5. Varieties of Capitalism

Capitalism and Capitalism The Developmental State Theories of Corporatism Varieties of Capitalism (VoC) Liberal Market Economies (LME) Coordinate Market Economies (CME)

Capitalism and Capitalism

Capitalism is an economic system in which the means of production are owned and controlled by private owners (private property) with the goal of making profits in a market economy.

Central features of capitalism include free and competitive market, wage labor and capital accumulation.

There are many different kinds of capitalisms such as mercantilism, free market capitalism, social market capitalism, state capitalism and so on.

The State-Centred Approach

Theda Skocpol argues that the state and the entire dominant class share a common stake in preserving the existing mode of production, but the state can be potentially autonomous from the interests of the capitalist class and the existing mode of production.

Influenced by the German tradition of Max Weber and Otto Hintze, Skocpol defines the state as “set of administrative, policing, and military organizations headed and more or less well co-ordinated by an executive authority and autonomous structure - a structure with a logic and interests of its own”. In this image the state is separated from its society and controlled by only a limited number of insulated state elites.

Bring the State Back In

Peter Evans, in collaboration with Theda Skocpol and others, succeeded to ‘bring the state back in’ to the study of capitalist development(Evans et al., 1985).

The authors argued that capitalism imposed limits on states, yet state elites possess some autonomy. Thus they suggest that a more active, more relatively autonomous state is an essential component in advancing the development of dependent countries.

The state autonomy theorists in essence have attempted to explain successful economic performance, focusing on potential national development led by the state: I shall call this ‘state autonomy approach’.

The East Asian Miracle

Many social scientists who have sought to answer fundamental questions about the East Asian states have been involved in the argument over which between market mechanism and state intervention is the main cause of economic development.

It is now widely acknowledged that state intervention was an indispensable condition for achieving industrial transformation in East Asia (World Bank, 1993).

The Developmental State

The idea of the developmental state is closely associated with Chalmers Johnson (1982) and his famous work, MITI and the Japanese Miracle. He showed the basic mechanism of the Japanese political economy, developing the concept of the “capitalist developmental state” from an institutional analysis of the government bureaucracy.

According to Johnson, the primary goal of the developmental state is economic development in terms of growth, productivity, and competitiveness. While the developmental state advocates private property and the market, it consistently attempts to guide the market through an elite economic bureaucracy.

As a result, the developmental state engages with various institutions that allow it to consult and coordinate with the private-business sector, and these policy consultations are an integral part of the state’s policy formulation and implementation.

The Developmental State

Johnson further argued that Japan, Korea, and Taiwan are “developmental states” and have market economies in which the state performs a highly interventionist role.

Amsden (1989) and Wade (1990) argue that East Asia was never a paragon of free market ideology through capitalist industrialization.

They argue that the picture of a centralized state interacting with the private sector so as to secure development goals conforms to the ‘developmental state theory’ of East Asian economic growth.

The Role of State in Economic Development

Alice Amsden (1989) pointed out four characteristics of the Korean economy: (1) the central role of state intervention in markets; (2) the importance of government “discipline” over private firms in guaranteeing efficiency; (3) the industrial capabilities of large and diversified business groups; and (4) the centrality of technological learning for later industrializers.

The Korean state has acted as an entrepreneur, banker, and architect of the industrial structure. While Korea has a relatively small proportion of foreign direct investments in the economy, the Korean state controls most of the foreign capital and public and commercial loans in the country.

Economic Bureaucracy

The economic bureaucracy plays a very important role in the formulation of industrial policies as they have financial control over the domestic and foreign capital.

Thus, the Korean state is referred to as “Korea Inc.” or the “senior partner,” and its economic system as “state-led” capitalism or “guided” capitalism.

Criticisms

The statist thesis has been criticized on the following grounds. The ‘state autonomy’ approach overlooks the institutional diversity of the state by characterizing the state as an internally cohesive and unitary actor in the Weberian sense.

