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230. Comparative Political Economy ​

Learning outcomes ​

  • When one rich democracy ends up with high inequality, short-termist firms, and flexible labour markets while another ends up with the opposite, you'll know to read the gap as a bundle of institutions (how firms get capital, how workers are trained, how wages are bargained) that fit together and were built by particular political coalitions, rather than reaching for a single-cause story about culture, geography, or growth.

What the field studies ​

Comparative political economy (CPE) asks why otherwise-similar rich democracies organise their economies differently, why those differences persist, and what consequences they have for growth, inequality, and innovation.

Post-1980 work has settled on three claims. Markets are constructed by institutions (legal systems, financial regulators, labour-market rules, training systems), not given by nature. Those institutions form complementary bundles whose parts fit together, so changing one part without the others tends to make the system work worse. And the bundles are politically maintained: they reflect the coalitions that built them and shift when those coalitions shift.

Varieties of Capitalism ​

The dominant framework, Peter Hall and David Soskice's Varieties of Capitalism (2001), sorts rich democracies into two ideal types based on how firms solve five recurring coordination problems: raising capital (corporate governance), bargaining wages and conditions (industrial relations), training workers (vocational education), dealing with other firms (inter-firm relations), and managing their own employees (employee relations).

Liberal market economies (LMEs: US, UK, Canada, Australia, Ireland, New Zealand) solve these problems through arms-length markets. Capital comes from public stock markets demanding short-term returns. Wages are bargained firm by firm. Training produces general, portable skills. Inter-firm dealings are competitive and contractual. Workers are hired and fired flexibly. The bundle suits radical innovation (Silicon Valley, biotech) where rapid reallocation matters more than deep firm-specific expertise.

Coordinated market economies (CMEs: Germany, Japan, Sweden, Austria, Switzerland, Netherlands) solve them through non-market coordination. Capital comes through long-term bank relationships less responsive to short-term pressure. Wages are bargained at sector or industry level by unions and employer associations. Training is apprenticeship-based and produces firm- or industry-specific skills. Inter-firm dealings rest on dense networks. Employees have voice on works councils. The bundle suits incremental innovation in manufacturing where deep expertise compounds (machine tools, automotive, chemicals).

The framework's empirical bite comes from the clustering: the five spheres reliably hang together within a country, and political institutions track them. PR and coalition government correlate with CME-style coordination; FPTP majoritarianism correlates with LME-style coordination. The political and economic institutions co-evolved. France, Italy, and Spain fit neither type cleanly and are usually treated as a "mixed" or Mediterranean variant with stronger state coordination and weaker associational capacity.

Redistribution and inequality ​

Why do rich democracies arrive at very different post-tax-and-transfer inequality levels?

Gini coefficients before and after tax-and-transfer for selected OECD countries (latest available year, around 2021). Pre-tax inequality looks similar across rich democracies; post-tax inequality diverges sharply, so most of the cross-country gap is produced by redistribution rather than by the market. Source: OECD Income Distribution Database.

Power-resources theory, developed by Walter Korpi and extended by Esping-Andersen, explains the spread by who organised whom. Where unions were strong and a social-democratic party could hold government, large redistributive welfare states were built (the Nordic cases, post-war Germany). Where labour was weaker and the political system had many veto points, smaller welfare states emerged (the United States, Switzerland).

Esping-Andersen's Three Worlds of Welfare Capitalism (1990) sorts the result into three regime types: a liberal regime built on means-tested benefits (US, UK, Canada), a conservative-corporatist regime tying benefits to employment status and the family (Germany, France, Italy), and a social-democratic regime providing universal benefits decoupled from employment (Sweden, Denmark, Norway). The typology overlaps with the LME/CME map but cuts differently: Germany is a CME with a conservative welfare regime, not a social-democratic one.

Three observations complicate any one-cause story. Pre-tax inequality varies far less across rich democracies than post-tax inequality, so most of the cross-country gap comes from redistribution, not from how unequally markets distribute earnings.

The relationship between welfare-state size and growth is weak in either direction. Large welfare states have not measurably hurt growth in the Nordic cases; small welfare states have not produced systematically higher growth in the US case. The trade-off most policy debate assumes appears empirically modest.

The post-1980 rise in inequality has been concentrated in LMEs; CMEs have seen smaller increases. The bundle has not just produced different starting levels but has differentially absorbed the globalisation and technology shocks of the last forty years. Thomas Piketty's Capital in the Twenty-First Century (2014) reads the long-run data as a return toward "patrimonial capitalism" in which $r > g$ (the rate of return on capital exceeds the growth rate) lets inherited wealth re-concentrate; the cross-country variation suggests the rate of re-concentration depends heavily on the institutional bundle in place.

Globalisation and the convergence question ​

Through the 1990s the dominant view was that globalisation would force convergence on the LME model. Capital mobility would punish high-tax welfare states, trade competition would erode wage-compression, and technological change would favour generalist skills. Twenty years on, the convergence has not happened to the predicted degree. CMEs reformed at the margins (Germany's 2003-05 Hartz labour-market reforms, Sweden's pension reforms) without converting to the LME model. Korea and Taiwan industrialised through coordinated, state-guided versions closer to the CME pattern than to the LME one.

What did happen is partial convergence on three specific axes. Financialisation: the rising weight of financial markets has pushed firm behaviour toward shareholder-value norms even in CMEs whose institutions formally resist, with German postwar coordination eroding incrementally rather than holding firm. Dualisation: CME labour markets have split into a protected-insider sector with traditional CME features and a precarious-outsider sector with LME-style flexibility, so the formal institutions stay while what they cover narrows. Asian variants: China's state-led growth model and the developmental-state legacies in Korea, Taiwan, and Singapore fit neither type, and scholars now treat them as a separate family with strong state coordination, business-group concentration, and an export orientation the original framework underspecified.

Kathleen Thelen's Max Weber Lecture, Varieties of Capitalism: Trajectories of Liberalization and the New Politics of Social Solidarity (European University Institute, 2012, around 75 minutes), develops this picture in primary form: she argues the LME/CME typology is best read not as a static snapshot but as three diverging trajectories, deregulation in LMEs, dualisation in continental CMEs, and embedded flexibilisation in the Nordics.

What changes when ​

CPE has settled on a model of institutional change in which critical junctures create durable configurations that path dependence sustains until the next juncture. Between junctures, change is gradual: layering (new rules added on top of old), conversion (old rules redirected to new purposes), drift (rules left to decay as circumstances move), and displacement (one rule overtaking another). Streeck and Kathleen Thelen's work on these mechanisms reframed CPE's account of how CMEs have actually changed since the 1980s: less a clean break than slow erosion at the edges.

Three current candidates for critical junctures are live. The 2008 financial crisis produced new financial regulation and large-scale monetary intervention but did not durably reorganise the political economy. The rise of populist parties has pulled both LMEs and CMEs toward more protectionist trade policy and more interventionist industrial policy. The climate transition is producing the largest reorientation of national industrial policy since 1945, especially in the United States (the 2022 Inflation Reduction Act's roughly $370 billion of clean-energy subsidies) and the EU (the Green Deal Industrial Plan). Whether any of these crystallise into a new equilibrium configuration is the live empirical question.

References ​