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Peter A. Hall and David Soskice, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage

Abstract and Keywords

The Varieties of Capitalism (VoC) approach became widely known through the collective volume by Peter Hall and David Soskice that investigates the cross-national institutional variations of advanced economies. They distinguish two ideal types of capitalism: the Liberal Market Economy (LME) model following neoclassical economics and the Coordinated Market Economy (CME) with a consensus-enhancing institutional infrastructure between firms as well as employers and unions. This chapter introduces the approach, summarizes the main contributions along key institutional spheres, and discusses applications of its comparative typology. Furthermore, it criticizes the initially rather static and apolitical approach which led to subsequent revisions and extensions. The recent financial and economic crisis has deepened the controversy over the fate of coordinated market economies subject to institutional changes resulting from intensified global economic pressures and transnational diffusion of liberalization.

Keywords: Varieties of Capitalism, political economy, comparative public policy, institutional change, institutional complementarity, coordination, liberalism, employers, trade unions

Introduction

Capitalism won the Cold War in 1989/90, but is there only one form of capitalism? Rarely has one edited volume received as much academic attention as has the manifesto of a new political economy approach named “Varieties of Capitalism” (Hall and Soskice 2001b), which investigates the cross-national institutional variations of market economies. This influential multi-authored edited volume combines contributions by younger and more senior scholars and has led to innumerable subsequent studies published as conference papers, journal articles, and books. In their Introduction (2001a), political scientist Peter Hall and economist David Soskice lay out an extensive analytical framework, the need to think capitalism not only in big letters but also in the plural. Challenging neoliberal currents, this approach proclaimed that there were two ideal types of capitalism: the Liberal Market Economy (LME) model of neoclassical economics, and the Coordinated Market Economy (CME) with a different institutional “infrastructure.”

This heterodox economic view was already advanced by earlier political economists like Andrew Shonfield (1965), who studied Europe’s post-war “mixed” economies, the cross-cultural comparison of British and Japanese firms by Ronald Dore (Dore (p. 606) 1973), and the popular pamphlet by French economist Michel Albert of the struggle between Anglo-Saxon and “Rhenish” capitalism (Albert 1993). By disciples and critics, the Varieties of Capitalism approach has been labeled “VoC,” which ironically resembles the abbreviation of the Dutch East Indian Company (Vereenigde Oostindische Compagnie), the first globally operating shareholder company. The VoC’s claim of persistent capitalist variety challenged dominant expectations about global convergence since the neoliberal turn of the 1980s and the unbridled success of market capitalism after the fall of Communism in the 1990s. For public policy scholars, the VoC approach provides a fresh institutionalist and firm-centered view on the interdependence of economic and other policy spheres. Most importantly, it claims that a specific set of interrelated institutions determine economic performance due to comparative institutional advantages in today’s global economy.

VoC’s broad-brush typology and comparative institutionalism may be compared to earlier waves of comparative public policy analyses, such as Esping-Andersen’s best-selling monograph on Three Worlds of Welfare Capitalism (1990) and Philippe C. Schmitter’s manifesto article “Still the Century of Corporatism?” (1974). VoC shares with these efforts a comparative research program that presaged a paradigm shift in conceptually understanding and empirically studying the durable cross-national diversity of advanced economies. Earlier or parallel undertakings in studying the diversity and convergence of “social systems of production” include several edited volumes (Crouch and Streeck 1997; Hollingsworth and Boyer 1997; Kitschelt et al. 1999) to which the VoC editors and their collaborators have contributed over the years.

