WEEK 3 STATES AND MARKETS

Coordination problem HAll and soskice

Coordination problem - Actors depend on one another but cannot secure cooperation alone

Definition: They occur when firms depend on other people or organisations to achieve their goals but must find ways to organise cooperation and make decison together.  

Hall and Soskice explain that capitalist economies differ in how firms solve these problems. Some rely more on market competition, while others rely more on strategic cooperation between businesses, banks, workers, unions and training organisations.

Liberal Market Economies (LMEs): rely more on competitive markets and market relationships. The United States is an example.

Coordinated Market Economies (CMEs): rely more on cooperation and long-term relationships between economic actors. Germany is an example.

Example: Germany compared with the United States

Germany (CME): Firms cooperate with workers, trade unions, banks and training organisations. For example, vocational training systems help firms develop workers with the specialised skills they need. Cooperation between firms can also help with sharing information and transferring technology.

United States (LME): Firms rely more heavily on competition and market relationships to coordinate economic activity, rather than the same degree of non-market cooperation.

The key point is not that one system has coordination problems and the other does not. Both face coordination problems, but their institutions help them solve these problems in different ways.

Significance: Coordination problems matter because they show that markets alone do not explain how economies function. Firms also depend on institutions and relationships that help them work with other economic actors.

States: Governments influence coordination through education and vocational training, employment laws and institutions that support cooperation between firms and workers.

Markets: Competition and prices can coordinate economic activity, while long-term relationships can help firms share information and make commitments.

Economic development: Different systems can support different strengths. For example, Germany’s training and cooperation arrangements help firms develop specialised skills, while market-based coordination can support flexibility and competition.

Policy: Governments cannot assume that a policy successful in one country will work equally well in another, because policies depend on existing institutions and relationships.

LME Hall and Soskice

LME - Coordination mainly through markets and managerial hierarchy

Definition: Liberal makret economy is a type of capitalist economy in which firms coordinate their activities mainly through competitive markets and market relationships, rather than through extensive strategic cooperation between businesses, workers, banks and other organisations.

Hall and Soskice argue that LMEs rely more on market mechanisms to solve coordination problems that Coordinated Market Economies (CMEs) often address through cooperation and long-term relationships.

Example: USA is an LME as firms rely more on competive markets and makret realtionships when making decisons bout finance, employment and business strat For example, an American firm may rely more on market-based finance and competition when making business decisions, whereas a German firm may benefit more from long-term relationships with banks and skilled workers.

Significance: LMEs help explain how institutions shape the way capitalist economies operate.

States: Government policies operate within existing institutional arrangements. Policies designed for a CME may not work in the same way in an LME.

Markets: Competition and market transactions play a central role in coordinating economic activity.

Economic development: Market-based coordination can support competition and flexibility, although outcomes depend on the wider institutional context.

Different forms of capitalism: Hall and Soskice show that there is not just one model of capitalism. Countries organise their economies differently, and these differences influence how firms operate

CME HALL AND SOSKICE

CME-  Coordination mainly through networks, associations and negotiation 

Definition: A Coordinated Market Economy (CME) is a type of capitalist economy in which firms coordinate their activities through strategic cooperation and long-term relationships with other economic actors, rather than relying mainly on competitive markets.

Hall and Soskice explain that firms in CMEs work with other businesses, banks, workers, trade unions and training organisations to solve coordination problems.

Example: Germany (CME): Firms cooperate with trade unions, banks and training organisations. Vocational training helps develop workers with specialised skills, while relationships between firms can support information-sharing and technology transfer.

For example, German firms can work with vocational training organisations to develop workers with the specific skills their industries require. This cooperation helps firms access skilled labour and supports long-term business planning.

The key point is that CMEs use cooperation between institutions and economic actors to solve coordination problems.

Significance: CMEs help explain why economic institutions matter for how firms operate and how economies develop.

States: Governments can support coordination through vocational training, employment institutions and policies that encourage cooperation between firms and workers.

Markets: Competitive markets remain important, but firms also rely on non-market relationships to coordinate decisions.

Economic development: Cooperation can support specialised skills, long-term investment, information-sharing and technological development.

Different forms of capitalism: Hall and Soskice demonstrate that countries can organise capitalism in different ways. Policies are more likely to work when they fit the country's existing institutions and coordination arrangements.

Insutional complementarity

Institutional complementarity -  One institution raises the returns to another

Definition: Institutional complementarity occurs when two or more institutions reinforce each other, making them more effective when they operate together than when they operate separately.

In Hall and Soskice’s approach, institutions are interconnected: how firms operate depends on the wider institutional arrangements around them, such as financial systems, employment relations and vocational training.

The key idea is that the effectiveness of one institution depends partly on how well it fits with other institutions.

Example: Germany as a Coordinated Market Economy (CME)

Germany provides a useful example of institutions that work together:

Vocational training: Develops workers with specialised skills.

Employment relations: Supports cooperation between employers and workers.

Finance: Long-term relationships with banks can support patient investment.

Cooperation between firms: Helps businesses share information and transfer technology.

