Seminar 5: The Politics of Economic Diversity within Europe

Political economists have always been interested in the differences in economic and political institutions that occur across countries. Some regard these differences as deviations from best practice that will dissolve  as nations ‘catch up’ to a technological or organizational leader. Others see them as durable historical choices for a specific kind of society, since institutions conditions levels of social protection and the distribution of income. In each case comparative political economy revolves around conceptual frameworks used to understand institutional variation across nations.


This is the open line to Hall & Soskice’s (2001) seminal book on ‘varieties of capitalism’ (VOfC). It’s core objective is to provide a theoretical framework for understanding the institutional similarities and differences between market economies. It’s a foundational study in the politics of comparative capitalism.

The overarching question guiding the literature on ‘the politics of comparative/advanced capitalism’ is whether we can expect the competitive pressures of globalization to lead to convergence among the advanced industrial societies of the world? Put simply; are all countries converging on a “neoliberal” model of capitalist development?

In this seminar we are going to examine those factors that condition the adjustment path a political economy takes in the face of such challenges. We will ask whether European integration is compatible with different growth models, and whether the EU gives priority to some growth models over others. The Eurozone is an excellent case study to examine this question.

To start, it is worth going back to the classical varieties of capitalism framework (VOfC), to assess it’s merits and limitations.


VOfC can be considered an attempt to move beyond three different perspectives in the study of comparative capitalism:

  1. Modernization theory (role of the state), classic case studies included France and Japan.
  2. Neo-corporatism (unions-employers), classic case studies included the UK and Germany
  3. Social systems of production (governance), classic case studies included Batten-Württemberg and Third Italy.

VOfC places the firm (or MNC corporation) at the centre of what they call an ‘actor-centred institutional’ framework’. The latter comes from the study of game theory, and rational choice institutionalism.

The corporate firm

VOfC scholars model the behaviour of the corporate firm in game-theoretic terms (strategic interaction). The rationale for this is to provide ‘micro-foundations’ to their ‘macro-economic analysis’. In effect, it is an attempt to replace neoclassical economics with new micro foundations built around the corporate firm and domestic institutions.

The basic elements of the theoretical approach can be summarized as follows:

  • It starts with a relational view of the corporate firm (MNC success depends upon overcoming coordination problems with a wide range of actors).


There are five sub-spheres of the political economy that the corporate firm must engage with, and each throws up a set of coordination problems that need to be resolved if the firms wants to become competitive in a market economy:

  • Industrial/labour relations (managing wage and productivity levels)
  • Vocational training and education (securing a workforce with suitable skills)
  • Corporate finance (secure sufficient levels of finance and investment)
  • Inter-firm relations (securing relationship with suppliers and clients through marketing and sales)
  • Employee relations (developing specialized information/culture within the firm)


From the VOfC perspective, different countries can be distinguished on the basis of how their MNC firms resolve these coordination problems. Not all firms are the same. Not all domestic institutions are the same. This leads to two ‘ideal types’ along which nations can be arrayed:

  • Liberal market economies (LMEs), of which the USA is an archetype case.
  • Coordinated market economies (CMEs), of which Germany is an archetype case.

In LMEs, firms primarily coordinate their activities via competitive market arrangements: formal contracting based on the price signal and the marginal calculations stressed by neoclassical economics. In CMEs firms depend more heavily on non-market relationships: incomplete contracting and network monitoring based on collaborative relationships and strategic interactions.

Markets (and national models of capitalism) are conceptualized as a set of qualitatively distinct complementary institutions (rules) that support the strategic capacity for:

  • The exchange of information
  • The monitoring of behavior
  • The sanctioning of defection


One additional factor is emphasized in VOfC that doe snot generally exist in game-theoretic approaches: deliberation.

Deliberation describes the capacity of conflicting actors to reach agreement on the collective and coordination problems they face. Deliberative institutions are forums for communication or problem-solving that provide actors with strategic capacities they would otherwise not enjoy.

In a political economy, where you have multiple actors and multiple iterations (and therefore multiple equillibria), formal institutions are rarely sufficient to guarantee coordination on an agreed equilibrium (for example, how to distribute the burden of fiscal adjustment, austerity).

