Recession and VoC Approach Analysis

“The economic recession that began in 2008 has shown that the Varieties of Capitalism approach has paid far too little attention to the common features of all capitalist economies.” Discuss.

Introduction

The purpose of this essay is to look at the Varieties of Capitalism (VoC) approach, and whether since the recession this approach has paid little attention to the common features of all capitalist economies. I am looking to provide an overview of the VoC approach and framework, and deliberate more on the two types of capitalist models, and to what extent these differentiate in terms of the economic coordination. I will also look at the common features of capitalist economies, i.e. neo-liberal policies, and how these compare with the continuing variance in organisations, e.g. policies and outcomes. I will cover strengths and weaknesses for both liberal and coordinated market approach to employment relations during the recession. I will then investigate the correlation between the recession and VoC approach. As an example, I will take collective bargaining. Both capitalist economies have a strong bound cross-shareholding arrangements.

Hall and Soskice (2001) in their publication identified ways of organising a capitalist economy, two types of economies, which are distinguished by certain set of institutions. One of them being a liberal market economy (LME) and second one being a coordinated market economy (CME). The CME module makes up the core Eurozone e.g. Denmark, Sweden and Germany, where the LME style economy is similar to the US and also present in the UK, Canada and Australia, to name a few. Both authors formed the general idea that characteristics of these two economic models differ, focusing on the power of the three main players in the economy – the state, labour market and businesses (Kostova, T., & Ph, D). Following the VoC claims, CMEs rely heavily on non-market relationships to manage their ventures with the main actors, building on their core expertise. The relationship between organisations in CME countries are collaborative, both because of the ability of creating institutional infrastructure e.g. collective bargaining, vocational training and wages, and having high-confidence dealings among large organisations. This means that employee relations are more orientated towards long-term employment contracting, where organisations operating within the LME model are able to dismiss workers more easily. For HRM practice this means minimal levels of employment security, creating difficulties in earning trust and commitment i.e. psychological contract. HR becomes more individualised, such as pay and career development, as well as radical decline of trade unions. Within the CME model, general education is funded by the state and large firms prefer to develop their own systems rather than subsidise to industrial systems. For HRM practice this means higher levels of cooperative employee participation and less individualised pay (Edwards & Rees, 2014). Even though both economy modules are profit focused (since work is done for profit), there is a higher tendency for LME firms to overpower labour costs in order to maintain their profitability (page visited on 27^th Feb 2017). Germany is an example of a typical CME, mainly when it comes to employment relations. Germany has earned its status for training its labour force in order to thrive it into various industries, especially in engineering. This means a clear transition from schooling to employment (via apprenticeships). In divergence to Germany, UK is characterised by weak trade unions, very limited collective bargaining coverage and independent employer regulation. All these attributes are associated with highly flexible labour markets, high degree of income inequality, more specifically between men and women, and inclination to compete on the basis of ‘cheap’ labour.

Hall in 1989 confirmed that economic ideas can be influential, and he and his colleagues defined how Keynesian and monetarist philosophies stimulated political agendas and institutional changes globally (Schneider, S. 2014). In brief, Keynesianism was the economic framework which was dominating in economics and economy policy making, and rose to prominence after the Second World War. It was soon later on replaced by the Monetarist approach, encouraged by the theories and research of Friedman. Since then, we were certain that neo-liberalism and related theories, has dominated in macroeconomic policy-making. This pointed out the tendency towards less strict state regulations on the economy, and more emphasis on economic policy stability, where in contrast, Keynesian main objectives were all about high employment and the easement of deplorable penury (Thorsen, D. E., & Lie, A. 2006). As a result, it is best understood that the recession in 2008 was the consequence of 1970 crisis. Keynesian economics to this date failed to clarify inflation in the 1970s and the recession in 2008 (Storey, D. 2004). It if further known that neo-liberalism “scheme” used to deal with 1970 crisis. Harvey (2010) argued that a key distinctive of neo-liberalism was the use of state influence to protect financial interests. In conclusion of this and by way of understanding neo-liberalism post 2008 crisis, it therefore demands that attention should be paid to the relationship between labour force state, capital and the state on the one hand, and to particular portions of capital on the other (Heyes, J., Lewis, P., & Clark, I. (2012). So drawing back to the VoC approach, firms’ collaboration with financial markets permits firms to raise an investment. Unfortunately, this framework failed to identify the problems within the collaboration between firms in the capital market for predicting the recession.