Building upon these comparative economic studies at the interface of political science, economic sociology, and institutional economics, Hall and Soskice provided a theoretical framework to rally earlier classificatory attempts. As editors they were able to inspire a cadre of young American and European scholars to systematically analyze the varieties of market economies and their consequences. David Soskice, a British economist then working at Social Science Centre Berlin (WZB) in Germany, had contributed to the neo-corporatist analyses of wage determination in Europe (Flanagan et al. 1983; Soskice 1990) and had already developed binary comparisons of liberal and coordinated market economies (Soskice 1991, 1999). Peter A. Hall, a Canadian political scientist at Harvard University, was well known for his earlier comparative work comparing French and British public administration policies and economic policy (Hall 1986), the ideational turn from Keynesianism to neoliberalism (Hall 1989), and different stages of policy change seen from an institutionalist perspective (Hall 1993; Hall and Taylor 1996).

The VoC´s epicenter is still the extensive Introduction (68 pages) that summarizes the approach not only of a remarkable edited volume combining analytical elaborations, comparative analyses, and case studies of particular sectors and countries. Google Scholar counts above 6,000 citations in text documents on the internet (mid-January 2014), while ISI-citation index reports 2,156 citations for the Introduction by Hall and Soskice to the Varieties of Capitalism volume (of which 22 percent during the first five years) in peer-reviewed (largely English) journal articles. This chapter will (p. 607) introduce the VoC approach as developed in the edited book, summarize the main contributions to that volume along the different institutional spheres, and then discuss applications of its typology before finally criticizing its initially rather static and apolitical approach. This review will go beyond the volume by referring to recent extensions and critical revisions in the comparative political economy literature.

The VoC Approach

Contributing to its success as major reference point, object of critical debates and inspiration for subsequent research, the “Introduction” of the VoC volume set the main stage. Peter Hall and David Soskice as editors lay out the main theoretical framework and major claims of the VoC approach. Given their workplaces it may not be a surprise that many examples of key institutional differences are based on Germany and the United States. The VoC approach provides several claims as part of its theoretical framework: an institutionalist perspective on national market economies, a micro-foundational view of firms’ coordination strategies, and a focus on the conditions and consequences of the institutional infrastructure for an economy and society.

Following Douglass C. North (1990), the editors adopt an institutionalist perspective of market economies, defining institutions as “set of rules, formal or informal, that actors generally follow, whether for normative, cognitive or material reasons” (Hall and Soskice 2001a: 9). Similar to Mark Granovetter’s theory of institutional embeddedness (1985), they conceive economic activities as relational between actors who are embedded in social relations. Following the neo-institutionalist conception of a social organization of the economy (Zukin and DiMaggio 1990), the VoC approach considers markets, whether liberal or coordinated, as embedded in social institutions that shape economic preferences, expectations, and actions. Thus, the type of market economy in a country results from the particular institutions present in the different spheres of the economy, and from their impact on actors’ strategies and relations. The most important claim of the VoC approach is that there are institutional complementarities between particular social arrangements across socioeconomic spheres, and that under global competition these can provide specific comparative advantages for economic performance and thus potentially also for social outcomes (Estévez-Abe et al. 2001; Hall and Gingerich 2009).

A major analytical-methodological claim of VoC is its firm-centered approach, bringing the corporation as an economic actor back into the analysis of political economy (Hall and Soskice 2001a: 6). While corporatist analyses concentrated on organized labor and capital, in particular on trade unions and employers, VoC focuses first of all on firms as strategic actors. The preferences of firms are not given, but derive from the institutional infrastructure in shaping these relations. Building upon earlier political economic concepts (Hollingsworth and Boyer 1997; Streeck and Schmitter 1985), the importance of different governance modes to coordination problems are at the (p. 608) core of the explanatory framework: in a competitive environment, firms rely on market mechanisms, but firms can also overcome coordination problem by means of hierarchy (solving transaction problems within a company), trust-based networks with other firms (e.g. between a producer and its suppliers), or associative modes in interest groupings (e.g. employer organizations).

