Capitalist Diversity and Diversity within Capitalism

Geoffrey Wood, Christel Lane

• Publisher: Routledge
• Year: 2011
• eBook ISBN: 9781136626531
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The economic crisis that began in 2008 has underscored the impact not only of embedded and assumed ways of managing the economy, but also that present circumstances are the product of a long period of experimentation and bounded diversity; it is understanding the nature of both that forms a central concern of this collection. This book redefines, develops and extends the emerging literature on internal diversity within varieties of capitalism, and the extent to which such internal systemic diversity goes beyond mere diffuseness to represent the coexistence of different logics of action within both liberal market and more cooperative varieties of capitalism.

The collection is based on new, fresh material, from leading scholars in the field. The contributors come from a variety of perspectives within the broad socio-economic literature on institutions, and yet they all focus on the limitations of current institutional fixes, and the protracted and durable nature of the current crisis, which, the editors suggest, reflect profound changes in input costs and the utilization of technology. What characterizes this common ground is an inherent pragmatism, combined with an increasing sophistication in the usage of analytical concepts; illustrating the progression since the early work on comparative capitalism in the late 1990s and early 2000s.

This book should be an invaluable resource for students and researchers of economic theory and philosophy as well as political economics and socio-economics.

1 Institutions, change, and diversity

Geoffrey T. Wood and Christel Lane

Over the past 30 years, there has been growing interest in the effects of institutions on what firms do, and indeed, on their consequences both in temporarily securing growth and in ensuring bounded yet persistent diversity. Yet, there is much debate as to what makes for contextual diversity and change, and the bounded yet, in some manners, open ended nature in which such processes unfold. More specifically, there has been growing interest in the nature of internal diversity within national institutional settings, and its relationship to systemic change (Lane and Wood 2009). This opening chapter seeks to both consolidate and develop this literature, through exploring the dynamics, foundations and likely trajectories of internal systemic diversity and change.

Whilst the existing literature on institutions remains a diverse one, within the ‘relationship’ or socio-economic literature, there has been a convergence of thinking on a number of key issues. First, there is a growing common recognition that specific institutional forms can only stabilize growth on a spatially and temporarily confined basis, to be followed by a sustained period of experimentation (Streeck 2009; Hall and Thelen 2009). During the latter, dominant interests will use the relative strength their position affords to reorder things in such a manner so as to secure and strengthen their relative advantage; should their solutions imposed not prove functional even to insiders, then further contestation and renegotiation is possible. This may appear somewhat akin to the Polonyian (1944) notion of a double movement; however, the contemporary literature is a lot more pessimistic as to whether progressive forces will prevail once unrestrained property owner interests have exhausted themselves.

Whilst the concept of a temporarily fleeting ‘growth regime’ is most advanced in regulationist thinking, broadly similar assumptions have infused historical institutionalism, and, indeed the more recent varieties of capitalism, and business systems literature. Second, there is a growing recognition of the relevance and importance of internal diversity, and the relationship between specific institutional sets and spatially confined economic performance on a sub-national level. Such diversity provides opportunities for institutional redesign; at the same time, institutional layering constrains the opportunities for social action at subordinate levels. Third, and related to this, is the distinction between institutional frameworks that make growth and/or greater social well-being possible, and residual institutional ecosystems that provide benefits in terms of familiarity and the limited functionality of specific sets of interests.

Three further issues emerge. The first is the sustainability of competing orders within an overall institutional framework. A national institutional framework may be undermined by contradictory trends at local and regional levels. Second, the relative definition of what constitutes a workable sub-national order is debatable. Whilst unrestrained markets prefer more fungible assets, long term sectoral competitiveness may be contingent on less fungible assets that may be difficult to accurately value. However, during periods of crisis - and, more specifically, those associated with energy transitions - the relative position of fungible capital is stronger.

