Comparative Political Economy Reader:
Introduction
This reader advocates for a market-institutional approach to studying political economy.
This perspective contends that markets should be viewed as institutions embedded in a
particular social and political context andmakes the study of these particular institutions its
central mission.
* Even classical liberals acknowledge that markets require states to set up and enforce the
'basic rules of the game': laws; infrastructure such as a monetary system; and basic public
goods such as national defense. But we should stress that market systems are embedded in a
far more extensive web of institutions
* Mainstream economics assumes perfect markets (no transaction costs) for analytic
leverage. But empirically speaking, these markets do not exist.
The Four Disciplines
New Institutional Economics (NIE)
NIE scholars embrace the neoclassical assumption of utility maximization, yet they criticize
standard economics for its failure to address economic institutions. NIE theorists build on
the study of transaction costs first introduced by Ronald Coase. They define transaction
costs as anything that impedes the costless matching of buyers and sellers. They divide
transaction costs into two kinds: information costs and enforcement costs. Systems of
property rights are seen as solutions to transaction cost problems.
Criticisms:
Some NIE theorists adhere too rigidly to the assumption of human rationality or adopt an
overly functionalist view of institutional change by assuming that changes proceed toward
more rational forms. The logic of NIE proceeds backward in the sense that it moves from
perfect markets to institutions: transaction costs impede perfect markets; institutions solve
this problem. Yet real-life history has proceeded in the opposite direction: Social institutions
came first, and the market system evolved upon their foundation.
See:
Coase 1937: first introduced transaction cost economics in an article in which he asked:
“Why do we have firms”? He argued that businesses create firms (corporate organizations)
to reduce transaction costs. That is, businesses choose to perform certain services and to
produce certain parts for themselves rather than purchase them on the open market. They
do so because transaction costs are high in the marketplace, so it is more efficient to keep
these functions out of the market and to conduct them in-house. He used this logic to
theorize about where the firm would end and where the market would begin: the firm would
expand to the point where returns disappear (i.e. where the benefits of further expansion do
not exceed the costs).
Douglas North (1977, 1981, 1989): Uses transaction costs to analyze the historical
evolution of economic institutions. Throughout much of history, he argues, transaction
costs were sufficiently high to prevent most transactions from taking place. As property
rights developed, however, transaction costs declined and market systems became more
efficient. North stresses that well-defined property rights spur innovation. He takes a
‘functionalist’ line in his early work arguing that people develop better institutional
solutions over time (North 1981). In later work, however, he depicts institution change as a
more open-ended process in which politics and ideology weigh heavily and changes may or
may not constitute improvements (North 1989).
In North’s critique of Polanyi, North agrees that price-making markets do not dominate
resource allocation in history and do not even dominate today, noting the role of
households, voluntary organizations, and governments. He then critiques Polanyi, however,
by suggesting that what Polanyi calls “reciprocity” and “redistribution” are really just leastcost trading and allocation arrangements for an environment of high transaction costs.
Williamson 1985:
Williamson revisits Coase’s original question about the boundary between firms
(“hierarchy”) and the market and in how firms make decisions about whether to produce inhouse or to buy parts on the market. One of Williamson’s key concepts is that of “asset
specificity”. This gauges the degree of transferability of an asset intended for a specific use
and a specific partner to other uses and partners. Assets with low specificity should be
procured through the market. Highly specific assets on the other hand, have little value
beyond their use in a particular transaction so companies are vulnerable to the threat of
opportunism on the part of their suppliers. These should be vertically integrated.
In Williamson’s more general view, economic institutions of capitalism have the main
purpose and effect of reducing transaction costs, although he concedes that it is not their
only purpose. In his analysis, the potential scope of transaction cost economics is huge, as
the transaction is the basic unit of analysis in understanding capitalism.
Economic Sociology
Following Polanyi, economic sociologists believe that markets are governed by shared
beliefs, customs, and norms, stressing that markets are embedded in social relations. They
eschew he methodological individualism of standard economics, identifying collective actors
– such as groups or even social systems – as important units of analysis. Some sociologists
reject the assumption of utility maximization, arguing that people are as likely to follow
logic of appropriateness in their actions as they are to adhere to a logic of utility.