VoC advances a relational view of the firm by mapping the interaction of the firm with its owners, suppliers, customers, employees, unions, public agencies, and other “stakeholders” in society. Whether economic actors are capable of coordination is crucial, its capacity and style determining how interests can be aligned. Coordination in pure markets allows only exchange in which prices are set by supply and demand between buyers and providers of goods or services. In addition to the market, hierarchy could solve coordination problems through power relations such as in economies with state intervention. To have more long-time, positive-sum coordination, trust in other actors is needed, but this depends on social relations between actors.

A fundamental thesis is that of institutional complementarity that “arises when there are interdependencies across domains” (Aoki 2001: 87). In their Introduction, Hall and Soskice define institutional complementarity in a rather functionalist way as institutions in which “the presence (or efficiency) of one increases the returns (or efficiency) of the other” (Hall and Soskice 2001a: 17). This implies coexistence (“presence”) of complementary institutions, thus empirical studies investigate cross-national correlations between institutions. Second, it assumes an efficiency-enhancing relation between spheres, i.e. institutions support each other. Third, this conceptualization leaves many questions open: why did these institutions arise, how do they support each other, and why does this lead to positive returns? The concept of institutional complementarities resonates with Max Weber’s concept of elective affinities, but it remains an open question whether similarity or opposition attracts. Many VoC scholars assume that complementarities can only be between similar institutions, while others have a wider understanding: see the debate in Socio-Economic Review following Höpner’s paper (2005a, 2005b) in Crouch et al. (2005). In empirical studies, the cross-national correlation of similar measures across different institutional spheres is seen as a test of such institutional coherence (Hall and Gingerich 2009; Kenworthy 2006).

Further, VoC scholars claim that institutional complementarities, both of LME and CME, provide specific comparative advantages in global markets. LME can compete thanks to profit-seeking capital markets with radical innovations or price-competitive mass production due to flexible employment relations. In contrast, CME firms specialize in more incremental technological progress with long-term patient capital and high-quality production, thanks to a skilled labor force and stable employment relations. VoC’s Introduction provides some comparative evidence for sectoral specialization and particular innovation patterns of firms. A subsequent quantitative study indicates that institutional coherence between spheres produces positive economic outcomes (Hall and Gingerich 2009), but other studies have found only mixed support for positive economic outcomes of institutional coherence (Kenworthy 2006; Schneider and Paunescu 2012).

(p. 609) The Institutional Spheres

As an institutionalist approach, VoC provides an important framework to study institutional interdependencies within modern political economies, claiming that such diverse spheres as corporate financing, vocational training systems, social policy, and innovation strategies display institutional affinities, if not functional complementarities, as well as potential comparative advantages. The volume’s contributions provide comparative cross-national studies on different areas with potential coordination problems. However, the coverage of countries varies, providing a patchwork of case studies examining varying sets of countries selected as exemplars for the liberal model (the UK or USA being the prime examples) and/or coordinated model (Germany being the most frequent choice).

In their Introduction, Hall and Soskice (2001a: 6–7) distinguish different spheres with particular coordination problems of firms: industrial relations, vocational education and training, corporate governance, interfirm relations, and firm–employee relations. Because no exact rationale is given for the selection of these five spheres, it remains unclear whether the list is comprehensive. Indeed, some chapters and later work add further spheres, from the financial system and the welfare state to innovation policy. Thus, the financial system, the relationship between different financial institutions (banks, financial markets) and companies, has been distinguished from the corporate governance of these companies (Jackson and Deeg 2006). Beyond the spheres listed in the Introduction, two VoC contributions also include social and labor policies that go beyond intra-firm employee relations (Estévez-Abe et al. 2001; Mares 2001). Further studies have noted an overlap between VoC and Esping-Andersen’s welfare regimes (Ebbinghaus 2006; Ebbinghaus and Manow 2001; Schröder 2013), though there may be advantages to keeping political economy and welfare state typologies separate. Innovation could well be a further area, extending the focus on the vocational training sphere.