Main Developments

During the 19^th century the employment contract was based on the Master and Servant Act 1823, designed to discipline employees and repress the ‘combination’ of workers in Trade Unions. Employment Law in the UK has developed rapidly over the past 40 years, due to a historically strong Trade Union movement, and since UK joined the EU in 1973 (Lewis & Sargeant 2006). Looking at the UK’s modern development, the central feature of the labour market had been a tradition of “voluntarism” where the role of state sits between social forces of capital and organised labour. UK’s collective bargaining, limited coverage has dropped since 1979 down from 75% to 27.9%.

Employment protection is quite week, which is an advantage for employers when it comes to employment terminations. I personally think the employment legislation has coordinated the rights for employers to freely recruit without having the anxiety of not being able to keep employees in long-term employment. Hence why employees in the UK don’t have any employment rights for the first 2 years of their employment. There is a bias towards compromise due to not cooperating with trade unions.

In comparison to Germany, welfare payments are not high (Huber & Stephens 2001). Saying that, Germany was in a position where their welfare payments were too high and had to cut back (Hartz 2003). Vocational training in the UK is decentralised to firms, where more attention is paid to people with high grades. Bargaining structure in the UK is highly fragmented and also decentralised.

During the recession, there were major changes in employment relations which affected workplaces, such as freeze or cut in wages and re-structuring in many organisations.

Although there has been an institutional change due to pressure from the market, VoC approach is still evident. It doesn’t seem to move towards convergence. Precisely: amendments in clauses within industry wide agreements, works councils promote wage reductions or there is an increase in working hours, and last but not least, organisations are exiting from bargaining agreements. Overall, core features of the CMEs remain intact, however they still widely differentiate from the LMEs (Behrens 2013; Streeck & Thelen 2005. On the other hand, employment relations are common across both CMEs and LMEs. Precisely: fall in trade unions, lower bargaining coverage, increased unequal pay, decrease of welfare benefits, week employment protection laws (Baccaro & Howell 2011; Heyes 2012 and Streeck 2009).

Soon before the recession, Germany and the UK all carried out programmes to bailout financial institutions. In general, members of the EU are regulated by EU state aid law and competition policy. However, due to pressure of time and the need for action, the European Commission was willing to compromise (Schneider, S. 2014).

Germany – Its main task is to set up and maintain a regulatory framework that guarantees the functioning of the market and sustains the freedom of economic actors.

The landscape of industrial relations has changed in fundamental ways since the end of the 1970s, and everywhere in the same direction involving an expansion of employer discretion. (Baccaro, L., & Howell, C. 2016)

As much as VoC makes the world of today’s economy, its theory has been critiqued xxx

Pontusson (2005, p. 164) witnessed: “the VoC literature has a great deal to say about ‘varieties’, but surprisingly little to say about ‘capitalism’… [and] theoretically privileges considerations pertaining to efficiency and coordination at the expense of considerations pertaining to conflicts of interest and the exercise of power.”

Although Japan is part of CME, is it really fair to put Japan in the same category as Germany and Sweden? Japan is a variant of the same political type economy, on the basis that their unions are weak by comparison, as well as their workforce movement has not been influenced by political actors. This means that originally Japan’s workforce has been effectively marginalised, and it still remains.

From these findings there is no “best-fit” model that would truly describe under which type of economy countries can fall under. This is because LMEs and CMEs are competing not against each other, but how they can compete in global markets (Coates, D.2005)

es, there are “tyoical” countries that more or less have the main charasterisitcsa that would categorise them as wither LME or CME. But how about Japan, which doesn’t really fall under either of them. I know my argument in this statement is not strong enough, but Japan is one of the examples.

Varieties of Capitalism approach has paid far too little attention to the common features

VoC was also blind to the sources of instability developing within capitalist economies.

