter of Fundamental Rights of Workers mentions the importance
of combating every form of discrimination, including discrimination on the grounds of sex,
colour, race, opinion and beliefs.
Since 1990: The European Council decides annually resolutions against racism and xenopho-
bia. In the EP it comes to numerous resolutions concerning the dangers of right-extremist
force.
190
1991 EP and Council of Ministers accept the Charter against sexual annoyance at the work-
place. It contains explicitly also the protection of lesbians and gays.
1993 Roth report of the EP about equal rights of homosexuals in the EC. Beginning of HE-
LIOS II program for the integration of the handicapped.
1994 The EP decides as answer on the Roth report a resolution, which demands equal rights
for gays and lesbians in the EU. At the Corfu Summit, acting on a Franco-German initiative,
the European Council decides to set up a Consultative Commission on racism and xenopho-
bia. Further resolutions of the European Council and the EP on anti-racism.
1995 The feasibility of setting up a European Monitoring Centre on Racism and Xenopho-
bia is analysed. The Commission proposes a Council Decision to designate 1997 as the Euro-
pean Year Against Racism.
The Social Dialogue Summit of employer and trade union representatives adopts a joint dec-
laration on the prevention of racial discrimination and xenophobia and the promotion of equal
treatment at the workplace.
Council decision about the 4
th
community action program to promote equality of woman and
man (1996-2000).
1996 The European Parliament, Economic and Social Committee and Committee of Re-
gions give backing to the 1997 European Year proposal.
The EP demands in its annual human rights debate, referring to its 1994 resolution, to abolish
all kinds of discrimination of homosexuals.
Communication from the Commission about integration of equality of woman and man in all
its community policies and actions (`mainstreaming'). Another Communication of the Com-
mission treats the topic of women trafficking for the purpose of sexual exploitation. Based on
the 1991 charter against sexual announce at the work place the social partners start consulta-
tions about further proceeding. The Council decides an important directive concerning paren-
tal leave, strengthening the position of women in the labour market.
1997 European Year against Racism: promoting integration and opening pathways to inclu-
sion, promoting equal opportunities and reducing discrimination; raising public awareness
and combating prejudice; preventing racist behaviour and violence; monitoring and punishing
racist crime; international cooperation; strengthening anti-racist legal provisions including
those on a European level
191
Member States and the European Parliament agree to the setting up of a Monitoring Centre in
Vienna. It will have a dual role: to take stock of and evaluate racist and xenophobic phenom-
ena and analyse their causes and to formulate concrete and practical proposals to combat
them.
Numerous new regulations concerning fundamental rights and anti-discrimination in the re-
vised Treaty of Amsterdam: TEC Article 13; general anti-discrimination article. Possibility to
fight discrimination based on sex, race, ethnicity, religion, disability, age or sexual orienta-
tion. Declaration 13 concerning persons with a handicap: in case of harmonisation measures
should the needs of handicapped people taken into account. TEC Art.3 underlines that the
Community shall foster the equality of woman and man in all its activities. TEC Art. 141 re-
formulates the old article 119 into the principle of equal pay for equal work or work of equal
value.
At the Luxembourg job summit the special position of women in the labour market is stressed
and has to be taken into account in future labour market guidelines.
1998 Communication from the Commission: An action plan against racism. The main goals
are to path the way for new anti-discrimination legislation, to take the fight against discrimi-
nation in each policy area into account, to develop and exchange new models of integration
and to foster information and communication.
The European Region of the International Lesbian and Gay Association (ILGA Europe) pub-
lishes with support of the Commission the report `Equality for Lesbian and Gay Men A
Relevant Issue in the Civil and Social Dialogue'.
The European Monitoring Centre on Racism and Xenophobia starts its work in Vienna and
future perspectives of the new article 13 are discussed at an expert conference (Commission,
1999e and ILGA, 1999).
Future Perspectives
The new article 13 (TEC) of the Treaty of Amsterdam specifies that:
"Without prejudice to the other provisions of this Treaty and within the limits of
the powers conferred by it upon the Community, the Council, acting unanimously
on a proposal from the Commission and after consulting the European Parliament,
may take appropriate action to combat discrimination based on sex, racial or eth-
nic origin, religion or belief, disability, age or sexual orientation."
192
In relation to article 13 the question arises, why do we need at all anti-discrimination meas-
ures?
· European identity: Intolerance and in particular racism are diametrically opposed to all
what Europe stands for - mutual respect and understanding for each other, civilness in its
broadest sense. European societies are multicultural and multiethnic societies, and their
diversity is an enrichment. A commitment for a integrative and partizipative society goes
along with an engagement for a fight against discrimination. While the main responsibility
for the fight against intolerance is with the member states, the transnational dimension
justifies actions on European level. The right to equal treatment and non-discrimination
are central principles and common values, on which the process of European integration
builds.
· Democracy: Pluralism is a characteristic of democracies. Democracies relate liberty with
equality. The equality ideal demands the fight against existing as well as future forms of
discrimination. No society is secure against intolerance, racism, xenophobia, anti-
Semitism, gay bashing, etc.
· Economic and social rights and development: Racism and xenophobia endanger the sta-
bility of society and thus the functioning of the economy (Commission, 1995). The Euro-
pean economy does not use the full potential of the diverse workers. Diversity promotes
new ideas and possibilities. Selection decisions should be based on objective criteria. Se-
lection decisions which are not build upon merit are inefficient and lead to unfair deci-
sions. Unfair decisions result in a loss of legitimacy and motivation (UNICE/ETUC/
CEEP, 1995). Social and economic integration is a central precondition for tolerance. In-
tolerance excludes, but at the same time does it build up on exclusion. Where people feel
threatened they want to exclude other people. Therefore the fight against discrimination
goes along with general improvements at the labour market, immigration policies and in-
tegration policies (like access to education and housing) (Commission, 1997c).
For the justification of European actions above all the question of subsidiarity is at the centre
of attention. What is the value-added of community actions?
· Racism and intolerance are generally transnational problems, which should be fought
therefore also transnationally. Most important is a change of attitude of the broad popula-
tion. Therefore engagement of civil society is central. Many small, decentralised projects
can be supported in their fight against intolerance. The question is, which is the most ade-
193
quate level for financing them (regional, national or European)? In any case exchange of
experience on European level makes a lot of sense (`benchmarking' and `best practice').
· In order to guarantee the free movement of people in the single market a European-wide
minimum base of discrimination protection is necessary. With unequal protection dis-
criminated minorities can be limited in their by TEC art. 14 assured freedom to move
(Commission, 1997d).
· European standards can have a catalytic function for backward member countries and lit-
tle progressive new members.
· Discrimination protection can be understood as part of EU citizenship. Discrimination
concerns everyone everyday. That is why European anti-discrimination protection brings
the EU more closer to its citizens.
Besides the question of subsidiarity of anti-discrimination measures is the relation between
article 13 and other relevant Treaty articles important, as well as means and options.
Article 13 is considered generally as large progress in the protection of human rights in the
Community. It reflects the human rights dimension of TEU art. 6. Art. 13 confers to the
Council the power to take appropriate action to combat discrimination without prejudice to
the other Treaty provisions. In light of this clause the relationship of the other parts of the
Community law is to be clarified. TEC art. 2 specifies equal treatment of man and woman as
explicit task of the Union. According to TEC art. 3 the community works to eliminate ine-
qualities and to promote the equalisation of man and woman with all activities specified in
this article. TEC art. 12 (ex article 6) forbids already since the establishment of the EC dis-
crimination based on nationality. TEC art. 137 and 141 (ex articles 118 and 119) contain an
authorisation to measures, which are to ensure the use of the principle of equal chances and
equal treatment of women and men in work and occupation. In this area are articles 137 and
141 special norms with other procedures. Article 13 is displaced to that extent.
For the fight against discrimination is the abolish of existing forms of discrimination as well
as the prevention of future discriminations important. The `discrimination trap' should be
avoided. Not those who are discriminated should be legally sued, but those who are actively
discriminating others. You should fight the discriminating ones! Article 13 grants for this a
broad framework of actions. They can range from `hard' measures like law (directives and
recommendations), including `affirmative action', to `soft' measures (recommendations, reso-
lutions, action programs, agreements between the social partners, as well as support, informa-
194
tion and monitoring. Important is further exchange of experiences of different anti-
discrimination legislation in order to learn from the most advanced form (e.g. from the
American, too). Article 13 should lead to increased attention for the fight against intolerance
in all policy areas of the EU (immigration policy, free movement of people, structural funds,
education policy, EU citizenship, etc.). That is the idea of `mainstreaming`.
For the furture different strategic options are possible. Should we proceed incremental or radi-
cal, uniform or depending upon the form of discrimination? Do we need binding or non-
binding legislation? Can we use similar law and similar means for similar forms of discrimi-
nation? Can we learn something from the experience of equal rights for man and woman for
the fight against other forms of discrimination? Crucially will be to launch as many small pro-
jects as possible. The formation of a rainbow coalition should help to mobilise the necessary
political will in order to wake the `sleeping giant' article 13.
Then commissioner Padraig Flynn outlined planned further measures in his conclusion speech
at the 1998 Viennese anti-discrimination conference.
First, a horizontal framework regulation should be created, treating all forms of discrimina-
tion related to the work place. Occupation is an area where all forms of discrimination exist.
Non-discriminatory employment is an economic advantage, but also important for social in-
clusion of all people of the EU.
Second, a special regulation concerning racism. It should aim beyond the work place and in-
clude e.g. also goods and services, health and education, as well as sports. Why racism? Re-
search and experience shows that racial discrimination is a fast growing problem in Europe.
But on the other hand it is here where we have a political potential for action, too. The Euro-
pean Year Against racism has created large expectations. This should be used now.
Third, an action program should be developed strengthening cooperation between member
states and civil society. Development of partnerships and of networks should stand at the cen-
tre, together with more knowledge about and spreading of `best practice' (Europaforum,
1998).
European Regional and Cohesion Policy
Article 2 of the Treaty of Rome referred to the objective of a "harmonious development of
economic activities, a continuous and balanced expansion", while in the preamble the con-
195
tracting parties went even further by calling for a reduction of "the differences between the
various regions and the backwardness of the less favoured regions." There were, however,
very few provisions in the Treaty for the reduction of regional disparities. Before 1975, sup-
porting depressed regions was almost entirely a national affair. Redistributive instruments at
the European level have been developed in relation to successive rounds of widening and
deepening.
