Capitalism Institutions

Abstract

Capitalist ideals are currently being practiced around the globe, particularly after the demise of socialism. The current political establishments are supporting the capitalist ideals via numerous ways ranging from economic policies to social and political programs undertaken by various agents of the state.

However, capitalist ideals have been questioned, particularly in its emphasis on private ownership. Capitalist ideals have been criticized in its ability to create instability, social exclusion, and unfairness within the societal systems. On the contrary, capitalism has been observed as dynamic and encourages innovations in political, social, and economic establishments. These ideals and practices are embedded on various economic, social, and political institutions.

Introduction

Capitalism is an economic system based on the principle that private citizens or corporations have the freedom to own, distribute, and control the factors of production in a society as opposed to the state. In other words, capitalism is a concept that emphasizes the private ownership of the means of production (Streeck, 2011).

The concept of capitalism has equal measures of support and criticism. While proponents argue that capitalism is dynamic and encourage innovations in political, social, and economic establishments, capitalism has been questioned in its ability to create instability, social exclusion, and unfairness within the societal systems.

In other words, capitalism is accused of generating political instability, global financial crises, joblessness, and the inability to take into account the welfare of the disadvantaged in society (Streeck, 2011). However, currently, capitalism is practiced in almost all political establishments, especially after the collapse of socialism in Eastern Europe. Essentially, capitalism has increased competition in the global market through globalization and free-market philosophy.

Literature Review

Various studies have been conducted on capitalism, starting with the works of Adams Smith. However, previous work on capitalism focused on the theoretical approaches instead of the practicability of capitalism (Thelen & Hall, 2009). The current studies focus on various dimensions of capitalism, especially its weaknesses. Current studies have raised various questions concerning capitalist ideals widely practiced around the globe.

In other words, political scientists and economists have constantly debated on capitalism with varied views arising from such debates. Currently, the types of questions various scholars are grappling with a range from the type of social and economic institutions that bring about improvements in the current capitalist advanced economies to the kinds of institutions that are not functioning well in the current systems.

Also, current scholars are questioning how the current capitalist system benefits the society, as well as the level of social and economic effects of the current capitalist system regarding social stability and inclusion (Hall & Gingerich, 2009).

Thelen and Hall (2009) argue that the current capitalism is different from the previous classical ideologies of competitive markets. While classical ideology views the marketplace as being perfectly competitive and prices are determined by the supply and demand, the current capitalism is driven by innovations and technological advancements.

Moreover, various economic and social institutions in addition to private players within political units, drove the previous free market dynamics. However, currently, the capitalist ideals are devoid of any institutions. In other words, current capitalism is based on individual players amorphously situated in diverse countries. Further, Thelen and Hall (2009) argue that the current global economic crises are attributed to this deficiency.

Besides, Hall and Gingerich (2009) faltered the current capitalist ideals being practiced around the globe and argue that private ownership is not necessary but sufficient for dynamism.

In other words, the capitalist practice where capital can be used in all sectors without the state controls becomes necessary in any economic developments. However, such developments have to be supported by strong economic and social institutions to encourage dynamism and do away with various limitations that may accompany such development.

Streeck (2011) tended to study how current innovations affect capitalist ideologies. Streeck (2011) observed a positive linkage between innovations and capitalism. However, in most parts of the globe, various institutions are lacking to support the dynamism. While innovations are critical in creating new markets, the investments made increases the demand for fixed capital. However, the study failed to identify various institutions critical in fostering decisive responsiveness to the novel prospects brought about by innovations.

Recent studies have demonstrated the existence of different models of capitalism practiced in the different parts of the world. Groenewegen (1997) distinguishes four models of capitalist systems practiced across the globe ranging from Anglo American to Japanese models.

Groenewegen (1997) argues that the nature of conventional capitalism is characterized by private property ownership and markets where entities operate with the governmental institutions providing supervisory roles and rarely intervenes unless failures or imperfections occur in the market. However, institutional capitalism emphasizes on the institutions, history, and cultures.

Types of Capitalist Institutional System

Capitalist systems can be classified into four different models. These models are derived from different cultures and histories. The models describe the dynamics and characteristics of various capitalist institutions found around the globe. While the differences exist in terms of characteristics, the bottom-line ideology of capitalism is found in all these institutions.

Anglo-American Model

The model is derived from the capitalist systems practiced in the United States, United Kingdom, New Zealand and Canada. In this model, the interest of the shareholders and the centre of management of firms are emphasized. Besides, in this system, the providers of capital have absolute control over the asset of the firm. As such, the capitalists assume ownership of the firm putting them at the top of the organizational hierarchy.

In fact, the main shareholder is granted an absolute authority to be the main signatory of all contracts. In addition, the main shareholder has the right to change the membership of the group and to define ownership of the firm among other rights. The model provides for the position of the Chief Executive officer (CEO) as the most powerful manger.