According to the VoC framework, corporate governance is an important causal factor for explaining differences in political economies. Corporate governance entails the institutions shaping the ownership structure and rules for controlling companies. VoC distinguishes two ideal-typical governance modes: shareholder versus stakeholder models, for instance, the British equity-driven capitalism and the German co-determination model (Vitols 2001). In liberal market economies (LMEs), shareholder value-orientation seeks to align the interests of management to the profit-interests of its owners (following principal-agent theory). Coordinated market economies (CMEs), however, are characterized by a stakeholder governance model in which companies must take into account the interests of its owners, management, employees, suppliers, and clients as well as the wider public. An example for an institutional complementarity between corporate governance and labor relations is the German co-determination law that stipulates not only information rights at workplace level, but also the equal representation of labor on bipartite supervisory boards of stock-listed companies.

(p. 610) Related to corporate governance, the financial system provides different incentive structures for firms with respect to their short-term or long-term goals. In the case of LMEs, larger firms mainly derive their financing through equities and financial markets are driven by institutional investors seeking high returns that reinforce the orientation towards short-term profits. As a consequence of more limited state pensions, private pension funds reinforce the importance of institutional investors in these countries (Jackson and Vitols 2001). On the other hand, credit provided by banks with time-honored ties to companies (Hausbanken) and self-financed growth strategies matter more in CMEs, allowing a more long-term investment strategy. In Germany, for example, larger firms pledge occupational pensions for their long-term employees that are financed by book reserves, thus reinvesting profits into the company (Ebbinghaus 2006).

Applying a relational view to interfirm cooperation, VoC argues that the efficiency with which firms use labor and capital is dependent on how well they coordinate with others, for instance in research and development. In LMEs, strong market competition and antitrust laws have limited business coordination, whereas a long tradition of business coordination through larger trusts, interfirm relations, and business associations exists in CMEs. Cross-ownership and interlocking directorates have also been a major hallmark of the German and Japanese business models, while long-term producer–supplier relationships extend cooperation beyond conglomerates. Financial institutions have played a broker role in such networks, though this led to a dramatic disintegration of the “Deutschland AG” in the “disentanglement” of the interlocking German corporations in the early 2000s, assisted by tax advantages provided by the red-green government (Beyer and Höpner 2003).

Building upon neo-corporatist studies, the VoC approach highlights important differences between two modes of labor relations that shape employer–employee intermediation of interests. In LME countries, conflictual labor relations with short-term zero-sum bargaining over wages and working conditions prevail. While management prefers to keep unions in check and maximize profits for shareholders, trade unions are more fragmented and their organizing capacity depends on market power through the strike weapon. As consequence of asymmetric power relations, larger wage inequality and less wage growth prevail. In contrast, labor relations in CMEs are planned long-term and consensual, particularly when positive-sum bargains are possible. As corporatist theory stipulates, this requires both sides to be well organized and encompassing—and the state to be supportive of their self-governing role. As a consequence of corporatist labor relations, wages should be more compressed, less numerical but with internal flexibility. Such differences between pluralist versus corporatist labor relations reflect the long-term historical trajectories and political compromises despite globalization pressures (Thelen 2001). In contrast to corporatist studies, Nordic corporatism has not been the main focus of VoC, but rather coordinated systems such as Germany, with its leading sectoral or regional negotiations that set wage norms (Soskice 1990).

Among VoC’s particular contributions (with parallel efforts by economic and educational sociologists) is the focus on the importance of skill formation, building on (p. 611) studies of the diversity of skill regimes (Crouch et al. 1999) and with more attention recently in comparative studies that also reflect the influence of supranational governance in Europe (Busemeyer and Trampusch 2012). Iversen and Stephens (2008) distinguish three “worlds of human capital formation” by combining welfare regime and VoC perspectives: a social-democratic redistribution with public education investment, a Christian-democratic social insurance and vocational training policy, and a liberal one relying on modest public education and significant private investment in general skills. Germany, relying on its dual vocational training model that combines school-based theoretical education with firm-based practical training, is seen as a particularly “successful skill machine” (Culpepper and Finegold 1999) based on a historical trajectory of craft-related apprenticeships (Thelen 2004) in which small and medium-sized firms contribute to occupation-based skill formation from which larger companies also profit. Advantages include smoother transitions from school to work and lower youth unemployment. However, not all CMEs have adopted German-style training systems and the Japanese on-the-job training focuses on firm-related skills only (Thelen 2004).