These institutions can reinforce one another. For example, firms may be more willing to invest in specialised worker training when employment relationships are stable and they expect to benefit from those skills over time.

This illustrates institutional complementarity: the institutions work together to support a coordinated economic system.

Significance: Institutional complementarity helps explain why countries develop different forms of capitalism and why economic policies do not always work equally well across countries.

States: Governments need to consider how a policy fits with existing institutions. Changing one institution without considering others may weaken the wider system.

Markets: Markets do not operate in isolation; their performance depends on institutions such as finance, training and employment arrangements.

Economic development: Institutions that reinforce one another can support investment, specialised skills, cooperation and innovation.

Different forms of capitalism: It helps explain why Germany's coordinated model differs from the United States' more market-oriented model.

General/ specific skills

General/ specific skills - Portable capabilities vs relationship bound capabilities 

Definition: Hall and Soskice distinguish between general skills and specific skills to explain how workers acquire capabilities and how these affect firms' relationships with employees.

General skills (portable capabilities): Skills that can be used across different firms and workplaces. They are portable because workers can take them to another employer.

Specific skills (relationship-bound capabilities): Skills that are particularly valuable within a specific firm, industry or employment relationship. Their value may depend on the worker remaining in that particular setting.

This distinction matters because it influences how firms train workers, how workers move between jobs, and how employers and employees develop long-term relationships.

Example: — The UK labour market

The UK is commonly characterised as a Liberal Market Economy, where education often emphasises broadly applicable qualifications and transferable skills.

For example, a worker with a general business degree may move between different companies or industries because their analytical, communication and management skills are useful across multiple workplaces.

• Portability: skills can be used across different firms.

• Labour mobility: workers can move between employers more easily.

• Employer flexibility: firms can recruit workers with existing transferable skills rather than providing extensive firm-specific training.

Significance: For the state: Education and training systems influence whether workers develop broad, transferable skills or more specialised occupational capabilities.

For markets: General skills support labour-market flexibility because workers can move between firms and employers can recruit from a wider pool of workers.

For economic development: General skills can support industries that depend on flexibility and rapid adaptation. However, they may be less suited to industries that rely on highly specialised expertise and long-term cooperation between firms and workers.

Patient capital

Patient capital -  Finance able to tolerate delayed returns

Definition: Patient capital is finance provided with a long-term perspective, allowing investment to develop over time rather than demanding immediate returns.

Example: Mazzucato discusses state development banks financing innovative sectors such as green technology, where investments are risky and private investors may be reluctant to commit funds. Public finance can support the early stages of development before technologies become commercially viable 

Significance: State: The state can provide long-term funding for projects private investors consider too risky.

Markets: Public investment can help create new markets, rather than simply correcting existing market failures.

Economic development: Patient finance can support technological innovation and long-term growth.

Comparative insutional advantage

Comparative institutional advantage - Institutions favour some activists over other 

Definition: Comparative institutional advantage is the idea that countries develop different economic strengths because their institutions work together in different ways, making certain types of economic activity more successful in some countries than others.

Peter Hall and David Soskice argue that firms’ success depends on how they coordinate with other actors, including workers, financial institutions, suppliers and other firms. Different institutional arrangements therefore encourage different kinds of business strategies and innovation.

Example: Germany — Coordinated Market Economy (CME): Strong vocational training, specialised skills, cooperative employment relations and long-term finance support high-quality manufacturing and incremental innovation.

United States — Liberal Market Economy (LME): More reliance on competitive markets, general skills and market-based finance supports flexible labour markets and innovation that can respond quickly to market opportunities.

Significance: State: Education, training, financial and employment institutions help shape the strengths of a national economy.

Markets: Institutions influence how firms coordinate — through competitive markets or strategic cooperation.

Economic development: Countries may achieve success through different economic models rather than following one universal path to competitiveness.

Entrepreneurial state Mazzucato

Entrepreneurial state- Public action can take uncertainty and shape markets 

Definition: The entrepreneurial state is the idea that the state actively drives innovation, invests in new technologies and creates markets, rather than simply correcting market failures or regulating private businesses.

In The Entrepreneurial State (2013), Mariana Mazzucato argues that governments often make the early, high-risk investments that enable technological breakthroughs, while private firms later commercialise these innovations.

Key idea: The state does not just fix markets — it can actively create and shape them by investing in innovation that private businesses may be unwilling or unable to fund alone.

Example: Mazzucato highlights how publicly funded research helped develop technologies such as GPS, the internet and touch-screen technology, which were later used in commercial products such as the iPhone.

This illustrates how the state can help create the technological foundations for private-sector innovation, rather than simply leaving innovation to businesses

Significance:State: The government can act as an investor and risk-taker, actively directing investment towards new technologies and industries.

Markets: Markets are not simply created by private businesses; state investment and policy can help shape and create them.

Economic development: Public investment can support technological innovation, productivity and long-term growth.

Value creation vs value extraction: When public money funds risky innovation but private companies capture much of the resulting profit, Mazzucato questions whether the public should receive a fairer return.