Varieties of Capitalism Approach - Essay Example

Introduction The Varieties of Capitalism approach has received growing recognition and use in analysis of political economies. The framework tends to look for comparison in the organizations of the private sector, and specifically, in large firms. The focus on large firms is a worthy undertaking considering the fact that the world economy is still dominated by large firms, and they are the main source of innovative processes and products. The Varieties of Capitalism (VoC) approach implements a relational view of firms in analysing different capitalist economies. Through the relational view, it brings in other factors such as unions, financiers, other firms, and employees. It is, however, faced with problems of lack of recognition of the most important features of a capitalist economy, which are important in identifying and predicting economic problems. It underestimates the role of the state and labour in the capitalist economy (Kang, 2006). The framework focuses on institutional changes and leaves out the most crucial features of a capitalist economy. The 2008 economic recession was caused by problems within the main drivers of the economy. In a capitalist economy, the main drivers of the economy are market relations, capital-labour relations, and accumulation of capital. VoC framework assumes that these drivers are analysed under the institutional theory which claim that, under the different varieties of capitalism, the features are different, but compatible with the economic systems (Witt, 2010). As described below, recent economic recession proves that VoC fails to effectively analyse the most important features of a capitalist economy. Causes of the Recent Economic Recession The economic recession is best understood as the result of processes which were intended to deal with the 1970s crisis. These processes extended to the next quarter century. It is well known that neo-liberalism was the project used to deal with 1970 economic crisis. This is project legitimised policies that restored and consolidated capitalist power (Reavis, 2012). It was characterised by the use of state power to protect the interest of a few powerful capitalist. This led to money being given priority as capital thereby leading to the elimination of production circuits and the creation of financial circuits. Because of this shift, it is important to pay attention to the relationship between the labour, capital, and the state, and fractions of capital (Cassis, 2011; Posner, 2011). Posner (2011) also notes that the financial troubles experienced in 2008 were as a result of novel federal regulatory interventions, and unusual monetary policy moves. The selection of these public policies was not done right, and this led to the diversion of loan-able funds into wrong investments, distorted asset prices and interest rates, and consequently, the failure of strong financial institution; it made them unstable and unsustainable. The 2008 recession started with flexible home-mortgage lending. The volume of unconventional mortgages had been expanded by originators and creative lenders, there had been high default risks taken (Halm-Addo, 2010). The unconventional mortgages led to an accumulation of house prices and condos. The house prices went up and then down. Those who had borrowed, but had insufficient income compared to their debts began to default. So many borrowers had expected that the house prices would go up, and they would be able to pay their mortgages, and get more. This never happened because of the decrease in prices, and so many borrowers defaulted leading to unexpected rates that shocked the financial system. This was when trouble started. The high risks taken of giving nonprime mortgages came back to haunt the financial institutions to whom the monthly payments were made, and the mortgage holders (Posner, 2011). It is clear that the problem started with the financial market although other factors contributed to the financial situations. According to the varieties of capitalism approach, firms’ interaction with financial markets enables firms to raise finances. This framework should have been able to identify the problems within the interaction between firms in the financial market to predict the recession. Variety capitalism A Variety of capitalism approach assumes that firms are the central actors in the economy. The behaviour of the firms collectively contributes to the national economic performance. This framework postulates that for firms to prosper, they have to interact with multiple spheres of the political economy. These spheres are; the financial markets, industrial relations, education and training, inter-firm relations, firm-employee relations, and product markets. Financial markets enable the firms to raise finance. Industrial relations enable the firms to control wages and working conditions. Inter-firm relations allow secure access to inputs and technology. Education and training provide the firms with a chance to ensure workers have the requisite skills. Firm-employee relations ensure that cooperation in the firms’ workforce is secure, and the