Capitalisms: A Global System
Summary and Keywords
The global political economy is a multilevel system of economic activities and regulation in which the domestic level continues to predominate—in other words, it is a global system comprising national capitalist economies. Nations differ in terms of the regulations and institutions that govern economic activity, an observation that is embodied in the so-called “varieties of capitalism” (VoC) literature. Contemporary VoC approaches highlight the significance of social and political institutions in shaping national economies, in stark contrast to neoclassical economics which generally ignores institutions other than markets or sees them as hindrances to the functioning of free markets. Three analytical premises inform the diverse conceptual frameworks within the VoC literature: the firm-based approach, national business systems approach, and the governance or “social systems of production” approach. The VoC literature offers three important contributions to our understanding of the global political economy. The first is that different sources of competitive advantage for firms and nations are institutionally rooted and not easily changed. The second contribution is that these distinct national arrangements give rise to different interests/preferences in how the global economy is constructed and managed. Finally, the VoC approaches provide a framework for analyzing long-term institutional changes in capitalist systems and the persistence of diverse forms of capitalism, including the global financial crisis of 2008–2009 that may usher in yet another epochal change in the “battle of capitalisms.”
Keywords: global political economy, varieties of capitalism literature, firm-based approach, national business systems approach, governance approach, social systems of production, capitalism, competitive advantage, global financial crisis, battle of capitalisms
The high prominence of the concepts of “global economy” and “globalization” in academic and public discourse since the early 1990s tends to obscure the fact that the global economy still consists primarily of a system of largely independent economies. Even in the recent era of rapid economic globalization, most production and consumption still occur within national borders. Moreover, the vast majority of economic regulation is still done by national governments, even as global regulatory coordination has grown. The global political economy thus remains a multilevel system of economic activities and regulation in which the domestic level still predominates; that is, it is a global system comprising national capitalist economies. For this reason it is essential to study the diversity of domestic political economic institutions and how they interact within the global system. This is the all the more important given that, theses of convergence notwithstanding, the regulations and institutions that govern economic activity remain quite distinct from nation to nation.
This last observation is embodied in a large literature most frequently referred to as the “varieties of capitalism” (VoC) literature. The VoC literature is concerned with documenting and understanding significant differences in how national economies are organized and governed. It presumes that there is not a single type but many types or varieties of capitalism and that these differences are meaningful for a variety of outcomes, including how states interact with each other in shaping the global economy. Within the literature there a number of approaches to understanding national differences, but there are three underlying features that give it general coherence. The first is that economic actors – firms and workers – are seen as institutionally embedded within a nation. That is, actors’ economic decisions are conditioned by (if not constituted by) the social and political institutions, norms, and so on within which they operate. Thus the behavior of economic agents cannot be completely understood if abstracted from the context in which they operate. The second feature is the emphasis on institutional complementarity, which highlights the functional interdependence between distinct institutions that together comprise each national economy. The final feature is an emphasis on the constraining effects of existing institutions on actor behavior and thus change: institutions generally change in an incremental, path-dependent fashion. In sum, the VoC literature views the contemporary global economy as consisting of a set of alternative forms of capitalism whose interaction within the global economy can either reinforce or undermine those differences. The literature is useful for understanding both “outside-in” processes – how international economic forces shape domestic capitalist institutions – and “inside-out” processes – how distinct national institutions shape the nature of global economic interactions and regulation.
This essay is organized as follows. First, it reviews the scholarly lineage of the current VoC literature. Second, it reviews three of the major alternative frameworks within the VoC literature. Third, it highlights the contributions of the literature to our understanding of comparative and international political economy. Finally, it notes some of the shortcomings of the VoC literature and directions for future research.
Lineages of the Contemporary Varieties of Capitalism Literature
The contemporary wave of VoC literature dates roughly from the early 1980s. However, there have long been studies of capitalism that emphasized national distinctions, and lineages of these earlier literatures are found within the contemporary literature. From the early to late twentieth century, one prominent strand of political economy literature centered around a “battle of the systems,” comparing capitalist and socialist approaches to economic organization. However, the VoC literature focuses on comparing capitalist systems and, since the collapse of socialism in Eastern Europe and the Soviet Union, the debates and literature have shifted to a clear focus on understanding differences among capitalist systems.
Contemporary VoC approaches generally stand in contrast to the neoclassical understanding of political economies. The former group highlights the significance of social and political institutions in shaping national economies, while neoclassical economics largely ignores institutions other than markets or sees them as hindrances to the functioning of free markets. In the neoclassical view, the price mechanism in competitive markets leads to the most efficient outcome, with maximum welfare gain, and individuals are rational and maximizing. There is only a small role for the state to play in correcting so-called market failures. Thus the VoC literature is to a great extent produced by sociologists and political scientists, though economists working within the new institutional economics paradigm are important contributors.
The importance of nonmarket governance institutions (e.g., associations, networks, and corporate hierarchies) in the functioning of modern capitalist systems was illustrated in the early twentieth century by Rudolf Hilferding (1910). Hilferding argued that as capitalism developed, concentration increasingly displaced competitive markets. Over time large industrial firms and banks naturally dominated markets through their size and the formation of cartels and trusts. Hilferding also observed the increasingly intimate connections between bank and industrial capital, in the form of extensive bank loans to and ownership in firms and the presence of bankers in corporate supervisory boards. These features placed banks in the “commanding heights” of the economy and constituted what he called finance capital. During the interwar period, as the state became increasingly active as a regulator of the economy, and as concentration facilitated planned production in the private sector, the system evolved into organized capitalism.
