Institutions of capitalisms: American, European, and ...



Institutions of capitalisms: American, European, and Japanese systems compared

Journal of Economic Issues; Lincoln; Jun 1997; John Groenewegen;

|Volume:  |31 |

|Issue:  |2 |

|Start Page:  |333-347 |

|ISSN:  |00213624 |

|Subject Terms:  |Comparative studies |

| |Capitalism |

| |Economic theory |

| |Capitalism |

| |Comparative analysis |

| |Economic models |

|Classification Codes:  |9130: Experimental/theoretical treatment |

| |1130: Economic theory |

| |9190: US |

| |9175: Western Europe |

| |9179: Asia & the Pacific |

|Geographic Names:  |US |

| |Europe |

| |Japan |

| |United States |

| |US |

| |Europe |

| |Japan |

Abstract:

American management techniques and organizational structures are spreading all over the world, The message seems clear: The evidence is that Anglo-American capitalism is conquering the world at the expense of civilized capitalism. Fortunately for those who are afraid that bad capitalism will drive out good capitalism, there is counter evidence. Four types of capitalist systems are described: the Anglo-American, two varieties of the continental European system, and finally the Japanese type of capitalism. For each ideal type, the organization of transactions, the nature of the firm and markets, the role of government, and the value system, in which the type of capitalism is embedded, are described.

|Full Text: |

|Copyright Association for Evolutionary Economics Fiscal Office Jun 1997 |

Capitalist systems are seriously debated nowadays both in academia and in the political arena. The discussion focuses on the characteristics of capitalism, on the strength and weaknesses of different systems (shareholders vs. stakeholder economies), and on the dynamics of systems (convergence or divergence). The debate has been stimulated by the collapse of Eastern European socialism ("we are all capitalists now") and by the globalization of financial and other markets. The latter is supposed to increase worldwide competition and to allow the survival of the fittest economic system.

Under the headline "Showing Europe's Firms the Way," The Economist [July 13, 1996] published this:

In 1967 a French politician, Jean-Jacques Servan Schreiber (JJSS) published a bestseller called "Le Defi Americain" (The American Challenge). He argued that the influence of American mutinationals was growing relentlessly and that Europe's civilized capitalism was about to be destroyed. Now 30 years later a new challenge is threatening Europe; . . . an aggressive new-world capitalism is spreading all over the new world. . . . As before many Europeans fear that this spells the end of Europe's business civilization. They foresee an American maelstrom of atomistic competition, job insecurity and social division.

Indeed things are a changing.1 A few years ago, Daimler-Benz listed its shares in New York and adopted American accounting standards, sold loss-making subsidiairies, and linked manager compensation to the profits of the corporation. Last month the new president of the Dutch multinational Philips, Cor Boonstra, announced that from now on shareholder interest is paramount for Philips. American management techniques and organizational structures are spreading all over the world. Likewise in the Netherlands, the breakdown of measures to protect firms against hostile takeovers is a hot political issue, and in Japan people say a market for corporate control is emerging. The message seems clear: The evidence is that Anglo-American capitalism is conquering the world at the expense of "civilized capitalism" whether you like it or not. Fortunately for those who are afraid that "bad capitalism is driving out good capitalism," there is counter evidence.

For example, in Human Capitalism, Robert Ozaki [1991] explains that the latest stage in capitalist development, "Human Capitalism," has been reached in Japan. It is a stage in which the interest of human resources is central. It holds that in advanced economies the primary value is human and not pecuniary. Japan has reached this stage, and others like the United States are about to follow. Similar stories can be heard about the superiority of the European "Rhineland model," which will survive the competitive battle with the other systems on the world market [Albert 1991].