product market provides an environment for the firms to compete for customers. The approach assumes that the firms are relational organizations, therefore, the key to success in each of the spheres, is efficient coordination with other actors. The main problem affecting firms is, therefore, inability to efficiently coordinate with other actors in the economy (Hall & Gingerich, 2004). There are two modes of coordination according to varieties of capitalism approach: the liberal market economy and the coordinated market economy. Liberal market economy modality is where coordination with other actors in the economy is through competitive markets. It is characterized by formal contracting and liberal relations. Stability outcomes depend principally on families’ marginalism considerations, market signals, and relative prices (Kang, 2006). Coordinated market economy, on the other hand is where firms’ coordination is through strategic interaction processes, typically modelled by the game theory. In this modality, formation of credible commitments through institutional support determines the equilibrium outcomes. Institutional support also includes maintenance of information monitoring, sharing, deliberation and sanctioning (Hall & Gingerich, 2004; Kang, 2006). The capitalist economy experiences instances of both strategic and market coordination, but the varieties capitalism approach holds that the balance between these two types of coordination is influenced by political economies. One end of the spectrum is taken by the liberal market economies where competitive markets drive the coordination between firms and other actors. The other end is occupied by coordinated market economies which are characterised by strategic interaction between firms and suppliers of finance, trade unions, and other actors (Hall & Gingerich, 2004; Kang, 2006). Common Features of Capitalism Capitalism is an economic system dominated by financial considerations. It is a scheme in which the pursuit for financial incentive drives the economy. The quest for financial reward determines who gets what in the system of distribution of rewards. Business activities are done for profit, and work is done for income. A capitalist economy is characterised by the following three main features; market relations, capital-labour relations, and accumulation of capital. A capitalist economy is characterised by market relations as a mechanism of resource allocation, and whose logic seeps into the whole economic system. The market relations are so all-encompassing that competition becomes the main driving force of economic activity (Wood & Lane, 2011; Gouverneur, 2005). The economy is also characterised by enrolment into capital-labour relations by most workers, which organizes power relations between the workers and the entrepreneurs. The managers have the right to organize a division of labour according to the payment of ongoing market wage to workers. In most modern capitalist societies, the labour force is increasing in the service and manufacturing sectors, and declining in the agricultural sectors. There are also recurring labour conflicts that show the dynamism of a capitalist economy (Gouverneur, 2005). Another characteristic is the accumulation of capital which becomes the norm of a capitalist society because of the pressure from product market competitions and capital labour relations. The pressure to accumulate capital is brought about by the interaction between the conflicting nature of the capital-labour relations, and competition on the product market. In a capitalist economy as previously mentioned, work is done for a source of income, and business activities are done for profit. The result is an economy driven by the urge to accumulate more capital, since this determines who gets what in the distribution of rewards. Each individual wants more income, and each business wants more profits. Consequently, accumulation becomes a common practice in the economy. In a capitalist economy, more than half of the GDP is represented by formation of capital. This has worsened the trend of capital accumulation among economies (Wood & Lane, 2011; Sardoni, 2011). Weaknesses of the Varieties of Capitalism Approach The varieties of capitalism approach is very influential in industrial relations, but the recent economic recession, reveals its weaknesses. It is indicated that this approach is not able to recognize the sources of instability that emerge in capitalist economies. It is because of its preoccupation with institutions, which leads to neglect of social agency, that it fails to provide insight to the causes and consequences of the 2008 recession. It is also because of the dynamics of the capitalist mode of production, that the varieties of capitalism approach is not well equipped for the provision of information about the causes and the cost of the recession (Heyes, Lewis, Clark, 2012). Specifically, VoC analysis does not show the role of State in promoting specific accumulation paths, the growth of the finance sector, and shifts in capital-labour relations; all which influenced specific characteristics, and causes of the crisis. The