The Varieties of Capitalism

Varieties of Capitalism

ESSAY

Theme: The most important institutional structures in “Varieties of capitalism” approach - labor market regulation, education and training, corporate governa

The Varieties of Capitalism approach

Varieties of capitalism analyses assume that firms are the central actors in the economy whose behavior aggregates into national economic performance. In order to prosper, firms must engage with others in multiple spheres of the political economy:

* to raise finance(on financial markets),

* to regulate wages and working conditions (industrial relations),

* to ensure workers have the requisite skills (education and training),

* to secure access to inputs and technology (via interfirm relations),

* to compete for customers (in product markets),

* to secure the cooperation of their workforce (firm–employee relations).

Adopting a relational view of the firm, this perspective assumes that the key to success in each of these endeavors is efficient coordination with other actors. The central problems facing firms are, therefore, coordination problems involving other actors in the economy.

The varieties of capitalism approach draws a distinction between two modes of coordination.

In one, firms coordinate with other actors primarily through competitive markets, characterized by arms-length relations and formal contracting. Here, equilibrium outcomes are dictated primarily by relative prices, market signals, and familiar marginalist considerations. In the other modality, firms coordinate with other actors through processes of strategic interaction of the kind typically modeled by game theory. Here, equilibrium outcomes depend on the institutional support available for the formation of credible commitments, including support for effective information sharing, monitoring, sanctioning, and deliberation.

This approach contends that, in the spheres central to firm endeavor, the balance between these two types of...