Economics 361 Study Guide

Economics 361 Study Guide:

Two main types of capitalism can be identified in Europe. Describe the main characteristics of these two capitalist models (relations between firms, education, financial resources, employee participation). Explain also to which “really existing” European countries these models refer and how these models relate to the European integration project. An economy that represents one of the capitalist types last year voted in a referendum to leave the EU. What might be the implications of this for its capitalist system?

        Hall and Soskice set out two distinct types of market economies that implement capitalism: liberal market economies (LME) and coordinated market economies (CME).  Liberal Market Economies include countries such as UK, USA, Ireland while the coordinated market economy includes Germany, Japan Austria.  The two main models that I will be focusing on are: Anglo-Saxon vs. German Capitalism

The labour market is one of the most important aspects on which capitalist regimes differ

Labour markets for Anglo-Saxon:

• Relatively short-term horizons of companies, but at the same time high risk taking
• The labor market is flexible and lightly regulated; a situation that may contribute to firms maintaining their cost efficiently and competitiveness in the short term.
• However in recent years, the UK adopted new legislation that favoured employment security.  In 1998 the Labour Government introduced the New Deal with the objective of moving people from welfare to work through better education and training.  Along with a national minimum wage.
• Even so, the labour market was kept more flexible in order to promote the high employment rates and labour market efficiency which were seen to give a competitive edge British economy.

Germany

• Long-term financing of companies

• Have maintained a combination of external competition, based on the production of high quality goods in several niche industries and a normalized high wage.
• The German apprenticeship system allows for the provision of high quality training at a relatively low cost and for mobility between firms.
• The coordination between the two provides opportunities for those graduating from low status vocational schools to acquire skilled qualifications and to enter well paid jobs
• Employees are protected by various collective agreements won through bargaining by strong labour unions and the control asserted by employees through the codetermination system.

Corporate funding and financial markets:

Anglo-Saxon:

• Corporate funding is dominated by the stock market.
• The shareholders’ general meeting is the supreme organ that appoints CEOS and monitors performance.
• The main concerns for a firm are the maintenance of high prices for its shares, the delivery of profits to its shareholders, the maintenance of performance in the short term, and the protection of a firm’s identity and reputation in the long term.
• A profit sacrifice would not be possible since the main objective of a firm is to keep high prices for its shares even if this leads to the reduction of the number of employees or to a change of a suppliers in a quest for minimal production costs.

Germany:

• Corporate funding relies heavily on debt finance.
• Many firms are funded more though long-term finance from main banks than through the stock market.
• Even though most firms deal with a large number of banks, only one of them is recognized as the main bank
• This bank provides funds for investment and will keep track of firms’ performance and problems and has a role in influencing any corporate decisions.
• Maintaining market share, value added per employee, sales growth, and employment security
• Firms are likely to sacrifice short term profitability and to cut excess costs, in the case of a recession, in order to ensure that market share, relations with suppliers and clients and employment security are preserved.

Inter-firm relations and business sophistication:

Anglo-Saxon:

• Inter-firm relations are dictated by short-term profitability: firms are generally on the lookout for a better deal and they are likely to switch suppliers in order to minimize their production costs, preferably without damaging their relations with their old suppliers in case they have to switch back.

Germany:

• Favor relational trading and the construction of long-lasting commitments with their partners, clients, suppliers and banks
• This long-term commitment may even operate to the detriment of short-term profitability
• Favor long-term commitments which generate mutual obligations
• The supplier has to fulfill his or her obligations by ensuring on-time delivery, by cutting excess costs in the case of a recession, and by speeding the process of developing new products
• In return, the firm will ensure that the supplier will not be abandoned because the firm found a slightly better deal elsewhere
• Inter-firm relations are characterized by the existence of cooperation between competitors which usually take form of cross share-holding.
• The cooperation between firms limits the possibility of hostile takeovers and favors agreed mergers, it allows firms to benefit from technology transfers and to cooperate in nursing the weakest firms through recession.

Codetermination:

Anglo-Saxon:

• Has no role in the management of their company
• A firm is the place where one earns a living, and where one might or might not have an agreeable social life

Germany:

• Employees are able to participate in the management of their company
• Employees are organized in works councils formed by elected representatives who act as intermediaries between employees and senior management.
• These representatives are given seats on a board of directors or supervisory board.

Trade Unions and wage bargaining:

Anglo-Saxon:

• Labor market flexibility has always been the hallmark of the successive governments
• In the UK, after the return of Labour to power in 1997, unions were precluded from having a privileged position in deliberating over policy.
• Considered to be interest groups that were supposed to cooperate with management in improving the situation of workers and in safeguarding the competitiveness of British economy

Germany

• Trade unions have generally retained a strong economic and societal role
• This allowed unions to act as publicly enabled associations and to have an effective role in deliberating over policy and in bargaining between organized groups
• The importance of institutionalized unions and the role of centralized and coordinated collective bargaining are reflected in the ability of Germany and other CMES to compete in high-quality product markets while maintaining high-wage employment
• In Germany, unions use their powers in the firm, and through sectorial social partner bargaining to maintain the skilled status of jobs, high levels of apprentice training and high pay and these in turn support firm strategies to aim for high-value added production and quality product markets

Economic culture and history:

Anglo-Saxon:

• Economic freedom is held close to the heart
• Society valued entrepreneurial, freedom, flexibility, individualism, and limited taxation and welfare
• Strongly held belief that competition is the key to economic success rather than inter-firm cooperation
• Short term profitability was the major instigator for radical innovation which allowed these economies to reap first-mover profits.  Finally, this short-term profitability led to competition price more than on quality and to the predominance of the stock market and the shareholding culture
• General education provided by state.  Vocational training systems unstable, as large firms prefer to develop their own systems rather than contribute to sectoral/occupational systems

Germany:

• Quality competition is prevalent over price competition
• The society values long-term commitments and goals rather than short-term profitability
• The compromise between labour and capital is the corner stone for high-wage employment and for competiveness in high-quality industries
• Is the persistence of early selection in the education system which has led to high levels of inequalities in educational achievements
• Firms pool resources into highly developed vocational training systems, usually at sectoral level

The definition of the economy is the production, distribution and exchange of goods and services in a society.  Capitalism can be seen as a specific way of engaging in activities in which entrepreneurs hire workers to produce goods and services to be marketed with the intention of making a profit. In economic liberalism, it is assumed that through the free exchange of goods and services between buyers and sellers on the market ultimately the overall benefit of society or the common good will be served.  It is therefore supposed that the market as an institution or sphere of society is best left to itself and should not be interfered with from the outside (the state): the invisible hand of the market.  Economic liberalism in the context of European integration by the single market.   There is elimination of barriers to trade and a free movement of goods, services people and capital.  There are policies to expand and protect the market such as completion policy, economic and monetary integration and the single market.  The social market economy in the context of European integration is about the ideas on social solidarity and market correction.  It calls for a social Europe where policies are to induce convergence, redistribute income such social policy, regional policies, education policies.