Understanding Varieties of Capitalism

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Hall and Soskice’s (2001) The Varieties of Capitalism is one of the more influential frameworks created to explain national differences in economic performance and policy. It basically offers a functionalist or inductive view by observing the existing array of capitalist outcomes, mainly Germany and the United States, and then hypothesizes an explanation of why they look the way they do. According to Hall and Soskice (2001), existing capitalist outcomes depend on nations’ specific historical and cultural circumstances. For an example, during the 19th century, the change from an agricultural based economy to industrialization created a new form of capitalism. Major historical events such as World War 1 and 2 also changed the existing capitalists systems by disrupting the structure of some countries’ political and economic institutions.

However, one of the weaknesses of Hall and Soskice’s (2001) Varieties of Capitalism in my opinion is that one cannot make accurate and specific predictions about other countries because by merely observing a few countries, it is difficult to make specific predictions about other countries in the future.

Varieties of Capitalism

Hall and Soskice (2001) identify several key attributes that distinguish capitalist systems. Asset specificity was pointed out as one of the key attributes that distinguish Coordinated Market Economies (CMEs) from Liberal Market Economies (LMEs). They posit that relationships are more likely to govern the manner in which actors organize their economic activity, when assets are specific to the goods and services that are produced (like in CMEs). On the other hand, when assets are more general – meaning when they can more easily be switched from producing one kind of good or service to another, arms length interactions govern (like in LMEs). However, not all the countries neatly fit into this CME – LME continuum. The countries that do not fit into this continuum such as Italy, France, Spain, Portugal, Greece and Turkey are placed into a third category called Mediterranean or Mixed Capitalism. They are distinguished by their recent histories of extensive state intervention and large agrarian societies. Hence, the three main key identifications that distinguish capitalist systems from one another are identified by Hall and Soskice (2001) as asset specificity, the level of government intervention and the importance of the agrarian sector. Hall and Thelen (2005) further emphasize the distinction between LMEs, where firms rely heavily on competitive markets to coordinate their endeavours, and CMEs, where more endeavours are coordinated strategically. According to Schmidt (2004), there are four varieties of capitalism: the liberal capitalism of the United States and the United Kingdom, the coordinated capitalism of countries such as Germany, the Netherlands, Sweden and Denmark; the state enhanced capitalism of Italy, France and Spain, and the hybrid capitalisms of Central and Eastern Europe. Schmidt (2004) suggests that these differences are related to variations in firms’ levels of exposure to the financial markets, the bases of firm ownership and control, the nature of inter-firm relations, the organization of labour-management relations, the patterns of production and innovation, and the role of the state in the economy.

Identifying the Key Actors

Actors are very important to the structure of any nation’s economy. Therefore identifying which actors matter the most will allow us to then observe how these actors influence the type of capitalist system in a particular country. According to Carney (2007), actors representing an economy’s main factors of production – land, labour and capital, are clear candidates. The importance of labour and capital to capitalism is hardly questioned by many people; however, some may view the relevance of farmers with scepticism. Carney argues that farmers have played an important role in determining the structure of the contemporary American financial system, the world’s largest economy (2007). Other than that, farmers are also an important player in China’s economy, which is likely to become the world’s largest economy in the next few decades. Also in view of their historical importance to OECD economies and their contemporary relevance to China’s economy and to other developing countries, to ignore farmers would be like ignoring the elephant in the room.

Therefore, farmers can be viewed as the main actors representing land. Actors representing capital on the other hand can be viewed as owners of firms both small and large. So to put the equation together, it can then be concluded that the critical actor for the development of the financial system and the structure of capitalism are the owners of large firms, since it is this actor more than any other that favours the development of equities markets.

Labour, farmers and owners of small firms all prefer an economy organized around specific assets (e.g. long-term relationships, as with lending from the bank). Owners of large firms on the other hand are more likely to push the economy in the direction of general assets (e.g. arms-length interactions, as with equities markets).