Early comparative institutional approaches such as Hilferding's were strongly influenced by Marxist ontology, most importantly the notion of evolutionary stages of capitalism (historical materialism). But there were also nonmarxist versions of evolutionary stages arguments, such as that of Alexander Gerschenkron (1966), who argued that late developing economies are forced to develop different approaches to economic development than early developers. In particular, late developers had to adopt extensive state intervention or alternative institutions such as developmental banks in order to catch up. Contemporary work, such as that of Eichengreen (2006), continues in this functionalist tradition by arguing that the shift from nonmarket to market coordination in Europe over the last 30 years stems from a structural shift from extensive to intensive growth patterns.
Later approaches, including VoC approaches, increasingly distance themselves from such determinist historical conceptions (though they are not ahistorical). Nonetheless, work like Hilferding and Gerschenkron's was an important precursor to VoC approaches in that it illuminated institutional features of capitalism – especially the character of the financial system and sources of firm finance and ownership – that later came to be seen as essential to shaping the character of national political economies. Hilferding also advanced the important thesis that coordinating institutions or governance mechanisms other than markets, especially hierarchies and networks, could produce economically efficient outcomes.
Another important precursor to the VoC approaches was the modernization approach, best captured in Andrew Shonfield’s seminal 1965 treatise, Modern Capitalism. In this work, Shonfield elucidated the diverse national institutional configurations that contributed to successful reconstruction and development in postwar Europe. In each national system Shonfield identified the actors with the strategic capacity to guide modernization through planning and inducing desired investment behavior by economic actors. In some cases, notably Germany, much of this capacity rested in the banks, but generally Shonfield was concerned with how state actors intervened in diverse ways to govern their economies. How each state did this depended heavily on the particular institutional configuration – in good part historically derived – of both state and economy. This emphasis on the state reflected the general fact that the postwar era was characterized by historically high levels of state economic intervention in the advanced capitalist economies, an era often referred to as ‘embedded liberalism’ (Ruggie 1982). Shonfield's study suggested further that political economies with stronger planning and coordinating capacities were (and would be) more successful than those without such capacities (which were thus forced to rely more on markets to guide economic activity).
At a very broad level, Shonfield's work suggested convergence toward a political-economic model based on mixed public and private ownership, strong planning capacities, and the increased role of associationally organized capital and labor (in this sense presaging the later neocorporatist literature), though the specifics in each national case would obviously vary substantially. Subsequent work in this tradition focused on elaborating in more detail the key institutions and state policies identified by Shonfield (e.g., Cohen 1977; Zysman 1983; Hart 1992), or on the question of what made states “strong” or “weak” (Katzenstein 1978). An important development in this tradition was Zysman's Governments, Markets, and Growth (1983), in which Zysman moved beyond the idiosyncratic national characterizations of Shonfield to a more streamlined, three-part typology of advanced capitalism: state-led capitalism, market-led capitalism, and negotiated or managed capitalism. The typology was constructed using multiple institutional features, but the key distinguishing factor was the different role of the state in each type. Zysman's typology remains influential in the contemporary VoC literature (e.g., Schmidt 2002).
There is also a long tradition of business studies – that is, the study of the development of particular firms and industries – which has provided an important empirical basis for the VoC approaches. While there are many works and authors in this vein, one of the most prominent is Alfred Chandler (1978, 1990). Chandler chronicled the rise of major American corporations and the development and evolution of dominant business organization models, most notably the rise of an integrated managerial hierarchy – what he called “managerial capitalism.” The emergence of stable and autarkic hierarchies in the US was connected to the competitive nature of markets and the extensive utilization of Fordist mass production (large, vertically integrated firms producing standardized goods on Taylorized assembly lines). When comparing the US to other nations, Chandler found a similar rise of corporate hierarchy, but it was distinct in form and coupled with different approaches to production. In Germany, hierarchical firms tended to cooperate more extensively with each other (via cartels, for example), hence he termed this “cooperative managerial capitalism.” In Britain, the development of hierarchies dominated by professional managers was slower and thus “personal capitalism,” in which the owner-industrialist played a large role, remained prominent. Chandler did not focus on the institutional context in which firms evolved so much as the consequences of this. Chandler's typology of capitalism based on different forms of corporate hierarchy and the organization of production complemented the modernization approach's emphasis on the role of the state.
Michael Porter, in The Competitive Advantage of Nations (1990), brought the business studies and modernization approaches much closer together – and thus nearer to the VoC approaches. In his multination study, Porter explored the institutional and social roots of industrial success. He made the important argument that nations tended to excel in certain industries over long periods of time, reflecting the accumulation of competitive advantages that increased and reinforced global trade. In Ricardian theory comparative advantage – and the resulting global division of labor – is based on natural endowments (of capital and labor), while Porter's comparative advantage is rooted in accumulated institutional capacities, reflected in technology and production skills. Porter thus reinterpreted the Ricardian notion of comparative advantage into one of “competitive advantage.” Porter also stressed the key role of the financial system in determining broader industrial capacities: nations with financial systems dominated by securities markets, such as the US and the UK, excelled at funding and promoting radical technological innovation because they were able to provide risk capital. Conversely, bank-dominated financial systems such as Germany's supported better long-term investments and investment in “intangible assets” (assets not easily priced by the market), such as research and development efforts, employee training, organizational development, and supplier relations, which provided a competitive advantage to firms. Porter's ideas are echoed quite clearly in many of the more recent VoC approaches, in particular the importance of finance and the idea that different national institutional configurations support certain kinds of economic activity (production and innovation) better than others.
