The German Mittelstand | Hacker News Reader

The German Mittelstand

kieranvelasquez.substack.com

re: the crisis of the Mittelstand in competing VS China, I'm reminded of this tweet. It's a fictitious illustrative case not a serious study but I think it describes some of the root challenges of western industrial culture when it comes to competing against China

https://x.com/AngelicaOung/status/1921364873444986888

I don't think the fundamental premise is much of an issue - it's what a (mostly) free market is meant to do. Someone sells a chair for $100, someone else believes they can sell it for $80, so they do. There are two main complicating factors (outside of brand reputation and possibly some others?)

1) quality - someone accepts the $80 chair which is a little bit more wonky

2) the $100 company spent a few years developing the technology to steam and bend timber to make the chair so they're marking up based on R&D and ip. The $80 chair company just copied the other tech

There is absolutely a lot of profiteering (charge what we can, not what we need to) happening, but honestly I believe that happens everywhere, including China (trivial case - wild price swings on aliexpress - they're maximising profits).

> There is absolutely a lot of profiteering (charge what we can, not what we need to) happening

I think that profiteering is the default behavior for companies. Maybe not all companies behave this way, or maybe in the past it wasn't the default behavior, but I'm very confident it is now

In the digital world quality is a post purchase signal and the ability for consumers to communicate about quality has basically been destroyed by allowing paid counterparts by businesses to drown out the signal

Agreed, it's that the free market _allows_ you to do. What's concerning is that we're used to the "semi-benevolent" image of the free market where a company succeeds and then returns value to stock holders, and the employees and the investors and the country all share of the riches. Of course the executives and main shareholders get outsized returns, inequality might raise, but many people see a bit, and capitalism works, kind of.

This new Chinese "involutioned" capitalism is much more scary and robotic. The companies never really make money, becoming just an operation that maintains itself on minimum wage workers, all to the service of reducing prices. Shareholders don't make money, employees are semi-poor, nobody sees any returns.

But the customers see cheaper prices! you say. Sure, yes, the products get cheaper, but now think of yourself as an employee not a customer. Imagine the involutioned companies triumph. Your previous company, where you had a good salary goes bust. You find a job in an involutioned company where everyone is almost poor and worked to death just to reduce prices. Your portfolio goes to shit because companies don't make money anymore.... Sure, everything's cheaper now but I'm not sure that makes it better.

But if everything is cheaper, isn't it exactly the same as if everybody is richer? Except that it could incentive people to put their money into rent seeking businesses and increase the real estate prices for example.

You forgot the last part about now no one having money anymore to buy the companies products, so you go into a deflationary spiral.

To solve that you'd want to increase wages by e.g. improving workers rights, giving them mandatory pensions etc. But that is scary: They might get too much power and revolt!

This works for China currently for a while, because they are exporting more and more. They have realized that they need to grow internal consumption, but are not managing to grow that sufficiently.

The original Aalto stool, consisting of three pieces of bent wood and a circle, costs $479: https://www.finnishdesignshop.com/en-au/product/aalto-stool-...

The IKEA copy, identical except that the circle is more of a triangle, costs $19: https://www.ikea.com/us/en/p/kyrre-stool-birch-60416925/

Both companies are very profitable, but I'm sure IKEA shifts a lot more units. And the Aalto stool is solid wood and will last forever, while the IKEA copy is probably laminated cardboard or something.

Laminated wood veneer for legs, plywood for seat. Not as disposable as the eternal LACK, but also not bent wood.

This is a great demonstration in the value of approximation. The IKEA is close enough for most people's tastes at a much more attractive price point.