It treats the state as the indivisible unit of analysis, just as neoclassical economics treats the individual.

However, the strong state, or even an authoritarian regime, could not always insulate its state bureaucracy from social classes that are often in conflict with one another.

State officials are usually not autonomous actors; rather, they typically respond to the demands of the dominant class or, occasionally, of the militant lower classes.

Society-centered Approach

The society-centered approach emerged in response to the lack of attention paid to the role of non-state (social) actors in explaining national variations in institutional arrangements.

The corporatist perspective abandoned the ‘state’ as an explanatory concept and choose to focus on the ‘political system’ in which societal interests constrain the government action in corporatist arrangement (Schmidt, 1996).

Corporatism

The concept of “corporatism” refers to a pattern of government-organized group relations where economic interest groups participate in the political process (Schmitter and Lehmbruch, 1979).

According to Schmitter (1979: 13), the concept of corporatism can be defined as a “system of interest representation in which the constituent units are organized into a small number of singular, compulsory, non-competitive, hierarchically ordered and functionally differentiated categories, recognized or licensed (if not created) by the state and granted a deliberate representational monopoly within their respective categories”.

He distinguished two forms, “societal corporatism” and “state corporatism”, arguing that the former arises naturally within a society and unlike the latter is not dominated by oppressive government.

Tripartism

Economically, a corporatist system preserves capitalist institutions, especially private productive wealth, while abandoning liberal ideas such as laissez-faire in favor of some economic planning, and accepting the collective organization of labor which Fascism had rejected.

The result is tripartism, for government, employers and trade unions. The interest groups influence policy, and the government often plays a part in deciding who shall be consulted and has clear views on policy.

But unlike the pluralist model, the interest groups are not competitive, they work together. The tripartism usually involves such themes as a stress on economic growth, national cohesiveness, planning and industrial discipline.

Liberal Corporatism v Societal corporatism

Many literature has concentrated on the argument that the modern state and interest associations blur into each other through the development of “liberal (societal) corporatism” (Schmitter and Lehmbruch, 1979).

In liberal corporatism, the institutional distinctiveness of the state becomes obscured and the diverse elites must collaborate in society.

In societal corporatism the concept of the state is divided and diluted by the major functional business, labor, professional, and agricultural elites in the society. Each of these elite blocs is organized into single peak associations which are directly represented in the decision-making process of the state through the governments and executive committees in places like the Scandinavian countries, Austria and Germany.

Corporatism in East Asia

East Asia also has a corporatist system in a much more state-driven than societally developed form. Much of the political rhetoric on Asian corporatism reflects Confucian or authoritarian social doctrine, and the pursuit of an ideological alternative to Western liberalism or parliamentary democracy.

These “Confucian” and “authoritarian” corporatist states have espoused organic theories of society and argued for authoritarian state or hierarchy based on a harmonious set of interests.

The case of industrialized East Asian countries illustrates that the Confucian values of respect for authority, social stability based on familism, and a preference for consensus rather independent thought have had a great impact on their industrial modernization process.

Authoritarian Corporatist States

Chalmers Johnson (1982: 196-7) argued that the Japanese political system of the 1950s and 1960s bore some resemblance to the “corporatism” that emerged in interwar continental Europe.

Robert Wade (1990: 228-55) also argued that the decision-making process had been supported by the corporatist and authoritarian political arrangements in Taiwan.

Korea also developed a distinctive form of the authoritarian corporatist political system during the period of Japanese colonial rule and subsequent military regimes.

The authoritarian corporatist states have often preferred to command associational intermediaries, at other times they have dealt directly with private business leaders, calling them into government offices and unilaterally forcing them to modify their demands (Schmitter, 1979: 60).

Fordism as Production System

Michel Aglietta (1998) and Michel Boyer (2000, 2003) attempted to explain the dynamics of long-term cycles of economic stability and change.

The Regulation theory had a huge international recognition and emerged as major theoretical efforts to interpret the patterns of post-war economic growth until the middle 1970s and of its crisis thereafter.

