Models of Capitalism: Varieties of Capitalism

Models of capitalism: varieties of capitalism

Capitalism is not a monolithic system. Different countries have developed diverse models of organizing the market economy, distinguished by their institutions, the role of the state, labor relations, and financial systems. The concept of "Varieties of Capitalism" (VoC) systematizes this diversity.

The VoC Approach: Two Ideal Types

Peter Hall and David Soskice identified two polar types of capitalist economies:

• Liberal Market Economies (LME) — USA, United Kingdom, Ireland, Canada, Australia.
  Finance: stock markets are the main source of financing. Shareholder value is the key criterion. Corporate governance: dispersed ownership, an active market for corporate control (mergers and acquisitions), short-term horizon. Labor relations: flexible labor market, weak trade unions, decentralized wage bargaining, ease of hiring and firing. Education: emphasis on general skills, mobility between companies. Inter-firm relations: market coordination, competitive relationships, contracts.

• Coordinated Market Economies (CME) — Germany, Austria, Switzerland, the Netherlands, Scandinavia, Japan.
  Finance: bank financing, "patient capital", long-term relationships with creditors. Corporate governance: concentrated ownership (banks, families, other corporations), protection from hostile takeovers, employee representation on boards of directors. Labor relations: strong trade unions, sectoral collective agreements, employment protection, social partnership. Education: vocational training system (dual system), specific skills. Inter-firm relations: networks, associations, long-term contracts, cooperation in R&D.

Institutional Complementarity

The key idea of VoC is institutional complementarity: institutions in different spheres mutually reinforce each other.

In LME: a flexible labor market is complementary to stock market financing. If a company must quickly restructure for shareholder value, it needs the ability to easily fire employees. Workers' general skills complement their mobility between companies.

In CME: employment protection is complementary to investments in specific skills. Workers agree to lengthy training in narrow skills only if they are confident in stable employment. Patient capital complements long-term innovation.

This explains why partial reforms are often ineffective: borrowing one institution from another model may not work without complementary changes.

Comparative Advantages

Different models have comparative advantages in different activities:

• LME excel at radical innovation, fast-changing industries, finance, biotechnology, IT. Flexibility enables rapid reallocation of resources into new sectors.
• CME excel at incremental innovation, high-quality production (machinery, automotive, chemicals). A stable workforce and specific skills ensure continuous improvement.

Other Models of Capitalism

The binary LME/CME typology oversimplifies reality. Researchers identify additional types:

• Mediterranean capitalism (Italy, Spain, Greece, Portugal): family businesses, informal networks, weak state, segmented labor market.
• East European capitalism: dependence on foreign investment, export-oriented production platforms (Visegrad group), or liberalized but weakly institutionalized economies (Baltics).
• Asian capitalism: strong state, industrial policy, "developmental state" (Japan, Korea, Taiwan, Singapore). China is a special case of state capitalism with the Communist Party in power.
• Oligarchic capitalism: concentration of ownership in the hands of a narrow group of oligarchs, close ties between business and government, weak institutions (Russia, Ukraine, some Latin American countries).

Change and Convergence

Models of capitalism are not static. Globalization, financialization, and technological change put pressure on all models:

• Financialization: increased importance of financial markets even in CME. German companies are increasingly oriented toward shareholder value.
• Liberalization: weakening of employment protection, decentralization of wage bargaining in CME under pressure from competition and political reforms.
• Dualization: emergence of segmented labor markets with protected insiders and precarious outsiders.

The question of whether models are converging (all becoming like LME) or diversity is preserved remains open. So far, evidence points to "convergence with persistent differences"—general trends are superimposed on enduring national characteristics.