While Porter brought the perspective of a management scholar, and Chandler that of a business historian, in the 1970s and 1980s a substantial literature in industrial sociology produced important findings about industrial relations, vocational training, and “shop floor” organization. An important early work was that of Dore (1973), who compared British and Japanese factories in order to understand the micro basis of relative economic success and failure. Within Europe another group developed a similar “societal effect” approach, comparing micro aspects of work organization by examining matched pairs of factories in France, Germany, and the UK (Maurice et al. 1986; Sorge and Warner 1986). The significance of this work lies importantly in the fact that the successful utilization of skill, labor relations, management relations, and so on within the firm was related to wider sets of interrelated institutions: firm organization, skill formation, industry structure, industrial relations, and national innovation systems. This pioneering work thus adopted a “holistic” comparison that understood national institutional contexts as systemic configurations, rather than random collections of attributes. The emphasis on the systemic character of national institutions, as now captured in the concept of complementarity, is a cornerstone of the VoC literature. The societal effect literature was later extended by comparative studies of production regimes such as Taylorism, lean production, or diversified quality production (Sorge and Streeck 1988; Streeck 1992).
During the 1970s a neocorporatism literature also emerged to explain the divergent responses and capacities of different national political economies to manage the growing problems of inflation and unemployment (Schmitter and Lehmbruch 1979; Berger 1981; Goldthorpe 1984). Whereas prior comparative approaches tended to emphasize the key role of the state, hierarchies, the organization of production, or financial institutions, this literature placed trade unions and collective wage bargaining institutions at the center of analysis. It documented and explored a widespread trend toward the inclusion of labor and business associations in the formation and implementation of economic policy. At the core of this process was the ability of the three parties – state, capital, and labor – to negotiate durable pacts or agreements over wages and related social and economic policy issues. Primarily, though, neocorporatism centered on wage or incomes policies that attempted to mitigate the inflationary effects of Keynesian demand stimulus through wage restraint. In exchange for such restraint, workers expected a commitment to full employment and improved social welfare benefits. It was argued by many that nations with a strong neocorporatist capacity were better able to manage the problems of inflation and unemployment (Goldthorpe 1984; Scharpf 1991; Kurzer 1993).
Institutions were central to this analysis, since successful neocorporatism required not only the political will of actors to engage in bargaining, but a relatively centralized or concentrated union movement and similarly centralized representation of business interests. In other words, neocorporatism worked only when there was a prior institutional basis for effective collective action in the form of peak associations. This enabled the representatives of capital and labor to negotiate on behalf of individual members and enforce their compliance with centrally bargained agreements. Later work showed the importance of central banks and an accommodating monetary policy in making neocorporatist bargaining successful (Scharpf 1991), and the importance of the party system as well (Katzenstein 1985). Because of these institutional prerequisites, neocorporatism was characteristic of the more “coordinated” European economies; that is, those that relied to a much greater extent on nonmarket governance mechanisms.
The VoC literature is not directly concerned with neocorporatist capacities, which have been generally seen as being in decline since the early 1980s (see Streeck and Schmitter 1991). During the 1990s neocorporatism revived somewhat as major social pacts became common again as a form of political exchange among capital, labor, and the state (Molina and Rhodes 2007). However, the more recent neocorporatism differs, in that labor is in a much weaker position vis-à-vis business and, consequently, the content of corporatist bargaining has shifted from incomes policy in the context of economic expansion to job protection via reductions in wage and social costs to business. The neocorporatist emphasis on the structure and nature of a nation's labor movement and collective bargaining system provided the VoC approach with an understanding of how the industrial relations system interacts with other institutional features of a national political economy. In the present era, the VoC approaches see neocorporatist capacities – to the extent they still function – as working to sustain or protect the institutional foundations of some coordinated market economies from convergence on a neoliberal model of capitalism. One key difference between the neocorporatist literature and the VoC literature is that the former viewed different advanced economies as sitting on a continuum from low to high levels of corporatism, while the VoC literature views differences among capitalist models as differences in kind, not merely in degree.
A final and very important intellectual antecedent of the VoC approaches is the new economics of organization or new institutional economics (NIE) (Williamson 1975, 1991; Milgrom and Roberts 1994). Rejecting the restrictive assumption of neoclassical economics that markets were nearly always superior in allocative efficiency, this school sought to understand when and why actors use nonmarket institutions or governance mechanisms. The school developed several key analytical concepts that are central to some VoC approaches. One is the notion of “transaction costs,” which refers to the investment of time, energy, and capital required to execute a given economic transaction. When transaction costs are high or frequently incurred, firms have an incentive to bring these transactions under direct hierarchical control, which reduces the overall costs associated with such transactions (thus representing a superior means of allocation over the market). Another key concept is “asset specificity,” which refers to the degree to which an asset can or cannot be turned to another purpose or the degree to which realizing returns on the asset requires cooperation with other actors. Highly specific assets are in some ways riskier, since their value is more vulnerable to shifts in market demand. Thus investment in specific assets is more likely to occur when they can be better protected from short-term shifts in markets. Governance mechanisms that foster long-term investment horizons and cooperation are thus superior at promoting such investment. A final important concept or theory in this literature is the “principal–agent” theory. In this theory it is often efficient for actors (principals) to delegate authorities or responsibilities to other actors (agents). For this relationship to be successful, the principal must have some capacity to “monitor” the behavior of the agent to insure compliance with their agreement. If the agent shirks his or her responsibilities, the principal must have a means to “sanction” such noncompliance. The contributions of NIE are particularly important in the VoC framework of Peter Hall and David Soskice (2001), a highly influential approach that this essay will discuss below.
