Comparative European Politics, 2003, 1, (215–225)

r 2003 Palgrave Macmillan Ltd 1472-4790/03 $25.00

www.palgrave-journals.com/cep

Review

Same as it Never Was: Temporality and Typology

in the Varieties of Capitalism
Mark Blyth
Department of Political Science, Johns Hopkins University, 338 Mergenthaler Hall, Baltimore,
MD 21218, USA.
E-mail: mark.blyth@jhu.edu

Comparative European Politics (2003) 1, 215–225. doi:10.1057/palgrave.cep.6110008

Perhaps it is simply a generational artifact, but every 10 years or so certain

positions in the field of comparative political economy become canonical. I
suspect that The Varieties of Capitalism (VOC) literature will do exactly this in
the coming decade, framing more research projects than any other perspective,
and shaping the way that an entire cohort of graduate students thinks about
growth, employment and the critical issues of institutional convergence and
divergence in a globalized economy. While the contributions to this literature
are many, three works stand out: Kitschelt et al. (2000), Iversen et al. (2000),
and Hall and Soskice (2001).
The first iteration of this literature by Kitschelt et al., offered us a macro-
level model, where the proximate causes of domestic institutional transforma-
tion are exogenous changes in the global economy, and since such changes were
seen to be mediated by institutions with increasing returns, divergence among
national economic models remain (Kitschelt et al., 2000). In this first version of
the Varieties literature, the action lay very much in the macro. Exogenous
changes refracted through different sets of institutions to produce particular
regime clusterings.1
The next iteration, Iversen et al. occupy a more meso level of analysis. For
these authors, rather than simply intervening with external pressures in a
passive way, certain meso-level variables, specifically; unions, employers and
central banks, are seen as active agents that respond to external pressures.
Thus, by focusing on the interaction of such agents, divergent national
outcomes are explained. Yet, despite invoking different variables to those
employed by Kitschelt et al. they come to the same conclusion — a ‘dual
convergence’ thesis where Liberal Market Economies (LMEs) stand apart, and
Coordinated Market Economies (CMEs), in general, converge on the German
model (Iversen et al., 2000).
Hall and Soskice, in turn, provide us with a micro-level analysis of the same
phenomena, and in doing so they offer us, in many ways, the most theoretically
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rich and complex version of the VOC literature. For Hall and Soskice, the
locus of action and the mechanism through which outcomes are best explained
are firms. VOC seeks to ‘bring firms back into the center of analysis’, by
focusing on the strategic interaction of firms and other actors in game theoretic
terms.2 Specifically, the responses of firms to five coordination problems
determine a nation’s particular ‘variety of capitalism.’ These are: (i) how to
coordinate bargaining with labor over wages and working conditions; (ii) how
to secure suitable skills; (iii) how to respond to problems of corporate
governance thereby gaining access to finance; (iv) how to deal with inter-firm
cooperation and competition, especially over skills; and (v) how to overcome
the problems of adverse selection in employment.
These five key problems are seen as coordination problems because they are
the product of strategic interaction in an institutional context that favors some
strategies over others, and when they are resolved, there is seen to be a Pareto
improvement over the initial position of the agents involved. In line with the
economics of organization approach used, institutional capacities for policing,
monitoring, and sanctioning labor and other product market partners, up to
and including the state, become the critical variable in delineating regime type.
Although deliberation and informal rules may ostensibly help here, the action
is focused upon self-reinforcing institutional complimentarities that result in
increasing returns. Thus, decisions taken in, for example, an LME, precisely
because it is an LME, reinforces the selection of specific LME strategies over
time (Hall and Soskice, 2001, 11). Thus, two distinct institutional clusters,
LMEs and CMEs, are seen to be the outcome.
Yet Hall and Soskice not only describe LMEs and CMEs as discrete
equilibria as the other authors do, they also elaborate how such equilibria are
stable and self-reinforcing by reference to the particular coordinative capacities
of firms afforded by different institutional settings. Consequently, phenomena
such as types of innovation strategy, the effectiveness of different types of
public policies; and even the type of social policies that will be favored in each
regime, become explicable in terms of particular institutional solutions to these
five coordination problems.
One can clearly see the strengths of this approach when taken as a whole.
Micro, meso and macro are all there. The interactions of agents and
institutions in their wider structural context is apparent, and how that context
shapes those interactions is central to the approach. It has microfoundations
meso institutions and macro regimes. It offers a coherent account of what we
see empirically; that globalization did not change everything, that agency and
institutions still matter, and that sustainable outcomes do look a lot like a
choice between Germany and America.
Given such comprehensiveness, is there room for critique? With such
paradigmatic statements there always is. However, rather than simply make
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virtues into vices, I would rather point to tensions in this body of scholarship
that are inevitable within the framework employed. Focusing my comments on
the Hall and Soskice volume in particular, but referring to this body of work
more generally, I divide my comments into three areas: what this literature is
for; why the posited stable alternatives of LMEs and CMEs may be neither
stable nor alternatives — at least as far as producing better economic outcomes
is concerned — and finally, what a focus upon skills and the institutional
dynamics of the manufacturing sector as a core focus of the VOC literature
may obscure, as well as illuminate.