framework does not provide the sufficient guide for understanding national governments’ reactions to the crisis, and the effects of such responses to the workers (Heyes, Lewis, Clark, 2012). Varieties of capitalism did not recognize the weakening of labour’s position before the crisis occurred. This weakening of the labour’s position could not be explained by the varieties of capitalism framework because it only focuses on the roles that networks, and markets play in coordinating economic activity. The framework also analyzes the comparative advantages granted by different institutional groups. It does not employ the concept of capital. There are only firms in the VoC account, there are no capitalists. The varieties of capitalism framework only focuses on the processes through which capital is accumulated, but does not show the difference between capital fractions (Heyes, Lewis & Clark, 2012). Analysis through this framework fails to reveal the effects of other sectors in the economy since it completely focuses on the manufacturing sector. It gives attention to the role of institutions in supporting divergent corporate strategies, for example, the development of industrial relations as a strategy to control the risk of poaching high skilled labour among firms. There is an inherent focus on different types of productive activity. VoC analysis concerning financial capital only focuses on firms’ access to finance and corporate governance (Heyes, Lewis & Clark, 2012). This predicts that with the known access to finances and corporate strategies, the trade unions, employers, and governments in coordinated economies will be encouraged to have social protections and preserve employment. This specially because of the competitive advantages that corporate governance and access to finance offer. VoC analysis left out the most important components of a capitalist economy; that would help identify the 2007-2008 crisis. It is, therefore, important to move beyond static institutions in industrial relations and comparative political economy analysis, and engage with class relations, dynamics of capitalism, and capitalist state (Heyes, Lewis & Clark, 2012). Varieties of Capitalism approach does not offer an analysis of capitalism as claimed. The close relationship between industry and banks that are characteristic of capitalist society are considered corporate governance in coordinated market economies. This is compared to liberal arrangements in liberal market economies. By doing this, the framework conceptualises finance as performing an intermediary function between firms and households at a national level. Capitalism is characterised by internationalisation of finance. Under the framework, finance internationalization has been discussed principally in connection to its effects on corporate governance on coordinated market economies. There are no analyses of the ways in which finance representatives try to influence government policies, there is no consideration of the creation of finance as a distinctive fraction of capital, and there is no consideration of the purpose of finance in regulating capital accumulation. According to the VoC approach, market economy is equated to capital, and this explains its financialization. It therefore dissolves issues of distribution, exploitation, and conflict into coordination mechanisms such as corporate governance arrangements, training and education systems, and industrial relations institutions. Additionally, the framework tends to consider national economies as closed. Through this, it does not stress the importance of capital flows and the effects on economic development. VoC explains how liberal market economies de-regulate and improve the power of finance capital, but what it fails to show is the interconnectedness of financial capital systems at national and global levels. In capitalism, even the failure of one firm can lead to an economic crisis. It means that even with de-regulation in LMEs, the crisis and is effects could still be felt in all ‘varietis’ of capitalism (Heyes, Lewis & Clark, 2012). Varieties of capitalism approach weakness is also shown in its interpretation of capital-labour relations. According to the framework, since firms in coordinated market economies depend on highly skilled workforce, there is need for industrial relations institutions to help in the management of the situation. Industrial institutions will ensure that workers are encouraged to cooperate with managers, and firms are discouraged from poaching of skilled workers. The framework explains the creation of industrial relations institutions from a functionalist perspective. It notes that such institutions are formed in response to perceived risk of instability in supply of skills. They therefore regulate the supply of highly skilled workers (Heyes, Lewis, Clark, 2012). Hall and Soskice also argue that distinct welfare states and specific training systems determine the type of varieties of capitalism. The different varieties of capitalism support and reflect the firms’ strategies in both liberal market economies and coordinated market economies. According to the VoC framework, liberal