Economic sociologists emphasize that capitalism is a constructed and continually
reconstructed system, rather than a natural system that can be articulated only through one
set of rules. Economic liberalism and Marxism see only two possible political-economic
outcomes for societies: capitalism or communism. Polanyi, in contrast, suggests that a range
of alternatives in political economy are possible, because markets can be embedded in a
range of different ways. This perspective problematizes the social relationships surrounding
economic activity, in contrast with the functionalist approach of NIE, which assumes that
institutional and social relationships exist to reduce transaction costs.
Polanyi:
Market systems do not spontaneously arise; on the contrary, governments have to actively
create markets.
“While laissez-faire economy was the product of deliberate state action, subsequent
restrictions on laissez-faire started in a spontaneous way. Laissez-faire was planned;
planning was not”. Polanyi stresses that markets undermind the existing social fabric
because they turn labor, land, and money – which are part of society – into commodities.
Society inevitably fights back against the market with regulation. This interaction is referred
to as a ‘double movement’: the trading classes promote economic liberalism to foster a selfregulating market, but the working and landed classes push for social protection aimed at
conserving man and nature.
Fligstein:
Lays out a “theory of fields” approach to market economies. “Fields” refers to arenas of
activity that have an identity as a coherent issue-area or locus of activity, with social
structures that go along with them. A distinctive feature of this analysis is that sectoral
markets have social structures, which in turn affect market behavior in predictable ways.
One of the core insights that emerge from Fligsein’s perspective of markets as fields is that
firms try to produce a stable environment for themselves, so the ultimate motive of firms in
this conception of markets is not always profit but also stability or survival.
Another key insight is that market activity plays out a series of power struggles both within
and among firms, where dominant actors, such as large incumbent firms, produce rules and
meanings that allow them to maintain their advance.
A market, in this view, is a socio-organizational construct intended to establish stability in
exchange relations, and firms generate that stability by creating social structure in the form
of status hierarchies. In other words, within a market there are dominant firms,
incumbents, and challengers, and dominant firms create the social relations of the market
to ensure their continued advantage.
Rather than viewing institutions as the functional outcomes of an efficient process as does
the NIE, Fligsteign argues that market institutions are cultural and historical products,
specific to each industry in a given society, that have evolved through a continuous,
contested process. These institutions have intersubjective meanings, that is, they depend
intricately on how social actors perceive them and are not constructs that are separable
from their embeddedness in society.
Following Polanyi, Fligstein emphasizes that the state plays a crucial role in creating
markets as institutions. The entry of a country into capitalism pushes states to develop rules
that market actors cannot create themselves. States are also the focal points for economic
and social actors during crisis and so are central in enforcing market institutions and
sustaining markets through change. The manner and extent to which they do so depends on
what type of state they are (interventionist versus regulatory) and their capacity.
In a comparative sense, the configuration of rules and institutions within markets and the
nature of social relationships between economic actors accounts for persistent differences in
national political-economic systems.
Kinds of “rules”:
There are four types of rules relevant to producing social structures in markets: property
rights, governance structures, rules of exchange, and conceptions of control.
1. Property rights: rules that define who has claims on the profits of firms. The
constitution of property rights is a continuous and contestable political process, not
the outcome of an efficient process. Organized groups from business, labor,
government agencies, and political parties try to affect the constitution of property
rights. Division of property rights is at the core of market society.
2. Governance Structures: refer to the general rules that define relations of competition
and cooperation and define how firms should be organized. They define the legal and
illegal forms of controlling competition, and take two forms: (1) laws and (2)
informal institutional practices. E.g. Anti-trust laws, tariffs, professional
associations, how to write contracts, where to draw boundaries of the firm.
3. Rules of exchange: Define who can transact with whom and the conditions under
which transactions are carries out. Include rules regarding weights, common
standards, shipping, billing, insurance, exchange of money (i.e. banks) and
enforcement of contracts. They regulate health and safety standards.