I guess it depends on where you would draw the line with respect to what still constitutes "Mittelstand", but in the small-town circles where my family operated our company, outsourcing wasn't really a thing. Most of the companies were around 30 to 3000 employees, and mostly operated B2B for the automotive industry. There was exactly one company which got overly ambitious and started to emit shares. It was a big deal back in the 90s, SHARES! From our hometown! Like, you could watch it in the Ticker in the evening news if you waited long enough! But they quickly faltered when the golden 90s turned into the permanent state of crisis beginning in the 2000s. Most of the others were still family-owned, including our own (electroplating, ~130 employees), and stuck it out much longer. But we've since had to close doors, too, as have most of the others. It's a combination of things. Regulations have you in a chokehold, you can't get decent employees, and every process input from energy to equipment to real estate related costs and whatnot just cost an arm and a leg and slowly bleed you dry. Nobody here ever flew business class (except maybe these flashy idiots with their shares). The families always re-invested.

This seriously needs to be repeated again and again. It's not that Mittelstand got greedy. Neither did most other small and medium companies in Europe and US. They gradually became less competitive by overregulation, high input costs, and complete lack of state support. The last sometimes bordering on hostility.

There has been at least indirect state support for some by support for the automotive industry. They might have gotten squeezed as a supplier but the ecosystem got help to keep moving.

Anecdote time re: Over-regulation: We had a side-hustle, automatic sorting machines. Mostly nuts and bolts, but other stuff, too. About 10 employees. By some miracle, it managed to survive the loss of it's biggest customer (the aforementioned electroplating company). But we had to move shop. After we got a place, the city terminated the operating permit for the building. Why? Because, you see, the company that operated the building before had it filed as "metal working", so that is what the permit said. But _sorting_ metal doesn't alter it, so the permit doesn't hold! And they wouldn't issue a new one. Fun times.

Honestly, in my view it's not an issue of overregulation but a malfunctioning administrative apparatus. Too much power is concentrated in the hands of few administrators who can interpret the law according to their own vibes, leaving businesses with few options of recourse without resorting to spending money on lawyers. It's the mideval mindset in the local administration that makes it so difficult, not the regulations per se.

The is a really eye opening interview with Marco Scheel from the small German company Nordwolle, where he describes the daily struggle with German administratives: https://dts.podtrac.com/redirect.mp3/files.lagedernation.org...

Sadly even eliminating all bureaucracy isn't the Holy Grail of saving the local workshop. The company has to pay German level taxes, the workers have to pay German cost of living, and most business owners also want to enjoy the fruit of their labor and that fruit in Germany usually wears a Porsche badge. These are the obvious and "easy" ones but probably not the most important ones.

The difficult problems are the entire ecosystems, supply chains, and tight integration that are just on very different levels between Germany and China. Every part of the supply chain has to be optimized or else it eats into the margins. China is a beast at "extreme supply chain micro-optimization". It would take decades to build equivalent ecosystems elsewhere, and in the meantime implement artificial barriers to keep China less competitive on Western markets.

This is true for all of Europe and the Western world at least.

This video [1] highlights just how big a gap there is between China and everyone else.

[1] https://www.youtube.com/shorts/h7McXnWRCQY

Agreed, however there are only two ways to handle this, race to the bottom and then everyone has Chinese working conditions and salaries, or it is about time that we build our walls and kind of, no kidding, make each country great again, which is why right wing parties are going up all over the place.

I still remember how it was in most European companies before we started offshoring everything, textil, shoes, TVs, mobiles, software,..., the whole bunch, with the colonist mindset that of course the "slaves" would never have the skills to master the end to end production themselves, what a joke, naturally as humans they have exactly the same skills.

And it isn't only China of course, we even do it among ourselves across European countries, for the new factory in some random eastern country, a bunch of folks in western Europe join the job center line.

All for the bank accounts for the managers of course, as employees get thrown around like pawns in the MBA chess, more akin to mediaeval lords managing their feudal servants.

> race to the bottom and then everyone has Chinese working conditions and salaries

I think it’s doable to be competitive even under Western conditions assuming you have the rest of the ultra optimized supply chains because you can find ways to support them even with just a nudge here and there, compared to when the only German part if the business is the one who says “designed un Germany”.

> or it is about time that we build our walls and kind of, no kidding, make each country great again, which is why right wing parties are going up all over the place.