However, the CEO must be answerable to a board of governors. The system provides for elaborate checks and balances on the management and performance of the private entity. Moreover, duties and obligations of various parties are well documented in formal contracts that must be signed by both parties.

Tentatively, the shareholder’s control over the resource is mainly based on the microeconomic theory of the firm. The theory of the firm places the capitalist in a central position. The capitalist offers employees better terms in exchange for control over the business. According to the theory, providers of risk capital should have control over the business resources. The theory stresses that a business concern is a hierarchical organization with definite power relations.

This point of view differs from the agency perspective theory, which the model is also based. According to the agency perspective model, the firm is a chain of agreements. The capitalist is viewed as the outstanding claimant and the central party to all the agreements made between the firm and other stakeholders. The capitalist can alter the terms of agreements on behalf of the company or sell the rights to other investors.

However, there are numerous flaws linked to the Anglo-American model; for instance, information management is rigorously controlled. As a result, stakeholders have limited access to the company’s information. The administration can also make it impossible for the company to protect itself from detrimental takeovers.

Last but not least, the model strongly discourages cross-stock holdings and concentration of power and close relations in the industry. Business transactions that entail labor, transitional products, capital, and expertise are all regulated through classical pacts. Official pacts, in which tasks and functions are comprehensibly described, govern all the transactions.

Generally, the Anglo-American model does very well in offering provisional flexibility. This is due to clear management goals, work rotation and employee turnover rate. Moreover, in the Anglo-American model, prices provide clear signs that arouse entry of new businesses into the industry.

Competition arouses innovations, particularly far-reaching innovations. For companies, investment in research and development is principally a matter of aptness, market penetration and financing through personal sources. Information that is reasonably easy to cipher can be developed and swapped.

Rivalry prompts management to capitalize on shareholder value. In other words, the management is profit-oriented. However, the principal shortcoming of the Anglo-American system is long-term efficiency, which is required in relation-specific investments. Since the model envisages intense vertical integration, the cost of managing relation-specific investment transactions is relatively high.

The European System

This system is practiced in most European countries such as Germany, Sweden, and Netherland, among others. The European model of capitalism emphasizes consensus building through negotiations between various stakeholders.

The system encourages the formation of vibrant labor unions and employer organizations to negotiate for compensation and reward policies and practices acceptable across the board with the survival of the system given priority. Unlike the Anglo-American model, both the shareholders and employees whose interests are equally important to do participate in managing the organization. Transactions are more open-ended and in most cases based on mutual interests, long-term commitments, and consensus building from both parties.

This model does not regard a firm as a nexus between unknown capitalists and representatives but as an arrangement between shareholders and employees. In Germany, the shareholders are statutorily represented by a supervisory board, which oversees the running of the business by the executive.

The transactions are controlled by more sensible pacts, which are unrestricted and long-term in nature as compared to the classical pacts. The key aspects of the European system model are quid pro quo, shared interest, and consensus building. The state laws support market structure and long ran investments. Government agencies are tasked to ensure that businesses adhere to long-term commitments.

The European model blurs the difference in ownership using a multifaceted system of inter-stock holdings and promotes long ran relations between the key stakeholders. The principal disparity between the Anglo-American system and the European system is the confidence among the investors and the executive.

The confidence is manifested in the cross-stock holdings and worker associations, among others. Relational capitalism is more or less the same as the European system. The system boasts of strong relations, accessibility of long-standing capital, and availability of financial monitors. This leads to a relatively low transaction cost. However, the shortcomings of the European system are also relevant for relational capitalism. The system is inflexible and comparatively ambiguous.

State Capitalism

State capitalism is characterized by absolute control of the economy by the government. Unlike the European model, labor unions and employer organizations do not engage in the formulation of labor policies for the central government. The key to this model of capitalism is the fact that a small elite group of individuals in the state controls the politics and the management of big firms, which forms the core of an economy of a state. This model is very common in some parts of Europe and Africa.

State-led model is strong in directing complex technological plans in which research, development, and marketing can be isolated from the global market. This system is frail in industries that are predisposed to market signals. From the perspective of social market capitalism, the model fosters venture in particular assets and equally in long ran relations. This is particularly true when it comes to human resources. However, the model suffers from short-term rigidity and restricted relations.

Relational Capitalism

Relational capitalism is practiced mainly in Japan and some Asian countries. The system derives most of its practices from the values of communism. Central to this model is the interest of all the stakeholders. This not only includes the interest of the shareholders and management, but also the customers, government, and suppliers.

Each stakeholder in the organization plays a mutually agreed monitoring role taking into consideration the survival of the system. The management enjoys a high level of autonomy, giving the managers exclusive abilities to prepare long-term plans for the firm. The key component of this model is the level of incentives that comes with competition among different groups.