These interpretations rest on the idea that systems all over the world will converge toward one model: the Anglo-American, the European, or the Japanese. I question that view and will here present an approach in which there is room for a variety of capitalist systems, each with its own strengths and weaknesses, each with its own path of development. Of course, we do observe the import of elements of the Anglo-American model into Europe and Japan, and vice versa. The question is whether this interpenetration leads to one universal type of capitalism. Underlying the assumption of convergence is the assumption of a metasystemic mechanism that selects the most efficient system.3

The Nature of Capitalism

In conventional economics, capitalism is defined in terms of private property rights and markets. Given self-interested individuals and an assumed self-equilibrating mechanism, the end result of market allocation is optimal allocation. This is characterized by a specific theory of the firm, a specific idea about the functioning of markets, and an argument for minimal government intervention. In short: firms are either production functions or a nexus of contracts. Markets are exchange mechanisms, where contracts coordinate behavior between anonymous agents and prices supply sufficient information. The government intervenes in cases of market failures and imperfections. The focus of government is on safeguarding the competitive process. The end result of those "free" markets cannot be other than optimal.

In institutional economics, the nature of capitalism is fundamentally different.

The conception of capitalism as a historical formation with distinctive political and cultural as well as economic properties derives from the work of those relatively few economists interested in capitalism as a "stage" of social evolution [Heilbroner 1988, 350].

Among those, Karl Marx, Clarence Ayres, John R. Commons, and Thorstein Veblen are prominent. In this institutional conception, history and institutions matter and because of that capitalism is not one universal result of an equilibrating process; specific histories and cultures lead to many varieties of capitalism.

A Typology of Capitalism

In the following pages, I will distinguish four types of capitalist systems: the Anglo-American, two varieties of the continental European system, and finally the Japanese type of capitalism. For each ideal type, the organization of transactions, the nature of the firm and markets, the role of government, and the value system, in which the type of capitalism is embedded, will be described.4

Anglo-American Model

The Anglo-American model (based on studies of the United States, United Kingdom, New Zealand, and Canada) is described as the system in which the interest of the shareholder is central (monism). Management of firms is controlled by several disciplining mechanisms that act in the interest of the shareholder. This view is based on an individualistic value system, in which the interest of the suppliers of risk capital ought to be central and management of the firm should be disciplined accordingly.

Theoretically, the control of shareholders over resources is grounded in the theory of the firm, which has its roots in the works of Frank Knight [1957] and Oliver Williamson [1991]. Knight places the entrepreneur, the risk-taking person, in a central position. He guarantees employees a fixed wage in exchange for control over the firm. In this view, suppliers of risk capital in an efficient system ought to have control over the assets.5

In the world of Frank Knight, the firm is "individualized," and for Oliver Williamson, the firm is a hierarchical organization with specific authority relations. Their views differ from the agency perspective, a theory upon which the AngloAmerican model is also based. In this interpretation, the firm is a nexus of contracts [see Alchian and Demsetz 1972]. The bundle of rights to be the residual claimant, to observe input behavior, to be the central party to all contracts with input suppliers, to alter the membership of the team, and to sell these rights serve to define ownership (or the employer) of the classical (capitalist, free-enterprise) firm.

In the Anglo-American concept of the firm, management has to be controlled in the interest of shareholders. In the model, the chief executive officer (CEO) is the highest ranked manager, who is disciplined by a variety of institutions. First, a board of directors is chosen by the shareholders with the task to monitor and evaluate management.6 Management is further disciplined by the shareholders by means of exit (selling of shares) and especially by hostile takeovers (the market for corporate control). Furthermore, management is encouraged to serve the shareholders' interest (to increase profits) by stock ownership and stock options, whereas relatively high salaries are offered on the market for managerial labor to those with a good shareholder reputation.

In the Anglo-American model, government makes it difficult for firms to protect themselves against hostile takeovers, the information management has to provide to shareholders is strictly regulated, and cross-stockholdings are strongly discouraged. Concentration of power and close relationships between industry and finance are discouraged. Transactions involving labor, intermediate goods, capital, and technology are all governed by classical contracts. Formal contracts, in which duties and obligations are described in detail, conditions are well specified, and sanctions are clearly described govern transactions of all kind.

