STRATEGY & POLICY
Critique of Legal Origins Theory
• No actual system fits platonic ideal of types.
• Does not allow for evolution
• Representing a broader market orientation.
Orientation
• Free Market vs. Government Coordination
• Developmental vs. Welfare
• Nationalist vs. Globalized vs. Regional
• Business vs. Labor
• Consumption vs. Investment
• Open vs. Closed
Read
• Hayek, Friedrich A., 1945, “The Use of Knowledge in
Society,” American Economic Review. XXXV, No. 4. pp.
519-30.
• Hall, Peter A. and David Soskice, 2001, Varieties of
capitalism : the institutional foundations of comparative
“An Introduction to Varieties of Capitalism,” pp. 1-70,:
Oxford [England] ; New York : Oxford University Press,
2001
• Polanyi, Karl, 1994 The great transformation Chap 3,
“The Self Regulating Market and the Fictitious
Commodities: Labor, Land and Money,” p.68-76,
foreword by Robert M. MacIver Imprint Boston : Beacon
Press.
Hayek: 1945
• Economy made up of millions of humans in wildly varying
quickly changing circumstances.
• Allocating resources to match the demands of particular
places and time has great value.
• Eliciting the subjective value of those opportunities is
uncertain.
• No single individual or institution could possibly process
that much information.
Prices as Information
• Centralized planning cannot provide an efficient co-
ordination mechanism.
• Market system provides decentralized means to allocate
resources to time and place.
• “The most significant fact about this system is … how little
the individual participants need to know in order to be
able to take the right action. …., only the most essential
information is passed on and passed on only to those
concerned.”
• All necessary information is contained in prices.
Prices solve allocation problem
• Assume either: 1) new use of tin appears; 2) source of tin
goes offline.
• Doesn’t matter which and most people don’t need to know
which. All that matters is prices will rise.
• This gives information to users of tin to shift toward
substitutes and users of substitutes for tin to shifts to
substitutes and so on.
• Everyone automatically gets info on a need to know basis.
Link
I am a Pencil
• I am a lead pencil—the ordinary wooden pencil familiar to all
… who can read and write…I am seemingly so simple…
Yet, not a single person on the face of this earth knows how
to make me.
Price Gouging
Polanyi: Great Transformation
• During 19th century, self-regulating markets dominated
society. In 20th century, free market ran its course, ending
in depression and war.
• Market society was justified under the rubric of “Laissez
faire” essentially “leave it alone” masking its true nature.
• As if self-regulating markets were a natural outcome i.e. what would
happen without society.
• Ahistorical
Historical Economic Structure
• Traditionally, economy was embedded within social
structure and fell into three basic forms.
1.
2.
3.
Autarky – Household production and Subsistence
Centralized – Allocation by chief/lord/headman
Gift Giving – Ritualized voluntary exchange of value.
• Markets existed but were strictly limited by society, served
as a tool of society.
Industrial Revolution:
First Transformation
• Disruptions of 17th Century, led to construction of
philosophy and legal system necessary for market
system.
• Self regulating markets are necessarily part of a system of
interacting markets allocating all of the commodities in the
economy.
• Inevitably, markets must include those for false
commodities: 1) Money; 2) Labor; 3) Land.
False Commodities
• Labor and land are false commodities in that their
production cannot respond to market signals.
• Labor and land are the essential elements of society itself.
Subjecting them to self-regulating markets means
disembedding economy from society.
• Inevitably society will push back against market
dominance of society for self-protection.
Varieties of Capitalism,
• Orientation and the Firm
• Four spheres in which firm interacts with society.
1.
Financial Markets (corporate governance);
2.
Industrial Relations (regulating wages and working conditions);
3.
Intrafirm relations (access to inputs and technology &
institutional customers)
4.
Education and Training
Corporate
Governance
Education
&
Training
Internal
Structure
Of the Firm
Labor Relations
Interfirm
Relations
Two types
• LME – Liberal Market Economies
• External relations are typically governed by arms-length,
competitive markets
• CME – Coordinated Market Economies
• External relations often governed by modes of co-operation.
• Institutions of co-operation have more specific nature.
USA Prototypical LME
Corporate Ownership – Management teams represent
atomized shareholders; disciplined by buyouts.
2. Labor relations – Fluid labor relations, right to hire and
fire; limited unions or firm level negotiations.
3. Training – Formal education, general skills.
4. Inter-firm Relations – Anti-trust legislation, reputation
based relationships. No technology transfer.
1.