Contemporary Approaches to Varieties of Capitalism
The literature comparing different models of capitalism includes several major alternative analytical frameworks. Best known today is arguably the framework of Hall and Soskice (2001), which takes a firm-centered approach to characterizing the institutions in terms of incentives for coordination. Alternatively, the social systems of production or governance literature compares nations in terms of a wider typology of different governance mechanisms (Hollingsworth and Boyer 1997). Finally, the national business systems approach associated with Richard Whitley (1999) links firm coordination and governance with a closer focus on the internal makeup and capacities of firms, but also culture and state structure. While this literature is large and diverse, it shares common concerns regarding the nature and extent of diverse forms of capitalism, their relative economic strengths and weaknesses, and the future of institutional diversity under conditions of growing global economic integration.
Three analytical premises inform the diverse conceptual frameworks within the VoC literature, and it is the combination of these that gives the VoC literature its innovative character. First, drawing on “embeddedness” from economic sociology, economic action takes place within social contexts and is mediated by institutional settings (Granovetter 1985). Beyond the comparison of state economic policies and formal institutions, the VoC literature compares differences in how private economic activity is socially organized and institutionalized. Taken together, these socially embedded institutions produce a nationally specific “logic of action.”
Second, the VoC literature conceptualizes the various institutions within an economy as complementary (Milgrom and Roberts 1994; Aoki 2001). Complementarity is a particular case of functional interdependence where institutions in different domains positively reinforce outcomes or enhance the utility of institutions in other domains. This gives rise to specific, nonrandom configurations of institutions, because random combinations are inefficient (or socially incompatible) and thus are either weeded out through various processes, or lead to relative underperformance (Hall and Gingerich 2009); complementarity is what makes taxonomies of capitalisms possible. Different configurations are associated with distinct comparative institutional advantages for particular kinds of innovation, production strategies, or distributional outcomes.
Third, VoC scholars stress how common pressures may be refracted through different sets of institutions, leading to different sorts of problems and distinct solutions. Given institutional complementarities and social embeddedness, national models will evolve in an incremental, path-dependent manner. Contrary to various convergence theories, the VoC literature generally sees capitalist diversity as persisting under conditions of increased global competition.
The Firm-Based Approach
Hall and Soskice (2001) compare capitalisms as production regimes and focus on the firm as a nexus of relationships. In their framework, firms are embedded in a context with four institutional domains that define their incentives and constraints: financial systems and corporate governance, industrial relations, education and training systems, and the intercompany system (the governance of relations between companies). The approach articulates a theory of comparative institutional advantage, wherein “the institutional structure of the political economy provides firms with advantages for engaging in specific kinds of activities” (Hall and Soskice 2001:32).
The Hall and Soskice approach starts with the assumption that firms seek to develop core competencies and dynamic capabilities that enable them to produce and market goods or services profitably. The second assumption is that the pursuit of these competencies and capabilities requires firms to develop and manage successful relationships with other micro agents. Following the new institutional economies (Williamson 1975, 1991; Milgrom and Roberts 1994), their approach recognizes and underscores that these relationships create transaction costs and principal–agent problems. Through strategic interaction actors find equilibrium solutions to these coordination problems within a range delimited by the national institutional context.
Focusing on the mid 1980s to mid 1990s, the authors distinguish two basic types of production regimes or capitalisms: liberal market economies (LMEs) and coordinated market economies (CMEs). This typology is based on the relative extent of market coordination through investment in transferable assets v. strategic coordination through investment in specific assets. LMEs and CMEs represent polar opposite ideal types. In liberal economies such as the US, the UK, or Canada, the market plays the dominant role in coordinating economic behavior, the state remains an arm's-length enforcer of contracts, company finance is market based, and labor markets are deregulated. In coordinated economies such as Germany, Sweden, or Switzerland, economic behavior is strategically coordinated to a larger extent through nonmarket mechanisms (i.e., long-term relationships among parties often involving noncontractually specified mutual obligations). CMEs are characterized by long-term industrial finance, cooperative industrial relations, high levels of vocational training, and cooperation in technology and standard setting across companies.
While this framework draws closely on the new institutional economics, Hall and Soskice reverse one analytical assumption in an important way: Whereas conventionally structure is argued to follow strategy (e.g., firms create structures that are efficient for them), Hall and Soskice stress how strategy follows structure and thereby leads to different firm behavior across institutional settings (Hall and Soskice 2001:14–15). Thus firms operating in the same sector, even those deeply engaged in global markets, are likely to follow different coordination strategies in different countries because domestic institutions will create distinct incentives.
A final key claim is that models of capitalism display strong complementarities between the four institutional domains, such that each institution depends on the others in order to function effectively (Soskice 1999:110). Where institutions facilitate strategic (or market) coordination in one domain, these support similar forms of coordination in other spheres. For example, short-term finance requires quick entry and exit from business activities and “fits” with industrial relations systems that allow inexpensive hiring and firing of labor. An important implication of complementarities is that viable public policy changes must be incentive compatible with existing patterns of business organization. Conversely, their argument suggests that national economic policy and political system characteristics reinforce distinctive production regimes:
the political regime may condition the levels of asset specificity found across nations […] political regimes characterized by coalition governments, multiple veto points, and parties that entrench the power of producer groups may be more conducive to investment in specific assets than ones that concentrate power in highly autonomous party leaders, because (i) regimes of this sort are well positioned to provide the framework policies that sustain the institutions supporting specific investments and (ii) because they provide producers with more direct influence over government and the capacity to punish it for deviating from its agreements, such regimes offer investors more assurance that the course of policy will not shift in such a way as to damage the value of assets that cannot readily be switched to other uses.