Right wing parties are going up to say they’ll make the country great again. Can’t think of a significant time in history when these parties actually did make a country great.

They didn't of course, however when they happen to have such an easy speech to sell about who is to blame about factories closing down, queues increasing sizes at the job center, no longer able to afford the same supermarket basket size even when employeed,....

It is no accident that in a way we are reliving the same uptake they had during the big depression, and there doesn't seem to be any way to counter that.

Germany has such a supply chain for some sectors (e.g. cars, chemicals). The question is do we want to protect it to some extent or let the free market do its thing?

Almost 50% of the energy consumption of the German chemical industry is natural gas. Its competitiveness is at the mercy of countries with no duty to Germany and they're the root of the supply chain.

> let the free market do its thing

The problem with the free market is that there's no such thing. Every market is regulated to some degree, the state has its finger on the scales somewhere. It needs to for things that are are strategically important or for the welfare of the citizens. It can be subsidies for fuel, tariffs for some import, market abuse regulation, there's always a mechanism in place to keep things on a specific track. As much as the 4 year democratic cycle allows in specifying that track.

The free market suffers from the same weakness communism does. It relies on deeply flawed humans. The more flawed, the more likely they'll be the ones pulling the strings. And they'll tear apart the fabric of society to make more money.

Natural gas can be replaced with coal gasification, and Germany has an endless amount of coal. It would probably even be cheaper, although much dirtier. China is already doing this.

What I don't get in these cases is why they do this if they are not looking for a bribe? Just for sport?

This is why the West is getting its ass kicked in non-legacy industries.

Our MBAs have internalized the idea that you "win at capitalism" by buying out your competitors, making products shitty and expensive, and making shareholders filthy rich. Their MBAs believe that it means selling the best product possible at razor-thin margins, killing your competitors by being the better choice.

Everyone is always complaining about Chinese companies "stealing IP", "getting state subsidies", and "dumping products". No, they are just being better at capitalism! We bootstrapped their industry with outsourcing, and then killed our own subsidy system by retooling it to give free money to large shareholders. No wonder our companies aren't able to compete - we reward incompetence...

Somehow MBAs, our champions of capitalism, completely forgot that capitalism only really works for society when free market competition takes place.

This is what's attractive about the "Mittlestand" - having a wide variety of companies competing in the same market so they push each other to improve services.

21st century consolidation is a direct opposite of that.

But consolidation is the inherent end game of capitalism.

It's almost as if it was full of contradictions that will always result in crises and a bad way to organize a society...

Some of these contradictions can be fixed well enough by government intervention to make capitalism the best known system. It used to work pretty well for several decades.

Several decades being 1.8 decades since the last major crisis?

I mean something like 1930-1975 in the US and 1950-1990 in Germany.

Those decades of working capitalism in Germany were subsidized by cheap Gastarbeiter labor from Southern and Eastern Europe, and cheap Eastern Bloc manufactured goods on unfavorable terms.

In the US, they were subsidized by overthrowing democracies across Latin America to keep the extraction flowing - key words being United Fruit Company, Guatemala, Chile, Operation Condor.

The prosperity in Frankfurt and Detroit was always paid for elsewhere. The economic miracle was a miracle of exploitative extraction, a miracle only for the already privileged.

Oh, please, stop this guilt cult nonsense. Economic progress (much of which is technological progress) is a positive-sum game for the most part, it doesn't require exploitation of this or that foreign ethnicity, and that was never a critical part of it after the East India Company or something. That exploitation has also been more important to make the rich richer than to make the poor richer, which is what "capitalism was working" is about.

Countries have stopped relying on imports for national security reasons often enough in history and they did fine after a few years of adjustment. I mean, apart from the consequences of war.

Tell that to Salvador Allende or Jacobo Árbenz.

I am not denying that the West did bad things, merely that these were necessary conditions for Western prosperity.

It's worth repeating, since so many people have different ideas about what capitalism is, but it's only having the means of production (factories, tools, employees, etc.) in private hand (as opposed to being owned by the government - a monopoly) with the purpose of making a profit (so you do not have to live paycheck to paycheck).