What is this Literature for?

Although Hall and Soskice say they do not wish to take a position with regard
to which of their two identified equilibria is superior, they do in fact have an
implicit preference, otherwise the VOC literature would merely be an a exercise
in categorization (ibid., 21). After all, comparative institutional advantage — a
key concept of the authors — is by definition, positional (ibid., 37). What this
literature stands for is best expressed in Hall’s earlier observation that, ‘An old
specter is haunting Europe: the specter of liberal orthodoxy’ (Hall, 2001). That
orthodoxy stresses how European economic performance, especially regards
employment, appears to lag behind the United States due to the inability of
European labor markets to adjust to an exogenous shift in labor demand away
from unskilled towards skilled workers (Johnson, 1997). European welfare
states, it is argued, with their high reservation wages and replacement rates,
discourage workers from upgrading their skills, thus leading to a labor-market
demand and supply mismatch and consequent unemployment (Becker, 1996). In
contrast to this orthodoxy, Hall argues that despite declining employment
performance in Europe in the 1990s, ‘there are at least two viable ways of
organizing a liberal capitalist economy;’ the LME and the CME (Hall and
Soskice, 2000, 53). Implicitly then, Varieties of Capitalism argues for the CME
alternative and thereby for the equalitarian distributions and outcomes typical
of European political economies in the face of the neo-liberal onslaught. Or, to
give it an old fashioned cast, for Social Democracy. This I fully applaud, and
this is where I believe the first problem with this literature unavoidably crops up.

What if the Orthodox Critique of European Economies is Wrong?

Hall and Soskice rightly contest the hegemony of the orthodox model by
pointing out another viable alternative. Yet, by contesting the fact of
convergence to the American model in this way, they implicitly accept the
evaluation of the model made by its partisans: that in the aggregate,
‘European’ political economies produce inferior outcomes, especially in terms
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of employment performance, and so an alternative must be found. Hall and

Soskice offer a caveat: the German model is viable contender. Yet granting the
validity of the self-congratulatory claims of the American model may create
problems. Specifically, what happens to the claims made for these ostensible
equilibria if European economic performance was never as bad as the
conventional wisdom held? if Germany was never as stable as it was portrayed?
and if American unemployment performance is not as admirable as its
partisans portray? In such circumstances, the question ‘what is this literature
for?’ comes back into sharp relief. For if none of the constants that make the
comparison meaningful are constant, then what is ultimately being compared,
and to what end? Let us examine each of these ‘what if’s’ in turn.

Was European Economic Performance as Bad as the Critics said?

