Varieties of Capitalism

In their introductory chapter, Hall and Soskice set out two distinct types of market economy that implement capitalism: liberal market economies (LME) (e.g. US, UK, 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. 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 (the interview and hiring process).
• 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 (ROI). 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.

While Hall and Soskice categorized the capitalism of different countries into two types (LME and CMEs), there is a "hybrid" type, represented by countries in the Mediterranean ring.

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 (CMEs and LMEs) 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. (For example: countries with stock market liberalization have less labour protection, and vice versa.) Firms of liberal and coordinated market economies respond very differently to a similar shock (an economic cycle), 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.

Examples of LMEs are the US and the UK, while Scandinavian countries are typically of CMEs. Germany was often described as an LME, but following the Hartz reforms, this viewpoint has become highly contestable.

According to Varieties of Capitalism, there are many different ways of organizing a capitalist economy. The book describes a spectrum between 'two extremes,' Coordinated Market Economies (CMEs) models and Liberal Market Economies (LMEs).

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, such as price competition and innovation by firms, to solve these problems, the firms in CMEs turn to non-market institutions, like regulations promulgated by government and actions by strong labor organizations.

The term 'coordinated' thus describes some parameters of market competition being managed or coordinated by non-market actors in government or society

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 (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 than in 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 (cf. U.S.-based retail) 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.

Sources:[3][4]

British Labour Party politician, Ed Miliband, was heavily influenced by Varieties of Capitalism during his time as Leader of the Opposition.[5] Miliband campaigned to become Prime Minister with the vision of transforming the British economy from the Liberal Market Economy it currently is to a Coordinated Market Economy - which he believed would be more equitable but retain economic competitiveness.[6] David Soskice disagreed arguing that "to be successful... you need to show that you're a party which understands what are the sectors" that deliver more university-driven growth,[7] whereas Colin Crouch was more sympathetic to Miliband's vision, stating that "it is possible for human beings... to try [and change the UK's type of capitalism]".[8]

Colin Crouch criticizes the deterministic nature of Varieties of Capitalism where “actors seem to exist in an iron cage of institutions, which they cannot change”. Crouch argues that “institutional entrepreneurs” frequently adjust the institutional framework which is viewed as stable in Varieties of Capitalism, citing examples such as Silicon Valley and Thatcherism.[9] Authors observe that many of the CMEs have been unstable since the 1990s and subject to institutional change and policy drift, including the archetypal Germany.[10][11]

Varieties of Capitalism has been criticized for its claim that economies perform best economically when exhibiting institutional frameworks that are ideal-types of CMEs and LMEs. This claim was developed further by Peter Hall and Daniel Gingerich who claim to find higher levels of economic growth in countries with institutions which match each other in terms of being CME or LME-types.[12] Mark Blyth responds to this implicit explanation of the Eurosclerosis found in Southern European states, with their mixed institutions, by arguing that many of those countries have not actually underperformed the US and that unemployment metrics are not cross-comparable when considering the US’s mass incarceration.[13] Mark Taylor has questioned Soskice and Hall’s claim that ideal-types of CMEs and LMEs show innovative specialization in different subject areas. The empirical results in Soskice and Hall’s book is driven by a major outlier in innovation output – the US – with other LMEs not showing any distinct innovation patterns from CMEs or intermediate countries.[14]

• Social market economy
• Anglo-Saxon model

• Allen, M., 2004. The varieties of capitalism paradigm: not enough variety?. Socio-Economic Review. 2 (1), 87-108.
• Hall, Peter A., Soskice, David (eds.): Varieties of Capitalism. The Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press, 2001.
• Peter A. Hall, Kathleen Thelen, "Institutional change in varieties of capitalism", Socio-Economic Review, Volume 7, Issue 1, January 2009, Pages 7–34

• Hancké, Bob, Rhodes, Martin and Thatcher, Mark (eds.). 2007. Beyond Varieties of Capitalism: Conflict, Contradictions, and Complementarities in the European Economy. Oxford University Press.
• 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.
• Kathleen Thelen. 2012. "Varieties of Capitalism: Trajectories of Liberalization and the New Politics of Social Solidarity." Annual Review of Political Science 15:137-159.

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