How American Management Theory Helped to Legitimize German Codetermination: Erich Potthoff and the Cross-Border Transmutation of Knowledge Jeffrey Fear University of Redlands draft! Please do not quote or cite without permission of author



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How American Management Theory Helped to Legitimize German Codetermination: Erich Potthoff and the Cross-Border Transmutation of Knowledge


Jeffrey Fear University of Redlands

DRAFT! Please do not quote or cite without permission of author.

Abstract

This paper examines an important moment in the early postwar history of German political economy when codetermination (labor representation on corporate boards of directors) was introduced. Codetermination was and is one of the unique features of the German “variety of capitalism.” Yet one of the crucial and highest profile advocates of codetermination at the time, Erich Potthoff, strategically deployed American personnel management and organizational theory that helped to legitimize codetermination as a corporate human resource practice rather than just as “industrial democracy” or as a power-sharing arrangement.

The article offers a sort of intellectual history of codetermination whereby Potthoff transmuted American management theory to promote German codetermination that should make firms work more “optimally,” more effectively. Potthoff’s ideas foreshadowed the transformation of the meaning of codetermination from a means of limiting executive license to a managerial, performance-oriented instrument to enhance corporate decision-making and legitimacy that occurred by the 1980s—and have become the standard arguments today. The paper offers a story of creative (mis)appropriation or re-working of American management theory that often occurs when ideas, practices, or firms move abroad. It provides insights into (cross-border) theories of organizational learning and institutional change.

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Introduction

At the heart of the study of German capitalism there lies a strange paradox, which might apply to the study of European capitalisms more generally, but the German case is peculiarly salient with major theoretical implications for how we understand institutional change in capitalism more generally.1

In the historical profession, one of the major themes in German history (and western European history by proxy) is its Americanization, especially after 1945. Ulrich Wengenroth characterized German business development as a series of successive waves of Americanization.2 In his classic work on the Americanisation of West German Industry, the historian Volker Berghahn focused on the liberalizing effect of American-style antitrust legislation after 1945, which helped to block the tendency for German big business to manage markets through cartels; once prohibited a more American-style oligopoly capitalism emerged. Berghahn made this debate over this law a crucial signifier for the liberalization and Americanization of West German business more broadly.3 Marie-Laure Djelic in Exporting the American Model, argued that “convergence in postwar Western Europe had essentially meant ‘Americanization’” and, notwithstanding differences, that the American system of industrial production was transferred despite resistances, obstacles, especially through cross-national transfer mechanisms such as


1 This has become a major research agenda in political science with Germany playing a key role. James
Mahoney and Kathleen Thelen (eds.), Explaining Institutional Change: Ambiguity, Agency, and Power
(Cambridge: Cambridge University Press, 2010). Wolfgang Streeck, Re-Forming Capitalism: Institutional
Change in the German Political Economy
(Oxford: Oxford University Press, 2009). Wolfgang Streeck and
Kathleen Thelen, Beyond Continuity: Institutional Change in Advanced Political Economies (Oxford: Oxford
University Press, 2005).

2 Ulrich Wengenroth, “Germany: Competition Abroad—Cooperation at Home 1870-1990,” in Big Business
and the Wealth of Nations, (eds.) Alfred D. Chandler, Jr.; Franco Amatori, Takashi Hikino (New York:
Cambridge University Press, 1997), pp. 139-175.

3 Volker R. Berghahn, The Americanisation of West German Industry 1945-1973 (New York: Cambridge
University Press, 1986). Jeffrey Fear, “Cartels,” Oxford Handbook of Business History, (eds.) Geoffrey
Jones and Jonathan Zeitlin (Oxford: Oxford University Press, 2008), 268-292. Yet, if one thinks
comparatively most other continental European countries did not begin to crack down on cartels until the
1970s. If cartels are taken as one marker of an organized capitalism or of a “non-liberal” economy, then

most other European countries continued to be more organized and “non-liberal” than Germany.