For a long-term growth perspective, innovation strategies matter. VoC claims a major difference between LMEs that foster radical innovation and CMEs that are more inclined towards incremental innovation (Hall and Soskice 2001a). In LMEs, entrepreneurial experimentation, private–public partnerships in research, and risky investments through venture capital of start-ups provide more opportunities for radical innovation. In contrast, innovation in CMEs remains more incremental, long-term, and improvement-oriented, due to long-established public research infrastructure, in-house research and development, and patient capital. When discussing comparative advantages, Hall and Soskice (2001a: 38–44) provide graphs of patent specialization, indicating the cross-national differences across sectors: the US specializes in radical innovation (such as in biotechnology), Germany in more incremental innovation (such as in the machine tool industry). However, there have been considerable debates on whether national or even regional innovation systems can be adequately captured by this binary (Lundvall 2010; Ortiz 2013). There may also be complementary insights between VoC’s concern for firms’ skill formation and the focus on knowledge production in the national innovation system perspective (Herrmann and Peine 2011).

Production models differ not only in skill formation, but also in terms of employee relations: in LMEs, flexible hiring and firing provides much less stable employment relations than in CME firms in which long tenure is common. Thus, internal labor markets providing advancement within firms (or conglomerates) play an important role in both Germany and Japan. Employment tenure and seniority wages, however, also lead to problems at career end. For example, until recently German employers relied on early retirement financed by public social policies to rejuvenate their workforce, while Japanese employers provided secondary jobs for their older-career workers in other firms within their network (Ebbinghaus 2006). The production models have unintended consequences for the gender biases in wage gaps and employment segregation (p. 612) given the specific skills biases for male breadwinners in CMEs in comparison to the more flexible labor market in LMEs (Estévez-Abe 2006).

Finally, analysis of social protection within the VoC approach as well as the employer perspective in social policy studies have gained in importance. Three contributions in the VoC volume explicitly addressed the production–protection nexus. In contrast to Esping-Andersen’s welfare regime analysis, VoC focuses on the firm’s preferences for particular solutions to social policy problems. One study explains differences in employers’ positions on social policy reforms using game-theoretical models (Mares 2001), while a British–German comparative case study explores employer interests in labor market policy (Wood 2001). A highly influential contribution is the comparative analysis of the welfare–employment nexus (Estévez-Abe et al. 2001) based on an asset theory of social policy preferences (Iversen and Soskice 2001). The main argument here is that employers in CMEs have an interest in fostering long-term investment in occupational or firm-specific skills by employees through regulated employment protection, generous unemployment insurance, and collective wage formation. Individuals are only willing to invest in non-transferable skills if they can trust that they will be sheltered against income losses. Empirical evidence shows some correlation between LMEs and rather flexible labor markets, low unemployment protection, and lower collective wage growth. However, the relationship is more complicated among CMEs, such as in firm-specific training for tenured employees in Japan, industry-specific skills in smaller Danish firms, or occupation-based dual vocational training in Germany (Estévez-Abe et al. 2001).