None of that has consolidation (might as well call it monopoly) at the end game. But then again, we can't really have free market capitalism while also having state granted monopolies (IP laws). When you have a monopoly you can set the price, but in a free market supply and demand sets the price.

If the means of production are in private hand and private individuals acquire profit, they will inevitably use said profits to acquire more means of production, which will beget more profits, more means of production, etc etc.

They will use those riches to buy out competitors, to bribe (or "lobby" in polite parlance) legislators to tilt the rules in their favor, until they have reached near-monopoly.

The free market always means monopolization, this is precisely the core contradiction of capitalism.

The perfect free market with fair competition only exists in ideological fantasy.

To say what we have now isn't capitalism is nothing but a no true Scotsman fallacy. This is actually existing capitalism.

That's where legislation is supposed to step in to prevent monopolization, which currently is not happening sufficiently.

The alternative is the government owning everything from the start, which is worse.

> The alternative is the government owning everything from the start, which is worse.

Why? That's just an assertion with no backing. If the government is democratically elected, how is democratic control over resources worse than a few oligarchs acting autocratically?

> which currently is not happening sufficiently.

This is not by accident. This is due to the mechanisms described above, a direct result of capitalism. A few have been able to amass enough resources to use them to influence lawmakers and tilt the board in their favor. It's not an accident. It's what actually existing capitalism does.

Because the government then by default has a monopoly on everything. The worst of the worst. It doesn't matter who the people with the monopoly are, it matters that there is a monopoly. It's like saying that a just king is better than separation of powers. Maybe, but in which way do you ensure the king stays just?

How is it that the means of production being privately owned for profit has the consequence of legislation failing to prevent monopolies? The government managed to break up the monopoly that Standard Oil had become back in 1911 just fine with capitalism existing, did it not?

> It's almost as if it was full of contradictions that will always result in crises and a bad way to organize a society...

We yet haven't found a better way

Come on, it's not just MBAs. I remember when patio11 (nothing against him personally, it's just the best example I can remember) became a star here on HN by saying that the solution to every problem as a consultant was to hike your rates. The idea of just asking as much money as you can get away with, which was seen as reprehensible by most of the population (my guesstimate, I don't have hard data) until more or less the eighties, Reagan and Thatcher era, has now permeated Western society at most levels, not just MBAs.

PS Chinese companies were (and probably still are, when they can) stealing IP, just like the USA did when it had more IP to steal from Europe than to protect from others. Western companies were very happy to let that happen when in exchange they could make more profits in the short term by using cheap Chinese labor and infrastructure.

You don't have to steal everything, you can just pay retired experts to produce roughly the same high tech thingies

> Advancing the precedent set by Alfred, generations of Krupps would continue to develop the region through various private and public works, for almost a century into the 1920s. > > With their basic needs addressed and the workforce inculcated with the “Kruppianer spirit,” the firm crossed the fifth ring. They forged an empire that, by the late 1950s,

<insert Goose meme> “What did Krupp make in the 1930s?”

This was kind of an interesting article but could have been a great deal shorter and wasn’t particularly insightful.

Thanks for the meme chuckle. For the uninitiated: https://i.imgflip.com/ayibmd.jpg

the article was a bit long for me to read, but when i hear "mittelstand", i think "inherited wealth", regulatory capture leading to gatekeepting of access to the trades and crafts, and employees that are getting paid less than they would in larger industries in exchange for lofty blah blah about family friendliness (sitting in a weird contrast with crazy levels of bean counting when it comes to, e.g., flexible working time and vacation entitlements).

Lol.