In the EC's first attempt at EMU, the 1970 Werner Plan, the member states accepted the need
for structural and regional actions to prepare for monetary union. The Werner Plan failed, but
in 1975, after enlargement to Denmark, Ireland and the United Kingdom, the European Re-
gional Development Fund was established. Given the negligible benefit of the Common Agri-
cultural Policy (CAP) to the UK, an EC regional policy could provide a `just retour' for the
UK while building on the British tradition of regional policy. The successive enlargements to
Greece (1981), Spain and Portugal (1986) made the need for a more substantial regional pol-
icy all the more clear. With the single market project regional policy became central to secure
social cohesion. In the single market project, greater competition (the four freedoms) was
coupled with cooperation (social, environment, and research policy) and solidarity (more op-
portunities for all regions). thus in the Single European Act, regional policy was set on a firm
legal basis with a new title on `Economic and Social Cohesion'.
105
The Teary of Maastricht
set up as most important innovation the Cohesion Fund. This was seen by many observers as
a side-payment to the poorer member states in return for their agreement to EMU.
Thus, we see regional and cohesion policy has a double, economic and political rationale. In
EMU different regions manage the restructuring processes more or less successfully. Already
old, conventional trade theory recognises that gains and losses due to economic integration
are uneven distributed. It only stipulates that in total all countries involved will gain. New
theories of international and regional economics see the possibility for concentration proc-
esses to occur and polarisation going along with economic integration. Core-periphery split-
ting might be due to economies of scales and spill-overs of leading industries and regions.
The rich, industrialised countries of the North are profiting much more from the single market
than the poorer Southern countries. The `New Trade Theory' (Baldwin and Venables, 1994)
105
For a more extensive treatment of this topic cf. Ziltener, 2000b.
196
sees the central advantage of trade in the increase of market size. The larger market generated
by integration allows (oligopolistic) firms to exploit increasing returns. Economies of scale
can lead to agglomeration effects, once transportation costs are minimised and barriers to
trade are eliminated. A firm can stay in the North, exploit economies of scale and profit from
better access to technology and high skilled labour available, and deliver nevertheless to
Southern markets. Spill-over effects are linked to the concentration of industry. You might
learn from your competitor, and hire better qualified staff from him. High value added, capital
intensive industry will thus cluster in the North. It will grow more rapidly and can pay higher
wages than the low skilled, labour intensive industry in the Southern periphery (Padoan
1996). This asymmetric distribution of net benefits causes the `cohesion problem'. The
United States with its large integrated market might be a mirror of Europe's future. In the US
industrial activity concentrates strongly around the East and West coast and the Great Lakes.
But a similar, radical restructuring of European industry as consequence of EMU would cause
sever social costs. Therefore the EU tries to counteract this polarised growth with its struc-
tural funds.
Market forces alone are not reducing regional disparities. German unification might be here
an example, admittedly a rather extreme one. But for several years more than 50 percent of
East German per capita income was transferred from the West to the East. EU structural pol-
icy is not that large, but nevertheless quiet substansive as well. It amounts for 35 percent of
the Unions budget. Net annual transfers to Greece, Ireland and Portugal usually exceed 3 per-
cent of their respective GDP, while the corresponding figure for Spain, the fourth member of
the so called cohesion group, is smaller.
Nearly 20 percent of people in the EU still live in regions with output per capita 25 percent or
more below the EU average. By comparison, just 2 percent of people in the US are in a simi-
lar position, and average disparities between States are less than half those between equiva-
lent regions in the EU. Regional convergence occurs through attraction of investment to re-
gions where costs are lower and labour and other resources more plentiful, and through trans-
fer of technology and best practice from leading to lagging regions (Commission, 1999a: 2,
12). EU regional policy helps to improve the competitive position of backward regions
through developing infrastructure (motorways, telecoms, etc.) and human capital (vocational
training, education, etc.) During the last 10 years the poorest regions and countries have
catched up by 10 percent to EU's average income, which can be attributed by roughly one
third to the impact of EU structural policy (Barnier, 1999: 13).
197
The political justification for European scale redistribution and EU regional policy comes
from the fact that regional imbalances may form a barrier to integration. If deeper integration
systematically disadvantages certain regions , the political support for further integration will
vanish. Therefore the EU's very legitimacy is at stake. A certain benefit from the integration
project has to be apparent to everyone (we might remember here the British example of the
`juste retour'). European redistribution is important, since most `poor' regions are concen-
trated in certain member states. Hence national instruments and financial resources alone are
insufficient (Tsoukalis, 1998: 17-23, Glöckler and Junius, 1998: 193-213) .
With regard to social capital accumulation is not just the direct reduction of disparities
through economic convergence important, but also the positive spill-overs of structural pro-
grams. The Commission (1999a: 63-72) has recognised the importance of social capital for
regional development. An efficient and effective public administration together with networks
between firms are important for regional development. The Commission distributes in coop-
eration with the Member States the money of the Structural Funds. Therefore it has developed
a delivery system which has as major features operational elements of programming and im-
plementation and feedback loops of monitoring, evaluation and financial control. This modern
way of public administration can influence beneficially local public administration. The im-
plementation of Structural Funds programs can also accumulate social capital by helping the
formation of local networks in lagging regions. Local partnerships create the contacts between
the many diverse actors from different walks of local life.
In view of Eastern enlargement the reform of the Unions' structural policy will be curtail.
New members will have income levels which are only a fraction of that of the poorest mem-
ber of the EU-15. At the Berlin European Summit in March 1999, the heads of government
have adopted the `Agenda 2000' and new financial perspectives for the years 2000 to 2006. It
was agreed to keep with the present spending limit of 1.27 percent of GDP. But they have
failed to agree upon substantial reforms. The CAP eating up (and wasting) half of the EU's 90
billion Euro budget has not been re-nationalised, nor have there been significant reforms of
EU's structural policies. There is only some small amount of money for pre-accession aid.
Unless there are no other substantial reforms admission of any large CEECs country will be
very expensive, and thus very difficult. This will contribute to a further widening of the gap
between West and East.
European social integration has always been driven by two engines. One engine has been run-
198
ning permanently: the economic engine. Besides that is a second one, which switches off from
time to time: the engine powered by the political venture of the EU. European economic inte-
gration creates a need for social regulation and redistribution at European level (Venturini,
1998: 114, 115). European social and regional policies are needed to secure social sustain-
ability of economic integration. After the opening up of markets, political re-regulation is
needed. More on the urgency of a European federal policy next.
A Federal Europe
With the forces of economic globalisation gaining in strength some observers see the demise
of the nation state (Omahe, 1995) and the rise of regional economies. Critics from the left
(Ziltener, 1999) see this development leading to a `Schumpeterian workfare state' or the
`competition state'. But this implies the ultimate hegemony of the logic of economics. There
is no room left for politics. And thus, our prediction, the social space will fragment. As
spelled out in part I, society as a whole is working according to different rules. Unchecked
markets and dominance of functional rationality leads to a decline of social capital. Therefore
what is needed is political re-regulation beyond the nation state a European polity. In the
following we will first compare the advantages of a federal solution in comparison to compe-
tition of systems. Than we will try to analyse forces and actors which could advance federal
solutions in Europe.
Competition of Systems or Federal Unit?
Some disciples of market fundamentalism think that more unfettered competition is neces-
sary. A single market for goods, services, labour and capital is not enough. Competition be-
tween systems is necessary (Schwarz 1994; Gerken, 1995). What Europe needs is a fifth free-
dom. The freedom to establish competitive governments (Frey 1997). To privatise the state.
Federalists, on the other hand, think that a European polity should be based on the principles
of autonomy, subsidiarity, participation and cooperation. A federal structure and a reformed
welfare state would allow best accumulation of social capital. But the idea of a federal Europe
is not undisputed. Representatives of an evolutionary approach (e.g. Frey 1997; Gerken 1995;
Schwarz, 1994) see danger for the competition of systems. They would prefer loose, competi-
199
tive regimes in the form of a `Europe à la carte'. They reject the idea of a political union, be-
cause they see the inherent danger of overcentralization and of an uncontrolled bureaucracy.
They criticise the constructivist approach of Ex-ante-harmonisation. Harmonisation is refused
from a dynamic perspective. It reduces the pressure to look always for the best solution. Po-
litical cartels protect governments from competition. Some go even so far to argue that a cha-
otic and arbitrary nature of public services, might provoke a backlash from citizens. Chaotic
and arbitrary government causes a decline of social capital. Together with spiritual disillu-
sion, collapse of the ideal of the `open society', and lack of resources for state actions due to
an errosion of the taxbase, public services might come under sever pressure (Commission,
1999c: 51).
Next we will first have a closer look a three allegation against federal unit.
106
First, we will
treat the issue of harmful tax competition and show that there has been already an erosion of
the tax base. Second, the question how political intervention can foster equal representation
vs. the economists allegation seeing always and everywhere rent-seeking. Third, the general
claim that it is ultimately the spontaneous order and innovation dynamic of free markets
which brings civilisational progress. We will challenge this view. As we have developed, we
are convinced that disembedded markets ultimately destroy the social foundations on which
they build. Therefore political unit can not be an obstacle for civilisational progress. We will
show this at the example of comparative historical development of China and Europe. And in
the last part we will give reasons why we should not only aim for federal European unity, but
in order to secure world justice also for federal World unity.
· Harmful Tax Competition
Trying to extend the advantages of market efficiency to the realm of politics is problematic,
because ideally the sphere of the state is characterised by market failure. Politics follows its
own logic. Beside the quest for efficiency there is also a constant strive for equality and
power inherent in the social structure of western societies. Freedom, equality and security are
its conflictive founding principles (Bornschier, 1996: 26-49). A weakened state, slimmed down
and privatised to the largest extent as consequence of enforced regulatory competition, couldn't
106
For a discussion of the most extreme form of competition of systems the idea of functional, overlapping,
competing jurisdictions of B.S. Frey (1997) cf. Leicht (1998a: 202-205).
200
support the market politically anymore. Institutional means to resolve conflicts peacefully would
be missing. A destructive competition is to be expected. Necessary redistribution, to secure
social cohesion and accumulation of social capital, would be missing.
