types of capitalism

Varieties of Capitalism is considered to be the most important theory on the variability of capitalism among all those put out by different experts. Although Hall and Soskice's (2001) hypothesis is commonly used in economics research, several academics have criticized it. The way various economic actors interact has evolved significantly as a result of numerous developments in market economies, such as the characteristics of capitalism. This essay examines the various forms of capitalism theory as well as the function of both official and unofficial institutions in market economies. Additionally, it provides examples of the UK and Germany in exploring the role of different actors in the different political economies.

Institutional change in advanced economies as well as in national political economies can be said to have been significantly influenced by the process of financialisation that generally began in the 1980s. As such, the process of financialisation is a topic of great interest for many political economy scholars. In general terms, financialisation can be described as the growing influence of financial institutions and markets over the real economy as well as the growing portion of revenues and profits for corporates as a result of financial transactions. Financialisation is cited as both a product and a cause of market liberalisation processes, such as product, service and labour markets, which greatly influenced advanced economies in the last three decades.

From the 1930s to the 70s, the model of capitalism in many western countries especially the United States was based loosely on a Keynesian growth model. Government policies focused on stimulating and maintaining aggregate demand and promoting key sectors of the economy such as housing and infrastructure. Both the public and private sectors embraced collective bargaining and pro-labour policies, while wages and working conditions were set through bargaining agreements across much of the economy (Bamber and Lansbury, 2003, p. 110). During the 80s however, corporate governance shifted from a system of managerial dominance characterised by minimal stakeholder governance, to a system of shareholder value governance. Corporate managers were now exposed to greater influence from external financial actors through takeover activity, activism by stakeholders like institutional investors, and increased use of performance pay. By the 90s, a new model had emerged, a model characterised by deregulated and decentralised labour markets, shareholder-oriented finance, and highly flexible allocation of resources in the economy. Within Hall and Soskice’s (2001) theory, this new economic model is referred as a liberal market economy (LME). On the other end of the spectrum in their theory is the coordinated market economy (CME).

The concept of varieties of capitalism focuses on business organisations, taking a relational view of these organisations. The argument is that the relationship a business organisation has with various institutions such as the state and trade unions is a critical success factor. According to Marshall, Mitchell and Ramsey (2008, p. 21) the interaction occurs along these five main aspects; “industrial relations, vocational education and training, corporate governance, inter-firm relations, and relations with employees”. However, differences arise in the various economies regarding how to solve the five types of coordination. Hall and Soskice (2001), state that coordination is achieved through either relying on market competition or through strategic interaction with various actors. Hal land Soskice categorised economies as either LMEs or CMEs, based on how business organisations coordinate with other actors in the economy. The UK is an example of an LME while Germany is an example of a CME.

In Liberal market economies, business organisations mainly rely on the mechanism of market competition. Some of the characteristics of LMEs include capital markets that are well developed and outside forms of corporate governance, firms use market mechanisms and contracts in coordinating relations with suppliers and buyers, and forms of industrial relations that are market based whereby there are few long-term commitments by both employers and workers (Peng, 2016, p. 35). On the other hand, coordinated market economies rely heavily on how business organisations interact with other market players. Some of its main characteristics include “well-developed capital markets and outsider forms of corporate governance; market-based forms of industrial relations with few long-term commitments by employers to workers and use of market mechanisms and contracts to co-ordinate their relations with supplier and buyer firms” (Marshall, Mitchell and Ramsey, 2008, p. 22). Thus it is evident that in this era of increasing globalisation, there are differences in how different actors in the two types of economies coordinate.

Liberal market economy: the UK

Hall and Soskice categorised the UK as an example of a LME as business organisations rely highly on competitive market relationships. The business organisations in this economy face large equity markets that are characterised by high levels of transparency, as well as dispersed shareholding and their access to external financing, depends on criteria that can be assessed publicly such as market valuation. As such, business firms in the UK can easily adapt to changes brought about by events such as globalisation. Due to the nature of the economy, firms are likely to respond rapidly to changes in markets and autonomously shift to new markets as they expand. The labour force in a LME focus mainly on general skills and less on specialised skills, and can therefore easily move from one sector to the next provided they modify their skills set. In instances where changes in workforce skills are required, the government can set up formal schooling to help workers develop new skills. An example of government involvement in developing labour skills in the UK is the 1997 program referred as the “New Deal” that encouraged unemployed workers to seek further training and also look for new jobs (Rhodes, 2000, p. 172).