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the Marshall Plan.4 Harm G. Schröter, in his 20th century survey on the Americanization of the European Economy, wrote: “in the course of the twentieth century European society and economy became increasingly like American society and economy.”5 Djelic and Schröter broadly meant convergence of business practices and economic wellbeing. Berghahn, Djelic and Schröter all stress that the transfer was partial, selective, and adaptive so that Germany/Europe remains distinctive but nonetheless a powerful Americanizing wind blew east from across the Atlantic. Victoria de Grazia went so far as to call this American wind an “irresistible empire,” particularly led by mass consumption (rather than mass production), supermarkets, fast food, and American consumer culture.6 For German historiography at least, this Americanization, economic modernization, and convergence to western democratic norms was also driven in part by explaining why Germany became so derailed in its deviant Sonderweg (or “special path”) that led to the Third Reich of 1933-1945, yet managed to reform, right itself, and “normalize” after 1945.7


Given this viewpoint and in spite of the obvious impact of America on Germany especially after 1945, one would think that the German business world would be a very familiar place to Americans. Yet it is not. Michel Albert famously termed it a “Rhineland model” of capitalism.8 After all this Americanization, how can this be?

What is even stranger in light of these Americanizing histories is a large body of political science literature under the umbrella term, “Varieties of Capitalism,” that tends to make Germany the stylized opposite of “Anglo-Saxon capitalism” whose archetype is the “American model.” This “varieties of capitalism” literature was in part sparked by Albert’s contention that “Rhineland capitalism” was not only more humane but also more competitive over the long-run than short-



4 Marie-Laure Djelic, Exporting the American Model: The Postwar Transfomration of European Business
(Oxford: Oxford University Press, 1998).

5 Harm G. Schröter, Americanization of the European Economy: A Compact Survey of American Economic
influence in Europe since the 1880s (Berlin: Springer, 2005), quote from p. 205.

6 Victoria de Grazia, Irresistible Empire: America
s Advance through 20th-Century Europe (Cambridge,
Mass.: Belknap Press of Harvard University Press, 2005).

7 Classic texts are Ralf Dahrendorf, Society and Democracy in Germany (New York: Norton, 1967). Hans-

Ulrich Wehler, The German Empire 1871-1918 (Lexington Spa: Berg, 1985). David Blackbourn and Geoff

Eley, The Peculiarities of German History: Bourgeois Society and Politics in Nineteenth-Century Germany
(Oxford: Routledge, 1984).

8 Michel Albert, Capitalism vs. Capitalism (New York: Four Walls Eight Windows, 1993).

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term, neo-americaine, casino capitalism. In this mostly political science literature, Germany is a “non-liberal,” “coordinated market economy,” an updated version of “organized capitalism” par excellence relative to the liberal, market-oriented, individualistic capitalism of the U.S.


After all this Americanizing in history departments, how can one even think of Germany as being the archetypal opposite of America in political science departments? At minimum, we have a problem of non-communication between historians and political scientists, and a problem of relating theory to empirical reality. William Sewell recently reflected on the importance but inability of historians and social scientists to engage in a greater interdisciplinary dialogue, which is needed to understand capitalism.9 Indeed in 2006 Volker Berghahn (historian) and Sigurt Vitols (political scientist) organized a conference on the “German model” of capitalism and asked whether there was a distinct model at all.10 After re-reading both disciplinary literatures, Mary Nolan (historian) felt as if she was in a room full of blind people attempting to describe an elephant.11

To be clear, not all historians accept this broad Americanization thesis, nor do all political scientists accept divergent capitalisms. Werner Abelshauser in his book “Cultural Struggle” (Kulturkampf) finds largely an autonomous German tradition of capitalism that had its roots in the late 19th century in Imperial Germany. Imperial Germany was a “hothouse of postindustrial institutions” that still exist today—among them codetermination; America had influence but the features of German capitalism were essentially “made in Germany” built on remarkable continuities since the 19th century.12 (I will return to Abelshauser’s argument a bit later in the discussion of codetermination). The political scientist, Wolfgang Streeck, recently stresses that the “commonalities of capitalism” need to be reasserted rather than invest more research effort in


9 William H. Sewell, Jr., Logics of History: Social Theory and Social Transformation (Chicago: University of Chicago Press, 2005).

