Varieties of Capitalism: Liberal vs Coordinated Market Economies

In the Varieties of Capitalism, Peter Hall and David Soskice created a framework to distinguish between two types of capitalism: Liberal market economies (LMEs) and Coordinated market economies (CMEs). In LMEs, companies predominantly organize their activities through market forces and hierarchies, while CMEs place greater emphasis on non-market forms of interaction (collaboration, exchange of private information, etc.) to coordinate their relationships. Countries can be categorized into the two models (LMEs or CMEs) based on how they solve the following five coordination problems:

• Industrial relations — wage bargaining and workplace conditions 
  • In LMEs, wage bargaining usually occurs during interviews and the hiring processes, while wage negotations in CMEs are usually led by industry-level trade unions and employer associations.
• Vocational training and education — resources that firms and workers devote to developing a skilled workforce 
  • In LMEs, workers have more general and wide-ranging skills. In CMEs, workers tend to have skills tailored to their company. 
• Corporate governance — firms’ access to finance and ability to secure funds 
  • LMEs tend to rely on the publicly available information of company value, such as share price and current profitability, while firms in CMEs are focused on the long-term and focus more on ‘patient capital,’ i.e. maintaining reliability and cooperation between firms and other stakeholders. 
• Inter-corporate relations — relationships between the firm, suppliers, clients, and competitors
  • Inter-firm relations in LMEs are more competitive and arms-length, while firms in CMEs tend to be more collaborative and support the diffusion of new technologies across businesses.
• Relations with employees — social institutions shaping and governing workplace behavior and interaction
  • LMEs typically involve more hierarchical relationships between management and employees, where managers hold decision-making authority. In CMEs, managers work together with employees to make major decisions.

Based on the ways firms coordinate their endeavors can be indicative of whether a country might be an LME or CME. As a result, the two types of economies have different patterns of income and employment. In LMEs, income inequalities are generally higher because the population is more engaged in employment. In CMEs, people work fewer hours and have more equal pay because of its emphasis on labor unions. By equalizing wages, CMEs instill employee loyalty and make it difficult for firms to poach each others’ workers.