The term neo-liberalism has been employed in a variety of ways and has been subject to competing interpretations (Harvey, 2005; Heyes and Nolan 2010). Our own interpretation is in line with that of Harvey (2010: 10), who regards neo-liberalism as a ‘class project that coalesced in the crisis of the 1970s’ and that ‘legitimised draconian policies designed to restore and consolidate capitalist class power’. Harvey argues that a key characteristic of neo-liberalism was the use of state power to protect financial interests. Gamble (2009: 78) similarly argues that ‘neoliberalism give priority to capital as money and therefore to the financial circuit of capital rather than to the production circuit’. Understanding neo-liberalism, and by extension the post-2007 crisis, therefore necessitates that attention be paid to the relationship between capital, labour and the state on the one hand, and to particular fractions of capital on the other.

The mechanism for finance-led accumulation has been well rehearsed through the demands that control financialisation creates for high returns on capital and the consequences of this for stable, well paid employment (Froud et al., 2006; O’Sullivan, 2000:192-3). Flexible labour markets, minimal welfare states and individualised wages are entirely consistent with the optimising logic of unfettered financial capital seeking out its most profitable activities

In 2010 it announced proposals for changes to the Labour Code that would increase employers’ freedom to employ workers on temporary contracts, extend the ‘probationary period’ during which workers could be dismissed without reason, and reduce redundancy payments for workers with less than three years of service. The government’s proposals resulted in industrial action and public protest and while reforms were eventually introduced in 2011, they were less extensive than originally envisaged.

Prime among these is the problem that VoC does not offer an analysis of capitalism as such. The main concerns of contributors to the VoC literature have been to examine the various roles that markets, hierarchies and networks play in coordinating economic activity and to analyse the comparative advantages conferred by different institutional constellations.

The VoC approach has focused implicitly on the manufacturing sector (Blyth, 2003; Bosch et al. 2007). Attention has been given to the role of institutions in supporting distinct corporate strategies, with an implicit focus on different types of productive activity. As far as financial capital is concerned, the focus has been on corporate governance and firms’ access to finance.

VoC has paid little attention to the development of finance as a distinctive fraction of capital, the ways in which representatives of finance have sought to influence government policy, and the role of finance as a ‘disciplining agent on capital accumulation’ (Albo, 2005: 69).

Financialization has tended to be because the VoC approach equates capital to the market economy, dissolving issues of exploitation, distribution and conflict into coordination mechanisms such as industrial relations institutions, training and education systems and corporate governance arrangement.

While LMEs led in the race to de-regulate and enhance the power of finance capital, the interconnectedness of national financial capital systems to an evidently global financial capitalism meant that the eventual crisis and consequent contagion were experienced by all ‘varieties’ of capitalism

Trade union density varies considerably, both between countries associated with different ‘varieties’ of capitalism and between countries associated with the same ‘variety. Nevertheless, density rates have declined in almost all countries, regardless of the variety of capitalism with which they are associated.

The seriousness of the economic crisis, its perceived roots in under-regulated market forces, and the scale of state intervention during its initial stages encouraged some journalists and other policy commentators to declare the demise of neo-liberalism

VoC approach has paid insufficient attention to the processes through which capital-labour relations are being reshaped. In particular, it has neglected the role of the state in facilitating the expansion of finance and in weakening the position of labour, and has also failed to incorporate the contrasting growth models that were pursued from the 1980s within the scope of its analysis. This is not to deny that studies conducted by researchers in the VoC tradition have produced valuable insights: a considerable amount has been learned about the role that institutions play in shaping economic activites and outcomes. However, VoC is conceptually and theoretically under-equipped to grasp the dynamics of change within and across economies.

Understanding neo-liberalism, and by extension the post-2007 crisis, therefore necessitates that attention be paid to the relationship between capital, labour and the state on the one hand, and to particular fractions of capital on the other.