10Volker R. Berghahn und Sigurt Vitols (eds.), Gibt es einen deutschen Kapitalismus? Tradition und globale Perspektiven der sozialen Marktwirtschaft (Frankfurt/Main:Campus, 2006).

11 Mary Nolan, “’Varieties of Capitalism’ and Versionen der Amerikanisierung,” Gibt es einen deutschen
Kapitalismus? Tradition und globale Perspektiven der sozialen Marktwirtschaft, (eds.) Volker R. Berghahn
und Sigurt Vitols (Frankfurt/Main: Campus, 2006), 96-110, comment from p. 98.

12 Werner Abelshauser, Kulturkampf: Der deutsche Weg in die Neue Wirtschaft und die amerikanische
Herausforderung
(Berlin: Kadmos Kulturverlag, 2003). Werner Abelshauser, The Dynamics of German
Industry: Germany
s Path toward the New Economy and the American Challenge (New York: Berghahn
Books, 2005).

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distinguishing, distinct national models; a general theory of capitalism and institutional change under capitalism (using fundamentally historical methods) is needed.13 Another historian, Mary Nolan, whose Visions of Modernity examined the transfer of Fordist and Taylorist ideas in the 1920s, tends to stress the partiality of the transfer, tends to view Americanization more as a field of discourse than a reality, and has recently become even more skeptical about the usefulness of the overall concept. At minimum, the version of “America” being transferred in the 1920s was not the same version of “America” transferred in the 1950s or, for that matter that of the 1990s built on financial innovations.14 Stefano Battilossi and Youssef Cassis on European banks tend to speak of an American challenge rather than Americanization; banks had to transform themselves especially on international markets, but they often remained quite distinct in their practices.15 One can also see the slow creep of “Americanization” in quotation marks indicating uncertainty with the term as in the works of Susanne Hilger or Christian Kleinschmidt. Susanne Hilger stresses the selective adaptation process whereby “one cannot assume an Americanization of German industry in a fundamental sense.”16 Christian Kleinschmidt uses American (and later) Japanese ideas more as “reference models” in a process of selective “perception of productivity” (Der produktive Blick) and as a process of contingent “re-importing” through organizational learning; “Americanization” (in quotation marks) was more a mental orientation and partial process than a distinct reality, a discourse affecting and effecting change.17


13 Wolfgang Streeck, Re-Forming Capitalism: Institutional Change in the German Political Economy
(Oxford: Oxford University Press, 2009). Wolfgang Streeck and Kozo Yamamura, The Origins of Nonliberal
Capitalism: Germany and Japan in Comparison (Ithaca: Cornell University Press, 2001). In “Origins,”
Streeck and Yamamura stress the divergent “non-liberal” variant of German and Japanese capitalism as
opposed to a liberal American one.

14 Nolan, “’Varieties of Capitalism’ and Versionen der Amerikanisierung.” Mary Nolan, Visions of Modernity:
American Business and the Modernization of Germany (New York: Oxford, 1994). Egbert Klautke,
Unbegrenzte Möglichkeiten: “Amerikanisierung” in Deutschland und Frankreich 1900-1933 (Wiesbaden:
Franz Steiner, 2003). Klautke explicitly views it as a discourse or field of debate and notes how much it
shifted between 1900-1933. Richard Kuisel, Seducing the French: The Dilemmas of Americanization
(Berkeley: University of California Press, 1997). Kuisel sought to distinguish Americanization from
modernization.