The Continental European System

I focus here on the social market capitalism (Germany, Sweden, Austria, Denmark, and the Netherlands) and will only very briefly describe some characteristics of state capitalism of the sort found in France. The value system is not individualistic, but focuses on cooperation and consensus building. Strong organizations of labor and employers negotiate at the national level about wages, social security, work conditions, and the like. There the framework for sectoral and microlevels is set. These negotiations are guided by a common interest in the survival of the system and in the competitiveness of the economy. Stock markets are relatively unimportant both in terms of listed firms and takeovers [Gelauff and den Broeder 1996]. Stable shareholders ("Universalbanken" in Germany) own blocks of shares. Instead of exit, it is voice that disciplines management ("Mitbestimmung").

The firm is not considered to be a nexus of contracts between anonymous principals and agents, but an organization with two stakeholders: shareholders and employees (dualism). In Germany, the stakeholders are represented by law in the supervisory board ("Aufsichtsrat"), which supervises management ("Vorstand").

Transactions in social market capitalism are governed by more relational contracts, which are long-term and more open-ended than classical contracts. Reciprocity, mutual interest, and consensus building are important elements. Government regulation supports market organization and long-term specific investments: "Universalbanken" have no problem with the "Kartelamt" (agency responsible for competition law); cross-stockholding and interlocking directorates are supposed to strengthen long-term commitments. Co-determination gives labor voice, and relational contracts open the way to long-term specific investments.

In state capitalism, labor unions and employer associations are not involved in strategic decision making. A strong state with a bureaucracy of elites controls key areas of the economy in which research, production, demand, and finance are centrally organized. In the state capitalist model, the triangle of politics, bureaucracy, and management of large firms form a closed group that controls the economy.

Relational Capitalism of Japan

Based on values of communitarianism, management of the firm is controlled by a variety of disciplining mechanisms in such a way that the interest of a plurality of stakeholders is served [Yoshimori 1995]. Shareholders, employees, but also suppliers, customers, members of the business group (keiretsu),8 and (local) government are all stakeholders.

Transactions are largely internalized inside the firm (internal labor market) and inside the keiretsu (capital, intermediary goods, technology, and information) [Imai and Itami 1984]. The contracts in the Japanese model are relational [Kester 1992].9

Crucial is managerial autonomy, which enables management to develop longterm relationships and reciprocal contracts. Control of management by stable stakeholders is based on theory that conceptualizes the firm as an evolving set of capabilities [Odagiri 1994]. Such a vision of the firm [see also Nooteboom 1996] has consequences for the type of diversification (related instead of unrelated), the type of innovation (incremental instead of radical), and for the finance of investments (group bank instead of capital market) [Imai and Itami 1984].

The mutual monitoring among stakeholders is stimulated through a common interest in the well-being of the firm as a whole. A strong rivalry among firms belonging to different groups provides a high-powered incentive to allocate efficiently also in the short-term. The ideal type of Japanese relational capitalism combines the best of two worlds: high-powered incentives from competition among rivals and long-term trust among horizontal and vertical stakeholders.

Strengths and Weaknesses of the Models

In general, the Anglo-American system performs well in providing short-term flexibility. Because of clear management objectives and the different disciplining mechanisms, the system stimulates dynamism, job rotation and entry and exit of firms. In the model, prices give clear signals that stimulate entry of firms in promising industries.

In the model, competition stimulates innovations especially radical innovation [Imai and Itami 1984]. For firms, investment in R&D is most of all a question of appropriability, diffusion via markets, and financing by private venture capital. Knowledge that is relatively easily codified will be produced and exchanged.

Competition forces management to maximize shareholder value; management is profit-oriented. Depending on the assumptions about the efficiency of markets, the model predicts a short-term efficiency. The weakness of the model is long-term efficiency for which relation-specific investments are needed. When dynamic efficiency demands specific investments of labor and suppliers of intermediate goods and capital, then a profit-oriented firm, which is first of all a nexus of classical contracts, will perform weakly.

