I recently completed two years of research on informality in Germany, where all unregulated economic exchanges of goods, services, and labor are illegal. To understand German reliance on rule-of-law for controlling informality, I dug into the social democratic principles that undergird an economy that integrates growth-focused capitalism with a strong social safety net. Back here in the United States, I’ve been surprised and pleased to see social capitalist principles emerging as some policymakers, advocates, entrepreneurs, and others test and promote solutions for making markets more just and inclusive.
For example, “patient capital” (or patient equity investment) is making its way into the mainstream development vernacular and public policy. I had never heard this during my 20 years advocating for economic development across the U.S., but over the past three decades, social enterprises have risen in popularity, offering a “third way” that integrates investments with philanthropy. The U.S.’s periods of strong economic performance have relied upon aggressive capital investments that favor maximizing growth. However, this focus on growth fosters rampant inequality and dismally high poverty rates.
Though Germany historically has had a patient capital economy, it is now following in the U.S.’s more aggressive footsteps. In the past, Germany’s economy relied on patient capital: most businesses leveraged bank loans, not private investment from distant shareholders, to drive business and economic development. This principle of long-term, low-growth investing kept inequality and poverty low. In the past, German businesses, especially in the skilled trades and crafts, known as the Handwerk sector, often eschewed models where owners did not work closely with those they employed.
Unfortunately, in recent decades, pressures that accompanied reunification, EU integration, an aging workforce, and low birthrates have inspired lawmakers to deregulate markets and open them to outside (often foreign) investment. New policies like the 2002 Hartz Reforms replaced longstanding preferences for patient capital with pursuit of short-term gains on impatient capital investments. This “impatient” model assumes the need for large capital infusions to fuel economic success. Though impatient capital encourages individual firms and workers to take more risks, the system is risk-intolerant, intensifying instability with more volatile cycles of boom or bust.
Germany’s new emphasis on rapid returns and protections for the investments of distant shareholders gutted the competitive capacity in Handwerk, service, and other sectors that undergird the country’s domestic markets. For such firms, outside investment was untenable, since people-driven production can only grow so much. In an export-dependent economy, how does one export a haircut or a furnace installation?
Waning patience shifted bankers’ focus from investment in small and mid-sized local businesses—the backbone of the German economy known as the Mittelstand—to global market investment in capital-intensive transnational companies. Such a snub of patient capital has driven up Germany’s poverty rates, reliance on wage-supplementing social services [Kombilohn], and inequality to the highest level among western European nations. In response, some sectors have discouraged “distant shareholders” and called for a return to prioritizing the value and agency of people by investing in their training, education, and social protections.
Ironically, in the U.S., social enterprises and patient capital markets rose in the early 2000s—roughly the same time of Germany’s growing impatience. Today, proponents of economic justice and community development in the U.S. openly discuss patient capital. Federal Opportunity Zone legislation promotes patience in exchange for tax breaks. I agree with their discourses that to make markets and economies more equitable, investors and developers must both commit to and be incentivized for long-term (10 or more years) rather than short-term (annual, quarterly, monthly) returns. Markets in low-wealth communities often lack the capacity to generate aggressive returns in short time frames owing to poor infrastructure and few resources. For the few with the capacity, city and regional planners often create markets that become too expensive for the existing local businesses and the residents who live, work, and play there.
The pursuit of rapid returns in real estate and infrastructure developments too often leads to displacement or even forcible removals. Consider the current eviction crisis or the displacement of Roxbury residents during the proposed Inner Belt freeway project in Boston that began in 1948. Patient capital makes room for return-generating strategies while maintaining social and commercial ties in existing communities. PUSH Buffalo provides a great example of how reinvestments and development coincided with preserving existing community institutions and systems. U.S. federal Opportunity Zone legislation offers additional promise.
The case of patient capital shows one way in which Germany’s traditional social capitalist principles help drive economic inclusion. In Part II of this essay, I’ll discuss another social capitalist concept—works councils—that is emerging in mainstream U.S. economic and community development as a way to provide workers a voice in how employers manage the enterprises that employ them all.