Capitalism With Family Values

The now likely takeover of European steelmaker Arcelor by a family-run company, Mittal Steel, has been viewed by its critics -- especially in the French and Luxembourg governments -- as a betrayal of old continental European traditions to the new cost-cutting imperative of globalization. It is actually something quite different: a return of European business to the traditions of family capitalism that shaped its greatest successes.

Arcelor is in fact largely composed of enterprises that grew as family businesses: notably the great Wendel iron and steelworks built in the Moselle, in Lorraine, in the 18th and 19th centuries, and the other families that rose to compete with the Wendels. A key player in the final takeover maneuver was Romain Zaleski, a French-Polish businessman who made his reputation as a rescuer and reformer of Italian family steel enterprises.

But by the mid-20th century, family business had acquired a poor reputation. To the critics, family-run companies did not invest enough and consequently missed out on technical innovation.

The debate led to a political consensus after 1945 that the state should take responsibility for planning and managing the steel business. State management actually turned out to be more disastrous. State incentives to expand production led directly to the European steel crisis of the 1970s and the subsequent wave of rationalization. Today, there is a consensus that state-run steel businesses have failed. This verdict is almost as universal as the earlier condemnation of family business, and is analytically much more accurate. What can replace the state, and what sort of privatization will really restore dynamism?

In the European past, state inadequacy was compensated for by the resilience of other institutions -- notably the family. Family companies became more important at times of political upheaval because they could provide a basis of trust in a setting where legal norms were in flux -- all over continental Europe at the time of the French Revolution and the Napoleonic wars, but again also in the aftermath of 20th-century conflicts. German families, for instance, were able to reconstruct businesses after the Allied breakup of German big business, while new entrepreneurs created or recreated the dynamic Mittelstand enterprises that drove the German success story. In Italy, a special new bank, Mediobanca, allowed Italian family companies such as Pirelli, Fiat and Falck to re-establish themselves after 1945. The German and Italian postwar miracles were thus largely driven by family companies.

Modern family business seems to offer new versions of the old attractions. It symbolizes a long-term commitment by owners to a business and to a group of workers; it creates a powerful image for the company; and it is the global flavor of the month because of the part it plays in the dynamism of Asian economies.

Family capitalism in Europe is especially developed in stakeholding economies such as Sweden or Switzerland, and is generally seen to enjoy superior labor relations in comparison to more stock-market driven enterprises. In the recent Arcelor battle, U.S. labor unions underlined Mittal's good behavior.

Family ownership has the advantage of being visible and identifiable, in contrast to the anonymous capitalism of numerous individual investors or the facelessness of institutional investors. If ownership is an important or even the defining feature of the capitalist process, it may be desirable that it is transparent. The greater difficulties that arise when disposing of family ownership offer a guarantee of continuity, and make property part of a stakeholding and relatively permanent pattern of institutional arrangements, with higher levels of commitment. Moreover, the 20th-century rise of the brand and the perception of individual relationship required by a good brand actually favor the family business. Ermenegildo Zegna embodies the virtues of his menswear fashion house in a way that chief executives of big corporations sometimes aspire to but in practice almost never manage. Everyone will know what Mittal is about.

Finally, the clincher: Europe is now taking over the model of the world's most dynamic economies. In India and China, the family business plays a vital role in promoting innovation and entrepreneurship in a politically non-transparent and potentially unstable setting. As in Europe's past, it is a counterweight to bureaucratic regulation.

The attraction of Lakshmi Mittal is that he both stands for something that is in business terms very new, namely India (even though his company does not produce there), and at the same time represents something very old, namely Europe's family values.

Harold James is professor of history and international affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University and author of Family Capitalism (Harvard University Press, 2006). This comment was published in the Financial Times.