Institutional change in varieties of capitalism
Peter A. Hall
1
and Kathleen Thelen
2
1
Minda de Gunzburg Center for European Studies, Harvard University, Cambridge, MA, USA;
2
Department of Political Science, Northwestern University, Evanston, IL, USA
Correspondence: phall@fas.harvard.edu
Contemporary approaches to varieties to capitalism are often criticized for
neglecting issues of institutional change. This paper develops an approach to
institutional change more extended than the one provided in Hall and Soskice
(in Varieties of Capitalism: The Institutional Foundations of Comparative Advan-
tage, Oxford, Oxford University Press, 2001) but congruent with its varieties-of-
capitalism perspective. It begins by outlining an approach to institutional stability,
which suggests that the persistence of institutions depends not only on their
aggregate welfare effects but also on the distributive benefits that they provide
to the underlying social or political coalitions; and not only on the Pareto-
optimal quality of such equilibria but also on continuous processes of mobilization
through which the actors test the limits of the existing institutions. It then devel-
ops an analysis of institutional change that emphasizes the ways in which defec-
tion, reinterpretation and reform emerge out of such contestation and assesses
the accuracy of this account against recent developments in the political econom-
ies of Europe. The paper concludes by outlining the implications of this perspec-
tive for contemporary analyses of liberalization in the political economy.
Keywords: capitalism; varieties of; economic reform; Europe; globalization;
institutional change; institutions
JEL classification: N0 economic history
1. Introduction
Comparative political economists have become deeply interested in processes of
institutional change, especially those taking place in response to the opening of
world markets associated with ‘globalization’ (Pierson, 2001; Djelic and Quack,
2003; Rieger and Leibfried, 2003; Campbell, 2004). They are asking a number
of questions: When do the institutions of the political economy change? What
factors drive the change? Are the changes in the international economy enforcing
institutional convergence on the developed economies?
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We take up these issues with reference to one of the more influential
frameworks devised to explain national differences in economic performance
and policy, namely the ‘varieties of capitalism’ perspective now employed by a
substantial number of scholars (see Hall and Soskice, 2001). Building on the
literatures of neo-corporatism and the ‘regulation school’, this approach applies
the new economics of organization to the macroeconomy (Boyer, 1990; Schmitter
and Streeck, 1985; Milgrom and Roberts, 1992). It focuses on firms, as actors
central to the process of economic adjustment with core competencies that
depend on the quality of the relations that they develop with other actors, includ-
ing producer groups, employees and other firms. Those relationships depend, in
turn, on the institutional support provided for them in the political economy.
Although the perspective acknowledges that these relationships can take on a
wide range of forms, it emphasizes the distinction between liberal market econ-
omies, where firms rely heavily on competitive markets to coordinate their
endeavours, and coordinated market economies, where more endeavours are
coordinated strategically. These different modes of coordination are said to
confer comparative institutional advantages that mediate national responses to
globalization. They rest on institutional complementarities that allow arrange-
ments in one sphere of the political economy to enhance the results secured in
others. The framework provides distinctive perspectives on many of the issues
raised by globalization.
However, questions have been raised about the adequacy of the varieties-of-
capitalism perspective for understanding institutional change. Some argue that
this approach is overly static and its distinction between liberal and coordinated
market economies outmoded by the liberalization of the world’s economies.
Others read into it an overweening functionalism that explains institutional
change by reference to its macroeconomic effects, and suggest that the approach
neglects the social or political dimensions of institutional change.
1
These cri-
tiques raise important issues that go well beyond the Hall and Soskice (2001)
volume. The varieties-of-capitalism approach offers fresh and intriguing insights
into differences among the developed economies, but it can hardly be considered
viable if it cannot also address processes of institutional change. Many of the
criticisms suggest that the equilibrium elements of the new economics of organ-
ization analysis are inimical to dynamic analysis and that rationalist approaches
understate the chaotic quality of institutional change or the contribution unin-
tended consequences make to it. These concerns have significance for the analysis
of institutional change more generally.
1
For relevant critiques see Howell (2003), Goodin (2003), Watson (2003), Blyth (2003), as well as
those collected in Coates (2005) and Stato e Mercato, 69 (December 2003).
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The objective of this paper is to address these issues by elaborating an account
of institutional change more extended than the one provided in the study by Hall
and Soskice (2001), but congruent with its varieties-of-capitalism perspective.
Our claim is that this perspective embodies a sophisticated understanding of
institutional change that is eminently political and useful for analysing contem-
porary developments in the advanced political economies. We show that the
equilibrium aspects of this approach are not incompatible with dynamic views
of the political economy and explain why rationalist approaches to the political
economy need not imply a barren functionalism.
We begin by reviewing some basic tenets of the varieties-of-capitalism
approach that underpin cross-national comparisons in order to show that they
can inform the analysis of change as well. Based on these tenets, we develop a
series of propositions concerning the sources of institutional stability, which we
subsequently use to develop contentions about institutional change. Although
our principal objective is to outline a theoretical perspective, we provide some
preliminary substantiation for its propositions with reference to recent develop-
ments in Germany and other coordinated economies, since these are key cases for
analysts of change in the political economy. We close by drawing some general
conclusions about the trajectory of the European economies today.
2. The institutional and theoretical terrain
In this paper, we conceptualize institutions as sets of regularized practices with a
rule-like quality in the sense that the actors expect the practices to be observed;
and which, in some but not all, cases are supported by formal sanctions. They
can range from regulations backed by the force of law or organizational pro-
cedure, such as the rules that apply when a worker is laid off, to more informal
practices that have a conventional character, such as the expectation that firms
will offer a certain number of apprenticeships.