As David Howell has recently shown, the case against European economic
performance rests upon three assumptions. First, ‘that it is meaningful to speak
about a European unemployment ratey[second, that]ythe underlying
problem can be found in skill-based demand shifts against the less skilled,
and thirdy[that] wage rigidities and job search disincentives imposed by
welfare state institutionsyareyresponsible for high unemployment.’ (Howell,
2002, 206). The VOC literature seems to accept these points, yet when one
looks at the data, the case for the orthodox interpretation seems rather under-
whelming.
First of all, European unemployment, once disaggregated, is an empty
category. When seen across a 20-year period, US unemployment is sometimes
lower, sometimes higher than European unemployment, and varies most with
overall macroeconomic conditions. For example, ‘In the 1983–1988 period,
Sweden, Norway, Switzerland and Austria had rates that were much closer to
Japan (less than three per cent) than such close European neighbors as
Denmark, France the Netherlands and Belgium (9–12 per cent unemploy-
ment.)’ (ibid.). In the 1989–1994 period, the same relationships hold. By 2001,
six European countries had lower unemployment than the US, and at least two
of those were paradigmatic welfare states (ibid., 206–207). In sum, ‘chronic’
European unemployment is either a statistical chimera or a function of period
specific macroeconomic policies, both which have less than a direct relation to
the institutional variables posited by the VOC literature.3
Regarding the second and third criteria laid out above; unemployment as a
function of skill shifts in the demand curve for labor and institutional rigidities,
these points are also accepted by the VOC literature. After all, the CME’s
vocational training system and consequent high-skill set is part of what sets it
apart from other European countries and what makes it an attractive
alternative model: it can adapt to this skill shift.4 However, Howell also
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details how this concomitant explanation of unemployment is rather thwarted

by the facts.
Contrary to what the orthodox critique assumes, the relation of skills, wage
structure and employment performance appear to run in exactly the direction
opposite to that predicted by theory. For example, ‘Lower skilled workers in
the United States have hadyfar higher unemployment rates relative to skilled
workers than has been the case inyNorthern European nations’ (Howell,
2002, 209). If so, one can hardly blame European unemployment on rigidities
in low-skill labor markets since no such institutional rigidities applied to
unemployed low-skilled Americans. Again, as Howell puts it, ‘Wage flexibility
should have protected low-skilled U.S. workers from relatively high
unemployment,’ yet, looking at the data, it seems it did not (ibid., 210).
Moreover, it is worth bearing in mind that ‘most countries suffering high
unemployment in the 1980’s and 1990’s had these [allegedly] adverse
institutions in the 1960’s, when unemployment was well below that of the
United States’ (ibid., 212). As such, blaming these institutions seems somewhat
off that mark. Taking these points together then, one must ask to what extent
the European unemployment crisis is real, and therefore, apropos our
discussion, to what extent there are only two possible institutional forms of
capitalism that ‘deliver the goods.’

What if Germany is not the CME we want it to be?

If the seeming superiority of the American model is only that, then a further
challenge to the VOC approach is to show that these two posited stable
equilibria are in fact just that, stable equilibria. There are grounds for doubting
this too. The concepts of institutional complementarity, feedback, increasing
returns and the like all suggest a rather static and indeed functionalist picture.
Indeed, some varieties of authors explicitly struggle with this. Kathleen
Thelen’s contributions to this literature are signal in this regard. The tendency
across all this literature is to regard Germany as the quintessential CME.
However, such a stance is problematic if Germany itself is no longer Germany.
Thelen offers a nuanced discussion of why German employers cannot bear
to bring down the German model, based around two key points. First, if agents
cannot have ranked priors, and hence preferences, over a set of institutions
over which they have had no experience, then if employers are unsure of what
their payoffs will be under new institutions, then they will probably cling to old
ones (Thelen, 2000, 141–142, 157–158; 2001, 76–77, 83–85). However, a far
stronger claim is that the reorganization of work wrought by German
employers in the 1990 s has paradoxically handed the advantage back to labor;
thus stabilizing the CME equilibrium in the face of deregulatory pressures. The
introduction of ‘just in time’ production techniques has allowed labor to hold
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firms to ransom since the traditional weapon of the lock-out in such