15 Stefano Battilossi and Youssef Cassis, European Banks and the American Challenge: Competition and
Cooperation in International Banking under Bretton Woods (Oxford: Oxford University Press, 2002).

16 Susanne Hilger, Amerikanisierung deutscher Unternehmen: Wettbewerbsstrategien und

Unternehmenspolitik bei Henkel, Siemens und Daimler-Benz (1945/49-1975), quote from p. 282.

17 Christian Kleinschmidt, Der produktive Blick: Wahrnehung amerikanischer und japanischer Management-
und Produktionsmethoden durch deutsche Unternehmer 1950-1985 (Berlin: Akademie Verlag, 2002).

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My own work tends to be quite skeptical. Americanization is a “concept too many” to quote D.C. Coleman’s comment on the theory of protoindustrialization. Unlike the concept of protoindustrialization, which has an enormous heuristic value for organizing research because of its intellectual hypotheses, the concept of Americanization offers little except a loose sense of convergence to some aspect of imagined American reality. The concept of Americanization ultimately obscures the process of cultural exchange and institutional translation (the subject of this article). Ideas from America clearly had influence, but a straightforward Americanization thesis obscures indigenous trajectories and continuities within German business. All that appears as “American” did not have American origins such as the multidivisional form or even many marketing practices. Many institutional, professional, and organizational developments were true parallels, rather than imitations. Even allegedly distinctive “American” or “German” institutional arrangements such as bank-industry “financial capitalism” were less distinct at certain times than imagined. Or the stylized features did not actually conform to the empirical reality of both economies. Finally, transferred ideas were transformed by or embedded in existing structures so much that Americanization is the wrong word—possibly “Germanization” of American ideas.18

But that latter formulation, too, falls short as it: 1) neglects the active trans-mutation process itself; 2) ignores how much “American” influences had “German” origins such as in political economy, consumer research, and engineering, which altered the course of “American” practices, which a generation later, came back to Germany as “American” (one can think of the enormous contribution of many Central Europeans to the success of Hollywood or Walter Gropius and Mies van der Rohe’s in architecture or design) and 3) elides how much they offered a mental representation of what it meant to be “American” that could be accepted or rejected as the case may be. In an influential piece, Jonathan Zeitlin stressed piecemeal borrowing, very selective or


18 Jeffrey Fear, Organizing Control: August Thyssen and the Construction of German Management (Cambridge, Mass.: Harvard University Press, 2005). Uwe Spiekermann, “>Der Konsument muss erobert werden!< Agrar- und Handelsmarketing in Deutschland während der 1920er und 1930er Jahre,” Marketinggeschichte: Die Genese einer modernen Sozialtechnik, (Hg.) Hartmut Berghoff (Frankfurt/Main: Campus Verlag, 2007), 123-147. Also see Berghoff’s introduction on mutual, transnational influences. Jeffrey Fear and Christopher Kobrak, “Banks on Board: Banks in German and American Corporate Governance, 1870-1914,” with Christopher Kobrak, Business History Review, (forthcoming Fall 2010). Matthew M.C. Allen, The Varieties of Capitalism Paradigm: Explaining Germanys Comparative Advantage? (Hampshire: Palgrave MacMillan, 2006).

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strategic adaptation (more bricolage), partial reception and hybridization through an active, creative reworking process rather than of just “resistance” to or “adoption” of American ideas.19 (Erich Potthoff’s transfer of American management theory to legitimize German codetermination illustrates this process of creative reworking.)


At minimum, we have a story of cognitive dissonance much like the recent Porsche story under Wendelin Wiedeking’s leadership. Although Wiedeking stressed his leadership models were classic Mittelstand entrepreneurs such as Bernd Leibinger of Trumpf or Reinhold Würth, Porsche’s turnaround owed much to Japanese lean production techniques (and direct consulting advice), classic German engineering prowess, and the financial wizardry of American-style derivatives of chief financial officer Holger P. Härter. And much like his American financial counterparts, Wiedeking and Härter overtaxed Porsche with those fancy financial derivatives until Volkswagen took it over. Although Wiedeking criticized the shareholder value-oriented Josef Ackermann of the Deutsche Bank, his own success hardly rested on the pure old-school virtues of the German family-oriented Mittelstand he publically espoused.20 The Porsche case blurs what exactly is “American,” “German,” or “Japanese.”