Varieties of Capitalism lacks a theory of capitalism. The crisis has made clear the need to address this deficiency. In place of VoC’s focus on firms, transactions and the institutions through which they occur, there is a need to reassert the analytical primacy of the concept of capital, the various forms adopted by capital (e.g. industrial capital, interest-bearing capital) and the process of generating, realising and investing surplus value. In other words, it is important that concrete relationships between actors within particular capitalist societies be understood with reference to underlying social relations that are common to capitalist societies, the processes through which economic and social relations are reproduced and the forces that may disrupt their reproduction.

The state plays a critical role in moulding the characteristics of national accumulation pathways (cf. Coates 1999) and has given concrete form to neo-liberalism through policies directed at weakening labour and promoting finance capital.

(Heyes, J., Lewis, P., & Clark, I. (2012)

Conclusion

Surprisingly, both neoliberalism as an ideology and capitalism as an economical system have remained “strong” (Thatcher & Schmidt 2013). It looks like the neo-liberalism as an ideology plays such a leading role even at the top of its most catastrophic crisis.

It is believed that free trade will potentially set the entrepreneurial spirit which is built into the human society, and therefore will lead to separating the liberty and well-being, as well as well-organised distribution of human capital (Rothbard 1970 & Hayek 1973).

Crouch C, 2014 in his research has identified the most notable evidence of a turn to neo-liberalism across all the countries examined is found in the decline of employment protection laws. A second clear inference is that in countries where unions’ industrial strength is weak and there is a strong neoliberal ideology, governments have made little effort to sustain social partnership institutions, though they have typically avoided complete liberalization of labour markets by imposing statutory minimum wages. Third, a clear turn towards neo-liberal policies only occurred in the mid-1990s. In sum, the turn towards neo-liberalism is substantiated in all of the countries, but the timing, extent, and dimensions of that turn vary quite substantially.

Trade unions have weakened by business enterprise and free-trade in LMEs, however they remain strong in CMEs where partnerships help to uphold them, as well as having some degree of managing wages definitely assisted too (Hall & Soskice, 2001).

Capitalism has shown lots of critique in the early stages of the recession, but not all has caused a “fixing” in how economy should be better coordinated.

Kostova, T in her research found that countries do fluctuate in their responses to the recession. LMEs showed a faster recovery compared to CMEs, in the arrears to their free-trade, enabling them to adjust their economic productivity. What I really found interesting was, how various economy models have certain advantages under the state of the recession. For an example, LMEs in crisis can benefit, this is because businesses play a dominant role in the economy. If markets fail, this model favours market solutions, as such, introducing additional market elements, resulting in significant productivity. In order for firms to keep their profit levels high and maintain their competiveness, an increase in productivity is a must. A table below shows labour productivity growth as a % in 2009.

Consistently having high levels of economic freedom, low employment protection, this leads to an increase in labour mobility, more flexi compensation and employees investing in their own education and training, consequently added transferable skills (Iankova, 2001; Hall & Soskice, 2001). Research carried out by Kostova, T has put down the consequences of the recession in some numbers: “From the pre-crisis year 2007 to the year 2009, the height of the crisis for most countries, the average real GDP growth rate of the 11 major CMEs (including Germany, Austria and Northern Europe) plunged from 3.3% to – 4.3%, or a drop of 7.6 percentage points. This compares to a significantly lower reduction among the 6 major LMEs, comprising Australia, Canada, Ireland, New Zealand, UK and US, among which the average GDP growth rate decreased from 3.5% to -2.9%. Perhaps more interestingly, the CMEs are now facing a much weaker recovery prospect than the LME”.

As mentioned earlier, LMEs have been able to recover from the recession much quicker and adjust to the new markets compared to CMEs. This is primarily due to the non-existent employment protection, where pay can be easily frozen or decreased, employees laid off or some business units even outsourced. Such consequences lead to low commitment and trust between the employer and the employee. As a result, in LMEs unemployment levels rise, as shown in the table below. Data shows annual change of unemployment rate by VoC, 2006 to 2011.

I think where, the VoC approached has failed during the recession, was that theory and its analysis clearly explains why economic performance for each type of economy might be weak, but it didn’t really have ideas on how to improve it. Precisely, it would be beneficial to know how these two types can benefit of shaping new skills and innovation to flourish in a time of knowledge-based evolution.