Markets are relatively costly for coordinating transactions with high relation-specific investments, and the model predicts strong vertical integration. Many empirical studies confirm the predictions of the model. 10

European-style state-led capitalism is strong in guiding complicated technology projects in which research, production, and commercialization can be isolated from the international market (armaments, space, public transport, nuclear energy, and the like). This type of capitalism is weak in sectors that have to react flexibly to market signals. In the case of social market capitalism, it is argued that, generally speaking, the investment in specific assets and correspondingly in long-term relationships is fostered. This is especially true for labor. The corresponding weakness of the model is the relative rigidity in the short run and the lock-in path dependencies in the long run that are largely due to personal relationships.

The European systems tend to blur distinctions of ownerships through a complex system of cross-stockholdings and encourages long-term relations between the suppliers and managers of capital [The Economist July 1996].

The Economist adds: "The heart of the difference between American and European firms is trust between capital suppliers and management. This trust is personally based and expressed in cross-stockholdings, alumni associations, and the like."

What has been said about the European model is more or less true for Japanese relational capitalism as well: the strength is the specific investment in labor and group relations, the availability of long-term capital, and the availability of a disciplining monitor ("group bank") in case restructuring is needed, and all of this at relatively low transaction costs [Goto 1982; Aoki 1990; Gerlach 1992; Sakakibara 1993]. The weaknesses of the continental social market model are also relevant for the Japanese case. There are rigidities and time-consuming decision making. 11

Interpenetration

In theories of economic organization, the idea of interpenetration is based on the failure of a specific ideal type of governance structure, which can then be corrected by the introduction of elements from other ideal types. Imai and Itami [1984] distinguish two ideal types: the market and the organization. Their thesis is that the failures of, for instance, the market will be corrected by importing elements from the organizational hierarchy. The market arena is characterized by a decision-making principle based on individual maximization and on the membership principle of free entry and exit. These characteristics have failures: individuals in a market setting with prices as signals adopt a short-term horizon and a rather narrow scope of efficiency. Together with opportunism and insufficient accumulation of information, the market arena endangers relation-specific investments. The other ideal type of the organization is characterized by collective decision making and fixed relations. The organization as arena fails because of X-inefficiencies, lack of incentives to operate efficiently, and path-dependent, inefficient lock-ins. The failure of the market can be corrected by introducing elements of collective decision making and fixed relationships into that arena, resulting in so-called organization-like markets. The same holds for the solution of the organizational failures: import market elements of individual decision making and entry and exit. The result is a market-like organization. When the elements of the market and organization are in balance, Imai and Itami describe the result as an intermediate organization, which is often found in Japan.

Many examples in the discussion on changes in capitalism and on the question of convergence of different systems can be interpreted as examples of corrections of failures by means of interpenetration. Kester [1992, 123] points out that many American and British businesses are beginning to adopt some of the long-term, relationship-oriented practices of their Japanese and German rivals.

Some of these changes come with the foreign investment of Japanese firms in the United States. Supply contracts with American subcontractors include co-design, just-in-time management, minority equity stakes, and even intrusion by the assembler into the operations of the supplier. Nummi, a Toyota-GM joint venture in California, Nissan in Tennessee, and Honda in Ohio are examples of firms with internal labor markets based on careful screening, long-term commitments, job rotation, management dining in the same restaurant as workers, minimum layoff policy, and similar policies. Other examples, especially on the West Coast of the United States, show that it is possible not only to create islands of Japanese capitalism in the sea of Anglo-American capitalism, but that American firms themselves learn from the other forms of capitalism and strategically invest in long-term relationships. The same holds for the American government. Several states have adopted anti-takeover regulations, which makes hostile takeovers subject to public investigation, in which the consequences of takeovers for different stakeholders, especially employees, is an important consideration.