Germany Prototypical CME
Corporate Governance – Patient capital, large or
institutional shareholders. Rules & institutions prohibit
takeovers. Stakeholder governance.
2. Labor relations – Work councils, national and industry
level negotiations; employment protection.
3. Training – Apprenticeship systems; job or firm specific
skills.
4. Inter-firm Relations – Research consortia; supplier
relationship. Anti-trust legislation, reputation based
relationships. No technology savings
1.
External Relations and Internal Structure
• LME’s give rise to firms with strong hierarchies.
Managerial decisions unencumbered by non-market
factors. Market pressure requires focus on immediate
profitability.
• CME’s have consensus decision making with stakeholder
relations in all directions impacting choices.
Institutional Complementarities
• Cooperative relationships in one area make cooperation
•
•
•
•
in other areas more advantageous.
Ex. Workers with more job stability more likely to invest in
specific skills.
Ex. Systems of cross-holdings of securities creates a
greater likelihood of long-lasting relationships with
suppliers.
Ex. Firms that co-operate with technology sharing more
likely to form groups to train new workers .
Ex. Consensus model of corporate governance more
likely to lead to cooperative model of labor relations.
Labor and Product Markets 2008
3.5
3
NLD
GER
ITA
Employment Protection Legislation
SWE
2.5
FRA
SPA
NOR
DNK
2
BEL
NZD
1.5
JPN
UK
IRE
AUS
1
CAN
0.5
USA
0
0.5
0.6
0.7
0.8
0.9
1
1.1
Product Market Regulation
1.2
1.3
1.4
1.5
Labor and Capital Markets 2007-2008
3.5
3
NLD
GER
ITA
Employment Protection Legislation
SWE
2.5
FRA
SPA
NOR
DNK
2
BEL
NZD
1.5
JPN
IRE
UK
AUS
1
CAN
0.5
USA
0
0.5
20.5
40.5
60.5
80.5
100.5
Market Capitalization % of Incom
120.5
140.5
160.5
180.5
Varieties and Comparative Advantage
• Many varieties may co-exist in symbiotic relationship.
• Institutional structure may offer comparative advantage
which can lead to specialization in particular goods.
• CME’s advantage in producing goods requiring long-term
investment, continuous upgrading, specific skills.
• LME’s advantage in producing goods requiring radical
innovation.
Examples from Link
• Varieties of Capitalism and Innovation: Patenting in LME
concentrated in industries (pharma, infotech) typified by
radical shifts, patents cite deep research; patenting in
CME concentrated (auto, machine tools) typified by
continuous improvement, patents cite previous patents.
• Industry Standardization – German industry organization
able to enforce specific detailed standards [A4
paradigmatic example]; UK standards focus on process
principles.
• BA vs. Lufthansa. BA thrives during periods of radical
market disruption. Lufthansa thrives at more stable
periods.
Measuring Coordination
• Big Picture Measure
• Objective Measures
Link
Bank Directed Economy vs. Financial
Markets
Capital Markets
140
120
%
100
80
60
40
20
0
Germany
Bank Loans/GDP
USA
Market capitalization of listed companies (% of GDP)
Capital Markets
300
250
200
150
100
50
0
Germany
Deposit money bank assets to GDP
USA
Stock Market Turnover to GDP
Buyouts
7
6
5
4
3
2
1
0
Germany
USA
M&A transaction value to GDP
Regulation of Firm Production Activities
6
5
4
3
2
1
0
Germany
USA
State Control Product Markets (0-5)
Cost of Starting a New Business (% of Income)
Regulated, Low Turnover Workforce
Labor Relations
50
45
40
35
30
25
20
15
10
5
0
Germany
Weeks of severance pay for redundancy of experienced workers
USA
% of Work Force: 10 years tenure or More
Job Separation Rates
4.00%
Job Finding Rates
70%
3.50%
60%
3.00%
50%
2.50%
40%
2.00%
30%
1.50%
20%
1.00%
10%
0.50%
0.00%
0%
Germany
US
Japan
Germany
US
Japan
Labor Orientation
World Bank Jobs Database
Hong
Kong Singapore Germany Spain
Notice period for redundancy
dismissal
(for a worker with 5 years of
tenure, in salary weeks)
4.33
Minimum wage for a 19-year old
worker
or an apprentice (US$/month)
0.00
Paid annual leave for a worker
with 5 years of tenure (in
working days)
10.00
Retraining or reassignment
obligation before redundancy?