Intensified locational competition makes redistribution ever more difficult. The tax base is
eroding. Some competition between tax regimes might be a good thing, if it encourages gov-
ernments to show more discipline in their tax and spending policies. But to much competition
leads to a `race to the bottom'. For instance from 1995 to 1999 average EU corporate taxes
have fallen from 38 percent by two percent to 36 percent (source: Goldman Sachs reported in
NZZ, 16.8.99). Taxes on transactions of financial instruments have virtually disappeared and
the ability to tax income from financial instruments has been weakened by the existence of
tax havens. The globalisation of financial markets, the reduction in the costs of financial
transactions and the difficulties in tracing such transactions have all played a role in the ero-
sion of the tax base. Higher social charges (mostly proportional or regressive due to income
caps) and flatter personal income-tax schedules as a result of tax reforms in the 1980s have
risen tax rates of low income people (earning only two third of average income) in OECD
countries during the period from 1978 to 1995, on average by 7.5 percent. This trend goes to-
gether with a shift towards increasing importance of consumption taxes. But since consump-
tion taxes are regressive, because poor consume proportionally more than the rich, they have
helped to reduce progressivity of the overall tax system further.
107
All this is part of a longer
lasting trend increasing inequalities between mobile capital owners and high skilled labour on
the one hand and low skilled immobile labour on the other.
The problems created by locational competition are real. They limit the revenue-raising power
of governments. Tax rates and revenues are forced like this progressively downwards. And
this problem worsens with the introduction of the Euro. With EMU mobility increases given
the elimination of currency conversion costs and exchange risk. A shift of taxes away from
capital and onto low-paid labour can have adverse consequences on labour markets. Reducing
107
The shift of taxation towards the less mobile is mostly the result of tax-base erosion and can only partly be
attributed to tax reforms aiming at enhancing economic performance. Another part of the costs of tax avoidance
and evasion comes from the fact that resources must be invested, and diverted from productive investments
(`rent-seeking'), to escape taxation and camouflage income. Such costs are associated with the creation of an
underground, or black economy.
201
the tax burden at the low end may become impossible if it would require to raise tax rates on
highly mobile tax bases (OECD, 1998a: 161, 162, 165, 166).
As a response to the problem of tax-erosion the ministers requested the OECD in May 1996
to study the harmful effects of tax competition, supported by the heads of state in the same
year at the G7 meeting in Lyon. Since than the OECD (1998b) has produced a report contain-
ing guidelines on harmful preferential tax regions. And the EU has started to take the issue of
tax evasion seriously, too. There is evidence that substantial bank deposits and portfolio in-
vestments flow to countries which do not tax interest paid to non-residents and do not ex-
change information with tax authorities in other countries. In response to this problem the
Commission proposes a Directive to establish a `co-existence model' for the taxation of cross
border interest flows of individuals. It would oblige EU countries to withhold tax on such
flows within the Community or to provide exchange of information of cross-border interest
payments to individuals. Attempts have also been made for greater coordination of corporate
tax systems. These differ markedly across EU countries. The Council is working on a code of
conduct for business taxation addressing preferential tax regimes in EU member states.
Only fiscal coordination and some harmonisation at the European level would make it possi-
ble to shift the financing of social protection from taxation on labour to taxation on capital
and energy or pollution (the so called `ecological tax reform'). Pollution a `bad' should be
taxed more, and labour a `good' less. And if you have to tax labour it is a question of justice
to tax those more how can perform more. But locational competition undermines the estab-
lishment of a coherent and just tax system. So fare the EU has not succeeded in tax harmoni-
sation. The problem is that some countries, like Luxembourg, hope to increase their overall
tax base by attracting new capital through low taxation. Or the UK fears that London would
lose of importance as financial centre had it to introduce a withhold tax on interest rate pay-
ments for people from abroad. Such reasoning might make sense for one country, but leads
overall to destructive competition, eroding the fiscal base of the welfare state. Without federal
powers, i.e. majority voting in the Council in tax issues, EU tax harmonisation is extremely
difficult.
108
108
For a further treatment of the issue of tax competition in the EU cf. Dehejia and Genschel 1998.
202
· Equal Representation vs. Government Inefficiency and Rent-Seeking
Proponents of enforced competition in order to tame Leviathan point to the recent resignation
of the Santer Commission because of allegations of fraud, corruption and mismanagement.
But the new Prodi Commission is determined to transform the institution of the Commission
into a modern, efficient administration, and which has not only learnt the lessons of recent
experience, but will also aim to match the best European practice. The new Commission will
become much more open to public scrutiny and put more effort into communicating properly
with the citizens of Europe, giving them open access to information (Prodi, 1999).
Economists assume that the main driving force of most bureaucracies is ultimately to maxi-
mise their budgets. Therefore to much state just leads to rent-seeking. What they normally
miss is that state intervention is normally productive in the form of government social capital.
Additionally, intelligent political interventions (welfare state, etc.) can foster civil social capi-
tal (cf. our previous conceptual distinction on pp. 58-61). But anyway, in the case of the
Commission there are tight constraints for doing so. The EU budget is limited to only 1.27
percent of the total GDP of the EU member states also during the next financial planning pe-
riod (2000 to 2006). The proportion of the EU budget on redistributive policies (such as agri-
cultural and cohesion policies) is set by the member states. As a result, the Commission is
prevented from expanding its budgetary capacity. But this has not prevented the Commission
from developing its executive powers. For example, the proportion of the EU budget spent on
administration increased from 4.35 percent of the total EU budget in 1985, to 4.8 percent in
1994 (Hix, 1999: 52). But this is a very modest increase taking into account the large scope
enlargement of successive treaty revisions (Single European Act, Treaty of Maastricht and
Treaty of Amsterdam). It seems more that the present Commission is under-staffed in order to
fulfil all its tasks.
The task of the Commission should be the one of a `promotional broker', of a `policy entre-
preneur' to advance the European public good beyond particular national or private interests.
But inevitably some interest groups are more able to organise to influence the Commission
than others. Therefore many budgetary lines are used to create an embryonic European civil
society that is transnational in nature and to counteract the excessive representation of pro-
ducer groups in the Union's governance structures. For example, the EU funds the `social dia-
logue' between European-level labour and employers' peak associations and the activities of
the peak association representing consumers at the European level. These funds are essential
203
to establish a `neopluralist' policy community in Brussels, where public and private interests
have equal access to decision-making. Further cohesive European political parties are needed
to promote their interests through formal channels of representation. And federalists would
add a third chamber the Economic and Social Commitee, but with more powers. This cham-
ber should institutionally reperesent the interests f the social partners. Lobbying would be
more transparent and weak interests better represented (cf. p. 50)
All this support for the weak and difficult to organise interests is important to prevent a lack
of countervailing power to the owners of capital. Public interest will always struggle to com-
pete with the more highly organised and resource-rich business lobby. This vision of Europe
dominated by an alliance of big-business and right-wing governments against the people of
Europe was a common criticism by left-wing parties and Marxist scholars in the 1970s and
early 1980s (Hix, 1999: 52, 207, 268).
· Long Term Historical Evolution: What Is Behind Civilisational Dynamics?
Proponents of competition of systems stress the importance of competition as a means for dis-
coveries (Hayek). They like to base their argument on long-term historical processes
(Schwarz 1994: 73-75; Frey 1997: 60-62). For example, the diversity of and the competition
among the different European states in the Middle Ages is seen as the reason for the enor-
mous acceleration in science and economic development in Europe. This is contrary to civili-
sations like India or China, which for a long time were more developed than Europe. This is a
heavy weight argument, because it runs down to the question of the fundamental sources of
our civilisational process.
But political unification is no obstacle for great scientific progress, to the contrary. Taking the
example of China we see that it was politically unified and controlled by a sophisticated, cen-
tralised bureaucracy when the great technical advancements, like the invention of printing
with movable types, gunpowder, the compass and porcelain, etc., have been made during the
Sung-Dynasty (960-1279). During that time China was much far ahead of the rest of the
world. Not political unification as such became a problem for long-term Chinese develop-
ment, but the ability of the centralised state to cut China off from the rest of the world by de-
cree.
China was closed for international trade under the Ming Dynasty. Between 1424 and 1450
international voyages were closed down. The emperor declared the end of explorations and
204
international trade and it was made illegal for Chinese to engage in international travel. The
imperial rulers decided not to expand into the wider world. No doubt, the closure of China to
trade was a decisive event in world history.
109
It robbed China of dynamism (as Adam Smith
repeatedly stressed), cut China off from technological diffusion just as the West was gaining
in technological prowess, and made the Chinese state poorer by cutting it off from a source of
income (taxation of trade). How could it happen? Only a centralised state over a massive do-
main could suddenly, within one generation, decree that the entire society would be cut off
from the rest of the world (Sachs, 1998). The danger of self-isolation was and is the central
threat of a centralised state. Marx has recognised this, too. He saw that the Chinese Imperial
State kind of froze out further class development, because it wasn't too favourably inclined to
commerce (Giddens, 1998).
Besides this more materialistic explanation of differences of development in China and
Europe one should also look at the influence of cultural, arational factors. Max Weber con-
sistent with his belief in the irrationality of the world (1948: 123) thought that concerning
the meaning of life, everything had already been thought in Asia, just more radically than in
Europe (Weber 1921/ 1991: 365, 375). But maybe the conclusion that everything is just a
revolutionary metamorphosis was too radical.
110
The Greeks on the other hand thought that a
stable base (the platonic ideas) exists and that the world can be recognised if we just try hard
enough (Gellner 1988: 76-90). Later science had been seen as `the path to the true nature of
things' or by some Protestants as `a way `to God' (Weber 1948: 42). It was believed that sci-
ence, like religion, could help to uncover the meaning of the world.
Again comparing the development in China and in Europe, we see that the Chinese, even as
late as the seventeenth century, were well ahead of Europe (Giddens, 1998). What China did
109
In the West, where capitalism began to unfold during the 16
th
century, this did not happen. The reason for
this, Marx argues, is that the dynamics of capitalism makes it impossible. Capitalism cannot stay still. It is about
endless change and expansion. Technological change is absolutely fundamental, because if you can produce a
specific technological change you can get a market for a while, until someone catches up with you. It is also a
society which ruthlessly expands into the rest of the world, because the more you can get cheap raw materials
and cheap labour power, the more you can compete more effectively with other people competing with you in
the market place. Capitalist society is therefore based upon what Marx calls the anarchy of the market (Giddens,
1998).
