The ties that bind

Trust
October 26, 1995

Francis Fukuyama's article on the end of history was a sensation and the book that followed it, The End of History and the Last Man, was a thoughtful reflection on the fin-de-siecle revival of capitalism as a dynamic system and the renaissance of liberal democracy as the world's favourite form of government. But what happens when history ends? Despite the vulgar interpretations of the end of history the Hegelian Fukuyama always knew, and indeed made clear, that the end of history was a realisation of the Hegelian programme, not the end of time or even of change. So now what?

In his new book Fukuyama has taken a Weberian path, a path that lacks the straight and upwards character of the Hegelian road: the Weberian path is full of thickets and snares since causality is now the holy grail rather than Progress towards the Idea, as in Hegel. Fukuyama has written a book on the comparative sociology of economic performance - a sort of Competitive Advantage of Nations by Michael Porter, as seen by a philosopher playing the social scientist. The result is a fairly lengthy, somewhat murky and untidy book that strains at putting order into a mass of facts that somehow refuse to sit down and behave.

Fukuyama is trying to understand the reasons why some economies, in which people are tied together by no stronger bond than the selfish economic one, can develop and sustain large private corporations, paradigms of continuing exchange and co-operation - whereas other econ-omies need the state as the agent for the building of large-scale enterprises. His emphasis on large-scale enterprises is surprising, since one might argue that the time is past for really large-scale vertically integrated enterprises in these post-Fordist days of Benetton-type corporate structures. Subcontracting, global sourcing, the revival (as by Benetton) of a modern version of the putting-out system, the delayered slimmed-down corporation, the spectacular downsizing of machines in information technology and so forth, may indicate the obsolescence of the large private corporation.

Be that as it may, to understand the capacity to develop private large-scale corporations is the challenge set by Fukuyama and we must follow him in his quest.

According to his hypothesis, there are some societies that have strong family ties, in which the family firm is dominant and there is a reluctance to let strangers take it over, when necessary. These societies find it difficult to build up large and lasting corporations, because trust is confined to the kin group and not extended beyond it. Chinese societies, both in China and beyond, are considered to be the typical case.

By contrast are the societies that can build up suprafamilial but substate-level associations, where trust is extended and values are shared with strangers who are not kin. Such societies can maintain and sustain large private corporations, the willingness to trust non-kin with one's capital; freeing the firm from the vagaries of genetic accidents in the distribution of business abilities across generations. Japan is the example here, despite its sharing a Confucian ethic with China: some of the best things in Fukuyama's book come from his extensive reading of the sociology of Chinese and Japanese families and his understanding of the more obscure parts of Confucianism. Thus, apparently similar societies are shown to be far apart in their trusting behaviour; and to a large extent (though not entirely to my satisfaction) the difference is traced to the family structures and practices such as adoption.

So far so good, or at least not bad. But social science, unlike philosophy which is Fukuyama's strong suit, requires more than pairwise comparison to establish the plausibility of a hypothesis. On the "familial" side (as I shall label the Chinese-type societies), Fukuyama adds Italy, France and, most surprisingly, South Korea. A consequence of the familial hypothesis is that these societies cannot develop large corporations without the help of the state. The existence of family firms is not enough as a base - state intervention is needed for corporation building.

While family ties can be said to be strong in Italian society, in many respects Italy does have a thriving culture of private companies, the above mentioned Benetton being not the least among them. Fukuyama argues that in the south, Italy has the least trusting culture and in the north there is, in his phrase, plenty of "social capital" and the capacity to trust others. So, large private corporations come from the north, ie Fiat. But in the middle - Red Bologna territory - an active municipal state is required to generate private corporations of any size. This differentiation by Fukuyama requires some evidence of restricted mobility - social and economic - in central Italy as compared with northern Italy, differentiation that I fail to find.