Examples of penetration in Europe and Japan of Anglo-American elements are many. In most European countries, shareholder-interest is now high on the list of the goals of managers. Together with growing interest in shareholders go the transparency and increased openness about profit developments, fines on insider trading, stock options, and other elements of the Anglo-American world. Increased reliance on the New York capital market will accelerate the Anglo-Americanization process. Disclosure of hidden assets by Daimler-Benz to conform to the SEC regulations for listing on the New York Stock exchange is symbolic. The setting of explicit profit targets, as in the cases of Commerzbank in Germany and Lyonnaise des Eaux in France, is an important signal that something is changing. When shareholder interest is explicitly set, then a cascade of changes can be expected to follow. These could include financial maneuvers such as buying own shares by a firm (as KLM did recently), restructuring by splitting off firms (Paribas, Volvo, Philips, etc.), the introduction of share options as a sign that the interest of shareholders and management are aligned, changes in corporate governance such as the law to reduce protection measures in the Netherlands, and the Vienot report in France on stimulation of shareholder activism by tax measures, associations, and deregulations.

The improvement of the position of the shareholder in Japan is also well under way. Japanese firms recently announced a target return on equity. Mitsubishi Corp. announced, for instance, that the return on equity will rise from 0.6 percent to 8 percent in the year 2000. The minimum number of statutory auditors has been increased from two to three, and a lawsuit of shareholders against management has been made less costly. Access of shareholders to confidential information is now possible for those holding 3 percent (was 10 percent).

The idea of interpenetration is what we have called the efficiency drive of capitalism: new institutions are introduced into existing systems to correct failures and to reduce production and transaction costs [see North 1981]. However, this does not imply that one universal capitalism is emerging.

The concept of the corporation is firmly rooted in the historic, economic, political and even socio-cultural tradition of the nation. Each approach has its own positive and adverse sides. It would be improbable nor would it be necessary, therefore, that any one concept should drive out another at least in the foreseeable future. Through the cross fertilization process, nations will be correcting the flaws in their systems, while retaining the core norms [Yoshimori 1995].

Institutionalists agree with this efficiency drive as an important force behind institutional change, but they will point to the importance of history and institutions on the one hand and the need of an initiating and guiding role of government on the other.

With respect to the former, institutionalists will stress the importance of historically grown values, norms, regulations, and structures, which determine the institutional space within which new institutions can be effectively imported. Knowledge about the "room to maneuver" is crucial for effective institutionalization; this holds for private as well as public actors [Bush 1987; Hayden 1995]. Interpenetration is likely to be effective when the other elements come from a type of capitalism that is closely related.12

For conscious government intervention is also important because market systems do not automatically produce efficient institutions; spontaneous emergence of efficient institutions is an exception and the need for government initiative and guidance the rule. This approach is closely related to the second drive behind the changes in capitalism: the desire of actors to control their environment and to exercise power in their own interest.

The Importance of Power

Capitalist systems change through conflict and the attempts of actors to hold or get control over resources [Marglin 1974; Bowles 1985; Munkirs 1985; Knoedler 1995; Melman 1997]. The distinction between lower and higher efficiency is useful here [Dugger 1993]. Lower efficiency holds that individuals, groups, and firms have their own interest and try to realize their own objectives. The objectives of society-the higher efficiency-is the responsibility of government. Governments should control the power of interest groups and firms in order to realize higher societal goals.

When we leave the models of capitalism we discussed above, and do not assume a metasystemic selection mechanism that forces actors to select the most efficient governance structures, then we analyze the process of institutionalization in a specific historical and geographical setting in which power conflicts play a crucial role. The history of capitalism shows that institutional change is to be understood as a search for efficiency as well as a continuing process of private and public interest seeking. The history of the United States, for instance, can be described in terms of "managerial capitalism" as an organization-oriented model, which evolved in this century to a combination of state capitalism [Melman 1997] and money-manager capitalism [Minsky and Whalen 1996]. In managerial capitalism, the capacity to acquire skills by managers was central,13 and this organizational orientation was gradually replaced when fragmented shareholding was replaced by pension fund managers [Lazonick 1995]. Until the rise of the institutional investor in the 1960s, the holders of stock were individuals and households. From the 1960s onward, the rise of mutual fund managers reduced fragmented shareholding in the United States. (In 1955, pension funds owned 2 percent and households 91 percent of shares; in 1990, it was 28 percent to 47 percent.) An important characteristic of those pension fund managers was their preference of quick capital gains and high dividends [Lazonick 1995].