This requires informal rules, norms and understandings on what is socially appropriate. History and a common culture matter.

Institutional complementarity 

VOfC contends that path dependent differences in the institutional framework (embedded in the five sub-systems mentioned above) of the political economy generate systemic differences in across LMEs and CMEs. They are differences in kind. Each economy operates according to its own distinct logic.

The presence of institutional complementarities reinforce these differences between LMEs and CMEs. VOfC scholars regularly cite the strong correlation between employment protection and stock market capitalisation, which is considered important for long-term and short-term skill investment.

A nation-state (political economy) that has one type of coordination in one sphere of the economy (flexible labour markets) tend to develop complementary practices in other spheres of the economy (de-regulated finance). If this is correct, institutional practices of various types should not be distributed randomly. They should cluster on the LME and CME divide.

Can we say this about a multilevel polity such as EMU?

The LME-CME difference is strongly supported by data on labour market and corporate finance across the OECD. LMEs rely more on markets for both of these, whereas CMEs tend rely on non-market forms of coordination, particularly when it comes to skill formation i.e. human capital regimes.

Old Germany 

The production regime in Germany, in the past, was usually considered the archetype CME. This gives rise to the following set of complementary institutions (see figures 1.3-1.4 in the introduction):

  • Patient capital that enable firms to retain a skilled workforce through economic downturns.
  • Executive managers have structural incentives to engage in consensus-based decision making.
  • Sectoral or industry level pattern wage-setting
  • Industry specific labour skills dependent upon vocational training
  • Inter-firm research, product development and innovation based around strong industry associations

Comparative institutional advantage

On the basis of all this VOfC gives rise to a theory of comparative institutional advantage, which explains why particular types of products are produced in certain types of political economy.

In the export sector this gives rise to a distinction between production regimes with a tendency toward radical or incremental innovation.

How then will these different political economies (and political governmental regimes) adjust to international economic integration?

Politics of adjustment 

The theory of comparative institutional advantage suggests that countries will adjust toward ‘market oriented’ or ‘coordination oriented’ public policies when confronted with a crisis. Corporate firms are not the same, and will adjust very differently, as will governments. This is broadly true when we examine how countries initially adjusted to the Eurozone crisis.

VOfC has been critiqued from five different angles:

  • It presents a too static view of political economies and cannot adequately explain institutional change (divergence within convergence)
  • It underestimated the power of international finance and the importance of monetary regimes (particularly within Europe)
  • It ignores the central role of partisan politics and class conflict in shaping distributional outcomes (power resources)
  • It is an ideal type typology that is not deductively testable (methodologically problematic)
  • It places too much emphasis on the nation-state as the unit of analysis (in a world of supranational governance).

From a VOfC production regime perspective, welfare state development emerges from the strength not the weakness of employers, particularly in CMEs.

It is assumed that business interests will want social insurance, to insure against market risk, which in turn will enable them and their employees to invest in asset-specific skills. Absent this (i.e. in LMEs), there will be no encompassing welfare state development.

Is the VOfC perspective wedded to an understanding of the political economy of manufacturing? How relevant is this today?

New wave of comparative capitalist scholarship 

There have been two dominant responses to the VOfC paradigm, and structural changes in the economy, which have revolutionised the sectoral composition of the labour market, and the politics of money/finance and global capital: an electoral turn, and a macroeconomic turn.

  • The electoral turn focuses on electoral cleavages, and how these increasingly shape economic policymaking, and subsequently the politics of capitalist diversity.
  • The macroeconomic turn focuses on the determinants of aggregate demand (exports and consumption-led), and underlying class-distributional conflicts that shape these.

Both perspectives have dropped the focus on the corporate firm and state elites as political actors in their own right.

  • Another perspective (which I am sympathetic toward) focuses on the set of mutual dependencies that exist between business and the state. The politics of capitalist diversity is an outcome of divergent growth regimes, which are shaped by the quiet elite politics of the business-state relationship.

Discuss these in relation to the Eurozone crisis. Which perspective is better places to explain the origins and response to the Euro crisis?

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