The level of job protection in this political economy is low, hence it is easy for business organisations to lay off workers and hire new employees who can help them support their business focus. Furthermore, the collective bargaining is low, and the range of issues that can be discussed in collective bargaining is also very narrow. As such, labour unions are often forced to take what is being offered by the other side (Kessler and Bayliss, 1999, p. 124). With less powerful labour unions, it is easier for business organisations to reduce labour costs as one of the strategies of bringing down operating costs. However, business organisations in LMEs may not be quick to adopt new technology as they can easily bring down operation costs by reducing employee wages. Finally, the labour markets in this system of economy are fluid, and market associations are weak, business organisations may not have the capacity to implement collaborative training programs that teach industry-specific skills.

Coordinated market economy: Germany

The interaction between business organisation and the various institutions in the economy is different in Germany as compared to the UK. It would be difficult for a business organisation to bring down non-wage costs due to the taxation system in Germany (Lawrence, 2014, p. 73). Wage reduction is, therefore, a crucial factor for businesses in this economic system if they are to remain competitive in a changing market. Business organisations in Germany are provided support by national institutions and trade unions have a lot of power in industrial relations. As a result, issues like the shift from a manufacturing economy to a service economy were slowed down as business organisations need to negotiate with trade unions about issues such as job losses for the workforce, and changes in the wage structure among others. As a matter of fact, many times before, trade unions in Germany have refused to agree to the layoff of employees or changes in wage structure as these and any other issues that negatively impact employee welfare.

Moreover, the workforce in coordinated market economies tends to be specialised, making it difficult for workers in such markets to shift from one industry to the next. Even for workers who have specialised skills and shift to new sectors of the economy may find that their jobs are not secured. The domestic demand is also greatly reduced by increased unemployment rates. Highly coordinated and centralised collective bargaining in this industrial relations system make it hard for the economy to provide solutions to major economic challenges like the high rates of unemployment (McCann, 2014, p. 76). Such problems facing German business organisations led to the creation of new solutions like the coordination of wage bargaining Germany. For instance, rather than industry-wide agreements, smaller firms reached labour agreements at organisation level (Silvia and Schroeder, 2007, p. 1438). The government also stepped in and implemented regulations allowing firms to hire part-time labourers who cannot collectively bargain on issues like wages.

Nevertheless, the level of coordination still remains high compared to the UK as business organisations still have to consider input from national institutions like the state, work councils and labour unions. For example, more than 60% of the workforce in Germany in 2006 were still covered by labour unions, which was two times higher than in the UK (Silvia and Schroeder, 2007, p. 1441). Also, a relatively higher percentage of the labour force in the country still had specialised skills rather than general.

Conclusion and discussion

This paper discussed the various formal and informal institutions and their roles in political economies. The types of industrial relations systems, Germany as a liberal market economy and the UK as a coordinated market economy, were also discussed. This essay shows there are differences in practices across the two political economies in spheres like labour relations and corporate governance. Financialisation is one of the pressures for change that greatly influenced institutional changes in both types of political economies and leading to internal diversity as well as a proliferation of distinct institutional impacts on the market economies.

Although the influence of the varieties of capitalism perspective is significant, it has also attracted criticism from various quarters. One of the arguments against this theory is that it is not enough to explain the various forms of capitalism in different parts of the world. There are many countries that lie in between the proposed LMEs and CMEs and thus this theory is not sufficient to explain these markets. Nations like Italy and Spain are classified as mixed market economies because their varieties of capitalism cannot be definitively classified as either LME or CME. These countries have the characteristics of a coordinated market economy as well as those of a liberal market economy.























References

Bamber, G. and Lansbury, R. (2003). International and comparative employment relations. London: Sage.

Hall, P. and Soskice, D. (2001). Varieties of capitalism : the institutional foundations of comparative advantage. Oxford: Oxford University Press.

Kessler, S. and Bayliss, F. (1999). Contemporary British industrial relations. Basingstoke: Macmillan.

Lawrence, A. (2014). Employer and Worker Collective Action. Cambridge: Cambridge University Press.

Marshall, S., Mitchell, R. and Ramsey, I. (2008). Varieties of capitalism, corporate governance and employees. Carlton, Vic: Melbourne University Press.

McCann, L. (2014). International and comparative business. Los Angeles: SAGE.

Peng, M. (2016). International Business. Cengage Learning.

Rhodes, M. (2000). Desperately seeking a solution: Social democracy, thatcherism and the ‘third way’ in British welfare. West European Politics, 23(2), pp.161-186.

Silvia, S. and Schroeder, W. (2007). Why Are German Employers Associations Declining?. Comparative Political Studies, 40(12), pp.1433-1459.