110
Even though this is the same conclusion to which 20th century existentialists came, too.
205
not have, however, and what Europe subsequently developed, was a scientific method that
permitted the progressive conquest of nature through empirical observation and experiment.
The scientific method itself was made possible by a cast of mind that sought to understand
higher-level causality through abstract reasoning about underlying physical principles, some-
thing alien to the polytheistic religious cultures of Asia (Gellner 1988; Fukuyama 1995: 350).
Thus, the problem with a simplistic evolutionary economic approach trying to explain long-
term processes of civilisation is that it misunderstands the complexity of developmental proc-
esses.
111
For other reasons, too, the libertarian critique is wrong. Federalists don't want to restrict di-
versity, but to the contrary, they see institutional guarantees as its precondition. Switzerland
is, for instance, a good example of how a federal state can foster diversity. And these days we
are living in a globalising world economy. We have to think about competition on a global
scale. The EU tries, for example, to foster its innovation capacity and competitiveness by
multiannual framework programs for research and development. The risks and costs of high
tech research are sometimes too high to be borne by one single country. And pan-European
cooperation makes it possible to exploit creative stimuli and synergies. With regard to innova-
tion we should also not forget that most of the time not pure competition (Hayek), but copeti-
tion, a peculiar mixture between cooperation and competition taking place in networks, is
more innovative. This the network advantage of social capital, which we have discussed in a
previous chapter (cf. pp.70-72).
Pathways to a Federal Europe
Europe is in crisis. We must secure its stock of social capital. Negative integration has lead to
Economic and Monetary Union and the unbounding of market forces, stronger than ever be-
fore. So far positive, political integration is lacking behind. Unfortunately there is no automa-
tism that following liberalisation of national markets and the related weakening of national
regulatory capacity European re-regulation will follow. European re-regulation in the form of
a transnational federal polity would be needed in order to secure social integration (Haber-
111
Last but not least social capital has helped the emergence of modern capitalism, too. Bornschier (1996: 243-
270) shows how more legitimacy a main element of social capital was a central resource in the historic evo-
lutionary process which led to the emergence of the modern state and market system.
206
mas, 1998). But there are many obstacles on its way. Where are the transnational social forces
bringing such change about?
There are signs of a profound value-change in Europe. On the one hand have socio-economic
advancement (e.g. improved levels of education and of standard of living) and changing val-
ues (e.g. individualism and declining allegiance to hierarchy) a profound impact on Europe-
ans' attitude towards traditional representative democracy. For instance, the rate of participa-
tion in general elections is decreasing. The last European Election in June 1999 confirmed
this trend with the turnout being 49 percent, the lowest ever. Membership in political parties
is decreasing, too. But Europeans are not becoming less interested in politics as such, they are
seeking more active and participatory forms of political expression. Alongside traditional po-
litical movements, new organised players have emerged. Lately, a dense web of non-
governmental organisations has emerged (Commission, 1999c: 67, 68). Especially transna-
tional civil society could become the driving force for European unity. Therefore it makes
very much sense that the EU is fostering European level civil society. This could be enforced
by grassroots citizen work schemes of translocal civil society.
There is still prevalent nationalism blocking encompassing European integration. Those peo-
ple support the intergovernmentalist method which recognises no real power for the EU. The
EU has just a helping function and it must be secured that the member states have the ultimate
say. At the centre of their action stands the protection of national sovereignty and in their re-
alist fashion they perceive most of European decision-making as a zero-sum game. Federalists
are opposed to this view.. They are convinced that deep, voluntary economic and political in-
tegration is in the ultimate interest of nearly everyone. Many functions can better be executed
at European level and there is a lot of room for more positive sum games. Thanks to coopera-
tion enducing federal structures would be much more cooperative problem solving possi-
ble.
112
Most federalist have become realistic to see that a federal Europe can not be brought about by
one great `saute qualitative' anymore. The next years and next Treaty revisions will bring us
only steps closer to a federal solution. But what will be crucial is to continue focusing the en-
112
We might remind here to our initial discussion of the problem of cooperation and of social dilemmas, where
the pursuit of individual rationality leads to collective irrationality (pp. 11-20).
207
ergy of all relevant actors on the big ideal. And fortunately the integration forces are still alive
and kicking.
113
There is neo-functional theory which stipulates that problem solving will occur according to
the geography of problems and not according to borders of nation states. There is problem
solving beyond the nation state by technocrats and interest groups. Problem solving networks
overtake functions of nation states and by doing so undermine them. `Sachlogik' leads to
spill-overs and further integration. There are functional and sectoral spill-overs. The integra-
tion of certain sectors forces to integrate further sectors in order to secure that the first is a
success. Monetary Union following the single market is such an example. Additionally, there
are institutional spill-overs. With further integration political actors shift their attention away
from the national to the supranational EU level where decisions are now made. Relevant in-
terests groups shift subsequently also their lobbing to the supranational level, thereby creating
a new political momentum. Last but not least, there is a territorial spill-over. The EU has be-
come a success story, attracting many new members.
With the accomplishment of EMU the EU has reached its `finalité économique', but for po-
litical union there are yet just some first sign marks fixed. The Union's `finalité politique' is
still quiet open, open to the `volonté politique' of creative, engaged social actors. There are
the bureaucrats and politicians in Brussels from the Commission and the European Parliament
bringing about through their day to day work incremental change. Than there are the rarer op-
portunities for great change at Intergovernmental Conferences. But so far here national gov-
ernments keep a strong and ultimate say. Thus for radical change must pressure on national
governments increase. But such political pressure is not just coming from domestic economic
and social actors.
As already the creation of the single market has shown, there are strong transnational inter-
ests. In the case of the Single European Act it was the European Roundtable of Industrialists
(ERI) who was looking for political entrepreneurs.
114
Now in the case of creating a political
113
to paraphrase a statement of Leni Fischer, president of the parliamentary assembly of the Council of Europe
at the 50
th
anniversary of the Hague Congress.
114
Bornschier (2000a) gives a detailed account of this paneuropean market building process. His studies explic-
itly stress the importance of the transnational actor ERI for the single market project. Like this Bornschier con-
tradicts the theory of liberal intergouvernmentalism of Moravcsik (1993). Moravcsik sees only a demand for
208
and social union other driving actors are needed. First, there are the poor cohesion countries
with their interests. Second, there is the European Parliament with a steady increase in power
with each Treaty revision. And third, there is an emerging transnational civil society. Euro-
pean trade unions, consumer interest organisations, and all other kinds of NGO's (environ-
ment protectors, fighters for the rights of the elderly, disabled, and gays and lesbians, etc.).
One day their combined power might be strong enough to bring the project of a green, social
and politically federally united Europe to an accomplishment.
"The destiny of Europe is no longer the affair of governments or institutions
alone: it is now of all citizens. We call on them to demonstrate their will to live
better together in unity and in freedom." Appeal to the Europeans, Congress of
Europe, The Hague, May 10
th
, 1998.
But in the meanwhile we must be careful not to lose track. Processes of spill-back can hap-
pen. For instance, the single market can with a resurgence of protectionism disintegrate again.
Or enlargement might dilute the Union so much that it would become reduced again simply to
a large continental free trade area. It must be secured that the `bicycle' keeps going. But also
a simple continuation of the integration process at slow pace is not without dangers. An ongo-
ing `fusion' of national administrations in comittology committees leads to a defusion of re-
sponsibility and a lack of accountability (Wessels, 1997). With the fusion process of national
actors and instruments goes a steady increase in institutional and procedural complexity
along. A Byzantine political union might not be able to deliver effectively and efficient the
necessary political support for the ongoing paneuropean economic integration process accel-
erated by globalisation at a world level. Such a development might trigger a deep crisis of le-
gitimacy of European society. Which forces will have contributed more towards this crisis,
strong economic liberalisation increasing inequalities or failed political closure through the
European integration project will than be useless to decide anymore.
If we have luck such a societal crisis will allow for radical re-direction and reform. In this
case it might push European integration ahead towards federal union. But if we have bad luck,
the outcome might be the opposite. Due to social fragmentation and atomisation, so much so-
cial glue will have evaporated that an authoritarian backlash has to be threatened. In that case
we will see a retour to nationalism and a definite failure of the European project. In order to
European integration coming from domestic economic and social actors.
209
minimise risks we might start looking already today for ways to foster effective European in-
tegration nurturing the European model of society.
The next big challenge will be to deal with enlargement. Enlargement is the historical oppor-
tunity to unite our continent in peace and prosperity. Prospect of EU membership can help a
policy of democratisation and goodneighbourliness and increases opportunities flowing from
the internal market. During the next 25 years the Union should become enlarged successfully
by up to 15 new member states. The IGC 2000 will hopefully settle some institutional obsta-
cles by reducing the number of Commissioners and reweighting voting weights in the Coun-
cil. Additional reforms, like abolition of veto powers and majority voting as a general rule in
the Council, a further reform of the co-decision procedure putting the European Parliament as
second chamber on an equal footing with the Council, and a reform of the chapter of `closer
cooperation' making flexibility actually working, would help a lot and bring the EU closer to
true federalism. Such reforms are the precondition for a larger, more diverse Union to work.
Deepening is a precondition for widening in order to prevent fragmentation.
We should not be afraid of more federalism in Europe. This because the ultimate goal of fed-
eralism is to re-equilibrate the two poles of unity and diversity. At present our society sees
accelerated individualisation, fragmentation and atomisation. And there is the danger for
things going even worse. Federalism is the therapy against this. But federalists are very well
aware of the opposite dangers, too, like centralisation, suppression of the individual for the
sake of the `collective', etc. The goal of federalism is to find the right equilibrium between
unity and diversity. Diversity without unity is anarchy, rule of the strongest. Unity without
diversity is centralism and totalitarianism.
In the course of human history many different forms of democracy and federalism have been
developed. We find, for example, already 500 in the republic gho-jeng of the preimperial
China local autonomy and democratic participation of all men and women. Such is similar for
the democratic federation of the buddhistic sanghas of India or the League of the Iroquois in
North America. The following figure 17, developed by Kinsky (1995: 42), gives a timely
classification of different combinations of unity and diversity.
