Paper Example on Capitalism in Modern World: Reflection on Adam Smith's Ideas

Introduction

The study of capitalism in the modern world is done with the consideration of Adam Smith's ideas of capitalism, which he wrote in his work "The Wealth of Nations" in 1776. Adam Smith explained that capitalism is characterized by the holding private property and accumulating additional wealth unrestrictedly (Wolloch, 2019). As such, in this system, human beings are motivated by their self-interests, which push them to seek ways of maximizing profits using the accumulated property. Nevertheless, the emergence of globalization has increasingly led to significant differences in the economic and political institutions across nations. Consequently, this has led to the emergence of a debate on whether economic policies and socio-economic institutions diverge or converge with time. Studies have been developed to explain the phenomenon, and Varieties of Capitalism approach is one of the most widely discussed concepts, and this paper will explain the approach in details, its strengths as well as its weaknesses within the context of employment relations.

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Varieties of Capitalism

The end of the Long Boom resulted in different market economies reacting differently in terms of their policy reactions, which resulted in scholars trying to identify the varieties of the market economy. It was a project that was developed as a result of rising neoliberalism, notably in the United States and the United Kingdom, as well as the collapse of Soviet communism. Individuals such as Mrs. Thatcher, the UK's prime minister at the time, claimed that there was no other way of organizing market economies apart from neo-liberalism (Jessop, 2015). However, scholars pointed out that the social organization of capitalism had different patterns, evidenced in the strong economic performance of Germany and Japan, which had different institutional arrangements than those of the US and the UK. Hall and Soskice (2001) are two authors that reject the notion that there is one best way of organizing market economies. These authors' Varieties of Capitalism is based on the perspectives of the idea of institutional complementarities as well as the significance of system coordination. This main approach focus is, therefore, on institutional subsystems that are responsible for controlling labor and capital, and ideally, in their right form, these subsystems reinforce one another. The institutional arrangements, in this case, include corporate governance, industrial relations, relation with employees, inter-firm relations, and vocational training and education (Goergen, Brewster and Wood, 2009). According to this theory, since there are external and internal coordination problems that face market economies, gaining competitive advantage requires addressing the above five spheres of coordination.

Hall and Soskice's argument is that superior economic outcomes can be produced if there is one can identify two of the five problems' solutions. The Varieties of Capitalism approach explains that different capitalist economies are path-dependent, such that they will adopt different changes which are implemented in their policies, thus resulting to two basic categories of capitalism; Coordinated Market Economies (CMEs) and Liberal Market Economies (LMEs) (Gallego-Alvarez and Quina-Custodio, 2017). The main difference among the two, according to varieties of capitalism approach is that institutions in CMEs exist to encourage market economies to cooperate. On the other hand, institutions in LMEs encourage a competitive relationship between economic actors.

In LMEs, as explained by the varieties of capitalism approach, collective bargaining does not exist. Instead, there are decentralized relations systems that are adversarial and voluntary, such as the Britain industrial relations system. In the private sector, a shop steward at the workplace is the top figure in the trade union rather than a collective national institution. Consequently, cooperation between employees and employers is encouraged in the workplace instead of creating a trade union that creates cooperation between workers and employers on a wider scale (Kirsch and Wailes, 2012). Another feature of LMEs is that there lack training schemes for specific firms or industries. Instead, training and education are highly generalized, which in turn makes skill profiles more portable. In LMEs, there are strong corporate governances since firms are directly answerable to shareholders. Consequently, firms are ruled by a central figure who is a powerful CEO appointed by the board to generate revenues for the shareholders. In this scenario, there are no expectations that the firm will fulfill social ends as the only responsibility is to the owners. Since power is fully bestowed on the CEO, there is little that is done to encourage the participation of employees in decision making. In LMEs, inter-firm relations are marked by competitiveness reflected in aspects such as fragmentation of standardization. For instance, In the United States, companies in the same industry work to their own rules on quality, which they utilize as their competitive weapons (Pistor, 2005). As a result, there is little done by companies in the same industry to come up with collective industry norms.