(Hall and Soskice 2001:49–50)
National Business Systems Approach
The approach of Hall and Soskice was primarily focused on Western Europe and North America. Yet there is a rich literature on East Asian capitalism that inspired alternative VoC approaches. A central early work was that of Chalmers Johnson (1982), whose study of the roots of Japanese postwar economic success heralded a robust literature comparing “Western” and “Asian” capitalism. Indeed, much of the VoC literature in the 1980s was driven by the political and policy concerns in the US and Europe spawned by the economic success of Japan. During the 1980s, many observers considered the Japanese model of capitalism superior to “Western” models, particularly that of the US, and a model to emulate (e.g., Dertouzos et al. 1989; Wade 1990; Thurow 1992). In the East Asian capitalism literature a central focus is on differences in how enterprise groups coordinate and control economic activity, as well as how national differences reflect the institutionalization of nationally distinct patterns of behavior and authority, captured in concepts like community (Japan), patrimonialism (Korea), and familial networks (Taiwan) (Biggart 1991). Some later comparisons sought to incorporate both Asian and Western cases, leading to a broader distinction between three types of capitalism: alliance, dirigiste, and familial capitalism (Orru et al. 1997).
Drawing on this rich literature on East Asia, Whitley developed a systematic and ambitious approach to comparing “business systems,” defined as “distinctive patterns of economic organization that vary in their degree and mode of authoritative coordination of economic activities, and in the organization of, and interconnections between, owners, managers, experts, and other employees” (Whitley 1999:33). Rather than seeing firms as unitary actors, Whitley links interactions among stakeholders to the development of diverse firm capacities. Two general variables produce diverse business systems: the degree and scope of ownership integration, and the degree and scope of alliance (or horizontal) integration among firms. Within these, business systems are compared along eight dimensions: means of owner control (direct, alliance, or market), extent of integration of production chains by ownership (low, medium, high), extent of integration of industrial sectors through ownership, extent of alliance coordination of production chains, extent of collaboration between competitors, extent of alliance coordination of sectors, extent of employer–employee interdependence, and extent of delegation to and trust of employees.
This approach yields eight ideal types of business systems (Whitley 1999, 2007). In fragmented business systems, ownership and alliance integration (coordination) are very low, such that economic activity is undertaken by small firms in highly competitive markets. In project network systems ownership integration is low, but firms are specialized, share some resources, and engage in cooperation for mutual gain. In industrial districts ownership coordination is also fairly low, but alliance or horizontal coordination is fairly high. In these first three systems, smaller firms play a relatively large economic role, while in the remaining five, large firms predominate. In financial conglomerate systems, scope of ownership is high but alliance integration is low, due to the prevalence of loose holding companies or cross-ownership networks based on partial holdings. In integrated conglomerate systems, alliance integration is still low, but ownership scope and degree are high. In compartmentalized systems, such as the US, large integrated and somewhat autarkic firms compete with each other in arm's-length markets. Collaborative systems imply a rather corporatist or associational organization of competitors within a sector. Finally, highly coordinated systems utilize an alliance form of ownership to coordinate activities across sectors, such as in the Japanese keiretsu.
In recent work, Whitley (2005, 2007) takes this analysis further to address the issue of internal diversity within national business systems. The essential argument is that the character of the state determines the degree of institutional coherence and homogeneity across the national economy: liberal states act as market regulators with minimal intervention, thus allowing for maximum internal diversity; promotional states direct economic activity in more detail and constrain internal diversity because they organize interest groups in order to achieve either developmental goals (developmental state) or social harmony (business corporatist state); the least amount of diversity, and hence the most truly national of business systems, is found in inclusive corporatist states.
Whitley's typology also categorizes what Hall and Soskice term “coordinated” economies more precisely due to the greater focus on sociological variables and the internal makeup of firms. He makes more fine-grained distinctions among different forms of nonmarket coordination and even different sorts of hierarchies within firms. In terms of institutional change, Whitley also stresses the path dependent aspects of national business systems arising from complementarities. However, Whitley's discussion of the state adds a further aspect of institutionalization, namely the differing degrees of coherence rooted in diverse patterns of state intervention and patterns of legitimate authority and trust. The business systems approach also highlights the fact that coherence is much lower within some national capitalisms than others. In this respect, his work hearkens back to Zysman's (1983) typology of capitalisms, in which diverse state roles played a crucial role in distinguishing capitalisms. Lack of internal coherence may mean that change in the dominant institutions and firm practices are easier and more likely, but also that there may be several rather than one single national economic model.
The Governance Approach
Another prominent approach to comparing capitalisms is known as the governance or “social systems of production” (SSP) approach (Piore and Sabel 1984; Dore 1986; Campbell at al. 1991; Hollingsworth et al. 1994; Crouch and Streeck 1997; Hollingsworth and Boyer 1997). Literature in this broad approach or school was developed in response to the rapid reorganization of industrial production observed in the 1980s as a result of factors such as technological change and the growth of global markets. This approach focused on the role of six basic institutional mechanisms for coordinating or governing economic activity: market, hierarchy, communities, state, networks, and associations. Two key dimensions were used to distinguish these six mechanisms: the degree to which they rely on actors’ self-interest or on obligations of actors, and the degree to which power is distributed horizontally or vertically. Early work in this approach focused less on national differences in the mix of governance mechanisms employed than on identifying the mix present in given industrial sectors. This sectoral approach was justified in the belief that the mix of sectoral governance mechanisms found would reflect in part the functional requirements of the technology employed and the market conditions specific to that sector. On the other hand, this approach recognized that national-level institutions also heavily condition the governance mix found in a given sector, thus imparting strong similarities in governance across all sectors within that particular national economy.