4. Conceptions of control: Reflect market-specific agreements between actors in firms
on principles of internal organization (i.e. forms of hierarchy), tactics for competition
or cooperation (i.e. strategies), and the hierarchy or status ordering of firms in a
given market. A conception of control is form of “local knowledge” (Geertz 1983),
historical and cultural products.
The "Propositions"
2.1: The entry of countries into capitalism pushes states to develop rules about property
rights, governance structures, rules of exchange, and conceptions of control in order to
stabilize markets.
2.2: Initial formation of policy domains and the rules they create affecting property rights,
governance structures, and rules of exchange shape the development of new markets
because they produce cultural templates that determine how to organize in a given society.
The initial configuration of institutions and the balance of power between government
officials, capitalists, and workers at that moment account for the persistence of, and
differences between, national capitalisms.
2.3: State actors are constantly attending to one market crisis or another. This is so because
markets are always being organized or destabilized, and firms and workers are lobbying for
state intervention.
2.4: Policy domains contain governmental organizations and representations of firms,
workers, and other organized groups. They are structured in two ways: (1) around the
state’scapcity to intervene, regulate, and mediate, and (2) around the relative power of
societal groups to dictate the terms of intervention.
Political Science
Do not represent a coherent research paradigm like NIE or economic sociology. They are
divided between those who use the analytic tools of economics to study politics and those
who focus on substantive areas that bridge economics and politics.
See:
Chalmers Johnson 19871: Focuses on the role of the state and its relationship to the
economy. Argues that the Japanese state enjoyed relative autonomy from the demands of
particular social groups plus a competent and powerful bureaucracy, and this enabled the
government to formulate and implement pro-growth economic policies designed to shift
the industrial structure towards high-value-added sectors. He extends this argument to
other East Asian developmental states, such as South Korea and Taiwan, while noting
variations among these.
Riddle: What accounts for the Japanese ‘miracle’ – spectacular rate of growth since WWII?
Previous Literature/Conventional Explanations:
1. National-character explanation argues that the economic miracle occurred because
the Japanese possess a unique, culturally derived capacity to cooperate with one
another.
2. ‘No-miracle-occurred’ school argue that what did happen was not miraculous but a
normal outgrowth of market forces, due primarily to the actors of private
individuals and enterprises responding to the opportunities provided in quite free
markets for commodities and labor; state’s role has been exaggerated.
3. Specific Japanese institutions gave Japan a special economic advantage because of
what postwar employers habitually call their “three sacred treasures” – the
“lifetime” employment system, the seniority wage system, and enterprise unionism.
4. Theory of “free-ride” argues that Japan is the beneficiary of its postwar alliance with
the United States: a lack of defense expenditures, reader access to its major export
market, and relatively cheap transfers of technology.
“Political Institutions and Economic Performance: The Government-Business Relationship in Japan, South
Korea and Taiwan,” in The Political Economy of the New Asian Industrialism, ed. Frederick Deyo (Ithaca:
Cornell University Press, 1987), 136-64
1
Main Argument: Stresses the role of the developmental state in the economic miracle. “Plan
rationality” is state-led but not ideological, and stands in contrast with market-rationality:
1. concerned with “effectiveness” over “efficiency”.
2. Greater difficulty than the market system in identifying and shifting its sights to
respond to effects external to the national goal (e.g. pollution)
3. But when the plan-rational system finally does shift its goal, it will commonly be
more effective than the market-rational system.
4. Depends on the existence of a widely agreed upon set of overarching goals for
society, such as high-speed growth.
5. Strength in dealing with routine problems, whereas the market-rational system is
effective in dealing with critical problems.
6. Change will be marked by internal bureaucratic disputes, factional infighting, and
conflict among ministries; in market-rational system, change will be marked by
strenuous parliamentary contests over new legislation and by election battles.
O’Donnell 1979: “Bureaucratic authoritarian” regimes in Latin America were relatively
insulated from short-term political pressures and thereby able to enact long-term
economic growth strategies.
