Institutions of capitalisms: American, European, and Japanese systems compared
Journal of Economic Issues; Lincoln; Jun 1997; John Groenewegen;
Issue: / 2
Start Page: / 333-347
ISSN: / 00213624
Subject Terms: / Comparative studies
Capitalism
Economic theory
Capitalism
Comparative analysis
Economic models
Classification Codes: / 9130: Experimental/theoretical treatment
1130: Economic theory
9190: US
9175: Western Europe
9179: Asia & the Pacific
Geographic Names: / US
Europe
Japan
United States
US
Europe
Japan
Abstract:
American management techniques and organizational structures are spreading all over the world, The message seems clear: The evidence is that Anglo-American capitalism is conquering the world at the expense of civilized capitalism. Fortunately for those who are afraid that bad capitalism will drive out good capitalism, there is counter evidence. Four types of capitalist systems are described: the Anglo-American, two varieties of the continental European system, and finally the Japanese type of capitalism. For each ideal type, the organization of transactions, the nature of the firm and markets, the role of government, and the value system, in which the type of capitalism is embedded, are described.
Copyright Association for Evolutionary Economics Fiscal Office Jun 1997
Capitalist systems are seriously debated nowadays both in academia and in the political arena. The discussion focuses on the characteristics of capitalism, on the strength and weaknesses of different systems (shareholders vs. stakeholder economies), and on the dynamics of systems (convergence or divergence). The debate has been stimulated by the collapse of Eastern European socialism ("we are all capitalists now") and by the globalization of financial and other markets. The latter is supposed to increase worldwide competition and to allow the survival of the fittest economic system.
Under the headline "Showing Europe's Firms the Way," The Economist [July 13, 1996] published this:
In 1967 a French politician, Jean-Jacques Servan Schreiber (JJSS) published a bestseller called "Le Defi Americain" (The American Challenge). He argued that the influence of American mutinationals was growing relentlessly and that Europe's civilized capitalism was about to be destroyed. Now 30 years later a new challenge is threatening Europe; . . . an aggressive new-world capitalism is spreading all over the new world. . . . As before many Europeans fear that this spells the end of Europe's business civilization. They foresee an American maelstrom of atomistic competition, job insecurity and social division.
Indeed things are a changing.1 A few years ago, Daimler-Benz listed its shares in New York and adopted American accounting standards, sold loss-making subsidiairies, and linked manager compensation to the profits of the corporation. Last month the new president of the Dutch multinational Philips, Cor Boonstra, announced that from now on shareholder interest is paramount for Philips. American management techniques and organizational structures are spreading all over the world. Likewise in the Netherlands, the breakdown of measures to protect firms against hostile takeovers is a hot political issue, and in Japan people say a market for corporate control is emerging. The message seems clear: The evidence is that Anglo-American capitalism is conquering the world at the expense of "civilized capitalism" whether you like it or not. Fortunately for those who are afraid that "bad capitalism is driving out good capitalism," there is counter evidence.
For example, in Human Capitalism, Robert Ozaki [1991] explains that the latest stage in capitalist development, "Human Capitalism," has been reached in Japan. It is a stage in which the interest of human resources is central. It holds that in advanced economies the primary value is human and not pecuniary. Japan has reached this stage, and others like the United States are about to follow. Similar stories can be heard about the superiority of the European "Rhineland model," which will survive the competitive battle with the other systems on the world market [Albert 1991].
These interpretations rest on the idea that systems all over the world will converge toward one model: the Anglo-American, the European, or the Japanese. I question that view and will here present an approach in which there is room for a variety of capitalist systems, each with its own strengths and weaknesses, each with its own path of development. Of course, we do observe the import of elements of the Anglo-American model into Europe and Japan, and vice versa. The question is whether this interpenetration leads to one universal type of capitalism. Underlying the assumption of convergence is the assumption of a metasystemic mechanism that selects the most efficient system.3
The Nature of Capitalism
In conventional economics, capitalism is defined in terms of private property rights and markets. Given self-interested individuals and an assumed self-equilibrating mechanism, the end result of market allocation is optimal allocation. This is characterized by a specific theory of the firm, a specific idea about the functioning of markets, and an argument for minimal government intervention. In short: firms are either production functions or a nexus of contracts. Markets are exchange mechanisms, where contracts coordinate behavior between anonymous agents and prices supply sufficient information. The government intervenes in cases of market failures and imperfections. The focus of government is on safeguarding the competitive process. The end result of those "free" markets cannot be other than optimal.