When owners of large firms control politics, they are likely to try and reduce transaction costs of external financing, and may seek to try and control it in order to have it for themselves. Hence, government intervention will be minimal, and agrarian financing will be low. However, when farmers and labour form coalitions, government intervention will be maximal and agrarian financing will be high. Yet another scenario is when labour wields exclusive political power. When this happens, a centralized, government- controlled banking system emerges. Labour seeks to control the financial system through nationalized, government run-banks in order to direct lending to specific firms and industries in exchange for high and stable employment.

Therefore, financial and capitalist system outcomes depend primarily upon the coalitions formed between farmers, labour, and owners of large firms. Carney further reminds us that these actors do not necessarily form coalitions to achieve specific financial system outcomes; rather, they form political power-sharing coalitions from which financial and capitalist structures emerge (2007).

Varieties of Capitalism – An outdated approach?            

Some question whether in this era of globalization, innovation and change, it still makes sense to speak of distinctive varieties of capitalism. “Are changes in the international economy enforcing institutional convergence on the developed economies?” (Hall & Thelen, 2005). Some analysts also believe that most political economies are becoming hybrids. Is the varieties of capitalism approach then outdated? In The Evolution of Varieties of Capitalism in Europe, Hall argues that the framework of varieties of capitalism is still functional in this era of globalization as there does not necessarily have to be rigid categories of which type of capitalism a nation falls into, rather the varieties of capitalism can help us to understand the dynamics of political and economical structures and how they create capitalist structures (2007).

According to Schmidt (2004), capitalist systems are becoming increasingly similar to resembling each other in their diversity. As all countries move toward greater market orientation, it seems like as if they are all coming together. However, Thatcher (2004) argues that nations maintain different varieties of capitalism in the face of economic globalization because of diverse domestic settings. I agree with this point of view because there are many other factors other than economic pressure that influence the varieties of capitalism in different countries. Schmidt posits that this convergence is related to a number of pressures: economic, institutional and ideational (2004). Increasing international competition in capital and product markets and the move from manufacturing goods to providing services is an example of the economic pressures faced in this era of globalization. All these bring change to national capitalist systems. Even China now is slowly being forced into a capitalistic system because of all the economic pressure upon it. In a comparative analysis done on national identity and varieties of capitalism, it was found that political and economic institutions that adapt to the challenges and changes of globalization are by far the most successful capitalists systems (Campbell, Hall & Pedersen, 2006). For example, Denmark has been identified as the most advanced capitalist country since the mid 1980s. “The Danish political and economic institutions facilitate bargaining and consensus building in ways that have enabled the state, businesses, and labour unions to adapt to the challenges of globalization” (Campbell, Hall & Pedersen, 2006). Denmark’s small population size, homogenous population and strong national identity is also part of the reason that it has such an adaptable and flourishing national political economy.

In my opinion, it is unfair to conclude that the varieties of capitalism is outdated and cannot be used to understand contemporary capitalist systems because the varieties of capitalism gives us a framework and structure which can be built upon in order to accommodate to the changes that globalization has made on political and economic institutions.

Conclusion

In order to make a conclusion as to whether there are fundamental differences in national political economies conditioning economic performance and social well-being, one has to observe a nation’s specific historical and cultural circumstances. Variations in firms’ levels of exposure to the financial markets, the bases of firm ownership and control, the nature of inter-firm relations, the organization of labour-management relations, the patterns of production and innovation, and the role of the state in the economy are also important factors that should be taken note of. Identifying the key actors is also of utmost importance. Globalization has also brought many challenges and changes that have affected capitalists structures. Globalization also has added pressures: economic, institutional and ideational to political and economic structures which in turn influences the type of capitalist system.

References

Campbell, J. L., Hall, J. A. & Pedersen, O. K. (2006). National identity and the varieties of capitalism: the Danish experience. Studies in Nationalism and Ethnic Conflict, 3.

Carney, R. (2007). Deducing varieties of capitalism. Munich Personal RePEc Archive, 5145.

Hall, P.A. (2007). The evolution of varieties of capitalism in Europe. Source unknown.

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

Hall, P. A. & Thelen, K. (2005). Institutional change in varieties of capitalism. International Sociological Association.

Schmidt, V. (2004). Capitalism and society. Transatlantic tensions from conflicts of interests to conflict of values colloquium.

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