Katzenstein 19782: Developed a typology that combines a spectrum from organized to
less organized societies with one from strong to weak states.
Zysman 19833: Explicitly links the state, microlevel market institutions, and policy
profiles. He focuses on financial systems, demonstrating a connection between strong
states, credit-based financial systems, and industrial policies in France and Japan, on one
hand, and weak states, equity-based financial systems, and more market-based adjustment
strategies in Britain and the United States, on the other.
Peter Evans: Links state strength not so much to autonomy from society but rather to the
state’s penetration of (or collaboration with) society.
Hall and Soskice: Varieties of Capitalism.
Objective: Elaborate a new framework for understanding the variation in the political
economies of developed countries. They trace their intellectual history lineage to three
major approaches to comparative capitalism that fall within the rubric of political
economy:
Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States (Madison: University of
Wisconsin Press 1978, especially pp. 323-24).
3 Governments, Markets and Growth: Financial Systems and the Politics of Industrial Change (Ithaca: Cornell
University Press, 1983)
2
1. a perspective oriented around the strategic use of 'national champions' in core industrial
sectors and state strength in leveraging key institutional structuressuch as economic plans
and the financial systems.
2. neocorporatist analyses that focuses on the interaction of trade unions, employers and
states, and
3. a series of broader viewpoints that engage sociology in studying 'social systems of
production' such as collective institutions at the sectoral level, national systems of
innovation, and flexible production regimes o the factory shop floor.
The VOC approach argues that the role and capacity of government should not be
overstated. In their view, firms are they key actors in a capitalist economy, whose activities
aggregate into national economic performance. Although they take a national-level
comparative perspective that recognizes that market-institutional structures are
dependent on national regulatory regimes, they develop a comparative framework
centered on firms and their relationships. They concentrate on four spheres of market
institutions in which firms develop relationships to carry out economic activities: industrial
relations between companies and employees, vocation training and education, corporate
governance relations between firms and investors, and interfirm relations. In examining
the importance of institutions in a market system, they emphasize the manner and extent
to which those institutions condition strategic interaction among firms and other politicaleconomic actors. They build on the NIE tradition which emphasizes the development of
contractual relationships to overcome transaction costs in economic collaboration. They
also recognize the political factors at play and build on the economic sociology approach by
reconizing that the firm is embedded in a web of interdpendent social relationship and
shared cultural meanings.
Centerpiece of the VOC framework is the dichotomous representation of liberal market
economics (LMEs) and coordinated market economic (CMEs) and the comparison in their
characteristics in terms of both relationships and outcomes. In broad strokes, the
differences between these two types of capitalist economies are explained in terms of how
firms coordinate their relationships and production activities through different sets of
solutions. In LMEs—such as the US and Great Britain—firms primarily coordinate
internally through hierarchical arrangements and externally through competitive market
relationships. In CMEs—such as Germany and Japan—firms are more reliant on nonmarket
relationships such as relational contracting and collaborative networking. Even though
LMEs function through the price signals and formal contracts emphasized by neoclassical
economics and NIE and CMEs seem to be more embedded in social relations in the manner
emphasized by economic sociology, both systems are embedded in different ways of
society and politics. One of the major utilities of the VOC approach is that it prevents us
from falling into the analytical trap of assuming that one type of system is the default and
the other the deviation to be explained.
Systematic variation in corporate practice between LMEs and CMEs is generated by their
different market-institutional makeup. Moreover, ‘institutional complementarities’ buttress
these firm-centered relationships and the differences between LMEs and CMEs. This
concept suggests that if political economies have developed one type of interaction (pricebased versus relational) in one sphere of economic practice they tend to develop—through
the actions of all actors, including the state—complementary practices in other spheres,
reinforcing the type of system and its outcomes. A related concept is that of “comparative
institutional advantage,” the notion that different types of market-institutional systems
structure different advantages for the firms functioning within them. Firms will be able to
perform some types of economic activities more effectively because of the types of market
institutions they are embedded within.