In practice, this meant that the governance approach analyzed the production strategies of firms in the context of sectoral governance mechanisms, which in turn are “embedded” in national noneconomic or social institutions. The governance approach starts from two basic systems of production. The first is the Fordist system resting on high-volume production, low cost (or price) for competitiveness, but at the cost of adaptability (which is generally viewed as declining in importance). The second is flexible production systems, of which there are actually two types: flexible specialization production and diversified quality mass production (Hollingsworth and Boyer 1997; also Piore and Sabel 1984). Flexible production systems base their competitiveness on being able to produce higher quality goods and adapt their products more rapidly to changes in demand. These systems require higher levels of trust and cooperation among actors, which, in turn, requires greater use of nonmarket governing institutions. Here the governance approach was drawing on insights generated by the French “regulation theory” developed in the late 1970s and early 1980s (Aglietta 1979; Boyer 1986). Regulation theory was particularly interested in understanding the economic crisis of the 1970s. It proposed that the overall mode of regulation of an economy was defined by the interaction among five institutional features: the wage–labor nexus, forms of competition, money, public authority, and international relations. In regulation theory the dominant or leading mode of production and regulation in the postwar era was Fordism. Thus the economic crisis of the 1970s resulted from the breakdown of the Fordist mode of regulation, due to technological change and the emergence of more flexible forms of production. The transformation of regulation modes was driven further by the rise of international capital mobility, which meant that the “financial” dimension supplanted the “wage–labor nexus” as the dominant institution among the five highlighted in this approach.
The governance approach also later went beyond its strong sectoral orientation to explore the existence of distinct institutional configurations at the level of regions within countries, at the national level (such as the EU), and at the global level. Hollingsworth and Boyer (1997), for instance, argued that increased globalization eroded to some extent the national embeddedness of economic institutions. But they did not see this as leading to convergence across nations in their governance mixes, so much as the emergence or increase of the “nestedness” of social systems of production; that is, a complex intertwining of institutions from regional to national to global. At the same time, global competitive pressures get translated into pressures for broader societal change because of the very social nature of production in each country.
Presaging Hall and Soskice's dualistic approach, some work within the governance approach did divide countries into two broad types of capitalism: “market capitalisms,” which relied heavily on markets and hierarchies, and “institutional capitalisms,” which relied on a greater variety and more complex mix of governance mechanisms (Crouch and Streeck 1997; see also Streeck and Yamamura 2001). Indeed, the term “varieties of capitalism” is attributable to Michel Albert (1993), who can be loosely ascribed to the governance approach. Writing from the perspective of a practitioner, Albert suggested there were two basic varieties of capitalism, the Anglo-Saxon and the “Rhine” model (the latter includes Japan, despite considerable geographic distance!). Albert saw the Anglo-Saxon model as dominated by individualism, a strong preference for short-term benefits or profits, and a persistent preference to maximize options or flexibility. In the Rhine model, long-term commitments, consensus, and collective action are far more common. However, neither Albert nor the governance/SSP approach developed a comprehensive typology of capitalism until the more recent work of Amable (2003; see also Boyer 2005). Similar to the national business systems and Hall/Soskice approach, Amable utilizes five fundamental institutional domains to generate a typology of capitalisms: product market competition, the wage–labor nexus or labor market institutions, finance and corporate governance, social protection/welfare state, and the education/training system. Grouping capitalist economies based on their similarities in these institutional domains generates five models of capitalism: market-based model, social-democratic model, continental European model, Mediterranean model, and an Asian model. Similar to the regulation school, Amable asserts a hierarchy among the key institutions, with the financial domain now determining the overall dynamics of capitalist systems.
What he adds to the governance approach is an explicit political dimension to models of capitalism, which turns out to be very important to understanding the change and evolution of the capitalist system. Amable argues that the institutional choices (and the hierarchy) existing in a national economy reflect the preferences of the dominant social bloc. In this perspective, institutional choices and change reflect the political coalitions that emerge and are successful in political competition with other coalitions. Further, the character of the political system itself (e.g., whether it is a majoritarian or consensual system) will affect the likelihood of any given coalition's success as well the likelihood of institutional change.
Related Frameworks and Critiques
There are a number of related alternatives to the above three approaches that categorize contemporary capitalisms, as well as critiques of the VoC literature, that deserve some mention here. Perhaps the most important alternative to mention is the comparative welfare capitalisms literature, which categorizes capitalist systems based to a considerable degree on the core characteristics of their welfare systems. This approach is based on the now increasingly accepted premise that the welfare state is a core institutional realm, along with labor markets, finance and other institutions, in constituting distinct forms of capitalism. Work in this field rests first on the seminal work of Esping-Anderson (1990), who famously posited three forms of welfare state in Europe. The more recent work by Ebbinghaus and Manow (2001) melds this welfare state literature with the VoC literature (see also Mares 2003) by suggesting that there are four basic models of capitalism in Europe – Nordic, Center, Southern, and Anglo-Saxon – which are derived from the systemic effects of various institutional domains, including those associated with the welfare state. In highlighting how welfare states affect private economic activity, this work complements the firm-centric approach of Hall and Soskice. However, unlike most of the VoC literature, the comparative welfare capitalism literature does not necessarily see all the institutional domains as complementary.