2
In some cases, macro-
institutions, such as the ‘vocational training system’, are composed of many
component rules and practices that are themselves institutions.
Compared with alternative perspectives, several features of the varieties-
of-capitalism approach to institutions are distinctive. First, as a firm-centric
and broadly rationalist approach, it conceptualizes the political economy as a
terrain peopled with entrepreneurial actors seeking to advance their interests as
2
While analytically distinct, it is worth noting that the more formal and the more informal or
conventional dimensions of institutions are often linked. For example, the convention that large
firms supply apprenticeship slots is supported, albeit at slight remove, by a number of formal
institutions—e.g. compulsory membership in employer chambers, strong unions pushing firms
up-market, and relatively centralized wage bargaining institutions that compress wages and allow
firms to earn rents on training.
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they construe them, constrained by the existing rules and institutions but also
looking for ways to make institutions work for them. Although some institutions
rely on sanctions for their operation, the varieties-of-capitalism approach moves
away from a view of institutions purely as factors that constrain action towards
one that sees them also as resources, providing opportunities for particular
types of action, and especially for collective action (see Hall, 1998).
Second, the varieties of capitalism framework emphasizes that the political
economy is replete with a multiplicity of institutions, many of which are
nested inside others. Some can serve as functional substitutes for other insti-
tutions, at least for some purposes.
3
Thus, any strategy adopted by a firm or
other actor is likely to be conditioned, not by one, but by a number of insti-
tutions. Emphasizing institutional interaction effects, the varieties-of-capitalism
approach argues that firm strategies are conditioned simultaneously by multiple
institutions, often in different spheres of the political economy (Hall and Soskice,
2001, pp. 21 –36).
There are important points of tangency between this perspective and some
other well-known approaches to institutions. From the ‘logic of appropriateness’
approach favoured by some new institutionalists, this perspective accepts the
point that institutions may sometimes influence action because they define
behaviour seen as appropriate to the endeavour at hand from the perspective
of a particular cultural worldview (March and Olsen, 1989; Dobbin, 1994).
From the ‘institutions as equilibrium’ approach advanced by Calvert (1995a, b)
and others, it accepts the observation that the stability of a particular pattern
of strategic interaction often rests on the absence of Pareto-improving alterna-
tives apparent to the actors under current conditions. Although often presented
as polar opposites, we do not regard these perspectives as mutually exclusive in a
real world that contains many motives for and patterns of behaviour.
However, neither of these approaches fully conveys the ‘institutions as
resources’ element of our perspective and, if carried to extremes, both overstate
the degree to which any one institution determines the action. To say that an
institution specifies patterns of behaviour seen as appropriate to the culture
should not be taken to imply that all or even most in that culture adhere slavishly
to it. There is always room, and often reason, to be critical of what is deemed
‘appropriate’. Similarly, although the mutual benefits of strategic interaction
may render an institution more stable, this observation says only a little about
how institutions are sustained, because it ignores the omnipresent processes of
search and negotiation whereby entrepreneurial actors look for alternative ways
3
In a powerful analysis, Streeck (1991) has described this last feature as one that supplies ‘redundant
capacities’ to actors. As he notes, some of these capacities are more available in some places and for
some purposes than others.
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in which to advance their interests (Knight, 1995). There is more intrinsic
openness to the institutional arena than these two perspectives imply.
3. Institutional stability as a political problem
Any analysis of how institutions change should begin from a conception of how
institutions are sustained during periods when they remain stable. As noted
above, the core theoretical pillars that distinguish the varieties-of-capitalism fra-
mework from many alternatives are: (i) it puts employer interests at the centre of
analysis, and (ii) it draws attention specifically to the institutions that support
either market or strategic coordination among firms and between them and
other actors. These two theoretical claims generate a specific set of propositions
about institutional stability.
First, while the emphasis on employer interests does not imply that other
actors (labour, governments) are unimportant, it underscores a crucial assump-
tion, namely, that the institutions and practices of capitalist political economies
can rarely be sustained over time without the active support of at least some
powerful segments of capital (see, especially, Swenson, 2002). Moreover, as we
have noted, the varieties-of-capitalism framework holds that most institutions
in the political economy rest not on practices of passive rule-following by
firms, but on a more active process in which entrepreneurial actors seek to
advance their interests, including in contexts of strategic interaction where insti-
tutions can improve the well-being of those who participate in them by resolving
collective action dilemmas. Such a view belies any simple notions of ‘institutional
inertia’ and implies a relatively loose coupling between self-interest and
institutions.
This loose coupling means that a good deal of politics surrounds institutional
stability. From the broadly rationalist perspective we adopt here, the durability of
an institution can rest substantially, if rarely wholly, on how well it serves the
interests of the relevant actors. Where an institution fails to serve those interests
well, it becomes fragile and susceptible to defection from its rules. But actors’ cal-
culations about whether an institutional practice serves their interests are
complex ones, dependent on a range of considerations. They entail balancing
the multiple interests that one single actor has in a potential course of action,
along with time discounts and competing evaluations about the effects of one’s
actions (Hall, 2005).
In the context of this politics, the varieties-of-capitalism perspective draws
attention to several factors that can militate in favour of the stability of insti-
tutions. One is the presence of institutional interaction. As we have noted, the
strategies followed by an actor, such as a firm, and the benefits to be expected
from the use of these strategies are usually conditional on the presence of a
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