This has implications for predictions regarding Globalizaiton. They anticipate one dynamic
response to globalization in LMEs – where firms will pressure governments for more
deregulation to enhance their flexibility in coordinating through markets – and another in
CMEs—where firms and governments should be more resistant to deregulatory pressures
because they challengetheir comparative institutional advantage. VOC framework predicts
a bifurcated response to globalization—widespread deregulation in LMEs and limited
change in CMEs—and they marshal evidence to claim that this does in fact represent the
reality.
History:
Economic historians have stressed several core themes that have been overlooked by
mainstream economists: entrepreneurship, innovation, personal leadership, and the
evolution of economic institutions.
See:
Hobsbawm: Stresses the growth of domestic markets, enabled by improvements in
tarsnportation, and the availability of expert markets, fueled by the expansion of the British
Empire, in an account of the British Industrial Revolution. Hobsbawm challenges classical
economists by problematizing technological innovation. He contends that business people
seek profits, not innovation, and in practice they often favor profits at the expense of
innovation. They will view industrial investments as profitable only if the potential market
is large and the risks is manageable. The growth in domestic and export markets in the 18th
century England provided just these conditions, and this fostered the Industrial Revolution.
Gerschenkron: His argument on the timing of industrialization has been influential in
political economy across disciplines. He argues that late-industrializing countries face
fundamentally different challenges from Britain, the first country to industrialize. His
approach contrasts to Walter Rostow’s more linear, uniform model of stages of growth.
Gerschenkron stresses that late-industrializing countries confront a huge technological gap,
so they do not have the luxury of industrializing slowly. They must make massive
investments to shift rapidly into heavy industry. This requires large-scale financing, an
institutional mechanism for channeling the funds, and a powerful ideology to motivate the
mobilization efforts. Industrial banks provided the institutional mechanism in Germany,
whereas the state played this role in Russia. Late industrializing would require a more
powerful state because of the larger technological gap, and this might well take the form of
a totalitarian state, as in the Soviet Case.
Landes
Landes argues that contemporary international empirical evidence is against neoclassical
economic theory and its belief that all nations will eventually industrialize and converge.
He thus disagrees with Rostow’s unilinear perspective. Landes agrees with Gerschenkron
that the government can have a very important role to play (both empirically and
normatively) in late development and points to historical evidence of the necessity of state
intervention in development. In addition, he emphasizes culture as a factor in the pursuit of
national wealth but admits that culture is unsatisfying as a monocausal answer. In short,
culture and economics interact in the history of development.
Vogel:
Vogel articulates the market-institutional counterpoint to the liberal perspective on
relationship between states and markets. He argues that “marketizing” reforms in
advanced industrial countries should be seen as a positive, creative process that
entails the development and transformation of market institutions rather than
perceived as a negative process of stripping away government regulation. Vogel
builds on Polanyi’s work in tackling the notion that markets are free or perfect and
hence challenges the prevailing liberal discourse on the relationship between
markets and governments. The central element of Vogel’s argument is a step away
from the conventional regultation-competition dichotomy that dominates more
debates about markets of reforms. He points out that liberalization of markets to
increase competition actually requires reregulation rather than deregulation: freer
markets need more rules. Indeed, some of the boldest deregulation programs,
including those of Thatcher era, have been accompanied by a proliferaiton of rules
and regulatory agencies.
1. There are no “free” markets
2. There is no such thing as a disembedded or even a less embedded market system
3. Market reform involves changes at every level of a political-economy system:
government policies, private sector practices, and social norms
4. The regulation-versus-competition dichotomy that animates most debates about
market reform is fundamentally misleading
5. Government-versus-market dichotomy that animates more debates about economic
policy is also misleading.
6. Market reform is a primarily create process not a destructive one.
Kinds of re-regulation: pro-competitive, juridical, strategic, and expansionary.
1. Market reform is a highly complex process precisely because it requires building
new institutions and not simply removing barriers
2. Market reform often requires not just one policy change but a wide range of interrelated steps
3. Market reform is not simply a process of policy change but a combination of policy
change and societal response
4. There is no single equilibrium for optimal market reform
5. Market reform is inherently a political process.