In institutional economics, the nature of capitalism is fundamentally different.
The conception of capitalism as a historical formation with distinctive political and cultural as well as economic properties derives from the work of those relatively few economists interested in capitalism as a "stage" of social evolution [Heilbroner 1988, 350].
Among those, Karl Marx, Clarence Ayres, John R. Commons, and Thorstein Veblen are prominent. In this institutional conception, history and institutions matter and because of that capitalism is not one universal result of an equilibrating process; specific histories and cultures lead to many varieties of capitalism.
A Typology of Capitalism
In the following pages, I will distinguish four types of capitalist systems: the Anglo-American, two varieties of the continental European system, and finally the Japanese type of capitalism. For each ideal type, the organization of transactions, the nature of the firm and markets, the role of government, and the value system, in which the type of capitalism is embedded, will be described.4
Anglo-American Model
The Anglo-American model (based on studies of the United States, United Kingdom, New Zealand, and Canada) is described as the system in which the interest of the shareholder is central (monism). Management of firms is controlled by several disciplining mechanisms that act in the interest of the shareholder. This view is based on an individualistic value system, in which the interest of the suppliers of risk capital ought to be central and management of the firm should be disciplined accordingly.
Theoretically, the control of shareholders over resources is grounded in the theory of the firm, which has its roots in the works of Frank Knight [1957] and Oliver Williamson [1991]. Knight places the entrepreneur, the risk-taking person, in a central position. He guarantees employees a fixed wage in exchange for control over the firm. In this view, suppliers of risk capital in an efficient system ought to have control over the assets.5
In the world of Frank Knight, the firm is "individualized," and for Oliver Williamson, the firm is a hierarchical organization with specific authority relations. Their views differ from the agency perspective, a theory upon which the AngloAmerican model is also based. In this interpretation, the firm is a nexus of contracts [see Alchian and Demsetz 1972]. The bundle of rights to be the residual claimant, to observe input behavior, to be the central party to all contracts with input suppliers, to alter the membership of the team, and to sell these rights serve to define ownership (or the employer) of the classical (capitalist, free-enterprise) firm.
In the Anglo-American concept of the firm, management has to be controlled in the interest of shareholders. In the model, the chief executive officer (CEO) is the highest ranked manager, who is disciplined by a variety of institutions. First, a board of directors is chosen by the shareholders with the task to monitor and evaluate management.6 Management is further disciplined by the shareholders by means of exit (selling of shares) and especially by hostile takeovers (the market for corporate control). Furthermore, management is encouraged to serve the shareholders' interest (to increase profits) by stock ownership and stock options, whereas relatively high salaries are offered on the market for managerial labor to those with a good shareholder reputation.
In the Anglo-American model, government makes it difficult for firms to protect themselves against hostile takeovers, the information management has to provide to shareholders is strictly regulated, and cross-stockholdings are strongly discouraged. Concentration of power and close relationships between industry and finance are discouraged. Transactions involving labor, intermediate goods, capital, and technology are all governed by classical contracts. Formal contracts, in which duties and obligations are described in detail, conditions are well specified, and sanctions are clearly described govern transactions of all kind.
The Continental European System
I focus here on the social market capitalism (Germany, Sweden, Austria, Denmark, and the Netherlands) and will only very briefly describe some characteristics of state capitalism of the sort found in France. The value system is not individualistic, but focuses on cooperation and consensus building. Strong organizations of labor and employers negotiate at the national level about wages, social security, work conditions, and the like. There the framework for sectoral and microlevels is set. These negotiations are guided by a common interest in the survival of the system and in the competitiveness of the economy. Stock markets are relatively unimportant both in terms of listed firms and takeovers [Gelauff and den Broeder 1996]. Stable shareholders ("Universalbanken" in Germany) own blocks of shares. Instead of exit, it is voice that disciplines management ("Mitbestimmung").