This points to one of the recently most common criticisms of the VoC literature, that the tight coupling or complementarity of institutions presumed by this literature seems inconsistent with studies showing contradictions and tension across institutional domains, as well as observations of institutional hybridization in which complementarities seem to shift in unpredictable ways (Crouch 2005; Jackson 2005; Vogel 2006). Indeed, perhaps the most resounding and widespread critique of this literature is that it lacks dynamic analysis; that is, it does not predict nor provide much guidance in explaining change within capitalist systems (e.g., Radice 2000; Howell 2003; Allen 2004). The presumption of strong complementarity imparts a bias in the literature toward assuming institutional stability. Yet over the last two decades countless empirical studies have documented widespread institutional changes in all capitalist systems. Thus very recent literature has sought to reconcile the VoC approach with these empirical observations by attempting to explain how stability and change interact (Amable 2003; Streeck and Thelen 2005; Hancké et al. 2007; Hall and Thelen 2009). Another important critique is that the VoC approaches largely ignore the interactive dynamics between domestic and transnational institutions (Radice 2000; Morgan 2005; Thatcher 2007). The line of critique suggests that viewing capitalist systems in isolation from international forces blinds us to important factors in their internal functioning, as well as to how they are changing.
Finally, it is worth raising the leftist critiques of the VoC approaches. This critique argues that the VoC approaches are largely bereft of political analysis and particularly ignore the importance of class relations and class power in shaping contemporary forms of capitalism (e.g., Blyth 2003; Howell 2003; Coates 2005). Many of these leftist critiques, especially those more Marxist in their inspirations, tend to see national capitalisms – and class conflict – as derivative of a global capitalist system driven by the need for capital accumulation. These approaches see capitalism as moving through stages and forms of accumulation where crises, such as that of the late 2000s, are precipitated by contradictory class relations. National distinctions as posited by the VoC school are not seen as particularly important because they are mutable, especially in the face of rising pressures from market forces to deregulate or “de-institutionalize” less liberal forms of capitalism. The work of a leading French regulationist theorist, Robert Boyer, is particularly worth noting, in part because his recent work links regulationist theory about capital accumulation regimes with the institutional dynamics and complementarities highlighted in the VoC school (Boyer 2005).
Contributions of Varieties of Capitalism to Understanding the Global Economy
The varieties of capitalism literature offers three important contributions to our understanding of the global political economy. The first is that different sources of competitive advantage for firms and nations are institutionally rooted and not easily changed. Moreover, in the face of increased global economic competition, much of the varieties of capitalism literature argues that national distinctiveness will be maintained, if not enhanced. The second contribution is that these distinct national arrangements give rise to different interests/preferences in how the global economy is constructed and managed. Finally, the varieties of capitalisms approaches help us understand the shifting fortunes of different models of capitalism across distinct historical periods, not least including the current global economic crisis, which is likely to usher in a new set of rules for global economic competition that may well shift those rules in a direction that benefits some forms of capitalism more than others.
Institutions and Competitive Advantage
Arguably the most important contribution of the varieties of capitalism literature is the identification of distinct patterns and sources of comparative or competitive advantage. By categorizing capitalisms into a limited number of types, it has produced general hypotheses to explain firm behavior in different national contexts; to explain the behavior and preferences of organized labor in different national contexts; and to explain distinct patterns and advantages in innovation. Hall and Soskice, for example, center their analysis around the distinct advantages of coordinated market economies in producing incremental innovation. This explains the strong competitiveness of countries like Germany and Japan in machinery and engineering industries. Liberal market economies, in contrast, excel in “radical innovation” of the kind that predominates in industries such as computing and information technology, pharmaceuticals and biotechnology, and aerospace. These competitive advantages are deeply rooted in the particular configuration of complementary institutions. They are thus not easily, if at all, replicable or transferable to other national contexts. Thus from the varieties of capitalism perspective, institutional borrowing from one nation by another is unlikely to reproduce the same results.
Hall and Soskice (2001) go one step further, arguing that “pure” systems of capitalism will outperform those that mix institutions from coordinated and liberal market economies (see also Hall and Gingerich 2009). Thus, rather than globalization leading to convergence, they see globalization as reinforcing long-existing institutional differences, at least among those nations that have been relatively successful in global economic competition (see also Vogel 2006; Hall and Thelen 2009). This is not to deny that there have been significant changes in domestic institutions across capitalist economies, but to assert that the distinctive logic of economic behavior created by their institutional configuration is sustained. In other words, coordinated market economies continue to rely relatively more on nonmarket forms of coordination. There are, however, a number of scholars within the literature who see a long-term erosion of much of the distinctiveness of nonliberal forms of capitalism (Lane 2003; Soederberg et al. 2005). And there are those who believe that mixed systems of capitalism can also be successful in global economic competition (Campbell and Pedersen 2007). In sum, the varieties of capitalism literature offers hypotheses explaining national economic performance as well as the persistence of institutional distinctiveness in the face of homogenizing external pressures associated with economic globalization (Menz 2005). Though, to be clear, these are not fully settled issues within the literature itself and represent questions of ongoing research and debate (see Hancké et al. 2007).
Finally, the varieties of capitalism approach offers an explanation for some of the observed patterns of global economic integration. Namely, this approach suggests that multinational firms will locate different parts of the production chain in the national institutional context that is most conducive to that type of economic activity. Thus, large MNEs might locate new research and development facilities in liberal market economies that are most conducive to radical innovation, while production of standardized or commodity components will be located in low-wage countries. Production requiring high skills or close proximity to other key input suppliers may be located in the more advanced economies. While this hypothesis is both plausible and appealing, it has not been systematically investigated.
