Deepak Lal: Towards stakeholder capitalism?

In my last column I had examined the travails of Anglo-American managerial capitalism, arguing that it was the success of incumbent managers (the insiders) in using the political process to limit hostile takeovers (by outsiders) which has led to excessive executive compensation at the expense of the shareholder owners of corporations. In the process income distribution also worsened. An important feature of this form of capitalism, providing economic opportunities even for those without their own resources, and enabling outsiders to challenge insiders to impart the dynamism of creative destruction which is involved in the most efficient deployment of an economy's resources, was also attenuated. The US search funds which allow those without collateral or connections to finance their new ideas, is emblematic of the Anglo-American capitalist model.

But since the late 19th century it has faced competition from the corporatist "stakeholder" model pioneered by Germany after its unification in 1871, and adopted by the reformers of the Meiji revolution in Japan. The major differences with the Anglo-American variety were, first, the toleration of cartels, as (following Fredric List) the nation rather than individuals was considered the basic economic unit, with industry required to serve the national weal. Second, there were incestuous relations between the industrial corporations and commercial banks. Third, German corporations had a two-level system of corporate control: a management board for day-to-day management and a supervisory board consisting of various stakeholders: shareholders, banks, cartel members, local politicians and trade unions. Fourth, companies had to provide social insurance to their employees as well as "co-determination", by giving them a formal voice on company boards.

The Japanese chose a variant of this stakeholder capitalism through the zaibatsu. These were conglomerates, which included banks and insurance companies, at whose centre was a family-owned holding company, with other associated firms linked by cross-shareholdings and interlocking directorships.

After the war, the US tried to introduce more features of Anglo-American capitalism in the two countries. But both reverted to their older corporatist forms. The German "social market" recreated Bismarckian corporatism, while Japan saw the zaibatsu reborn as the keiretsu. This model was exported to other Asian countries, most notably South Korea, whose chaebol was another form of corporatist capitalism. This is the so-called Asian model of capitalism.

It was successful as the countries adopting it were latecomers to industrialisation, catching up with the industrial leaders in the UK and the US. Late developers with abundant labour can easily discern the initial industrial structure in line with their comparative advantage. It will consist of small-scale labour intensive industries, which can be financed through the extended family or small partnerships, run by owner-managers. With growth and the shift of comparative advantage to progressively more capital-intensive industries, families would not have the large amounts of capital required to establish such businesses and retain control, avoiding the "agency" problems of managerial capitalism, discussed in my last column. This problem can be overcome by creating large concentrations of wealth or finding ways for some concentrated wealth holders