The Typology Business

The most widely referred to aspect of the VoC approach is its binary typology of capitalist systems: the distinction between LMEs and CMEs based on their coordination capacity. This typology has been widely used as a reference point for classifying capitalist systems even beyond the OECD countries initially covered. After the collapse of Communist regimes, this typology of intra-capitalist variety seemed to address the need to contrast different conceptions of market economies. VoC provided a micro-theoretical base and macro-empirical mapping for the existence of two institutional equilibria that were locked in and had their comparative advantages (Hall and Soskice 2001a). However, the claim of a stable binary typology also gave rise to many empirical studies and conceptual attempts to partially revise or completely refute this scheme (for a review see Jackson and Deeg 2006). The original VoC volume did not provide any empirical test and the Introduction showed only illustrative bivariate evidence and ad hoc references, largely covering Germany/Japan versus Britain/USA. Thus, VoC has been criticized for being “limited by its methodological nationalism, a tendency towards static analysis and latent institutional functionalism, and by an inability to adequately balance national specificity and path-dependency on the one hand with (p. 613) common underlying tendencies in capitalist restructuring on the other” (Peck and Theodore 2007: 731).

A widely cited comparative analysis by Hall and Gingerich (2009) tested the VoC “congruence” across institutional spheres for a set of 20 OECD countries. Particularly indicative is one graph that shows the correlations between the six spheres: labor relations, corporate governance, firm strategy, interfirm relations, training systems, social protection, and production market regulation. This cross-national comparison has been interpreted as a test of institutional complementarities, though any correlation would merely indicate institutional coherence across the differentially classified countries. Interestingly, the empirical test included a third type situated between the poles of LME and CME, namely a hybrid Mediterranean Market Economy (MME) including France and some Southern European countries that have less fortunate economic performance.

Later empirical replications found more mixed results and much less support for the thesis that coherence within LME or CME institutional infrastructures is associated with positive economic output, in particular with employment growth (Kenworthy 2006). A major comparative study based on a wide range of indicators that suggested five clusters of capitalism across OECD countries was presented by French economist Bruno Amable (2003): an Anglophone market-based, a Nordic social-democratic, a continental social market, a Mediterranean mixed, and an Asian model. Such a differentiated scheme reflects not only varieties of production systems, but also its “elective affinities” with different labor relations and welfare regimes (see also Ebbinghaus 2006; Schröder 2013). A recent comparative time-series study (Schneider and Paunescu 2012) finds mixed evidence for VoC among 26 old and new OECD countries, in particular finding considerable liberalization among some of the prominent CME showcases, such as Nordic countries and the Netherlands. Similarly, an econometric study of OECD countries derived four clusters that matter less for economic growth than for distributional outcomes, though these clusters became unstable after the fall of the Berlin wall (Pryor 2005).

VoC’s binary categorization (as well as its empirical test of three real types) has been criticized on conceptual, methodological, and empirical grounds. Conceptually, the ideal-type model is more strongly grounded in the liberal than in its coordinated counterpart, which was largely based on an eclectic summary of features from real cases such as Germany and Japan—a criticism advanced by Crouch (2005) and others. Indeed, various authors have emphasized different aspects of coordination and there seems to be a wide variety of institutional arrangements that are subsumed as “non-liberal”. Thus, the choice of a primary example will shift the analytical focus to institutional combinations more specific to this region, while comparative efforts to extend the typologies beyond these will indicate more complex patterns. Already in VoC’s initial empirical typology (Hall and Gingerich 2009), the pragmatist ad hoc use of a third type (MME) may reflect the importance of state intervention in France, Southern Europe, and Latin America that resonates with criticism from other scholars about state-led capitalism that has evolved over recent years (Guillén 2001; Schmidt 1996). (p. 614) The role of the state in promoting economic development and a more evolutionary concept of business development has been noted in South Korea and other Asian emerging economies (Carney et al. 2009). Whether finer distinctions need to be introduced to classify real variations and to what degree hybridization undermines the CME ideal type remains much debated in comparative political economy.

