In Defense of Varieties of Capitalism (VOC)
In the current campaign for the presidency, we hear quite often that the choice before us is between capitalism and socialism. Or worse, a vote for socialism may actually be a vote for communism. For some, any type of governmental involvement, whether through regulation, public programs, or even taxes is viewed as socialism. Capitalism, after all, requires unfettered markets along the lines of 19th Century laissez-faire. Or put another way, if you believe that markets can coexist with a welfare state, then you must be a socialist.
The reality, however, is a bit more complicated, especially if we can understand capitalism in terms of what has been referred to as Varieties of Capitalism (VOC). If we learned anything from the Great Depression, it is that even a free market requires a certain degree of public expenditure. Regulation is required so that in the constant race to the bottom to lower prices and costs to remain competitive, the market won’t implode under its own weight, as Marx suggested it would.
The capitalist, in other words, would seek regulation and even supports to those in need because of market failure in order to avoid the violent Communist revolution that Marx said was only inevitable. Indeed, during the late 19th and early 20th centuries when government began regulating industries, especially by breaking up trusts, it was because industries specifically requested the regulation to be protected.
A trust would form through the natural progressions of the marketplace. Through competition, large companies would undersell smaller ones, and then acquire them through mergers. The results would be monopolies in restraint of free trade. By busting the trusts, government would protect smaller firms and the competitive nature of the capitalist marketplace. But let us remember that if left to its own devices, the marketplace can self destruct. Or if there was no social safety net in place, then there would be social strife and the potential for a mass uprising.
To talk about VOC is to recognize that capitalism in its pure form, i.e. the neoclassical model of purely competitive markets simply does not exist, nor did it ever. Even a laissez faire market requires some minimal government to protect contract, maintain a basic infrastructure, and preserve competition through antitrust laws. At the end of his alleged laissez faire treatise, An Inquiry into the Wealth of Nations, Adam Smith lists the proper functions of government. Moreover, Smith acknowledges that if firms will collude to drive down wages, it can be expected that workers would organize to drive them up, because they would have no other choice.
A VOC approach attempts to get beyond some of the monolithic labels that have not been very helpful. In VOC, political economy is comprised of multiple actors, each of whom seeks to advance his or her interests in a rational way, but also in strategic interaction with others. To some extent, VOC attempts to bridge the chasm between what are referred to as liberal market economies (LMEs) and coordinated market economies (CMEs).
In liberal market economies, firms coordinate their activities primarily via healthy and competitive market arrangements. The market is less centralized, government’s involvement is less, and the welfare state, to the extent there is one, is smaller. The U.S. economy is often associated with LME. In coordinated market economies, however, firms depend more heavily on non-market relationships to coordinate their pursuits with other actors and to construct their core competencies. That is, there may be more centralization, more planning, and coordination with labor.
Although government is more involved in a CME, it is still a capitalist economy because there is still a concept of private property, which might be totally nonexistent in a socialist economy. In a VOC approach, what type of coordination would be necessary in order for capitalism not to implode under its own weight?
First, there needs to be greater coordination of bargaining over wages and working conditions between organizations representing workers and those representing employers. In our LME, we have no such coordination, which is but one reason for stagnant wages and rising inequality. Second, especially with the march of technology, there needs to be more vocational training and education because of the challenge that employers currently face in securing a workforce with suitable skills.
Lastly, there perhaps needs to be a new model of corporate governance. Firms currently in LME turn for access to finance and investors seek assurances of a return on their investment. In LMEs, firms run by money-managers gain financing from a venture capitalist who require maximum return on share value, and often at the expense of workers. Maybe the issue should be maximizing stakeholder value, which would include workers and their communities.
Varieties of capitalism clearly calls into question many of the assumptions we make about globalization. A VOC approach might open up a new perspective on social policy, as it highlights the importance of social policies to firms and the role that business groups play in the development of welfare states. In the typical LME, social policy is often thought to interfere with labor markets by raising labor costs. But strong labor markets institutions, especially in a more global economy, is essential to save capitalism from itself.
Yes, this election does present voters with a real choice, but not a false one between capitalism and socialism. Rather, it is between which set of policies will support institutions that enable capitalist markets to flourish while also allowing wages to rise and workers to live in dignity. Instead of talking about who is to blame for the COVID pandemic and who would have been better prepared, perhaps the discussion should revolve around how to best redress the inequities that have surfaced as a result.
The question is can we continue to out-source our manufacturing to places where labor costs are low because that is what we would expect in a LME? Or do the consequences make it clear that we need more coordination, and that coordination needs to include a mechanism for centralized wage setting? Perhaps tax policy discussions shouldn’t revolve around how much more to cut capital gains taxes. On the contrary, only those who agree to either reinvest in plants and equipment in the U.S. or bring back operations to the U.S., thereby creating jobs, should be entitled to capital gains taxes.
Capitalism is here to stay. Ultimately, the issue is what type of capitalism we are going to have. As with everything else, our candidates from both parties simply dance around the issues, without getting at the heart of the problem. Until we do, we will continue to see wages stagnate, inequality increase, and anxiety grow over the nation’s economic health. At the end of the day, it is the state of the nation’s health that may determine how inclusive we are as a society.