The firm is not considered to be a nexus of contracts between anonymous principals and agents, but an organization with two stakeholders: shareholders and employees (dualism). In Germany, the stakeholders are represented by law in the supervisory board ("Aufsichtsrat"), which supervises management ("Vorstand").
Transactions in social market capitalism are governed by more relational contracts, which are long-term and more open-ended than classical contracts. Reciprocity, mutual interest, and consensus building are important elements. Government regulation supports market organization and long-term specific investments: "Universalbanken" have no problem with the "Kartelamt" (agency responsible for competition law); cross-stockholding and interlocking directorates are supposed to strengthen long-term commitments. Co-determination gives labor voice, and relational contracts open the way to long-term specific investments.
In state capitalism, labor unions and employer associations are not involved in strategic decision making. A strong state with a bureaucracy of elites controls key areas of the economy in which research, production, demand, and finance are centrally organized. In the state capitalist model, the triangle of politics, bureaucracy, and management of large firms form a closed group that controls the economy.
Relational Capitalism of Japan
Based on values of communitarianism, management of the firm is controlled by a variety of disciplining mechanisms in such a way that the interest of a plurality of stakeholders is served [Yoshimori 1995]. Shareholders, employees, but also suppliers, customers, members of the business group (keiretsu),8 and (local) government are all stakeholders.
Transactions are largely internalized inside the firm (internal labor market) and inside the keiretsu (capital, intermediary goods, technology, and information) [Imai and Itami 1984]. The contracts in the Japanese model are relational [Kester 1992].9
Crucial is managerial autonomy, which enables management to develop longterm relationships and reciprocal contracts. Control of management by stable stakeholders is based on theory that conceptualizes the firm as an evolving set of capabilities [Odagiri 1994]. Such a vision of the firm [see also Nooteboom 1996] has consequences for the type of diversification (related instead of unrelated), the type of innovation (incremental instead of radical), and for the finance of investments (group bank instead of capital market) [Imai and Itami 1984].
The mutual monitoring among stakeholders is stimulated through a common interest in the well-being of the firm as a whole. A strong rivalry among firms belonging to different groups provides a high-powered incentive to allocate efficiently also in the short-term. The ideal type of Japanese relational capitalism combines the best of two worlds: high-powered incentives from competition among rivals and long-term trust among horizontal and vertical stakeholders.
Strengths and Weaknesses of the Models
In general, the Anglo-American system performs well in providing short-term flexibility. Because of clear management objectives and the different disciplining mechanisms, the system stimulates dynamism, job rotation and entry and exit of firms. In the model, prices give clear signals that stimulate entry of firms in promising industries.
In the model, competition stimulates innovations especially radical innovation [Imai and Itami 1984]. For firms, investment in R&D is most of all a question of appropriability, diffusion via markets, and financing by private venture capital. Knowledge that is relatively easily codified will be produced and exchanged.
Competition forces management to maximize shareholder value; management is profit-oriented. Depending on the assumptions about the efficiency of markets, the model predicts a short-term efficiency. The weakness of the model is long-term efficiency for which relation-specific investments are needed. When dynamic efficiency demands specific investments of labor and suppliers of intermediate goods and capital, then a profit-oriented firm, which is first of all a nexus of classical contracts, will perform weakly.
Markets are relatively costly for coordinating transactions with high relation-specific investments, and the model predicts strong vertical integration. Many empirical studies confirm the predictions of the model. 10
European-style state-led capitalism is strong in guiding complicated technology projects in which research, production, and commercialization can be isolated from the international market (armaments, space, public transport, nuclear energy, and the like). This type of capitalism is weak in sectors that have to react flexibly to market signals. In the case of social market capitalism, it is argued that, generally speaking, the investment in specific assets and correspondingly in long-term relationships is fostered. This is especially true for labor. The corresponding weakness of the model is the relative rigidity in the short run and the lock-in path dependencies in the long run that are largely due to personal relationships.