The VoC approach and parallel efforts by others has led to a cottage industry of comparative or historical case studies, indicating more complex variations and contingent paths than VoC suggests. Streeck and colleagues explored the historical commonalities and subtle differences of two “non-liberal” capitalisms, Germany and Japan, and their future prospects in a global economy (Streeck and Yamamura 2001; Yamamura and Streeck 2001). Although Germany and Japan had overcome their authoritarian past by a post-war economic miracle, they developed strong export-oriented economies with coordinated governance. Today, they need to adapt these non-liberal institutions, given global competition and political trends of liberalization. There was a more delayed reaction in Scandinavia as the former academic interest in the social-democratic welfare states and Nordic corporatist centralization eroded, while the studies on Nordic economies indicated rather hybrid models of export-oriented small economies (Campbell et al. 2006; Campbell and Pedersen 2007; Mjøset 2011).

More recent comparative studies aim beyond the usual VoC showcases and emphasize global changes, thus asking “where are national capitalisms now?” (Perraton and Clift 2004). Case studies on the long-term institutional change of capitalism across Europe show the rather contingent outcome of socio-political compromises (Jackson and Deeg 2012). With the transition to market economies and European Union membership since 2005 or later, the Central and Eastern European countries have gained attention, though these studies sought to develop more adapted concepts for the changing and hybrid institutional mixes (Bohle and Greskovits 2009, 2012; Myant and Drahokoupil 2010; Nölke and Vliegenthart 2009). Further extensions on other Asian economies (Carney et al. 2009) and on the Global South, in particular Latin America (Schneider 2009) have pointed to the importance of different national trajectories, state developmental policies, and the role of foreign direct investment. The VoC conceptual scheme has thus been a starting point to develop more differentiated maps of institutional variation, showing the importance of historical contingencies, global economic location, and variant political conditions for capitalist development.

Institutional Change and Politics

The widespread reception of VoC and its influence on debates in political economy, political science, and economic sociology as well as other social sciences (education, geography, developmental studies) has also led to conceptual clarification and substantial empirical revisions. As a contemporary classic in public policy, several of these challenges to the original VoC volume are of particular relevance. First, there are (p. 615) conceptual critiques from a historical institutionalist perspective about the VoC conceptualization of institutional change, which may assume too much path dependence and lock-in. Second, there is a debate in political science on whether and how political forces (partisan effects, class conflict, and state traditions) have shaped the evolution of VoC and political coalitions and power relations explain the institutional changes in the interrelated institutional spheres. Third, the recent financial and economic crisis has deepened the controversy over the fate of coordinated market economies subject to institutional changes resulting from intensified global economic pressures and transnational diffusion of liberalization.

The largest scope for debate and the most fundamental challenge has focused on VoC’s arguably rather ahistorical, apolitical, and static-functionalist view of institutions (Blyth 2003; Howell 2003). VoC assumes a rather path-dependent and static equilibrium perspective of institutional complementarities (Crouch et al. 2005). At the time of publication in 2001, VoC scholars wanted to stress the stability of institutional diversity despite the popular and at that time omnipresent expectation of cross-national convergence due to deindustrialization, liberalization, and globalization (Kitschelt et al. 1999). Despite such pressures, the authors pointed out the lock-in effects of institutional complementarities and comparative advantages of given institutional infrastructures for continuously export-oriented and highly productive economies such as Germany and Japan. After publication of the path-breaking VoC volume, its editors themselves have addressed many criticisms (Hall and Soskice 2003) and in particular Hall has further discussed the need to study institutional change (Hall 2007; Hall and Thelen 2009).

Although the VoC approach considered itself to adopt a political economy perspective, the political constitution of market economies has been less at the center of scholarly attention. The editors noted that one “of the objects of the volume was to highlight the importance of organized capital, as well as organized labor, to the political economy” (Hall and Soskice 2003: 249). In contrast to power resource theory (Korpi 2006) applied to welfare regimes, most prominently by Esping-Andersen (1990), VoC did not systematically consider the strength and unity of organized labor and the electoral and governmental power of left political parties as paramount factors, but focused on the interests of employers shaped by institutional constraints (see also Culpepper 2010). Only the chapters on labor by Thelen (2001), labor policy by Wood (2001) and on social policy by Mares (2001) dealt in depth with political interests, while the Introduction remained relatively silent on the political forces that shaped the known varieties of capitalism. In recent years, scholars have developed more explicit considerations of VoC politics (Hancké et al. 2007), for instance, when explaining education and social policies for different skill formation regimes (Iversen and Stephens 2008).