In the meantime, a concentration of power was realized, despite official regulations forbidding cross-stockholding, interlocking directorates, and the like. Via indirect linkages, a "private sector planning core" was created of 7 banks, 4 insurance companies, and 126 non-financial companies [Munkirs 1985]. A large part of the American industrial and financial sector became part of what Seymour Melman has called American state capitalism. Under the leadership of Robert McNamara, the Central Office controlled a substantial part of labor, capital goods, and R&D [Melman 1997]. That part of the American system had nothing to do with a market economy anymore, and the higher efficiency was not a leading principle; it was and still is the interest of the military-industrial complex that determines a very large part of national American investments. 14

Meanwhile, the pressure on management to apply short-term standards increased. The rise of the junk bond market in the 1970s increased pressure on shortterm returns. With the deregulations in the late 1970s, the market for corporate control had been unleashed. All these changes increased the incentive for top management to ". . . ally with the forces that sought financial liquidity rather than financial commitment [Lazonick 1996, 16]. Or, in the words of Hyman P. Minsky:

. . . capitalism in the United States is an ever-evolving construct that recently entered a new stage: money manager capitalism. In this form of capitalism nearly all businesses are organized as corporations; pension and mutual funds are the predominant owners of financial assets; and managers of these funds are judged solely on the return on fund assets (dividends and interest plus appreciation in share value). One consequence of the money manager structure is predominance of short-run considerations in decision making [see Summary 1996, 23].

This is strenghtened by the introduction of share options, which makes management partly owners. Access of management to ownership income weakened the incentive to make innovative investments.

By boosting short-term profits, top managers saw the market value of their shares rise, which in turn justified increasing dividends to maintain yields, which in turn reduced the retained earnings available for investment in organization and technology. Through the integration of ownership and control at the top of the corporate hierarchy top managers in effect set themselves apart from the rest of the organizational structure [Lazonick 1996, 16].

The "compensation" of American top management is illustrative: While the real average after-tax earnings of American wage and salary earners fell by 13 percent during the 1970s and 1980s, the real average after-tax compensation of CEOs of major American corporations increased by 400 percent. This can be called the value-extracting capability of American management. Also illustrative is the way management deals with labor. "Re-engineering" or "downsizing" are the popular slogans management uses in the 1990s to increase short-term profits and to please shareholders. By terminating thousands of employees, corporations attempt to restore profits and boost stock prices without making the investments in technology, organization, and new products [Bernstein and Adler 1994].

The European and Japanese capitalist systems have their own power structures. In organized capitalism, the "enigma of Japanese power" [van Wolferen 1989] makes Japanese capitalism difficult to understand in terms of traditional power structures. Karel van Wolferen describes Japan as a system without a clear leadership. Both in politics and business, leadership is shared and decision making diffuse. Others identify organized capitalism as "Toyotism" [Ruigrok and van Tulder 1996], in which at the level of the firm, industry, national economy, and also internationally, power structures control the environment in the interest of the (Japanese) group. Labor is controlled in the interest of the firm, firms are controlled in the interest of the industry, and industries are controlled in the interest of Japan Inc. Complicated networks of interrelated interests guide decision making, for example, with respect to investments in East Asia. Overseas Development Aid (ODA) of the Japanese government, foreign direct investment of Japanese firms, and trade policies are linked in such a way that the interests of different Japanese groups are served. As everywhere else, Japanese power relations change. Inside the firm, the mobility of labor increases, which makes labor less dependent, while inside the keiretsu the power relations change, as well as the relations between the bureaucracy, politics, and keiretsu [see Groenewegen 1993]. Because of the many checks and balances in Japanese society, changes take place slowly, and conflicts are settled in such a way that no one interest group overrules the others. Japanese society knows many safeguards, which protect the interests of a variety of stakeholders. The same holds for the European social market economies. Capitalism is change, but the dynamics differs from one variety to the other. What kind of changes take place and how these changes are decided upon is basically a matter of political decision making. If society wants to preserve specific institutions representing specific values concerning equity, the nature of decision making, or speed of change, then society should make these values explicit and decide what changes to accept and which ones to reject. The spreading of Anglo-American capitalism is not automatic. Elements of other systems can be purposefully imported into the other varieties of capitalism. To do that properly, societies should be fully aware of the positive and negative aspects of the implementation of such alien elements. Changes in capitalism are certainly driven by more or less external forces such as political integration, technological developments, international alliances, mobility of financial capital, and the like. However, the specific nature of capitalism is something societies decide upon [Tool 1985] and the reason why The Economist and others write about European capitalism as "civilized capitalism' and about Japan as "human capitalism" is given by the nature of the decision-making processes and the participation of a variety of stakeholders. The better this is understood, the less likely that "bad capitalism will drive out good capitalism."

