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Rhine capitalism or Rhenish capitalism (also known as the Rhenish model or Rhineland model) is a contemporary economic order existing primarily in Western Europe.
History of concept
The term originates from the French economist and (in 1991) Chairman of the Board and CEO Assurances Générales de France (AGF), Michel Albert who first used it in his book Capitalisme contre Capitalisme He compared the so-called “neo-American model” of a capitalistic market economy, introduced by the administrations of Ronald Reagan and Margaret Thatcher with the “Rhine capitalism", present in Germany, France and in some of the Northern European economies.
While the former is based more on the ideas of Friedrich von Hayek and Milton Friedman, the latter, according to Albert, is founded on publicly organized social security. Albert analyzes the Rhenish model as the more equitable, efficient, and less violent one. However, according to Albert, complex psychological phenomena and the functioning of the press lets the American model appear more attractive and dynamic to the general public.
Against this Albert wrote - even in 1991 - for example: “The largest banks know, however, that they are literally 'too big to fail' and can count on a helping hand from government if the worst comes to the worst. America's political leaders would step in to prevent the crash of a major financial institution on the grounds that it could set off a lethal chain reaction culminating in widespread disaster. ... Thus, in yet another intriguing but ominous irony of history, 10 years of ultra-liberalism have resulted in a US financial system whose future may only be assured with the help of federal government handouts” (p. 61).
Albert identifies the following characteristics of Rhine capitalism:
- the world of finance is more dominated by the banks instead of the stock exchanges,
- close relationships between banks and companies,
- a well-adjusted balance of power between share holders and managers,
- social partnership between employers and unions,
- employees of higher loyalty,
- better educated employees thanks to something like the dual education system,
- more regulated markets and – last but most importantly –
- shared values by most of the citizens regarding the ideas of equality and solidarity.
Tradable and non-tradable goods
According to Albert, both models differ little in their respective ideas about which goods are not tradable – with one major exception: religions. Areas where the models diverge significantly are the realm of negotiable goods (commodities, services) and that of mixed goods.
- Religions in the Rhine model do not function as economic institutions as they do, in part, in the US.
- Companies are, in the neo-American model, negotiable goods as any others, whereas in the Rhine model they are a community.
- Wages are determined by a momentary market situation in the neo-American system, while in the Rhine model they are more constant and take into consideration qualifications, seniority and nationally agreed pay scales.
- Housing is mostly a market commodity in the US. In Rhine economies it is mixed, costs are often subsidized.
- Urban transportation would be partly regulated in the USA also, but is more a commodity than a mixed good.
- The mass media is traditionally commercial in the US. While in the Rhenish system there is a tendency toward privatization, the opposite can be found in the USA, and in the Rhenish system, the most watched television stations tend to be state-run.
- Education is much more a commodity in the USA than in the Rhine model.
- Health and legal professions: In the Rhine model a long tradition frees the members of a profession (e.g. doctors and lawyers) from the need to chase profit in order to be able to concentrate in a disinterested fashion on serving the public good. The service is a kind of an honor, and the expression for the payment in these areas (Honorar) is closely related to this underlying idea.
Two researchers, Peter A. Hall and David Soskice, followed up the idea of two different kinds of capitalism with a large, empirical, international study. They came to a typology of (a) liberal and (b) coordinated market economies with different institutions and governance systems. The paradigm of a coordinated market economy is the German way of Rhine capitalism, the Social market economy, which, in the Anglo-Saxon world, is frequently called the “German model”, whereas - according to Hall/Soskice - the meaning of the expression “German model” is more referred to the social practice in Germany than to Erhards and Müller-Armacks fundamental concept.
Difference between "Rhine capitalism" and the "German model"
The term Rhine capitalism is an allusion to the former German government capital Bonn at the river Rhine and is also related to the nearby town of Bad Godesberg where the German Social Democratic Party SPD accepted this kind of capitalism with the so-called Godesberg Program. Apart from Germany's, Rhenish capitalism has been associated with other Northern European economies (Switzerland, Austria, the Netherlands, Denmark, and Sweden) and it has also been used to characterize Japan's.
It is linked to some principles of social legislation, which can be found in all these countries, as social security in illness, unemployment etc., reducing economic inequality, strong banking system but weak equity market, solidarity based insurances, a large public sector, and far reaching labor laws. Some economists also make a distinction between the Rhenish model and the Nordic model.
- Albert, Michel: Capitalism Against Capitalism. London: Whurr, 1993. - ISBN 1-870332-54-7.
- Albert, Michel; Gonenc, Rauf: The Future of Rhenish Capitalism. In: Political Quarterly, 67(2005)3, p. 184-193.
- Brittan, Samuel: Capitalism with a human face. Aldershot: Elgar, 1995. - ISBN 1-85278-446-6.
- Edinger, Lewis Joachim; Nacos, Brigitte L.: Capitalism with a Human Face. In: Edinger, Lewis Joachim; Nacos, Brigitte L. (Ed.): From Bonn to Berlin : German politics in transition. New York: Columbia University Press, 1998. P. 145-195. - ISBN 0-231-08413-7.