circumstances plays into labor’s hands. Given this, the balance of power has
shifted decidedly and unexpectedly back to labor, thus halting deregulation
(ibid. and Passim).
Yet, Thelen also notes that German employers are increasingly defecting
from those very organizations that makes the model what it is (Thelen, 2000,
164). Strategies such as ‘flexibilizing’ central contracts to the plant level may
discourage employers exiting the whole bargaining system, but such actions are
nonetheless transformative of the institutional mechanisms that make
Germany a CME in the first place (Thelen, 2001, 83). Anke Hassel puts these
transformations in much sharper focus.
‘Today, at the end of the 1990’sythe pressures on the system to change are
overwhelming. Employers increasingly resign from employers’ confederations
or undercut — often illegally — terms and conditions provided for in collective
agreements,’ (Hassel, 1999, 2). Indeed, the very institutions posited by the VOC
literature to sustain the CME equilibrium; codetermination and training
institutions, are disappearing from the scene. ‘In 1997, only 14.4 percent of
West German and 12.3 percent of East German plants were covered by a valid
collective agreement as well as a works councily[while]y46 percent of plants
in the East had neither a works council or a collective agreement’ (ibid., 6). In
the service sector the coverage figures are even lower. In 1994, 62.4 per cent of
all firms had no plant level consultation mechanisms, and as a whole, these
institutions are not being extended into the service sector where employment
growth is at its highest (ibid., 2, 10). Similarly, the vocational training
institutions, seen as key to the CME’s success, are, according to Hassel, ‘in
severe crisis due to the reluctance of companies to take on trainees’ (ibid., 3). If
this is the case, and if such institutions are those that make the CME what it is,
then one must ask to what extent the Germany that exists is the one
represented in the model? And if it is not, then what is this a viable model of?

What if America’s Success Really is not down to it Being an LME?

If actually existing Germany may not be the Germany that the VOC literature
portrays, a parallel problem for maintaining the LME/CME distinction lies in
the fact that America’s unemployment success (even as qualified above) may be
due to factors wholly outside the LME model. Recall that the LMEs superior
economic performance rests upon overcoming the five coordination problems
Hall and Soskice detail. In the LME, this is achieved through hierarchically
organized companies with transparent balance sheets and workers with general
skills in deregulated markets rapidly responding to factor price, share price,
and labor demand shifts. Leaving aside the issue of the stability of American
corporate governance thrown up in the wake of the innumerable accounting
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scandals of the past year and what this says about transparency and
information as a governance devices, there may be a far simpler explanation
the United States’ superior employment performance. The US jails large
numbers of its unemployed. This is not as far fetched as it seems, and research
by Bruce Western and Katherine Beckett backs this up.5
Contrary to the image of the US as the quintessential LME whose
unemployment performance is a function of free markets and flexibility,
Western and Beckett argue that ‘criminal justice policy [in the US] provides a
significant state intervention with profound effects on employment trends’
(Western and Beckett, 1999, 2). Specifically, with $91 billion dollars spent on
courts, police and prisons in contrast to $41 billion on unemployment benefits
since the early 1990s, the United States government generates ‘a sizeable non-
market allocation of labor.’6
By 1993, 1,339,695 million people were incarcerated in the US, which gave
the US an incarceration rate 519 inmates per 100,000.7 In contrast, Germany’s
incarceration rate in 1993 was 80 inmates per 100,000 (Western and Beckett,
1999, 35). Western and Beckett used Bureau of Justice Statistics data to
recalculate US adult male employment performance by including the
incarcerated in the total labor pool. They found that ‘in Europe, unemployed
males outnumber male prison inmates between 20 and 50 to 1. In the United
States the ratio of unemployed to incarcerated was less than 3 to 1’ (ibid., 12).
Clearly, such a difference in the incarceration rate impacts the labor market
since including the incarcerated in the unemployment calculation reveals the
potential size of the labor market without this labor market intervention, and
thus what adjusted unemployment would be.
Western and Beckett argue that their recalculated series ‘shows that U.S.
labor market inactivity never falls below 7% in the 1980’s’ (ibid., 13). Indeed,
‘if all inmates are included among the unemployed, labor utilization in Europe
is higher for 15 of the 19 years of the 1976–1994 period’ (ibid., 14). The authors’
calculations reveal that in 1995, the official unemployment rate was 7.1 per cent
for Germany and 5.6 per cent for the US. However, once recalculated to
include inmates in both countries, German unemployment rises to 7.4 per cent
while US unemployment rises to 7.5 per cent (ibid., Table 2, 37).
Although these recalculations focus on the subset of adult male unemploy-
ment and as such cannot account for the total variance in unemployment
between the two states, such state intervention into the labor market
‘contributes to a falsely optimistic picture of U.S. labor market performance
in comparison to Europe’ (ibid.,). The US, it seems, intervenes in labor markets
just as much as European governments do, and this does indeed seem to
improve unemployment performance, but going by this example, none of this
has much to do with the institutions that make it an LME and that
hypothetically give it superior performance.8 In sum, if the three key
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assumptions that support the case for distinct varieties of capitalism; inferior
European unemployment performance, superior American performance, and
Germany as a distinct and stable alternative, are all questionable, one must
question not just the stability of these hypothesized alternatives, but their very
existence.