Constructing Global Economic Regulation
Debates over the nature and extent of international rules and regulations for the global economy have typically focused on either relative power, such as hegemonic stability theory (Gilpin 1987), or on the role of regimes in facilitating cooperation for mutual (and absolute) gains. While not necessarily inconsistent with these approaches, the varieties of capitalism literature adds important theoretical and empirical content to these debates. Specifically, the literature offers hypotheses explaining the distinct preferences of national governments over the form and content of international economic regulation. The VoC literature applied to European economic integration offers some of the most developed and well-tested hypotheses of this kind. Fioretos (2001), for example, argues that “the shape of multilateralism that an EC member espouses depends primarily upon the potential or actual implications of the form of multilateralism on the ability of that country to sustain the comparative institutional advantages provided by its specific variety of capitalism” (Fioretos 2001:215). Following this line of argument, Callaghan and Höpner (2005) examine the battle in the EU during the early 2000s over a corporate takeover directive. They test the VoC hypothesis by examining votes in the European parliament. Rather than voting along ideological lines (either for “capitalists” or for “workers”), nationality best explained voting. The authors attribute this to parliamentarians’ defense of their distinctive national economic models. Specifically, the proposed liberal takeover rules would have differential distributional consequences, with countries that have strong representation for workers within firms suffering the most adverse consequences.
The construction of a global corporate accounting regime reveals a similar pattern of preference formation and defense. Beginning in 2005, all publicly listed firms in the EU were required to use International Financial Reporting Standards (IFRS), developed by a private standard setter, the IASB, which is funded and dominated by the accounting industry, particularly from the US and the UK. It develops its standards through a large number of committees that include representatives from the accounting and financial industry and some international organizations. Since the EU adopted IFRS, European and American authorities have been working toward a common global standard. While this, on the one hand, represents an example of convergence on a set of global rules, its further extension beyond the largest multinationals has been limited by preferences rooted in distinct varieties of capitalism. Thus when the Commission attempted in 2007 to extend the same requirements to nonlisted firms in Europe, it elicited a groundswell of opposition that began with German small firms, who feared it would undermine their traditional reliance on bank borrowing in which owner capital plays a crucial role as collateral. The revolt soon spilled over into the European parliament and the Commission backed off.
The “Battle of Capitalisms” Across Time
The varieties of capitalism literature also provides a framework for analyzing long-term institutional changes in capitalist systems and the persistence of diverse forms of capitalism, even when intensified competitive pressures were predicted by many to lead to a convergence on one “best model” of capitalism. During the 1980s the varieties of capitalism approach focused on explaining the transition from the postwar era, marked by economic growth and dominated by mass production models and the Keynesian welfare state, to the “post-Fordist” era, marked by economic dislocation, the transition to more flexible economic production and organization, and the erosion of the Keynesian welfare state (e.g., Piore and Sabel 1984). In this period, coordinated forms of capitalism, particularly that of Japan, were viewed by many as ascendant. During the 1990s the locus of attention shifted to the impact of “globalization” and Europeanization on distinct models of capitalism (Berger and Dore 1996; Keohane and Milner 1996; Dore 2000). A convergence thesis soon emerged as the focal point of debate (e.g., Soederberg et al. 2005). This thesis held that globalization would lead to the erosion of less liberal models of capitalism; that is, their convergence on the most liberalized forms of capitalism. Thus in sharp contrast to the 1980s, when the Japanese model of capitalism was held as the most competitive, by the mid 1990s the US model was increasingly viewed as the key to global economic success. While the mechanisms of convergence were varied, the general thesis was that external pressures associated with economic globalization would lead to adaptive institutional changes (Keohane and Milner 1996; Simmons 2001; Simmons et al. 2008). Since the early 1980s, increasing neoliberal hegemony has led to global rules favoring deregulation and liberal market economies, in part because constructing global economic integration – or European economic integration – through deregulation is far easier than constructing a global economy through regulatory harmonization (Streeck and Thelen 2005). Within Europe, the political process has generally led to regulations permitting the coexistence, if sometimes uneasy, of diverse models of capitalism. But here too, recent efforts by the European Commission have targeted institutional changes that would, in the view of the varieties of capitalism perspective, threaten the comparative institutional advantages of the more coordinated economies within the EU (Höpner and Schäfer 2007).
The global financial crisis and steep recession of 2008–9, however, may herald yet another epochal change in the “battle of capitalisms.” The more coordinated European models of capitalism appear to be reclaiming some of their international élan. Germany, for example, was harangued in the early 2000s – within and without – for its sclerotic institutions, anemic growth, and insufficient institutional reform. Yet over the last few years its economy surged, exports rebounded, and the German model, while not the same as that which prevailed in the 1980s, is now seen as back on track. More importantly, the deregulation mantra that guided the US and the UK (and even the EU to a lesser degree) from the 1980s has fallen into some disrepute. Recent global negotiations over managing the crisis and financial regulation clearly reflect distinct preferences arising from diverse forms of national capitalisms, as well as some shift in relative power among states to define the new rules of the global economy. In short, despite a long period of global economic liberalization and attendant pressures to deregulate (i.e., converge on a liberal model of capitalism), national varieties of capitalism remain alive and well. While some might bemoan this as politics hindering economic efficiency, the varieties of capitalism literature suggests that there are both national and global advantages to variety (Crouch 2005).
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Links to Digital Materials
OECD country website. At www.oecd.org/countrieslist/0,3351,en_33873108_33844430_1_1_1_1_1,00.html, accessed August 9, 2009. This site provides country-by-country surveys of recent economic developments and the key institutions governing each capitalist economy.
World Economic Forum. At www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm, accessed August 9, 2009. The World Economic Forum produces an annual Global Competitiveness Report, which ranks countries based on their performance on a wide variety of institutional indicators, including education, law, financial markets, and more.
International Labor Organization. At www.ilo.org/global/What_we_do/Publications/lang–en/index.htm, accessed August 9, 2009. Provides data and studies pertaining to developments in national labor markets, and places these studies in the context of broader domestic and international economic developments.