Third, we need a better notion of the foundations of change. Social change is a product of institutional arrangements decaying as key players become no longer convinced as to their worth, and as ‘tinkering’ or experimentation at a range of levels becomes no longer reconcilable. At the same time, such processes reflect external forces, which can include changes in technology and resource cost inputs, the latter of which are likely to favour the interests of owners of more fungible assets over less fungible ones. Owners of more fungible assets have less of an interest in complex institutional mediations and trade-offs; in turn, this may weaken national level institutions, and force a greater reliance on more localized accommodations. The latter may prove unsustainable, or, over time, assume a greater macro-systemic prominence.

A caveat is in order here. This distinction between owners of fungible assets versus infungible ones is not as clear-cut as the well-established distinction between finance and productive capital suggests. For example, private equity investors hoping for shorter term returns may, owing to changes in external circumstances (most notably, the availability of debt), be reluctantly forced into a longer term role, if disposal of financially reengineered assets becomes more difficult. In other words, certain representatives of financial capital may be reluctantly forced into the position of owning assets that are no longer readily fungible; if they cannot exit, they are forced to run a firm in a manner that is no longer excessively short-termist. Again, private equity investors may forge alliances with existing management, in supporting MBOs, in order to gain a better understanding of, and more effectively utilize the existing cognitive capabilities of the firm again, rather than private equity funded MBIs, who inject fresh management teams that may be primarily concerned with liquidating assets (Wood and Wright 2010; Aoki 2010). Hence, not all segments of finance capital have an interest solely in highly fungible assets. In other words, by accident or design, certain types of financial capital are more longer termist in behaviour. Conversely, if subject to specific reward-incentives, managers in firms that ostensibly deploy productive capital, may still behave irresponsibly, and exhibit behaviour more akin to those managing highly fungible assets, actively remodeling the firm so that its capabilities are more readily liquidatable (Boyer 2009).

Understanding institutions: actors, complementarity, and change

The revival of interest in institutions has assumed many different forms. In less critical strands of the literature, the rather broad, and, indeed, somewhat lazy term ‘neo-institutionalism’ is used, as if all writing about institutions can be simply lumped in a single camp. Attempts to classify institutionalist thinking include Thelen (1999), Peters (2005), Boyer (2006), and Goergen et al. (2009). Thelen (1999) argues that a major divide is between rational choice, sociological and historical accounts. Echoing this, Peters (2005) assumes an essentially discipline-based perspective, and suggests that conceptualizations of institutions partially correspond to the disciplinary boundaries between economics, sociology and politics. Boyer (2006) draws a distinction between rational hierarchical, transaction costs, evolutionary theories, and institutional complementarity approaches. Goergen et al. (2009) focus primarily on drawing out the distinction between rational hierarchical and relationship orientated approaches, the former a development of the rational choice economic model, and the latter most associated with the broad literature on comparative capitalism.

There is little doubt that there are many ways of categorizing contemporary perspectives on institutions. And, as with any such process, these categories are by no means distinct and a considerable overlap exists between them. Moreover, specific approaches to institutions assume greater or lesser influence at particular times, in line with changes in the global political economy and associated systems of ideas. A further complicating factor is that specific approaches have been particularly influential in certain areas, and less so in others. For example, Powell and DiMaggio (1991) view norms as emerging from the active choices and interactions of individuals and groups. Institutions are social constructions that are made and sustained by individual interactions. This approach, rooted in the interpretive sociological tradition, has been extremely influential in comparative organizational sociology, and, indeed, strands of the management literature (Brewster et al. 2008). However, its influence in both the mainstream economics and finance literature, and the heterodox socio-economic literature has been rather more limited. In this volume, we primarily seek to contribute to debates in these latter areas, and accord particular attention to those perspectives of particularly salience to them, whilst not discounting the relevance or value of alternative approaches in other areas of enquiry.

More specifically, this means that this volume primarily brings together accounts that view institutions as influencing and conditioning the outcomes of strategic interactions (Hall and Soskice 2001: 4). However, embedded in these accounts are implicit or explicit critiques of those that see institutions as providers of incentives and disincentives to rational actors (Goergen et al. 2009). The distinction between these two perspectives is an important one. What this suggests is that institutions may be seen either more in ‘motion’ terms, as conditioners and filters of actions that have specific causes and consequences at particular points of time, or as providers of objective rules that have general consequences, regardless of time and setting. What does this mean? If we take the former perspective, we assume that specific institutional effects are confined to particular times and places; the effects of a particular set of institutional configurations will vary between settings, and it cannot be assumed that specific sets of embedded rules and norms will always have the same consequences.