I was enjoying this until this signature sentence by Claude:

>>Slowly but surely, it did, once again becoming a world-renowned brand, now separate from that of Thonet. The same town, the same factory, the same people—just a different name

The moment I see this, the piece loses all of its credibility. I cannot take any of the factual informations I was enjoying as implicitly correct now, I just can’t. Authors should edit LLM help in a much stricter way. As a writer, LLMs should only be research helpers and used to check for typos and syntax mistakes. Authors, please, do better

I think it's more likely model creators will up their game. I've been generating some copy for our company website. I'll be honest, not all of it is great and there are clear AI slop signs. However, you can use guard rails to limit this kind of thing somewhat. I've been doing that. But the good news is that there are pretty easy to spot patterns. And LLMs are actually really good at identifying those already. It seems spotting the patterns is a lot easier for LLMs than addressing them.

> As a writer, LLMs should only be research helpers and used to check for typos and syntax mistakes. Authors, please, do better

I know professional writers that are definitely no longer just limiting themselves like that. I think that ship has sailed.

Everyone with a stake in AI wants that ship to have sailed.

You do know em dashes are a normal part of formal prose right? If you go through pre GPT New Yorker and the Atlantic articles, there are plenty of em dashes too.

The New Yorker has a whole style guide. Most people aren't writing "née" or "reëlected" very often but the New Yorker keeps those formats and even has a custom typeface.

Yes em-dashes are real but aside from a few NY-based magazines with real editors, writers aren't actually using them very much. I'm a bit sad because I like using them and now I think twice before doing so in case it is misinterpreted as an AI signature.

Also people are generally more aware of the American-English usage of them. The UK (and splitters) uses them differently, as do non-English languages.

It has nothing to do with the em dash, you AI-dweeb. The entire construction is pure LLM slop. Go touch some AI-generated grass.

I think GP was talking about the phrasing itself, not the dash. I actually didn't notice the em dash itself when reading it and agreeing.

don’t be too quick to judge, putting the text through pangram indicates it’s 100% human written. It didn’t strike me as too AI because it wasn’t superfluous; it literally was what happened. AI is using this phrase more as a stylistic device than an a factual statement

"I Wouldn't Say Pangram is Broken, But I Would Say That It's Brittle": https://freddiedeboer.substack.com/p/i-wouldnt-say-pangram-i...

> it wasn’t superfluous; it literally was what happened.

Yeah, so I gave that sentence to ChatGPT in a new context and asked it to make it longer without saying anything additional, several times, and it still reads fine, more than. The truth is the truth no matter how you put it.

https://pastebin.com/gKhCbmNQ

https://pastebin.com/9HpkN4tc

https://pastebin.com/J6znwxZf

https://pastebin.com/wXs84csy

https://pastebin.com/LrjVm4JT

The last one really speaks to me. I wanted to go on but it raised all sorts of questions in me that I think I should investigate instead.

It was, in that sense, a change that changed the thing that was being called something without changing the thing that was being called.

and

Everything that was not the name remained the same.

Everything that was the name was no longer the same.

Really makes you think.

Sometimes I'm taken aback by the visceral reaction some people have when their spider sense detects LLM impurities in the writing.

I read that same sentence (and the whole article, which I loved) and it didn't trigger anything in me.

It reminds me a bit of the OMG GMOs! craze people used to have a while back (and might still have?).

Wood bending is way older than the nr 14. Plenty of that stuff in 18th c. Europe but apparently it was a common technique in lots of cultures before they had any contact with europeans too, going way back.

Reads like capitalist romanticization to me.

The point about concentric circles (of care) is true e.g. for workers. If you have ownership. Not corporate-speak ownership like you feel like you are invested in outcomes but real, legal ownership.

Maybe these are capitalist cooperative enterprises. Then you really have concentric circles.

Post WW1, the US was a world hegemon, lent money and set low interest rates and for the past 100 years the countries of the Western EU, fattened from their ancient trade and slavery profits were engaged in a lot of delulu thinking (we could even note franco-prussian war for this).

Effectively there is no job / value creation since at least the 90s, coupled with uncontrolled mass immigration, and what is going on is stagnation and eventually fall. Lento, then adagio, then allegro, then presto as nn taleb says.

We can see this mindset in this summers AC discourse, doing less than Pakistan on the Hormuz situation et c., et c.

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