market economies are characterised by liberal social policies that promote general skills and flexible labour markets demanded by the economies. Coordinated market economies on the other hand are characterised by superior unemployment benefits, and stronger employment protections which promote specific skills investments in higher level industry, that are required in CME firms. Workers and employers in CMEs both benefit from strong institutions, such as those of social protections and employment; therefore, they are likely to support the institutions. CMEs are also likely to maintain entitlements and right in relation to employment and welfare provision. Evidence of what is actually happening, however contradicts the prediction above. It has been shown that the power of trade unions and worker entitlements has decreased. Hall and Soskice (2001) indicates that evidence about social protection and trade union show that the position of labour has been weak for a long time, and there have been erosion in social protections and employment in both coordinated market economies, and liberal market economies, although to different degrees (Hall & Soskice, 2001). The framework emphasizes political resistance which ignores the role that the employer and the firms play in coordinating the economy. From a VoC perspective, for example, the decentralisation of industrial relations can be explained as the managers’ preferences that influence the comparative institutional advantage. The capitalist economies for some time have seen labour unions weakened due to intense world competition, and have experienced rapid decline in industrial working class. These should be reflected in a capitalist economy analysis given that the centres of capitalist economies are the distributive concerns. It should be able to recognize that weak labour has economic effects (Hopkin, 2004). The framework also argues that adjustments in the current capitalist economies are firm-led, therefore it ignores the role of the state. The state is the decisive controller of business and defines the business environment (Howell, 2003). Conclusion Varieties of Capitalism approach has received growing recognition and use in analysis of political economies. The framework tends to look for comparison basis in organization of the private sector, and specifically, in large firms. The focus on large firms is a worthy undertaking considering the fact that the world economy is still dominated by large firms, and they are the main source of innovative processes and products. Irrespective of this, the framework ignores the most important features of a capitalist economy that played a role in the 2008 economic crisis. This discussion has revealed the weaknesses of the varieties of capitalism approach. There are two main weaknesses; overlooking labour as a passive agent in the capitalist economy, and underestimating the role of the state in the economy. This revelation shows that the VoC framework is not fit to analyse and produce the true picture of a capitalist economy. Bibliography Cassis, Y. 2011. Crises and Opportunities: The Shaping of Modern Finance. New York: Oxford University Press. Gouverneur, J. 2005. The Foundations of Capitalist Economy. Journal of Economic Development, 5 (2), 33-43. Hall, P. A., and Gingerich, D. W. 2004. Varieties of Capitalism and Institutional Complementarities in the Macroeconomy An Empirical Analysis, MPIfG Discussion Paper. Hall P. A., and Soskice, D. 2001. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. New York: Oxford University Press. Halm-Addo, A. 2010. The 2008 Financial Crisis: The Death of an Ideology. Pennsylvania: Dorrance Publishing. Heyes, J., Lewis, P., Clark, I. 2012. Varieties of Capitalism in Crisis? The Consequences of the ‘Great Recession’ for Employment and Social Protections and Comparative Institutional Analysis. Retrieved from: http://ilera2012.wharton.upenn.edu/RefereedPapers/HeyesJason%20PaulLewis%20IanClark.pdf Hopkin, J. 2004. How Many Varieties of Capitalism? Structural Reform and Inequality in Western Europe. Retrieved from: http://personal.lse.ac.uk/hopkin/apsahopkinblyth.pdf Howell, C. 2003. Varieties of Capitalism: And Then There Was One? Comparative Politics, 36 (1): pp. 103-124 Kang, N. 2006. A Critique of the “Varieties of Capitalism” Approach, ICCSR Research Paper Series, No. 45. Retrieved from: http://www.nottingham.ac.uk/business/ICCSR/assets/researchpapers/45-2006.pdf Reavis, C. 2012. The Global Financial Crisis of 2008: The Role of Greed, Fear, and Oligarchs. Retrieved from: https://mitsloan.mit.edu/LearningEdge/CaseDocs/09-093%20The%20Financial%20Crisis%20of%202008.Rev.pdf Posner, R. A. 2011. What Caused the Financial Crisis. Pennsylvania: University of Pennsylvania Press. Sardoni, C. 2011. Unemployment, Recession and Effective Demand: The Contributions of Marx, Keynes and Kalecki, Massachusetts: Edward Elgar Publishing. Witt, M. A. 2010. China: What Variety of Capitalism? INSEAD Working paper. Retrieved from: http://www.insead.edu/facultyresearch/research/doc.cfm?did=46188 Wood, G. T., Lane,C. 2011. Professor Emeritus of Sociology. Oxon, OX: Routledge. Read More