Varieties of Capitalism
Varieties of Capitalism: The Institutional Foundations of Comparative Advantage is an influential 2001 volume on economics, political economy and comparative politics, edited by political economists Peter A. Hall and David Soskice.
The book emphasizes the role of institutions and firms in national political economies. The book distinguishes between liberal market economies and coordinated market economies .
Contents
In their introductory chapter, Hall and Soskice set out two distinct types of market economy that implement capitalism: liberal market economies and coordinated market economies .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. The authors considered five spheres in which firms must develop relationships with others:
- 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.
- 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.
- Corporate governance — Firms in CMEs rely more on patient capital, i.e. capital that does not 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 stock markets.
- 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.
- Relations with employees — In CMEs, managers often have to cooperate with employees to reach major decisions, while in LMEs, there are often more adverserial relations between management and employees, in which managers are the prime decision-makers.
Varieties of Capitalism offers a new framework for understanding the institutional similarities among and differences between 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 the 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 institutions in other spheres. Firms of liberal and coordinated market economies 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 companies toward particular kinds of corporate strategy. Thus, the two types of economy have different capacities for innovation, and tend to distribute income and employment differently.
| Criteria | Liberal market economy | Coordinated market economy |
| Mechanism | Competitive market arrangements | Non-market relations |
| Equilibrium | Demand-supply and hierarchy | Strategic interaction among firms and other actors |
| Inter-firm relations | Competitive | Collaborative |
| Mode of production | Direct product competition | Differentiated, niche production |
| Legal system | Complete and formal contracting | Incomplete and informal contracting |
| Institutions' function | Competitiveness Freer movement of inputs | Monitoring Sanctioning of defectors |
| Employment conditions | Full-time, general skill Short-term, fluid | Shorter hours, specific skill Long-term, immobile |
| Wage bargain | Firm level | Industry level |
| Training and education | Formal education from high schools and colleges | Apprenticeship imparting industry-specific skills |
| Unionization rate | Low | High |
| Income distribution | Unequal | Equal |
| Innovation | Radical | Incremental |
| Comparative advantages | High-tech and service | Manufacturing |
| Policies | Deregulation, anti-trust, tax-break | Encourages information sharing and collaboration of firms |
Examples of LMEs are the US and the UK, while most Scandinavian countries and Germany are CMEs.
Coordinated market economy
According to Varieties of Capitalism, there are many different ways of organizing a capitalist economy. The sees 'two extremes' between Coordinated Market Economy models and the Liberal Market Economy models.CMEs capture certain salient features of Northern Europe; in particular, in Denmark, Finland, Norway, Sweden, Austria, Belgium, Netherlands, Germany, Switzerland. These features are similar to the U.S.-style economy, and other features are also partially present in the UK, Canada, Australia, New Zealand, and Ireland.
In any market economy, companies typically face coordination problems in their productive operations. While firms in LMEs turn to market institutions to solve these problems, the firms in CMEs turn to non-market institutions.
The term 'coordinated' is thus stated with respect to the strategic interaction between profit-oriented 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. In the latter, the employer usually has the upper hand, when the labour required is unqualified, and such labour supply is high.
There are also stronger inter-firm relations in CMEs, with dense networks of interaction and greater inter-firm collaboration. 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. 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 than in LMEs. While LME firms rely more on equity-financing, 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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