Varieties of Capitalism is a title of book written by political economists Peter A. Hall and David Soskice. In this book, they analyzes two distinct types of capitalist economies: liberal market economies (LME) and coordinated market economies (CME). They considered 5 spheres which firms must develop relationships with(industrial relations and wage and productivity; vocational training and education; corporate governance; inter-firm relations; and employees) and categorized capitalism of different countries into the two types. Varieties of capitalism is 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 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.

According to the book, institutions are shaped not only by 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 to develop complementary institution in other spheres. (for example: countries with stock market liberalization has less labor protection and vice versa). Firms of LME and CME respond very differently to a similar shock 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 firms toward particular kinds of corporate strategies. Thus, two types of economies have different capacities for innovation and tend to distribute income and employment differently.

Criteria	LME	CME
Mechanism	Competitive market arrangements	Non-market relations
Equilibrium	Demand/supply and Hierarchy	Strategic interaction among firms and other actors
Inter-firm relations	Competitive	Collaborative
Mode of Production	Direct product competition	Differentiated, niche production
Legal system	Complete and formal contracting	Incomplete and informal contracting
Institutions’ function	Competitiveness Freer movement of inputs	Monitoring Sanctioning of defectors
Employment	Full-time, General skill Short term, Fluid	Shorter hours, Specific skill Long term, Immobile
Wage bargain	Firm level	Industry level
Training and Education	Formal education from high schools and colleges	Apprenticeship imparting industry-specific skills
Unionization Rate	Low	High
Income Distribution	Unequal (high Gini)	Equal (low Gini)
Innovation	Radical	Incremental
Comparative Advantage	High-tech and service	Manufacturing
Policies	Deregulation, anti-trust, tax-break	Encourages information sharing and collaboration of firms

Examples of LMEs are the U.S. and the U.K economies while most of Scandinavian countries and Germany are CMEs.

External links

Peter A. Hall http://www.gov.harvard.edu/people/faculty/peter-hall
David Soskice http://www.politics.ox.ac.uk/index.php/profile/david-soskice.html