210
Source: Kinsky (1995: 42)
Figure 15: Federal State or Confederation?
The present situation of the EU can be described as something less than a federation but more
than a regime ("unvollendeter Bundesstaat", Walter Hallstein).
115
The first pillar, with the in-
volvement of the Commission and the European Parliament and the possibility for majority
voting, comes close to a federal structure. But intergovernmentalism prevails with its quest
for unanimity in the second and third pillar and prevents the EU from being much more than a
close regime. Unfortunately this situation hasn't much improved with the Treaty of Amster-
dam. The long term goal should be to transform the present confederation with its multilevel
system of governance into a federal state. Therefore we might learn some lessons from the
Swiss unification last century into a federal state. The Swiss example is so interesting for the
project of European unification, because the Swiss federation unites peacefully and produc-
tively four different cultures.
First, the growing of a `will to unify' by means of institutionalised law. Switzerland has al-
ways been described as a `nation of will'. Second, encompassing possibilities for democratic
participation. Third, based on historical experience integration of the respectively `other'.
115
For the historical perspective cf. Bornschier (2000b). He shows the historical roots of the contemporary
European state building process. Over centuries have two opposing logics struggled with each other: nationalism
(territoriality and collectivism) and liberalism (openness and individualism). They have found a new, temporary
equilibrium with the creation of a single European market on the one hand and a multilevel structure of Euro-
pean governance on the other.
Internat. Organisa-
tion
Confederation Federation Decentralised State
Centralised State
Integration Integration Integration Integration
DIVERSITY
FEDERATION
UNITY
Decentralisation Decentralisation Decentralisation
Examples
UNO,
Council of Europe
Switzerland (before
1848),
Germany (1815-1866)
USA, Belgium,
Switzerland,
Germany
Italy, Spain GDR,
USSR
European Union
Austria
France
211
Fourth, incorporation of this kind of cultural sensibilisation into procedures of levelled, fed-
eral sovereignty. And finally, we should not forget that the Swiss federation was build neither
in one day (Kohler, 1998: 26). But taking Switzerland as an example we should also be aware
of the dangers of this model which is foremost a `de-politisation' (Friedrich Dürrenmatt).
Nothing really innovative and challenging is happening in the well balanced Swiss system.
212
Part IV: An Internationally Cooperative Europe
We have started this book from the premisis that our European society, or one can easily gen-
eralize, that the Western society as a whole is in a deep crisis. With the demise of the ideo-
logical rival of Soviet central planning it looks like as if the market economy has won out as
the sole organising principle for human affairs on earth. But this is the dangerous fallacy of
market fundamentalism which is becoming after totalitarianism the next threat to open soci-
ety. It is assumed that markets are self-correcting and a global economy can flourish without
any need for a global society. But monetary values and free markets alone do not provide an
adequate basis for social cohesion (Soros, 1998, Gray, 1999). In order to secure social cohe-
sion a double strategy must be persued. Social capital a measure for the stock of a society's
social glue must be fostered on all level. This requires, as we have seen, actions on the mi-
cro (family and local community), meso (nation state) and macro level (European Union). But
social capital accumulation is not just about a reformed European societal model, securing
social cohesion and giving Europe like this a competitive edge in global locational competi-
tion. Europe must also develop the capacity to implement, together with the US and other
partners, a framework of global regulations. The global economy must be underpinned by
global political governance. Therefore the EU must develop the capacity to act as a global
political player alongside the global economic players (transnational corporations, global in-
vestment banks, etc.). Global governance and hopefully in the future the establishment of a
world federation could help to secure social cohesion and social capital on a global scale.
Global Player EU
Facing globalisation, Europe must not only modernize and adapt its internal structures, but
the EU should also develop the capacity to shape its own destiny. It should acquire the capac-
ity to influence the ongoing process of globalization according to its own interests and values
(Santer 1997). The EU is the world's largest economic entity. But preoccupation with procedural
questions has prevented effective foreign policy actions so far. Therefore the capacity to act as a
global player will become crucial for the EU. A global player EU would allow to exerce more
assertively European sovereignity. The following chart may help to distinguish the main ac-
tors in world politics.
213
A
CTIONS ON A
GLOBAL SCALE IN
THE FIELD OF
...
Humanitarian
Aid
Economics Politics Military
Super Power
X
X
X
X
Global Player
X
X
X
Civilian Power
X
X
< `low politics' > <
`high politics' >
Figure 16: Typology of the Main Players in World Politics
Players in world politics distinguish themselves by their willingness and ability to act on a
global scale and hence by their impact on world affairs. As we see in figure 18 a super power
has potential and power in all four categories. It is a large donor of humanitarian aid, an im-
portant trading partner, it shapes world politics and has the capacity for military interventions
world-wide. The only country left after the end of the Cold War which fits into this category
are the US. The US has the will and the power base for world leadership together with the
necessary military strength to be engaged in two major conflicts anywhere in the world at the
same time. Further, it has a global diplomacy, is the largest tradingnation and the major
source of foreign direct investments; its currency - the US-$ - dominates international finan-
cial markets; the US is also an important donor of foreign aid (not in terms of percentage of
GDP, but in absolute spending).
A global player has, like a super power, global aspirations and the will to shape its own des-
tiny. But it lacks the military capacity to be involved in armed conflicts away from its terri-
tory. Its power base is mainly economical and political. The EU is a candidate for this cate-
gory. It is the world's largest donor of humanitarian aid, the biggest trading bloc (20% of
world trade); it has with the EURO the world's second reserve currency, and has in theory
a common foreign and security policy (CFSP). But the EU lacks apart from some limited
British and French resources a navy with aircraft carriers, overseas military bases and long
range missiles. Therefore the EU's ability to be involved in armed conflicts away from the Euro-
pean continent is very limited. Most important for the EU's status as a global player would be its
economic strength which is based on the world's most important market and the largest share
of world output (over 30 percent). But besides simple market seize technological prowess and
diplomatic prestige are important for the status as global player.
214
The EU commercial policy has a major impact on the world. Together with the US, the EU
was the central protagonist of the Uruguay Round which finally led to the establishment of
the WTO. After the end of the cold war, economics has gained primacy. Europe's security in-
terests have less to do with deterrence of a potential military aggressor far beyond its borders
than with promoting economic prosperity and social stability. In this battle commercial policy
plays a central role, together with a common monetary policy with the establishment of the
EURO. There is a whole range of issues (labour and environmental standards, competition
policy, stability of the international monetary system, etc.) where a global regulatory frame-
work is needed to counteract global market failures. But for the creation of new regimes in
these areas, effective global leadership is needed. Global governance builds on strong global
political actors. At the moment it looks like as if the US together with the EU are the only se-
rious actors ready for this task.
A civilian power by contrast is not interested in high politics. Its primary aim is to use its
influence to pursue a policy of human rights, peace building and to reinforce regional coop-
eration. Japan might be a candidate for this label. At least it tries hard to make a low profile in
world politics because of fears of its Asian neighbors. But we should not forget that the Japa-
nese are even though at the moment in economic troubles tough negotiating partners in
commercial diplomacy. Therefore Japan shows some aspects of a global player, too.
If the EU succeeds in further integrating its common commercial and monetary policy into an
overall coherent common foreign policy (i.e. to unite the first and second pillar) we can speak
of a global player EU. Therfore, however, the member states must give up some core parts of
their sovereignty in the area of foreign policy. A global player EU can not emerge before fur-
ther integration in `high politics' takes place (Leicht, 1998a: 208-210).
Evolution of EU Actorness
The European Community, established in 1958 was an exclusively civillian body. The Treaty
of Rome made no mention of foreign or security policy. Responsibility for `external economic
relations', however, was entrusted to the Community. It was not before the 1970s that the EC
started to develop a foreign policy. With the Luxembourg Report European Political Coopera-
tion (EPC) was established as an exclusively intergovernmental process, but without any in-
stitutional base. The Singel European Act (SEA) in 1987 provided a treaty basis for EPC, but
which remained an intergovernmental process. For the first time a secretariat was established
215
in Brussels. The Maastricht Treaty on European Union established further the Common For-
eign and Security Policy (CFSP) as second intergorvernmental pillar of the Union. The goal
to develop a common security policy is stipulated. Provisions for joint actions with qualified
majority voting to apply at implementation stage are developed, but rarely used in practice.
The CFSP Secretariat is formally incorporated into the Council Secretariat. A commitment
that the Union should ensure overall consistency of `external activities' (humanitarian aid,
immigration, environmental, trade and monetary policy, etc.) is made. But with dispertion of
competence among different pillars with different procedures and ways of external represen-
tation lack of coherence and consistency remains the main problem. A problem which is not
yet solved with the Treaty of Amsterdam. The member states contine to prefer national mili-
tary weakness to European military strength.
The Treaty of Amsterdam slightly increases the use of qualified majority voting and includes
a procedure for `constructive abstention' to increase flexibility. But the major obstacle for ac-
tions the unanimity requirement for decision-making (ToA Art. 23) remains. A special or
reinforced qualified majority (at least 10 member states in favour) is possible only for imple-
menting common strategies, joint actions or common positions which, before, have already
been adopted by unanimity. The Secretary-General of the Council Secretariat is apointed as
High Representative for the CFSP (`Mr CFSP'). This aims at giving CFSP a face and one
voice. Further a Policy Planning and Early Warning Unit is established in the Council Secre-
tariat. Despite this improvements CFSP remeins so far an example of limited case by case co-
operation. Thus it does not surprise that the results achieved are more than meager. In previ-
ous conflicts the EU has shown its inability to respond to crisis situations in time. The central
problem is the loose form of cooperation in the second pillar. Each country has a veto right
and can block necessary actions. In this regard constructive abstention is only a slight im-
provement and must still prove its worth in practice.
External trade representation and negotiation of trade agreements by the Commission on be-
half of the Member States has always been a Community competence and hence qualified ma-
jority voting was applied. It is the logical consequence from the aim to create a customs un-
ion. But this Community competence granted under EC Article 113 has remeind incomplete
and restricted to trade in goods. How to include negotiation powers for agreements on trade in
services, intellectual property and investment is still a matter of debate. The Treaty of Am-
sterdam has not settled this issue. It merely adds (TEC Art. 133.5) wording that the Council,
acting unanimously, may decide to extend the application of TEC Art. 133 (ex-article 113).