Transactions in rational capitalism mainly take place within the firm. The agreements within this model are interdependent. The most important element in this model is managerial autonomy, which makes it possible for the executive to come up with long-term relations and mutual pacts.

The model is based on the theory that views the firm as an embryonic set of competences. Such a conceptualization of the firm has an impact on the type of business portfolio, innovation, and investment finance. The joint assessment among the stakeholders is motivated by a common interest in the general welfare of the company.

Currently, competition experienced among companies offer a major incentive to develop short-term relationships and mutual contracts. The model type of rational capitalism normally takes into consideration both the short-term and long-term incentives, for instance, a high level of competition within the industry and long-term trust among the stakeholders.

The concept of cross-penetration

According to the economic theories, the concept of cross-penetration is hinged on the flaws of a given governance structure, which can be rectified by introducing components of other model types. Several authors emphasized the interpenetration between markets and organizations. According to these authors, failures in the market can be rectified by borrowing certain aspects of the organization. The market is usually characterized by profit-maximization principle and free entry and exit principle among the members.

The market elements have flaws; for instance, an entrepreneur in a market setting with prices as indicators normally embrace temporary and contracted level of effectiveness. On the other hand, the market arena normally suffers from opportunism and inadequate information. The flaws in the market can be rectified by specific elements of the organization, for example, collective decision-making and contracted relations.

Similarly, the organizational flaws can be corrected by borrowing certain elements of the market arena, which is importing aspects of individual decision-making and market venture. The result is an organizational-like market arena and vice versa. The balance between the market and the organization is what constitutes relational capitalism, which is predominant in Japan and other parts of Asia.

Numerous changes in capitalism in different countries and continents can be interpreted as instances of rectification of flaws through cross-penetration. Many Anglo-American firms have started to embrace long-term, relationship-geared practices of their Asian and European competitors.

Some of these changes are attributed to the foreign investment of Asian and European companies in the American market. For this reason, American companies have been able to adopt other forms of capitalism, and tactically invested in long ran relations. Similarly, a number of the American states have embraced several elements of the European model, for instance, anti-hostile takeover laws, which makes hostile takeover an industrial crime punishable under law.

The concept of cross-penetration has significantly contributed to the spread of capitalism. Foreign models of capitalism are being introduced into other territories through institutions. Many studies conceptualize institutions as a bunch of practices based on rules that have to be adhered to, whether they are backed by the law or not. These rules can range from official laws or organizational processes to unofficial practices that are conventional, for instance, industrial expectation.

Since most economies are full of capitalists interested in enhancing the competitive advantage, prevailing institutions are always under intense pressure. Institutional balance can budge due to fabric conditions, command, and individual characteristics (Streeck, 2011, p. 158). Streeck (2011, p. 159) argues that the changes can become common features of noninterventionist and corresponding market economies.

The development of the global socio-political economy is one of the most significant incentives for the present institutional adjustments across the globe.

These developments include the increasing significance of the service sectors in the manufacturing industry, global competition, fewer barriers to trade, labor mobility and the emergence of new markets (Streeck, 2011, p. 160). Hall and Gingerich (2009, p. 441) emphasize that governments should make sure that institutional goals and interest matches the legislative initiatives and public interest.

Conclusions

The models of capitalism present various institutional frameworks characterizing the capitalist ideals practiced around the globe. However, the current scholars have questioned the ideals of capitalism, particularly its contribution towards the benefits of society. While previous studies have attributed major global developments to capitalistic ideals, the current studies have faltered the ideology arguing that it has led to increased human sufferings particularly in the current system where innovations play a crucial role.

Numerous changes in capitalism in different countries and continents can be interpreted as instances of rectification of flaws through cross-penetration. In other words, certain aspects of capitalism can be imported to correct flaws in the existing model. Many Anglo-American firms have started to embrace long-term, relationship-geared practices of their Asian and European competitors.

Some of these changes are attributed to the foreign investment of Asian and European companies, in the American market. Similarly, a number of the American states have embraced several elements of the European model, for instance, anti-hostile takeover laws, which makes hostile takeover an industrial crime punishable under law.

References

Groenewegen, J. (1997). Institutions of capitalism: American, European and Japanese systems compared. Journal of Economic Issue, 26 (2), 333-344.

Hall, P. A., & Gingerich, D. W. (2009). Varieties of capitalism and institutional complementarities in the political economy. British Journal of Political Science, 39 (3), 449-482.

Streeck, W. (2011). Taking capitalism seriously: towards an institutionalism approach to contemporary political economy. Socio-Economic Review, 9(1), 137-167.

Thelen, K., & Hall, P. A. (2009). Institutional change in varieties of capitalism. Socio-E