From a historical institutionalist perspective, the VoC approach has been criticized for its static typology (Howell 2003) with its strong path-dependent, functional equilibrium assumption, and strong lock-in through institutional complementarities. Given VoC’s assumption that institutional change would either be externally (p. 616) induced or follow shifts in firms’ interests along VoC’s asset theory of preferences (Iversen and Soskice 2001), politics would not matter much. Importantly, Kathleen Thelen and Wolfgang Streeck (Streeck and Thelen 2005) provided an alternative view that stressed how institutions were the result of historical contingency and that gradual institutional change occurs even if politicians do not act (Streeck and Thelen 2005). Indeed, Hall (in collaboration with Thelen) has developed a more evolutionary perspective on institutional change, stressing that contestation over distributive results could lead to “defection, reinterpretation and reform” (Hall and Thelen 2009).

Many observers have pointed to multiple institutional changes of advanced capitalist economies propelled by globalization and liberalization. All market economies are seen to be subject to exogenously induced changes through global competition, financialization, and technological change. For instance, responding to external pressures set by globalization and Europeanization, German finance has changed substantially since the 1990s, but remodeled its stakeholder corporate governance structure to adapt to the demands of financial markets (Deeg 2005; Lütz 2005). The financial and economic crisis following the Lehman Brothers bankruptcy in 2008 implicated all economies and nation states face mounting public debt as a consequence of their bank bailouts, while their success in regulating banks and financial markets to prevent such crises in the future have thus far been limited.

Liberalization has been a politically advanced project of deregulation, privatization, and flexibilization, though there are differences across countries as to its scope and form (Hall and Thelen 2009). Nevertheless, critics of VoC have pointed to the effects of gradual institutional change in Germany, for instance, the crumbling corporatist pillars (Streeck and Hassel 2003), the erosion of collective bargaining (Hassel 2002) and the disintegration of corporate governance (Beyer and Höpner 2003) as a move toward a liberal model (Streeck 2009). In terms of flexiblization, policy-makers in conservative welfare states have opted for political reasons toward dualization, maintaining the rights of tenured employees while flexibilizing the employment conditions for labor-market outsiders (Emmenegger et al. 2012).

As Kathleen Thelen has pointed out, VoC, by focusing on coordination problems between economic actors, focused mainly on one of two dimensions in modern economies, while others have emphasized problems of social solidarity (Thelen 2012). For the politics of redistribution, the balance of power between capital and labor as well as between conservative and progressive political parties matters. Iversen and Soskice go even further in claiming that center-left governments redistribute more and that they are more likely to rule under proportional representation than under majoritarian systems (Iversen and Soskice 2006). In their view, capitalist diversity derives from different historical roots of electoral systems—or hard-wired politics. Hence, the politics of VoC may thus be related to other public policies, such as social protection and labor relations, in intricate ways (Ebbinghaus and Manow 2001). While it has been crucial to strengthen our understanding of firms’ preferences in economic and social policies, we should also seek to analyze the political and social forces reshaping the economic (p. 617) and social institutions upon which capitalism is built. The conditions for the survival of CMEs seem to depend not only on institutional changes needed to adapt to changing economic conditions, but also on the political consensus needed to legitimate the institutional changes necessary to maintain a distinct non-liberal path in CMEs. Whether such a model can survive global economic challenges and endogenous social and political transformations will have to be seen.

Acknowledgments

The author is grateful for comments by Sebastian Koos, Martin Lodge, Justin J. W. Powell, and J. Timo Weishaupt.

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