216
External representation in monetary matters is not yet completely settled either. Responsibil-
ity is divided between the Council and the ECB. In particular the Council has the right to en-
ter into formal exchange rate arrangements with non-EU countries or to formulate general
orientations for the exchange rate. Otherwise the managment of the exchange rate is the sole
responsibility of the European Central Bank (ECB).
A good example of coordination of EU foreign and economic policy is the Asia Europe Meet-
ing (ASEM) which took place for the first time in March 1996 in Bangkok. Every two years
the heads of state from Europe meet their counterparts from Asia and discuss a range of issues
from nuclear non-proliferation to trade issues (Leicht, 1998c: 13/14). But there are major ob-
stacles preventing the EU from becoming a serious actor in global affairs is fractionalisation
of its external representation. The Troika is replaced by a new formula where the Presidency
represents the Union in the sphere of the CFSP and is assisted by the Secretary General of the
Council in his new function of High Representative for CFSP. The Commission is fully asso-
ciated with the task of representation of the Union, but work is divide among four different
directorate generals (external relations, trade, development and enlargement). The Presidency
may be assisted by the Member State which will exercise the next presidency (TEU Art. 18)
But the procedural complexity for cooperation of 15 nation states and coordination of differ-
ent policy fields each with different procedures applying is enormous, not to forget the exter-
nal visibility problem of the final policy. Future reforms should take the basic requirements
for actorness into account:
(1) Shared commitment to a set of overarching values and principles.
(2) The ability to identify policy priorities and to formulate coherent policies.
(3) The ability effectively to negotiate with other actors in the international system.
(4) The availability of, and capacity to utilize, policy instruments.
(5) Domestic legitimation of decision processes, and priorities, relating to external policy
(Bretherton and Vogler, 1999: 38).
Federal solutions seem to be the best answer to all problems listed. Facing many common
challanges, like economic globalisation, it should be not to difficult to identify areas of com-
mon interests. The prevailance of intergovernmental procedures is most often the result of na-
tionalistic thinking, and vasted interests of national governments not to loose influence. With-
out qualified majority voting a single country can prevent European actions. Common actions
should be in the interest of all since united Europeans can influence world affairs, but divided
217
no one succeeds. A clear cut federal solution with an EU government and respective ministers
responsible for foreign policy, trade and finance would simplify internal policy coordination
and enforce their external impact a lot. A federal government would increase transparancy
and accountability to the European Parliament and gain in legitimacy in the eyes of the Euro-
pean public at large. The present opaque procedures are not just ineffecient and ineffecive,
they also lead to a diffusion of responsibility and accountability. A federal Europe, enabling
the EU to act as a global player in external affairs, would not only allow the EU to actively
contribute to the needed global governance of transnational markets, but also increase internal
legitimacy of government actions. Thus social capital would be fostered in a double way.
Global Governance and the Need for a World State
Effective global governance global political rule making and enforcement seems to be the
precondition for long-term sustainability of the present globalisation of markets. The major
defect of the present system of free market hegemony is the belief that markets are self-
correcting. But in reality they are not. As the recent Asian crisis has demonstrated the interna-
tional monetary system in particular is highly instable. But market fundamentalism has put
financial capital into the driver's seat without any political guidence worth to mention so far.
Will Unchecked Markets Bring Fundamentalisms Back out from the Cold?
Market fundamentalism assumes that the common interest is best served by allowing every-
one to look out for his own interests and that attempts to protect the common interest by col-
lective decision making distort the market mechanism. Communism abolished the market
mechanism and imposed collective control over all economic activity. Market fundamental-
ism seeks to abolish collective decision making and to impose the supremacy of market val-
ues over all political and social values. What we need is a correct balance between politics
and markets, between rule making and playing by the rules. But at present there is a terrific
imbalance between individual decision making as expressed in markets and collective deci-
sion making as expressed in politics. We have a global economy, but no global society, and
are far away of effective global politics.
Markets are given an unduly large role to play and are allowed to penetrate into fields of ac-
218
tivity where they do not properly belong. But even if we put aside the bigger moral and ethi-
cal questions, market forces are also destructive in the purely economic and financial arena
and produce chaos which could lead to the downfall of the global capitalist system (Soros,
1998, Gray, 1999). Here we should remember once again the historical analogy. It is not the
first time that we have a global capitalist system. 19
th
century globalisation based on laissez-
faire economics and balance of power politics lead to social fragmentation. Karl Marx and
Friedrich Engels' `Communist Manifesto' (1848) is an analysis of and a response to the `first
globalisation'. But the `belle époque' of 1870 to 1914 ended in the trenches of two World
Wars. By the 1930s the world economy had broken down, and rival blocs formed around the
great powers. Subsequently liberalism's counter-ideologies of fascism and of communism
gained in strength and claimed global supremacy. Fortunately they lost out in the historical
evolutionary process. But why should history not repeate itself, what will secure future stabil-
ity of the present system?
Postwar leaders rejected the Social Darwinian strand of laissez-faire economics (exemplified
by Herbert Spencer) that seemed to justify misery as inevitable, even healthy, in market
economies, but which provoked fascism and communism as a response. A new, alternative
vision of political economy, famously represented by John Maynard Keynes gave society as a
whole a responsibility for the economic well-being of citizens. "The outstanding faults of the
economic society in which we live", he wrote in `The General Theory', "are its failure to pro-
vide for full employment and its arbitrary and inequitable distribution of wealth and incomes"
(Keynes, 1936/1964: 372). His theories formed the hard core of the postwar welfare state.
Trying to break down protectionist barriers and to rebuild a globally more integrated economy
postwar leaders had learned their lessons from the past (Kapstein, 1999: 90/91). The second
attempt at global liberalisation, which started with the establishment of the Bretton Woods
institutions and consecutive rounds of trade liberalisaion in the framework of the GATT,
should not put at risk social cohesion once again. Therefore subsequently the welfare state
was established. The new motto was `Keynes at home and Smith abroad'. But with forces of
economic globalisation gaining in strenght this synthesis is increasingly becoming more frag-
ile. Contrary to what Fukuyama assumed (1989 and 1993) that there is no reasonable alterna-
tivity left to organise society other than according to the principles of market economy and
democracy it seems as if conditions for liberalism and openness could errod one more time.
This will be the case when economic globalisation fails to deliver the benefits its most enthu-
sistic prophets have promised. There are already first signs indicating fundamental flaws in
219
the desing of the present system: monetary instability indicated by a series of successive fi-
nancial crises, and a rise in inequalities (both within nations as well as between nations).
The collapse of soviet central planning has proved the superiority of free markets in allocating
scarce resources. And, like Kant, Fukuyama is convinced that free trade, economic globalisa-
tion, will spread democratic institutions universally.
116
Subsequently universalisation of de-
mocracy will secure world peace. We are at the end of history or very close to it. But an alter-
nativity to this scenario might be that the global spread of free and unchecked markets might
destroy social cohesion and creat social chaos. Therefore economic liberalism and political
democracy might not follow so smoothly one another. Fundamentalism and nationalism are
common reactions to the encounter with the disruptive forces of global capitalism. Atomisa-
tion and fragmentation of society leads to demands for a strong authority. In poorer countries,
global laissez-faire produces fundamentalist regimes and works as a catalyst for the disinte-
gration of the modern state. In advanced industrial countries, like in Europe, rising national-
ism and euro-scepticism is the consequence. It might be no wonder that euro-scepticism is,
for example, the highest in the UK where market forces have been the strongest in the last
decade.
Fear of the future is a main cause for reactionary attitudes. The unleashing of market forces
through the process of globalisation goes along with profound social changes. A reactionary
attitude is a consequence of a fear of change. The rise of right wing parties in Europe might
lead to a stronger emphasis on heavy-handed policies of external and internal security. Such a
process might not totally stop the process of European integration. Integration might continue
in the area of freedom, security and justice. But a biased integration process, focusing only on
economics and enforcement measures can not stop social errosion. To the contrary, such a
development might lead to a further depletion of social capital. Social atomisation and lack of
social capital finally asks for even more enforcement rising the specter of a police state. Fur-
ther, such a development might become locked in into a persistent authoritarian path. Preoc-
cupation with issues of internal and external security might divert ressources and attention
away from necessary structural reforms of the welfare state (Commission, 1999c: 50). Instead
116
But to be acurate we must mention that for Kant unlike the simplistic view of the 19
th
century `Manchester
School' of economics peace depends upon a combination of factors, representative democracy, law, com-
merce, and mutual respect (Clemens, 1998: 287). More on that further below.
220
of reforming the welfare state enabeling to continuing to secure for social cohesion, the strat-
egy will be to exclude (all kinds of minorities and especially immigrants) and to lock up. That
is why it is so important to secure through intelligent welfare state interventions social cohe-
sion and social capital.
Free markets are creatures of state power, and persist only so long as the state is able to pre-
vent human needs for security and the control of economic risk from finding political expres-
sion. In the absence of a strong state dedicated to a liberal economic programme, markets will
inevitably be encumbered by a myriad of constraints and regulations. These will arise sponta-
neously, in response to specific social problems. Laissez-faire must be centrally planned,
regulated markets just happen. This the view of the German school of ordoliberalism or `Ord-
nungspolitik'. Therefore what kind of global `Ordnungspolitik' do we need in order to har-
ness the benefits of florishing markets and secure at the same time social cohesion? Or do we
have to accept that the world's economic life cannot be organised as a universal free market
and that better forms of governance by global regulation are unachievabel? Is late modern an-
archy our historical fate (Gray, 1999: 17-21)?
Global laissez-faire may break down in an unmanageable crisis of the world's stock market
and financial institutions. Financial derivatives enhance the risks of a systemic crash. Such a
crash might be triggered by competitive devaluation of China's currency. A spiral of devalua-
tion in east Asia is only one of several events that could trigger a systemic cisis in the world
economy. The collapse of the Russian ruble or further deflation and weakening of the finan-
cial system in Japan are others. Or Wall Streets recent highs might have been based on false
assumptions of a bubble economy.
