Coordinated market economy

Varieties of Capitalism: The Institutional Foundations of Comparative Advantage is a 2001 book on economics authored by political economists Peter A. Hall and David Soskice. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage is a 2001 book on economics authored by political economists Peter A. Hall and David Soskice. In their sizable introductory chapter, Hall and Soskice set out two distinct types of market economies that implement capitalism: liberal market economies (LME) (e.g., U.S., U.K., Canada, Australia, New Zealand, Ireland) and coordinated market economies (CME) (e.g. Germany, Japan, Sweden, Austria). Those two types can be distinguished by the primary way in which firms coordinate with each other and other actors, such as trade unions. In LMEs, firms primarily coordinate their endeavours by way of hierarchies and market mechanisms. Coordinated market economies rely more heavily on non-market forms of interaction in the coordination of their relationships with other actors. The authors considered five spheres in which firms must develop relationships with others: While Hall and Soskice categorized the capitalism of different countries into two types (LME and CMEs), there is a ‘hybrid’ type, represented by countries in the Mediterranean ring. Varieties of Capitalism offers a new framework for understanding the institutional similarities and differences among the developed economies, since national political economies can be compared by reference to the way in which firms resolve the coordination problems they face in these five spheres. These two models (CMEs and LMEs) are at the poles of a spectrum, along which many nations can be arrayed; i.e., even within these two types, there are significant variations. Extending the scope of Hall and Soskice's framework to countries outside Western Europe and the US, other authors have developed different varieties of capitalism, such as dependent market economies, and hierarchical market economies. According to the book, institutions are shaped not only by the legal system, but by informal rules or common knowledge acquired by actors through history and culture of one nation. Institutional complementarities suggest that nations with a particular type of institution then develop complementary institution in other spheres. (For example: countries with stock market liberalization have less labor protection, and vice versa.) Firms of liberal and coordinated market economies respond very differently to a similar shock (an economic cycle), and institutions are socializing(?) agencies, and go through a continuous processes of adaptation. Institutional arrangements of a nation's political economy tend to push its companies toward particular kinds of corporate strategies. Thus, the two types of economies have different capacities for innovation, and tend to distribute income and employment differently. Examples of LMEs are the U.S. and the UK, while most Scandinavian countries and Germany are CMEs. According to Varieties of Capitalism, there are many different ways of organizing a capitalist economy. The sees 'two extremes' between Coordinated Market Economy (CME) models and the Liberal Market Economy (LME) models.