But more profoundly, we have a fundamental problem of narration—of relating these cross-border translation processes effectively without resorting to stylized national archetypes. Broadly speaking we have three contesting narratives in the history of German capitalism. The first is the “special path” (Sonderweg) story of distorted modernization prior to 1933/45 whereby Germany’s speedy modernization was not matched by democratic modernization, which led to severe upheavals in society and politics. A fundamentally illiberal polity and authoritarian mentality among its businessmen prior to 1945 was forcibly opened to liberalizing American ideas after defeat. The integration of labor through unions, collective bargaining, and codetermination/works councils, which was so contested prior to 1933, was a decisive feature of West Germany’s


19 Jonathan Zeitlin, “Introduction: Americanization and Its Limits: Reworking US Technology and
Management in Post-War Europe and Japan, (ed.) Jonathan Zeitlin and Gary Herrigel, Americanization and
Its Limits: Reworking US Technology and Management in Post-War Europe and Japan (Oxford: Oxford
University Press, 2000), 1-50.

20 Wendelin Wiedeking, Anders ist besser: Ein Versuch über neue Wege in Wirtschaft und Politik
(Frankfurt/Main: Piper, 2008).

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normalization beyond authoritarianism and debilitating class conflict. A second broad story, particularly associated with Werner Abelshauser or Wolfgang Streeck, is one of “non-liberal” continuities. Both find significant features of present-day capitalism extant in the period prior to 1914 (discussed immediately below). Finally, an emerging potential transnational narrative is to make German capitalism more porous and open to foreign influences—as it clearly was. Both the first two narratives presume a self-contained national economy, yet French (early 19th), British (mid-to-late 19th), and American influence (1920s, but esp. post 1945), leaving aside the globalizing and Europeanizing tendencies present since the 1980s all call into question a fully autonomous development. The question remains when a distinct “German-style” capitalism emerged (and why)—leaving aside the question if one can speak of a specifically “German” model of capitalism.


For the purposes of this paper, codetermination (that is, labor representation on German supervisory boards of directors--Mitbestimmung) is clearly a uniquely German institution with few parallels across the globe. It plays a crucial—but differing—role in each of these narratives. In the first narrative, codetermination proves that German business managed to escape its illiberal, authoritarian mindset and accept power sharing and “democratization” of corporate life, let alone national parliamentary life. Codetermination was a symbol of social partnership and democratic acceptance—one of the reasons why it carries a great weight of political symbolism today. Disposing of it symbolically ends this hard-won social partnership. In the second narrative, codetermination and the demand for “industrial democracy” had its roots in the class struggles of the late 19th and early 20th century. Many firms voluntarily introduced forms of worker representation quite early on; codetermination was an evolving continuity of distinctly German arrangements that solved particularly agency problems inherent to corporate industrial life.21 In this narrative, codetermination is a key way in which society has integrated labor into business, introduced a non-market, “non-liberal” manner of organizing firms, and enhanced loyalty among key groups of skilled workers necessary for manufacturing, especially high-value added products.


21 Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan (Cambridge: Cambridge University Press, 2004). Thelen tells a similar story how training programs layered themselves over particular innovations in the late 19th century.