Anyway, Americas fractured society stands at the centre of such scenarios. A crash, as it oc-
cured in Japan in the early 1990s, in which the market dropped by over two-thirds, could
triggger large-scale economic and social upheaval in the US. A serious economic crisis could
leave large sections of the American middle class impoverished. Already minor set backs
might trigger a protectionist backlash in the American Congress. The international regime of
free markets might not survive an economic upheaval at its epicentre (Gray, 1999: 198, 221-
225). In the absence of reform, boom and bust capitalism, will destroy further social cohesion.
Conditions for financial and trade openness will errode further. Thus a return to trading-blocs,
fragmentizing the global economy, might be one possible future (Commission, 1999c: 62).
The Asian depression can be seen as the first systemic crisis of a world economy where fi-
221
nancial capitalism has overtaken industrial capitalism.
Another threat to the stability of the present system lays in the fact that the present interna-
tional economic system contains no effective institutions for conserving the wealth of the
natural environment. The risk is that sovereign states will be drawn into a struggle for control
of the earth's dwindling natural resources. In the coming century ideological rivalries be-
tween states may well be succeded by Malthusian wars of scarcity. When states are rivals for
control of scarce natural resources military conflicts will be harder to avert (Gray, 1999: 210,
211).
We should be aware of the dangers which loom in the present system at the time of the global
triumph of capitalism. The end of the Cold War and the raise of free market capitalism are not
sufficient conditions to guarantee a future of peace and stability. The role of governments is
not becoming increasingly obsolete. In fact, globalisation increases the role of goverrnment
and this not only at the level of the nation state. As already mentioned a new balance between
global market forces and forms of political governance must be found. On the one hand is de-
centralization to the local and regional level needed in order to bring government closer to the
citizens. On the other hand must integration of governmental forces on higher, continental and
world levels allow for effective political closure of the global market.
Managing the International System beyond the Washington Consensus
The challenge for the years to come will be to find a way to manage the international system
in a way which allows every region and civilisation to prosper in its own way, to develop its
own varaiety. Alternatives to the American way are possible (cf. our discussion on pp. 127-
132 about varieties of capitalism). The growth of a world economy does not inaugurate a uni-
versal civilization, as both Smith and Marx thought it must. Instead it allows the growth of
indigenous kinds of capitalism, diverging from the ideal of free market and from each other. It
creates regimes that achieve modernity by renewing their own cultural traditions, not by imi-
tating western countries. There are many modernities (Gray, 1999: 195).
But in order to allow this to happan an enabeling environment must secure basic rules of
peacefull coexistance and cooperation. Comprehensive global `Ordnungspolitik' has to take
place to correct for global market failures and to facilitate securing social cohesion. Global
222
governance should help to exercise a countries sovereignty more successfully. Cross-cutting
corporate industrial and financial networks integrate the world economically but fragment it
politically, therefore putting sovereignty at risk. The nation state has more and more difficul-
ties in securing internally social cohesion.
At the centre stands a new approach to development. The Washington consensus, suggesting
free markets, financial and trade liberalization, and minimal government was endorsed by the
IMF and World Bank untill recently nearly unquestioned. It is the try to project the American
model, its values and institutions, to every other nation in the world, a kind of `Wall Streetiza-
tion' (Smadja, 1998: 71). The only hegemonic state left after the collapse of the Soviet Union
tries to install its hegemonic social practise of free markets on a global scale.
117
Fortunately
there have been some doubts recently about the accuracy of free markets ideology from
within the establishment. Joseph Stiglitz, senior vice president and chief economist of the
World Bank, and former chairman of the Council of Economic Advisers to president Clinton,
asks together with World Bank president James Wolfensohn to start thinking about a new
comprehensive development paradigm, a post-Washington consensus agenda (Stiglitz, 1999).
The social and institutional embedding of markets should explicitly taken into account. Thus
social capital the ability to bring about more `win-win' situations - stands at its centre.
Focusing on cooperation we distinctively disagree with the realist school of international rela-
tions. Relalists don't see much room for mutual gain, the world is dominated by a struggle for
power (zero sum games), where the winner takes all. Contrary to this view we are convinced
that under the right institutional conditions mutually benefitial cooperation can develop much
deeper. What has to be created is the right kind of world order. Without a structure to promote
issue linkage and mutual reciprocity, distrust and animosity can prevent states from joining
together even when all would benefit from cooperation. Global public goods meet the follow-
117
For the distinction between hegemonic social practice (hegemony) and a hegemon state (hegemon) cf.
Bornschier, 1999: 86/87). To recognise the Washington consensus of the free market doctrine as the hegemonic
social practise of the hegemonial state US is important. But we do not agree with Bornschier when he predicts
that the `World Market for Protection' (WMfP) will replace as new hegemonic social practice traditional he-
gemons. This since the WMfP recognises already explicitly the importance of social cohesion. Legitimacy, so-
cial cohesion and social capital are essential competitive advantages in the reasoning of the WMfP (cf. our dis-
cussion of Bornschier's earlier work, 1988 and 1989, on the WMfP on p. 56). But this is precisely what is miss-
ing in the old development paradigm of the Washington consensus of market fundamentalism.
223
ing criteria: their benefits extend to more than one group of countries and do not discriminate
against any population group or any set of generations, present or future (Kaul, Grunberg, and
Stern, 1999: 16).
A balance of powers, such as the Cold War, is one way to preserve peace and stability in the
world; hegemony of an imperial power another; and an international organisation capable of
effective peacemaking could be a third. At present we have none of the above. Is our pre-
dicament realy such, as Gray (1999: 235) points out, that we can not expect feasible alterna-
tives to global laissez-faire to emerge until there has been an economic crisis more far-
reaching than that we have experienced so far. Or is pressure flowing from common prob-
lems, interdependence and mutual vulnerability strong enough to bring about change? Crucial
for radical change, for effective global political governance, is sufficient strenght of the key
actors. Global governance depends upon the strength and willingness of the actors to bring
about change. Growing `vulnerability interdependence, linking areas of the world irrespective
of their degree of economic integration might be the main driving force for further integra-
tion. Global environmental problems are one of the most prominent examples, rising global
inequality, triggering migration, another.
Political momentum for change could come from the energy that greater equity and fairness in
international relations could unleash. Equity and justice promote cooperative behaviour, itself
needed for the provision of public goods. Although social cohesion may not be an absolute
precondition in the supply of public goods, its value lies in making cooperation easier and
giving global rules greater legitimacy and sustainability. And when the system is perceived to
be fair and equitable, nations will participate in it willingly. Therefore more participatory de-
cision-making, a new tripartism among governments, civil society and business, and stronger
participation of developing countries (e.g. in G16 meet the G8 industrialised countries eight
of the most important developing countries, like China, India, Brasil, etc.) is important. Oth-
erwise a lack of reforms could easily result in a series of global crises resulting in a public
backlash against globalisation (Kaul, Grunberg, and Stern, 1999: xxxvi, Rao, 1999: 70).
The end of the Cold War does not mean the end of armed conflicts in Europe. It did, however,
dramatically change the strategic position of the continent and the nature of security threats.
Threats come increasingly from non-military phenomena. Intra-state conflicts, often ethni-
cally defined, increasingly replace wars between states (Commission, 1999c: 69). After the
demise of the communist threat and due to its technological and economical leadership it
should be much easier to cope with resurgent external authoritarian threats to the democratic
224
Western world. But as previously pointed out, the West is not totally secure itselve against
potential authoritarian uprisings coming from within and putting the very ideal of democratic
society at risk. And proliferation of weapons of mass destruction starts to make things again
more difficult. Additionally there are new `soft' security threats emerging (i.e. bellow the
level of a full scale war between two nations). Examples are global environmental degrada-
tion, famines, wars over natural resources, mass migration, and international terrorism, etc.
But in the following we will concentrate ourselves on economic and political issues. These
are in our view the most urgent problems to tackle and here the EU can actually have an im-
pact.
Foremost is the need to stabilise the international monetary system. It must be assured that it
does not only provide sufficient liquidity at low inflation. Its major problem is, as consecutive
financial crises have shown, its inherent instability. Financial instability can trigger political
and social chaos, therefore endangering profoundly social cohesion and social capital. The
Asian meltdown has not only destructed huge amounts of real capital, but also large amounts
of social capital.
The IMF must be reformed in order to secure individual country and global financial stability.
Global financial stability does not automatically flow from sound domestic stability. The IMF
must improve its efforts to help countries to cope with temporary balance of payments prob-
lems without resorting to damaging policies such as trade barriers or competitive devaluation.
Common elements of financial crises are a sudden loss of confidence and large-scale with-
drawal of capital by domestic and foreign investors, initially out of a concern about the fun-
damentals, but increasingly out of a concern not to be the last out as a kind of bank run psy-
chology takes hold. A preventive strategy builds on three components: Enhancing the capac-
ity of emerging market economies to absorb capital safely, reducing countries' vulnerability
to sudden turnarounds in confidence, and developing new international tools for responding to
these new kinds of balance-of-payments crisis. First priority should be to improve banking
supervision, and secure prudent management of national balance-of-payments. Therefore an
adequate exchange rate regime is important, too (Summers, 1999). If we do not strengthen
international financial authorities we will leave it to individual countries to fend for them-
selves. In the latter case we ought not be surprised by the spread of captial controls.
Top items on the trade agenda are, for example, the issues of trade and labor standards, trade
and environment, trade and foreign direct investments (FDIs) and the question of a global
framework for competition policy. In view of social capital accumulation the debate about
225
trade and labour standards is the most important one. It is about how to preven social dump-
ing (creating social unrest in the first world) and how to secure respect of human rights in the
third world (fostering social capital in the thrid world). Thus it does not surprise that the de-
bate has focused on the human rights dimension of certain labour standards. Respect of `core'
labour standards (i.e. freedom of association and collective bargaining, elimination of ex-
ploitative forms of child labour, prohibition of forced labour and non-discrimination in em-
ployment) increases economic efficiency regardless of the level of development. But short
term interests and imperfect political markets (i.e. dictatorships) prevent their respect. To cor-
rect global market failures the WTO should enforce the respect of `core' labour standards,
using both positive and negative measures (i.e. sanctions) (Leicht, 1998b).