The reasons behind the rise of these two different accounts were very different. The rational-hierarchical tradition was initially most associated with the works of Douglass North (1990). What North sought to explain was that, why, if all individuals were rational profit maximizing individuals, did it appear that on a sustained basis many, apparently ‘wrong’ choices could be made. What North (1990) suggested was that those institutions that were of primary importance were those that secured private property rights; if the latter were strong, individuals were more likely to make optimal choices, making for superior economic outcomes. What defines this approach is first the assumption that specific institutional features are both objective and trans-temporal; irrespective of setting, strong property rights will have similar consequences. Second, and related to this, this approach lends itself to benchmarking; one simply has to be able to measure property rights to be able to predict both behavioural patterns and macro-economic outcomes.

The hegemony of neo-liberalism both within the disciplines of economics and finance, and the wider policy community, in the 1990s and the early to late 2000s led to the proliferation of literature that sought to both measure and benchmark this. Most notably, La Porta and colleagues (1999) argue that it was legal tradition that was the ultimate determinant of relative property rights, and that this would, in turn, mould national economic performance. Civil law legal traditions were associated with social compromises and weaker property rights, and common law ones with strong property rights.

Notwithstanding its influence, there are many problems with this approach. First, it is a relatively selective account, that works best when taking into account the economic basket cases of (civil law) Francophone Africa, and concentrating on the evidence of the late 1980s and 1990s; it works rather less well when comparing and predicting national economic performance during the long boom from 1950 to 1973 (see Deakin et al. 2007; Deakin and Sarkar 2008). Second, and more directly salient to the present collection, such approaches assume that there is one dominant set of institutional arrangements that has similar consequences right across a specific national setting; in other words, there is no meaningful internal diversity within nations. However, as Deakin et al. (2007) note, countries do not always have nationally homogenous legal systems. For example, within the United Kingdom, Scottish law incorporates civil law elements, in contrast to the purer form of common law encountered in England (ibid.).

An alternative account, Pagano and Volpin (2005) explore the effects of electoral system. Proportional electoral systems force compromise and coalition-building; such compromises, in turn, necessitate dilutions of property rights. In contrast, in first past the post systems, election outcomes depend on ideologically uncommitted swing voters, who are unsympathetic to pro-working class agendas leading to fewer coalitions, and the political predominance of propertied interests (ibid.). And, it might be added, propertied interests have the greater financial wherewithal to fund lavish electoral campaigns targeting such swing voters. Once more, however, this account pays limited attention to internal diversity. If the United Kingdom example is again considered, it is worth noting that both the Welsh and Scottish assemblies are elected via more proportional systems. The latter constitute ‘states’ within a ‘state’, but there are many countries where electoral rules vary according to the level of government. For example, in South Africa, local government elections are less proportional than national government ones. Variations in electoral systems can impact on the composition of local elites, and their relationship with the centre.

Rational-hierarchical accounts do all set aside the fact that key institutional features are heavily embedded, and always yield the same outcome. For example, combining both political science accounts that explore the way in which politics may shape institutional outcomes (cf. Peters 2005: 21) and a Northian emphasis on property rights, Roe (2003a) suggests that electoral outcomes determine firm level behaviour and economic growth. Right wing parties are more likely to emphasize property rights, whilst left wing parties will countenance their dilution in pursuit of other agendas (ibid.). A limitation of this argument is that it assumes that political ideologies are essentially objective phenomena and readily scaleable. In the real world, what is ostensibly left or right varies greatly; examples would include both New Labour in the United Kingdom, and the general differences between the right wing in Canada and the United States. Again, this distinction varies not only between, but also within nations. This would include the differences between the English, Scottish and Welsh Labour Parties, or for that matter, between the right wing in Quebec and the rest of Canada. And, as we have seen, this can translate into profoundly different policies, and, indeed, developmental trajectories.