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Codetermination (on boards of directors) and works councils (in individual factories) also represented a core traditional demand by labor unions for German industrial democracy since the late 19th century. Indeed, the debates in the early 1990s about the European Social Charter whereby multinational firms were required to have works councils or the delayed introduction of the Societas Europaea because of the question of labor representation continue this struggle about how a European capitalism might look. German distinctiveness in its industrial relations and corporate governance has significantly delayed a common European enterprise. Finally, in the third more transnational narrative, German codetermination just looks weird and exceptional from a global, comparative perspective. The strength of labor representation on corporate boards is distinctive, nearly unique. Under liberalizing conditions of globalization or Europeanization, it might be consigned to the dustbin of history because no one outside of Germany understands how it works—as one prominent German businessman provocatively asserted—and it only depresses company share prices.


Codetermination is thus a great vantage point to discuss each of these three narratives in microcosm. In certain respects, Erich Potthoff’s story blends each of these three narratives with a surprising American twist. Potthoff played a crucial behind-the-scenes, role in early union politics as an advisor to Hans Böckler—the leader of the newly unified German union movement, and particularly in his capacity as founding director of the Economic and Social Research Institute of the Hans-Böckler Foundation (Wirtschaftswissenschatliche Institut, WWI) in Köln (now Wirtschafts- und Sozialwissenschaftliche Institut (WSI) der Hans-Böckler-Stiftung)—still the main research arm of German unions today. Recently, the historian Karl Lauschke, an expert on codetermination and the union movement, has also stressed Potthoff’s unsung importance for the Social Democratic Party and the early union movement.22

In this article, I would like to portray Potthoff was the intellectual father of codetermination as management practice, not as “economic democracy” as originally propagated by Fritz


22 Karl Lauschke, Die halbe Macht: Mitbestimmung in der Eisen- und Stahlindustrie 1945 bis 1989 (Essen: Klartext Verlag, 2007). Author interview with Erich Potthoff, Düsseldorf, 24. März 2005. Subsequent research was undertaken at the Archiv der sozialen Demokratie der Friedrich Ebert Stiftung (AdsD FES) and at the Mannesmann-Archiv (MA). The author thanks the help of Christine Bobzien at the AdsD FES and Dr. Horst A. Wessel for his many years of support at the Mannesmann-Archiv.

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Naphtali.23 Along with Karl Hax, a friend, and a prominent management theorist at the University of Frankfurt, Potthoff helped legitimize codetermination in German management theory.24 Their arguments shifted codetermination to a performance-oriented human resource instrument. Potthoff did so by borrowing liberally from American management and organizational theory to modernize German personnel management practices. It was Erich Potthoff who integrated American management theory into longstanding demands by German labor for industrial democracy, helping to legitimize codetermination as a modern human resource and management practice that helps make firms work more “optimally,” more effectively. Potthoff’s arguments in the 1950s foreshadow the arguments made by the union movement today to defend codetermination.


Thus, the Potthoff-codetermination story integrates all three larger narratives into one, but one reworked, twisted in surprising ways. Ultimately, it is a story of creative (mis?)appropriation that often occurs when ideas, practices, or firms move abroad. In its spirit, it is much like the story of Japan—borrowing Western models for its navy, army, central bank, postal system, police, education, and even western dress—but somehow managing to remain quite “Japanese.”25

In the first part of this paper, I would like to review the stress on “path dependency” and “non-liberal” capitalism to introduce this influential “varieties of capitalism” perspective. But it establishes the specific theoretical base for discussing a very focused, archival-based story on Erich Potthoff. If Potthoff did not exist, he would have to be invented (paraphrasing a classic statment about codetermination itself).


23 Fritz Naphtali, WirtschaftsdemokratieIhr Wesen, Weg und Ziel (Frankfurt/Main: Europäischer
Verlagsanstalt, 19663 [1928].

24 On Karl Hax, see Adolf Moxter, “Karl Hax: His Work and Life as We See It Today,” Schmalenbach
Business Review, Vol. 53 (October 2001), pp. 250-262.

25 D. Eleanor Westney, Imitation and Innovation: The Transfer of Western Organizational Patterns in Meiji
Japan (Cambridge, Mass.: Harvard University Press, 1987).

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