0.00
Weeks of severance pay for
redundancy of experienced
workers
5.80
4.00
0.00
8.67
2.14
USA
0.00
1145.47 1043.96 1242.58
11.00
24.00
22.00
0.00
0.00
1.00
0.00
0.00
0.00
43.33
52.00
0.00
Dataset: Trade Union Density
80
70
60
50
40
30
20
10
0
http://stats.oecd.org/
% Employees 5 Years Tenure or More
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Technically Oriented Education
Technical Training
25
20
15
13
10
5
4
0
Germany
USA
Technical/vocational enrolment in secondary (ISCED 2 and 3) as % of total
On-the-Job Training, Global Competitiveness Ranking (in World)
Social Welfare (% of GDP)
35
30
25
20
15
10
5
0
st
ra
Au lia
Be stria
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C
ze C ium
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D ub
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Fi ark
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a
F r nd
G anc
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m
G any
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It
Ja aly
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Ko n
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N Me ea
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N he ico
ew rla
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a
N land
or
w
P o ay
Po land
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g
S p al
S a
Sw we in
itz de
er n
U
l
ni
te T and
d ur
U Kin ke
ni g y
te d
d om
St
at
es
Au
0-5
Criticism: All countries deregulating
Product Market Regulation
4.5
4
3.5
3
2.5
1998
2
2003
2008
1.5
1
0.5
0
OECD Countries
Nature of Japanese Competition, 2000
Porter, Michael E., and Mariko Sakakibara. 2004.
"Competition in Japan " Journal of Economic Perspectives,
18(1): 27-50.
• Inter-firm Relations:
• Large Japanese business groups, Horizontal Keiretsu, organized
around small number of city banks, share financing, personnel,
distribution networks.
• Vertical Keiretsu: LT relationship between industrial firms and family
of suppliers.
• Gov’t encourages research consortia and sometimes cartels. Antitrust weak.
• Corporate Governance:
• System of cross-shareholdings within business groups make it
difficult for equity investors to replace management.
• Bank financing more important than bond financing.
Japan, cont.
• Labor Relations
• Legally, socially difficult to fire long-term workers
• Company unions play a role in corporate management
• Training
• Firm specific human capital
• Seniority based compensation
Competitive Outcomes
• Low returns on capital
• Firms emphasize market share, maintenance of
employment
• Intense domestic competition in some sectors especially
those internationally successful ones.
• Sectors with government sponsored cartels or planning,
low competition, low success
Credibility
Main Bank System
Corporate Cross-Holding
Anti-Takeover Legislation
Banks support &
Coordinate group
Group cross-holding
supports management
Firm Specific
On-the-Job
Training
Keiretsu,
Limited Anti-trust
Research Consortia
Specialized Workers
Incentives to
acquire training
Japanese Variety of
Capitalism
Talent
sharing
Lifetime Employment
Firm level unions
Knowledge
Sharing through
consortia &
councils
Can Japan Compete?
Link
• Japanese companies dominated a number of advanced
industries from the 1980’s and experienced high growth up
to that period with slower subsequent growth.
• Japan: Known for industrial policy activism through Ministry
for Industry, Trade and Investment. MITI approach was to
• encourage cooperation by companies in key industries.
• allow cartels and even encourage formation.
• Limit foreign trade & investment
-5.00%
-10.00%
20
09
20
07
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
63
19
61
Japanese GDP per capita (constant Yen) Growth Rate
15.00%
10.00%
5.00%
0.00%
Share Ownership Tokyo Stock Exchange
120.000
100.000
80.000
Individuals
%
Foreigners
60.000
Cross-Ownership
Other FI
Banks
40.000
20.000
0.000
Govt
http://www.mhlw.go.jp/english/policy/affairs/dl/04.pdf
Link
Changing Structure of Economy
• Lifetime employment still exists but many firms reluctant
to hire long-term employees.
• Declining cross-ownership, limited corporate take-over.
• Decline in Keiretsu system. Increased anti-trust, decline in
main bank system has diminished horizontal Keiretsu
Employment to population ratio, 15+, total (%) (modeled ILO estimate)
66
64
62
60
58
56
54
52
50
2000
[YR2000]
2001
[YR2001]
2002
[YR2002]
2003
[YR2003]
2004
[YR2004]
Germany
2005
[YR2005]
2006
[YR2006]
United States
2007
[YR2007]
Japan
2008
[YR2008]
2009
[YR2009]
Denmark
2010
[YR2010]
2011
[YR2011]
2012
[YR2012]