It is best known for its term “Fordism”, which describes a mass-produced production regime (i.e., modes of accumulation and regulation) that became dominant in the early 20th century in the advanced economies.

Flexible Specialization

The theory of flexible specialization was first proposed by Piore and Sabel (1984) who attempted to describe and explain a new form of manufacturing organization which emerged with the decline of Fordism.

It focused primarily on the area of production in manufacturing sector.

Flexible specialization refers to the production of a wide and changing variety of products in small volumes (including single items) for specialized markets, using general-purpose machinery and skilled and adaptable labor. it can be viewed as a modern form of craft production.

Varieties of Capitalism

Varieties of Capitalism: The Institutional Foundations of Comparative Advantage is a book edited by Peter A. Hall and David Soskice.

Hall and Soskice classified two distinct types of capitalist economies: liberal market economies (LME) and coordinated market economies (CME).

Varieties of capitalism are a framework for understanding the institutional similarities and differences among the developed economies.

Institutional Complementarities

The VoC approach compares national political economies by reference to the way in which firms resolve the coordinationproblems they face in various spheres such as mechanism, equilibrium, inter-firm relations, mode of production, legal system, employment, wage bargain, training and education, innovation.

At the core of the VoC perspective is the importance of “system coordination”, and the idea of “institutional complementarities”.

Liberal Market Economies (CME)

Liberal Market Economies is described in terms of competition, formal contracting, and the operation of supply and demand in line with price signals.

VoC argues that institutional complementarities influence different firm behaviors and investment patterns.

Flexible labor markets fit well with easy access to stock market capital and the profit imperative, making firms the “radical innovators”.

LMEs are assumed to be more competitive in industrial sectors ranging from bio-technology, semi-conductors, software, and advertising to finance.

The LME is found in most Anglo-American countries such as U.S. and U.K.

Coordinated Market Economies (CME)

In the Coordinated Market Economies, long-term employment strategies, rule-bound behaviors and durable ties among firms and banks made firms to be “incremental innovators” in manufacturing sectors such as machine tools and equipment of all kinds.

The logic of the CME revolves around “specific or co-specific assets”, whose value depends on the active co-operation of others (Hall and Soskice 2001).

The Coordinated Market Economy (CME) is found in many European countries (in particular in Denmark, Finland, Norway, Sweden, Austria, Belgium, Netherlands, Germany, Switzerland) and Japan.

Among them, the German economy is often described as Rhine capitalism or Social Market Economy.

Evaluation

The theoretical contribution of the VoC approach is to explain the “diversity” that goes beyond the conventional wisdom such as modernization theory, convergence theory and the globalization thesis.

The notion of “comparative institutional advantage” in both LMEs and CMEs highlights the characteristics of capitalist systems.

However, its binary classification was criticized as a limited framework to explain the varieties of capitalism (Howell 2003). France is described as CME or “limited pluralism” or “weak corporatism”, and Japan as CME or “corporatism without labour”(Pemple and Tsunekawa 1979).

The VoC approach, as an firm-centered approach, failed to provide satisfactory explanations to understand the role of other economic actors, particularly labor and the state.

Dynamics

The VoC perspective rejected the conventional view of globalization that emphasized the homogenizing pressures as forces of institutional change and the persistence of diversity attributed to political resistance.

While the institutional complementarity of the VoC perspective is good at explaining change in terms of continued diversity (or path defence), it offers little in the sense of explaining fundamental change (or path breaking or shaping change).

Beyond Capitalism?

In 1848 Karl Marx in The Communist Manifesto described the dynamic force of capitalism as it swept through the 19th century: Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation. ‘All that is solid melts into air’. Was Karl Marx, in criticizing capitalism, actually responsible for defining it?

From Marx’s critique of capitalism in the 19th Century through to the collapse of Communism at the end of the twentieth century, have we witnessed the triumph of capitalism? Or are we only now learning the full costs and the social impact of unfettered capitalism?