Varieties of Capitalism

Varieties of Capitalism: The Institutional Foundations of Comparative Advantage is a book edited by political economists Peter A. Hall and David Soskice. In their sizable introductory chapter Hall and Soskice set out two distinct types of capitalist economies: liberal market economies (LME) (e.g., U.S., U.K., Canada, Australia, New Zealand, Ireland) and coordinated market economies (CME) (e.g. Germany, Japan, Sweden, Austria).

Those two types can be distinguished by the primary way in which firms coordinate with each other and other actors, such as trade unions. In LMEs firms primarily coordinate their endeavours by way of hierarchies and market mechanisms. Coordinated market economies rely more heavily on non-market forms of interaction in the coordination of their relationships with other actors. They considered 5 spheres in which firms must develop relationships with others:

1. Industrial relations - Companies have to coordinate with their workers, trade unions and other employers over wage and productivity. CMEs generally have a higher level of membership in trade unions and employers organizations and bargaining over wages tends to happen at the industry, sectoral or national level. Conversely in LMEs workers and employers are often less organized and wage negotiations take place at the company level.
2. vocational training and education - In CMEs workers tend to have specific skills that are tied to the firm or the industry they are working in. In LMEs workers have more general skills that easily can be used to work at other companies.
3. Corporate governance - Firms in CMEs rely more on patient capital, i.e. capital that doesn't totally depend on financial openness and short term return on investment. LMEs tend to rely more heavily on public information about finances and short-term capital, such as stockmarkets.
4. Inter-firm relations - Inter-firm relations in CMEs tend to be more collaborative, while inter-firm relations in LMEs are more competitive and arms-length.
5. Relations with employees - In CMEs managers often have to cooperate with employees to reach major decisions, while in LMEs there is often a more adverserial relation between management and employee in which managers are the prime decision-makers.

They categorized capitalism of different countries into the two types (LME and CME, however there is a third type which is "Hybrid" which consists of countries in the mediterranean ring, but Hall and Soskice only used LMEs and CMEs in their analysis). Varieties of capitalism is a new framework for understanding the institutional similarities and differences among the developed economies since national political economies can be compared by reference to the way in which firms resolve the coordination problems they face in these five spheres. These two models are at the poles of a spectrum along which many nations can be arrayed. i.e.) even within these two types, there are significant variations. Extending the scope of Hall and Soskice's framework to countries outside Western Europe and the US, other authors have developed different varieties of capitalism, such as dependent market economies and hierarchical market economies.

According to the book, institutions are shaped not only by legal system but by informal rules or common knowledge acquired by actors through history and culture of one nation. Institutional complementarities suggest that nations with a particular type of institution then develop complementary institution in other spheres. (for example: countries with stock market liberalization has less labor protection and vice versa). Firms of LME and CME respond very differently to a similar shock and institutions are socializing agencies and go through a continuous processes of adaptation.

Institutional arrangements of a nation’s political economy tend to push its firms toward particular kinds of corporate strategies. Thus, two types of economies have different capacities for innovation and tend to distribute income and employment differently.

Examples of LMEs are the U.S. and the U.K economies while most of Scandinavian countries and Germany are CMEs.

Coordinated market economy

According to Varieties of Capitalism, there are many different ways of organizing a capitalist economy. There seems to be two extremes in the Coordinated Market Economy (CME) models, which capture certain salient features of northern Europe (in particular in Denmark, Finland, Norway, Sweden, Austria, Belgium, Netherlands, Germany, Switzerland), and the Liberal Market Economy (LME) models. These are similar to the US style economy and others also partially present in UK, Canada, Australia, New Zealand, and Ireland.

Capitalist firms typically face coordination problems in their productive operations. While firms in LMEs turn to market institutions to solve these problems, firms in CMEs turn to non-market institutions. The term 'coordinated' is thus stated with respect to the strategic interaction between capitalist firms and non-market institutions. For instance, firms in CMEs typically coordinate with labour unions to bargain wages at the industry or national level, rather than at the firm or plant level as is typical in LMEs. There is also stronger inter-firm relations in CMEs, with dense networks of interaction (for example, through employer associations) and greater inter-firm collaboration (e.g. greater collaborative research and development). Additionally, CMEs generally have specific skills regimes, as opposed to general skills regimes of their LME counterparts - as a result of a greater emphasis on vocational education and training (and complementary state social policy targeted at facilitating individual investment in specific skills). For CMEs, employee relations are more oriented towards long-term employment contracting, as opposed to the high degrees of labour 'flexibility' associated with LMEs that enable employers to fire workers more easily than in CMEs. Lastly, the corporate governance structure in CMEs is different to that of LMEs. While LME firms rely more on equity-financing (and thus LMEs have relatively larger stock markets in proportion to their economies) which is associated with more focus on current firm profitability and shorter-term expectations, CME firms rely more on credit-financing through dense professional and business networks with strong trust levels that have a more long-term focus. This enables CME firms to be able to keep labour costs stable during economic shocks by sacrificing some profitability; whereas LME firms tend to suppress labour costs to maintain current profitability so as not to lose finance from short-term focused financiers.

In general, firms in coordinated market economies rely on strategic interaction to solve coordination problems - from labour unions to employer organizations, to the state.

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References

Albert, M. 1991. Capitalisme Contre Capitalisme. Paris: Les Editions de Seuil. Hall, Peter A., Soskice, David (eds.): Varieties of Capitalism. The Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press, 2001. Hancké, Bob, Rhodes, Martin and Thatcher, Mark (eds.): Beyond Varieties of Capitalism: Conflict, Contradictions, and Complementarities in the European Economy. Oxford and New York 2007: Oxford University Press, 456 pp. Howell, C. 2003. "Varieties of Capitalism: And Then There Was One?" Comparative Politics, 36:1, pp. 103–124. Vlandas, T. 2016. Coordination, inclusiveness and wage inequality between median and bottom income workers. Comparative European Politics.

External links

• the book's introduction
• Peter A. Hall
• David Soskice