Besides instability of the global financial and trading system the question of rising global ine-
quality is essential. In a world where the rich get richer and the poor poorer migration and
conflict can threaten social cohesion at a global scale. Global inequality is far greater at the
end of the 20
th
century than at its begining. According to the United Nations Human Devel-
opment Report was the gap between the world's richest and poorest country roughly 3 to 1 in
1820, 11 to 1 in 1913, and 72 to 1 in 1992 (FT, 24/9/1999). Overall the story of the 20
th
cen-
tury is one of convergence in living standards among industrialised countries, but of diver-
gence among less developed, poorer countries. The poorest don't manage to catch up. Lack of
development has internal as well as external causes. But debt relive for the poorest, as for in-
stance planed in Cologne at the G7 summit meeting in June 1999 with the Highly Indebted
Poor Country initiative (HIPC) would be one step into the right direction in reducing world
inequality. Other measures might be to secure technology transfer to the South and access to
markets in the North in order to secure developmental opportunities.
The general problem we are facing is that at the international level we have a steadily grow-
ing gap between externalities wich are becoming more and more international in reach and a
political regulatory framework which remains mostly limited to the nation state. But deregula-
tion at the national level would recquire reregulation at higher levels. There is a jurisdictional
gap, a discrepancy between a globalized world and national, separate units of policy-making.
The idea of global public policy is to reverse the adjustment path of the two geographies by
placing the principal burden of adjustment on the political geography. Political geography
should be matched up to economic geography. Rather, global public policy decouples the op-
erational aspects of internal sovereignty (governance) from its territorial foundation (the na-
tion-state) and its institutional environment (the government). By exersising souvereignty
226
more collectively, politics can regain lost power. Pooling sovereignty is the way to rescue the
state facing the forces of unleashed markets. This pro-active approach of global public policy
and global governance, trying to secure the exercise of sovereignty through a realignment of
the political geography, is diametrically opposed to a defensive, interventionist approach. The
defensive position relays on tariff and nontariff barriers or capital controls that force compa-
nies to reorganize along national lines. That is the answer of economic nationalism which
might go along with a raise of nationalism in general.
The problem with global public policy is that by being decopled from its territorial base, it
runs the risk of undermining popular sovereignty and thus the democratic character of poli-
cymaking even further. Up to date accountability and democratic legitimacy have been cruc-
tial problems of international organisations. Democratic governance must instead find new
avenues, institutions, and instruments that reach beyond the current political geography of the
nation-state. And of course, strict application of the principle of subsidarity: vertical (global
vs. local) and horizontal (state vs. nonstate actors) is important. For global governance to suc-
ceed, governments from third world countries as well as nonstate actors have to become more
involved. Cross-national social networks, representing the foundation of a global civil society,
are important to facilitate the exercise of sovereignty in a nonterritorial context and vital to
the legitimacy and accountability of global public policy (Reinicke, 1998: 8, 219, 227, 229).
Perpetual Peace, World State and World Justice
In recent years not just the capitalist market system started to spread around the planet, but
democracy did so as well. A political culture of mutual gain and respect becomes, supported
by an ascending middle class, more deeply enshrined. But at the same time do we see a de-
cline in trust and satisfication with democracy in its heartlands (cf. pp. 83/84). Further as we
have explained above, unchecked market forces are, by destroying social capital and cohesion
a central threat to the institution of democracy. Without supporting institutions global capital-
ism might destroy itself through its inbuild instability, through depletion of natural resources
and destruction of social cohesion. But on the other hand, with the right kind of political clo-
sure and governance, we might enter in the next century into the age of global democracy and
perpetual peace. This prediction is based on Kant's essay `Zum Ewigen Frieden' (1795).
Kant points to the combined impact of democratic government, the confederation of peace-
227
willing nations, international law, the spirit of trade, and the growth of a common enlightened
culture. But the key to peace, Kant argues, is democratic government. Where "the consent of
the citizenry is required [...] to determine whether there will be war, it is natural that they con-
sider all its calamities before they enter so risky a game." By contrast, authoritarian rulers can
simply declare war. Therefore the liberal peace theory holding that stable, sovereign democ-
racies don't go to war with one another becomes understandable. It appears to be valid across
the seventy or more interstate wars that have taken place since 1815 involving at least 270
states. Far from fighting each other, democracies tend to band together in war, based on the
shared norms. Free and self-governing peoples tend to form confederations to preserve peace
and their rights. NATO is such an example. If a powerful and enlightened people forms a de-
mocratic government, "it will provide a focal point for a federal association among other na-
tions that will join it in order to guarantee a state of peace among nations [...] and through
several associations of this sort such a [con]federation can extend further and further" (Clem-
ens, 1998: 283-287).
Kant speaks of an evolving federation of peace-loving democracies, but actually he means a
confederation, since he is against the establishment of a world state. There should be no su-
preme world power, no world federation. But such a world federation might become never-
theless in the future a necessity if we do not only want to secure world peace, but also world
justice. Democratic truce does not rule out further power play by rule of the strongest. To se-
cure justice, global rule of law must be esablished.
Today the creation of a world federation seems to lay far away. Therefore some intermediate
steps might bring us further in the right direction. A next step could be a radical reform of the
United Nations. At present the General Assembly is not more than a talking shop. But it could
become a kind of legislature in charge of making laws for our global society, of course, al-
ways strictly respecting the principle of subsidarity. Important is that the laws would be valid
only in the countries that ratify them, but members of the democratic society confederation
would pledge themselves to ratify the laws automatically, provided they have been ratified
voluntarily by a qualified majority (of countries, population, and UN budget). Countries that
do not abide by their commitment to accept the decision of a qualified majority would be ex-
cluded from the democratic society confederation. In that way, a body of international law
regulating for example human rights, global environmental problems and financial stability
could be developed without infringing on the principle of national sovereignty (Soros, 1998:
228
234). For the next decade this would result in a kind of binding triadic governance. A step fur-
ther towards a world federation would be enhanced regional integration. A federal Europe
could become an example for similar endavours in other parts of the world, following recent
trends towards increased regional economic integration in Asia, South America and Africa.
Continental states would be much more effective in delivering global governance of global
markets. But regional bloc solutions or continental states will remain to stay only a partial so-
lution to problems like the environment, the rise of organised crime, and population growth.
Therefore the need for a world federation securing world peace and justice.
229
Conclusion
Which societal model will be the one of the future? The American, the European or the Japa-
nese one? The American economy has grown uninterruptedly during the 1990s. Unemploy-
ment was low, so was inflation as well. The Americans are by far the most successfull in in-
corporating the benefits of modern information technology into their business. Terzierisation
is much advanced. There is a developed service sector. Everything looks like as if the Ameri-
cans are the first who have entered into the post-industrial area. Europeans are lacking behind.
Their technology is often not so sophisticated as the American one is, terzierisation is not so
advanced and there is the huge unemployment problem. Conservatives now blame for all this
the welfare state. But is the welfare state really a leaky bucket and an obstacle to change?
Here we should maybe go back to the question why the welfare state was developed in first
place. At the beginning of this century there was a strong socialist movement threatening to
overthrow capitalist society. As a response the welfare state was developed to ease the class
problem. This seems to have worked out well. Communism became never a real danger in
Western Europe. In America a socialist movement never occurred and thus no real welfare
state was developed. Werner Sombart gave a convincing reason for the lack of a socialist
movement in America. Through constant inflows of immigrants the people at the lowest end
of the social ladder were always sweped some ladder steps higher. Thus no coherent manifes-
tation against capitalism could develop. This situation was in Europe completely different.
Here feudalism became transformed into a class society. This means that there was no social
mobility in the occupational structure from one generation to the next. Thus opposition to a
capitalist society which created large, lasting inequalities became larger. The welfare state
was the sweeter to transform this latent violent class struggle into a democratic, peacefully
one.
Today, at the end of this century the situation might have reversed. Immigration flows into the
United States have become smaller. The large degree in inequality, accelerated through the
information technology revolution, is not (anymore) connected with higher social mobility.
Thus the US have become the Western country most prone to slide back into a closed class
society. Prominent writers in America form the left as well as from the right warn against this
trend. For the neoconservative Michael Lind it is the spectre of an `overclass'. For the left,
postmodernist Richard Rorty it is the danger of a `hereditary cast system'. To remind, recent
230
empirical research on social mobility confirms that there is no opening in the American strati-
fication system.
Social fluidity is not much higher in Europe than in America either. But since Europe had to
deal with the class problem over one century, it has found with the welfare state a way to ease
inequalities at least ex post. Therefore the welfare state is, and can become reformed in the
right way, an even more productive factor. Empirically the relationship between growth and
the welfare state is underdetermined. Thus it is a matter of the right political decisions to
transform it into a social investment state fostering social capital accumulation. As our em-
pirical study has shown the cooperative values of trust, civic engagement, tolerance and jus-
tice are of central importance for economic growth in the Western world during the 1990s.
Social capital is the glue that holds society together and makes it more than a collection of
individuals. It helps the emergence of networks which is important for successful unfolding of
the potential of new information technologies. Further sociability is central for services. Thus
in the postindustrial world social capital will be the central competitive advantage.
Now gazing a look into the future. Which region of the triad is most likely to produce more
social capital? Americans have found with a well developed civil society a partial functional
equivalent for the European welfare state. In Japan it is more community orientation at the
work place which provides welfare and social capital accumulation. But as this decade of
sluggish growth and stagnation has shown there are major incoherences in the Japanese
model. Therefore a prediction that the next century might be a European century (too) might
be not to unreasonable. If Europeans succeed in transforming their welfare states into a social
investment state they might have the necessary competitive advantage in the economic field.
Together with a more coherent foreign policy Europe might become a global player and more
of a kind of partner to the United States in the next century. We will see if and how quickly
Japan and Asia as a whole will bounce back. Triadic global governance might be a right step
into the right direction. It can help to stabilise global financial markets, secure the respect of
core labour standards and environmental protection in international trade, reduce global ine-
qualities and support the advancement of democracy world-wide.
But unlike Kant, who thought that democratisation of the world might be enough to secure
world peace and world justice, a world state will become a necessity in the next century.
World-wide democratisation might be enough to secure world peace. But no use of military
violence among (triad) countries will not mean that we will have a juste world. Rule of the
231
strongest and not rule of law will be a lasting feature of world politics until a world republic is
created.
232
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