Explaining Stasis Amid Change: Skills and the Manufacturing Bias

All of which brings up two final points; the general focus on skills and what
might be termed the concomitant ‘manufacturing bias’ in the VOC literature.
Several authors in the VOC literature focus upon how skills are not only
important to employers, they are in fact seen as the very key to future job
growth and equality (see Estevez-Abe et al., 2001; Mares, 2001). This point
may be fair enough, but pushed too far, this ‘supply side social democracy’
suffers from a latter day ‘Say’s Law’ problem — supply may not create its own
demand.
As Robin Varghese puts it, ‘One can debatey whether a different
composition in the skill set of labor would mean more jobs using skilled
labor, etc. But the fact remains that many jobs are not amenable to
productivity increases and improvements as a result of raising the level of
human capitaly[since]yLabor productivity across the skills set increases as
the capital–labor ratio increases, that is, as capital substitutes [for] labor’
(Varghese, 2001). Given this, it is little surprise then that employment growth is
concentrated in the service sector since productivity increases in manufacturing
are predicated on employing less labor, not more; something this approach
seems to ignore and those in the 1960s, 1970s and 1980s, frightened of
automation-induced unemployment, may have gotten partially right.
The reasons for this are simple. First is a simple saturation effect: increase
supply and price drops. However, more serious is the charge that skills per se
may have little to do with employment outcomes. Again, Howell’s work is
instructive in this regard. Citing research by Andrew Glyn, Howell argues that
the orthodox theory of European unemployment discussed above would
predict that the employment rate gap between skilled and unskilled workers
should be greatest in states with the most labor market protections. In fact,
‘there seems to be little association across countries between unemployment
rates by skill and the strength of labor market institutions’ (Howell, 2002, 212).
Moreover, if skills are so important, especially in CMEs, then job growth, even
in the service sector, should reward skills. Indeed it does, at least in part, but a
simple quantitative fact overwhelms this.
The US Bureau of Labor Statistics projections for job growth for 2000–2010
rank computer software engineers as the fastest growing occupation and
predicts a 100 per cent increase in such jobs over the next decade.9 In
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quantitative terms, 380,00 new skilled service jobs should be created. However,
when one looks at the occupations with the largest job growth by volume one
finds that while high-paid service sector jobs such as software engineers will
total some 760,000 by 2010, food preparation and customer service
representatives will account for 5,456,000 jobs over the same period.10
As such, if skills increase with the capital–labor ratio, and job growth is
concentrated in occupations where that ratio is the lowest, one must wonder
what all these skilled workers are supposed to do when the service sector does
not need their skills, and manufacturing reduces its overall labor demand in
proportion to the skill input. As The Economist Magazine put it ‘the most
believable forecast for 2020 suggests that manufacturing output in the
developed countries will at least double, while manufacturing employment will
shrink to 10–12% of the total workforce.’11 Paradoxically then, the German
skills machine might be producing itself into oblivion as far as job creation is
concerned. In short, more skills do not necessarily add up to more jobs, let
alone better jobs.
Finally, all of this points to a particular bias in the VOC literature as a
whole where the focus upon the manufacturing sector, especially in the
discussion of CMEs, is somehow representative of whole economy. Not one of
the essays in any of the three volumes that constitute this literature deals
directly with the service sector, and the identified institutions and processes
that constitute these discrete equilibria seem much more constitutive of
manufacturing than services.12
In fairness, Hall does make the case that CMEs can produce service sector
jobs that do not jeopardize equalitarian outcomes in another piece outside the
Varieties volume (Hall, 2001). Hall posits three possibilities. First, that ‘the
service sectoryincludes business servicesywhere many positions demand
high skills and the productivity that can justify reasonably high wages’ (Hall,
2001, 72). Second, that by increasing the scope of public goods provision by the
state, high service sector wages can be maintained. Third, that by cutting social
security taxes, job growth can expand without altering wage distributions
(ibid., see also Iversen and Wren, 1997).
All of these are indeed possibilities, but they are ultimately possibilities
within highly circumscribed limits. As noted above, unskilled service sector job
growth quantitatively overwhelms skilled service sector job growth. Similarly,
as Hall recognizes, the expansion of public goods and the cutting of social
security taxes is limited by the available tax base. In an era when tax increases
seems to be off the agenda of practically all political parties, such strategies
seem inherently limited in scope (ibid., 73).
While I am all for arguing for social democracy, doing so through a lens that
ignores the fact that manufacturing needs less workers the more skilled they
are, and that the majority of service occupations, a sector which constitutes
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over 60 per cent of advanced country GDP, does not need skills, just workers,
seems rather to miss the point. The issue of how to generate equalitarian
outcomes in services is perhaps the single most important issue facing social
democracies in the new millennium. Unfortunately, with its implicit acceptance
of the orthodox theory of European unemployment, its attempt to ‘fix’
Germany the only alternative, and its skills and manufacturing bias, the VOC
framework, offers only partial solutions for such a laudable and necessary
project.