MLEs are more likely to address issues trough non-market coordination. As opposed to LMEs, CMEs have centralized bargaining regimes. In other cases, it is at a national level not even in the same industry, a phenomenon that is visible in Germany. For instance, IG Metall negotiates deals in the engineering industry, and apart from negotiations in this industry, it acts as a guide to other sectors (Haipeter, 2017). In terms of training and education, there is coordination among firms with long-term expectations. Hypothetically, this means that firms in CMEs who are operating in the same industry are more likely to coordinate their training to ensure that they collaboratively develop a list of skill requirements and even cooperate with the government to develop specific training programs that suit their respective industries. According to Varieties of Capitalism, this is done supposedly to create trust in training schemes and, at the same time, reduce inequality in training because education and training are collective. The norms in CMEs are furthered through the cultivation of corporate governance, with firms being more strategic when pursuing shareholder value. Because LMEs are cemented in cooperation, firms tend to portray the same by allowing dialog between firms as well as relying on workers' associations (Pistor, 2005). Consequently, this is reflected in the likelihood of firms in the same industry collaborating to develop collective industry's standardization measures. Also, employee consensus is emphasized in CMEs. In Germany, pay bargaining in the engineering industry is done higher up, but the German Works Councils have the mandate for various issues of work organization at the shop floor level.

Strengths of Varieties of Capitalism

One of the main advantages of the Varieties of Capitalism approach is that it offers a theoretical as well as a methodological inspiration to the developing economies. The approach draws a holistic view of institutions in the two varieties such that it is possible for a nation to evaluate coherent patterns of complementarity and therefore tailor their models. Nevertheless, it is paramount that the study of developing economies takes into account the achievement of developed economies, and Varieties of Capitalism provides this framework. With this approach, it becomes possible to make national and sectoral comparisons and therefore make international comparisons and generalizations among economies (Carothers, 2002). It is a prevalent phenomenon considering that the Varieties of Capitalism integrates results from various disciplines, including political science, economy, law, history, and psychology based on neoliberalism.

Another strength of the Varieties of Capitalism is that it is an approach that draws attention to social, national, and sectoral responses to crises and challenges that have been brought by globalization. Consequently, this makes it possible for one to make a comparison of public policies that are characterized internationally (Jasiecki, 2018). Additionally, the Varieties of Capitalism provides a platform through which one can turn national interests into international relations. These interests always prevail in how competitive institutions and economic models differ from one nation to the other. In this way, it becomes possible to instigate further reforms in capitalism models.

Limitations

The Varieties of Capitalism approach has become one of the central theories of political economics by trying to explain diversity that goes beyond the modernization theory. It has been done by explaining the concept of comparative advantage in CMEs and LMEs. Nevertheless, this explanation is also one of its major weaknesses. Varieties of Capitalism approach, in this case, lacks varieties even though it has tried to move from one form of capitalism, specifically neo-liberalism (Howell et al., 2003). The binary classification of LMEs and CMEs explained in the approach gives rise to a spectrum depending on the degree and nature of coordination. However, the Variety of capitalism approach only considered a few countries that fitted the two varieties. Hall and Soskice acknowledged that six countries could not fit the approach, including Spain, Italy, Portugal, Turkey, and Greece (Poon and Ng, 2017). These countries, according to Hall and Soskice, are difficult to accommodate in either CME or LME categories.

Additionally, the CME and LME categories are too large such that it is possible to ignore certain differences among countries that might be considered to be of the same Variety. For instance, Japan and Germany are explained by varieties of Capitalism as perfect examples of CMEs, but the fact is that there are important differences that are omitted in this description. For example, corporate governance rights in Germany are contained in legislation, but this is not the same case in Japan.

The other limitation of varieties of capitalism is that it ignores the power of labor, viewing labor as a passive agent (Hamann & Kelly, 2008). The role of the firms and employer organization in the coordination of the market is underplayed by the idea developed by Varieties of Capitalism through the emphasis of political resistance, especially the trade union movement, specifically in neo-corporatist literature. The Varieties of Capitalism perspective explains that the reduction of the industrial working class as a result of intense competition has weakened trade unions (Hamann & Kelly, 2008). However, this is not correct because there are always labor disruptive concerns, and even weak labor has its own implications.

The other imitation is that Varieties of capitalism suffers from flaws and generalizations. This is reflected in the way that this approach divides innovation into radical and incremental, which is dubious. According to Crouch (2005), it makes no sense that in Microsoft was to come up with a new version of Windows, and it would be considered radical innovation, whereas if BMW came up with a new type of car, it would be considered incremental innovation. If so, what about other countries like Finland that is presumably CME and consequently cultivated high tech industries like Nokia? It is a reflection that this definition is erroneous and, therefore, cannot be used in the classification of capitalist markets.

Also, the Varieties of Capitalism focuses largely on the formal well-regulated markets, specifically the developed world. This is typified in the description of the US, the UK as the LMEs and Japan and Germa...