Whilst commonly depicting the state as more often a problem than a solution, it is significant that rational-hierarchical accounts remain very nation state centred. Moreover, they tend to see outcomes as a zero-sum game between players over a finite pool of resources available at a given point in time. As such, much of this literature is dismissive of the possibility of complementarity, that specific rules and practices may yield a better set of outcomes than an analysis of their constituent parts would suggest (Goergen et al. 2009). From his somewhat more synthetic starting point, Roe (2003b) does acknowledge that complementarity is possible; however, he sees this more as a purer process of building on systemic strengths, rather than a compensatory process, that seeks to circumvent systemic weaknesses, bringing together seemingly contradictory elements (see Crouch 2005). As such, these approaches represent infertile ground for those seeking to develop institutional analysis to understand the bounded nature of internal diversity within national settings.

As Aoki (2010) notes, it is very difficult to accurately cost the cognitive assets and capabilities of firms and industries, and the types of investments and social ties that make their accumulation possible. This partially explains why rational choice-orientated perspectives on institutions focus on common objectively measurable nationally relevant relationships such as property rights, and a limited range of macro-systemic outcomes. In other words, such perspectives discount the relevance of social ties which are most concentrated at local firm, associational and community levels, ties which, however, represent a core concern of the socio-economic or ‘relationship’ literature.

However, the formers’ influence within the policy arena is not to be discounted. The World Bank's Doing Business reports are heavily based on La Porta et al. (1999); countries that score poorly on owner rights and strongly on worker rights according to the scales devised by La Porta et al. are condemned as poor environments to do business (Cooney 2010). These concerns are echoed in IMF policy prescriptions: hence, whilst there are clear theoretical limitations to such approaches, they have impacted on institution design in practice.

Alternative, more socio-economic relationship-orientated accounts were initially inspired by the export success of German and Japanese manufacturing in the 1970s and 1980s, and the malaise of industry in liberal market economies (Aoki 2010). Most notable accounts would include the pioneering work of Lincoln (1990), and later developments and extensions of this line of thinking by Dore (2000). In the rather shrill heyday of neo-liberalism that followed, this literature on comparative capitalism sought to explain why convergence would be unlikely (Hall and Soskice 2001: 54), and why different national models each incorporated elements that were particularly conducive to particular types of economic activity (ibid.; Whitley 1999). In the 1990s and early 2000s, some of the most influential work was simply dichotomous, drawing a distinction between liberal markets and more coordinated alternatives (Hall and Soskice 2001; Dore 2000). However, it is worth noting that a 1999 volume produced by one of the contributors to this book already identified some half dozen different varieties of capitalism in developed economies, each the product of different institutional traditions, the nature and actions of social collectives, and associated belief systems. Whilst there are important differences in the works of Hall and Soskice (2001) and Whitley (1999) surrounding the relative role of the firm, and the specific nature of corporate governance, both echo an important feature of Durkheim's work; that contractual relationships are contingent on embedded formal and informal rules, and that what constitutes the respective underpinning moral consciousness is likely to vary from setting to setting, with different forms of social order being capable of persisting over sustained periods of time (Durk-heim 1964; Giddens 1971: 78-80). We would add the caveat that much of the current literature on Varieties of Capitalism is very synthetic, a...

Table of contents

• Front Cover
• Capitalist Diversity and Diversity with in Capitalism
• Routledge frontiers of political economy
• Title Page
• Copyright
• Contents
• Notes on contributors
• Preface
• 1 Institutions, change, and diversity
• 2 A new epoch but still diversity within and between capitalisms: China in comparative perspective
• 3 Institutional change and organizational diversity in Japan
• 4 Internationalization and sectoral diversity: the roles of organizational capabilities and dominant institutions in structuring firms’ responses to semiglobalization
• 5 Financialisation and models of capitalism: a comparison of the UK and Germany
• 6 The shareholder value concept of the corporation and co- determination in Germany: unresolved contradictions or reconciliation of institutional logics?
• 7 Regions, varieties of capitalism and the legacies of neoliberalism
• 8 Rethinking the diversity and variability of capitalism: on variegated capitalism in the world market
• Index