Notes
1 That is, Liberal Market Economies on the one hand and the tendency for National Coordinated
Market Economies to converge upon Sectoral Coordinated Market Economies on the other.
2 Although this use of game theory seems to be more metaphorical than actual since none of the
contributions to the volume actually employ an extensive form game theoretic framework in
their accounts.
3 The deflationary sado-monetarist bias of the ECB springs to mind here.
4 Indeed, for many of the VOC contributors, how skills are apportioned and produced by LMEs
and CMEs is their defining feature.
5 Western, B. and Beckett, K. ‘How unregulated is the U.S. labor market? The penal system as a
labor market institution’, Mimeo copy from Dr. Western’s Website at http://www.princeto-
n.edu/Bsociolog/faculty_directory/western_working_papers_online.html. This paper was also
published as Western and Beckett (1999).
6 Ibid., p. 7. However, such differences cannot be attributed to simply a function of rising crime
rates since crime rates have fallen while numbers jailed have increased.
7 Today, the Economist puts the US prison population in 2001 at 1, 931, 859, which does not
include the 347,320 prison staff guarding these prisoners. Figures from The Economist, Pocket
World in Figures 2002 (London: Economist Newspaper Ltd. 2001); and Statistical Abstract of
the United States 2001 Table No. 380. If anything, the Western and Beckett study is
underestimating hidden unemployment in the US.
8 Another example of this is James Galbraith’s estimation of US unemployment performance in
the 1990s being a function of the introduction of the Earned Income Tax Credit (EITC), which
acts as a wage subsidy for low-wage workers. Again, while plausible, this is a very un-LME
policy that bears little relation to the institutional effects delineated by the VOC literature,
which are supposedly constitutive of US employment performance. See Galbraith et al. (1999).
9 See BLS data on fastest growing occupations at http://www.bls.gov/emp/emptab3.htm.
10 See BLS data on occupations with the largest job growth at http://www.bls.gov/emp/
emptab4.htm.
11 The Economist magazine, ‘The manufacturing paradox’, 15th September 2001.
12 For example, patient capital, supervisory and codetermination boards, vocational training,
peak bargaining, etc., are all far more common in the manufacturing than the service sector.

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