But even conceding the Italian case, Fukuyama's "familial" case for South Korea is a severe strain on credulity. There are large private corporations in South Korea, as Samsung's recent move into the northeast of England demonstrated. But these large corporations also have family origins. Thus the Korean case seems to refute the Fukuyama thesis. He, however, insists that the well-documented policy of the South Korean state in managing the market and promoting development supports his thesis. But there is surely a difference between China's large state-owned corporations and the private corporations that the South Korean government has encouraged to get large. The latter can happen even within a "familial" culture as long as the government is business orientated. India, which Fukuyama completely ignores, has a "joint family" structure that has been well exploited by the business castes to build up large conglomerates - the Tatas, Birlas, Ambanis and so on. In India, behind the earlier socialist facade, there was collusion between the government and big business. And with the economic reforms of the 1990s this tie-up is even more intimate. So the fact is that family firms can grow large with a little help from the state (by way of cheap credit and guaranteed markets).

On the suprafamilial side, Fukuyama ranges, beside Japan, Germany and the United States. The inclusion of the US will provoke the most speculation. It is true that it does not have the strong familial ties the Chinese do, unless you have in mind the American first-generation immigrants who must fall back on the family for credit. Fukuyama argues that in American society the Pilgrims and their children built up many suprafamily associations inside and outside the church that led to the development of the US's trusting character, which thereby helped to generate large corporations. But this line of argument is doubleedged. If trust extended among one ethnically and religiously homogenous group, the White Anglo Saxon Protestant (Wasp), enabling it to prosper -what happened to more recent immigrant groups: Italians; Poles; Koreans; not to mention Jews and blacks? First-generation immigrant experience in the US includes bitter resentment of Wasp culture inasmuch as it blocked the development of these communities (think of the Boston Irish). Ultimately this blocking failed. But the reason why it failed is not connected with suprafamilial ties: it is that the state refused to support Wasps as the South Korean state has supported its leading community. The democratic structures prevented the state from being captured by Wasps, at least at the federal level, and hence, by the second or third generation, the immigrant firm could grow.

Fukuyama can be a captivating writer, as his earlier book proved. This book will be championed by those who want to escape the inevitability of market-orientated global capitalism. Trust and social capital are phrases that give us a cuddly feeling and if the clever Fukuyama promises us that trust is good for economic success then we will tend to buy both his book and his thesis, so as to stave off the evil laissez faire wallahs. But I am afraid this promise will be seen to be false.

What Fukuyama has failed to see, in my view surprisingly, is that national differences in economic performance, even as measured by the number of large corporations, have a simple explanation. Implicit in Hegel, it was spelt out by Marx. In the preface to the first edition of the first volume of Das Kapital, Marx wrote that "the country that is more developed industrially only shows to the less developed the image of its own future". This remains, in my view, a more parsimonious and better calibrated hypothesis than Fukuyama's. If the US has the biggest number of large corporations, followed by Japan and Germany, it is hardly a wonder. The ranking will no doubt be followed by the United Kingdom, France, Sweden, and so on. The correlation between size of GDP and number of large corporations will not be exact - but it cannot be expected to be in any single-variable model.

The prediction of the Marx-Hegel model is that soon enough the Chinese will spawn large corporations; in other words family firms were the starting point in the economies that now have large corporations. You do not need trust, in Fukuyama's sense; you need large markets and cheap credit - the trust of your banker and your shareholders. Everyone else you can treat as you would any stranger.

If one forgets its thesis, Trust does have some fascinating, though not especially relevant, material on French history and Confucian culture. Fukuyama has read widely and many will no doubt benefit from his hard work. But in the final analysis, his is a book that could have done with some tightening up in style by an editor and some tightening up in logic by the author.

Lord Desai is director, Centre for the Study of Global Governance, London School of Economics.

Trust: The Social Virtues and the Creation of Prosperity

Author - Francis Fukuyama
ISBN - 0 241 13376 9
Publisher - Hamish Hamilton
Price - £12.99
Pages - 457

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