[Footnote]

1. Now 30 years after "Le defi Americain," a lot of Europeans warn again of the American threat, "killer capitalism." Again, it is a Frenchman, Michel Albert, who wrote a book that is central to the discussion: Capitalism Contre Capitalism.

2. Especially in the case of Japan, it is clear that the U.S. government is constantly trying to convince trading partners that Japan is not a real market economy and Japanese capitalism needs to be adapted to American standards. This was especially clear when on the April 3, 1992, the U.S. Justice Department announced "that it would take `antitrust enforcement' action against conduct occurring overseas that restrain U.S. exports" [Kester 1992]. The major target was the Japanese business group known as the keiretsu.

3. In contrast with Oliver Williamson [1985], who accepts the idea of a metasystemic selection mechanism, my title is not "Economic Institutions of Capitalism," but "Institutions of Capitalisms."

4. Ideal types are abstractions and as such are useful for understanding reality. However, in the discussion, ideal types can also be a danger because they are often used as advertiments to "sell" a system abroad. The negative aspects are not shown. This is clearly the case when The Economist discusses the blessings of the Anglo-American system (see the beginning of this article).

5. "With human nature as we know it, it would be impracticable or very unusual for one man to guarantee to another a definite result of the latter's actions without being given power to direct his work. And on the other hand, that second party would not place himself under the direction of the first without such a guarantee. The result is a `double contract' . . . [Knight, in Putterman 1993, 651.

6. In reality, the pressure of the board of directors is limited, because the board is often chaired by the CEO and because other members of management are executive members of the board. The situation differs between the United States and the United Kingdom. In the United States, the number of directors who are also managers is smaller and declining.

7. The term "relational" has been suggested by Hiroyuki Odagiri of Tsukuba University, who was the 1996 Ayres scholar of AFEE.

8. The keiretsu are horizontally or vertically organized business groups where members are related by means of stockholding, bank loans, intermediate goods, technology exchange, interlocking directorates, and the like. For details, see Goto [1982] and Gerlach [1992].

9. When a continuum of contracts is made from classical to relational, then: Anglo-American contractual governance is positioned at the formal, legalistic end of the continuum. Industrial groups, in contrast, may be viewed as systems of contractual governance located at the other end of the continuum with agency problems addressed by concentrating equity ownership and control in the hands of key group stakeholders with multiple, comingled claims against other corporations in the industrial group [Kester 1992, 110].

10. See, among others Lazonick, [1995], Boyer [1996], De Jong [1995], and Yoshimori [1996]. For example:

Market relations provide enterprises with access to productive resources with existing productive capabilities but do not provide the social conditions for the collective and cumulative-or organizational-learning that develops productive capabilities [Lazonick 1996, 5].

11. The consequences of the strengths and weaknesses of the different models can be nicely illustrated with the process of restructuring industries. Yoshimori [1996] compares the case of Mazda with Chrysler. He shows how Japanese capitalism organized an orderly restructuring in which the interests of different stakeholders are taken into account, whereas in the case of Chrysler distrust among stakeholders in the end forced government to come to the rescue.

12. The creation of a "humanistic" firm demands a lot of specific investments, contrary to a firm with a focus on financial assets.

13. "The capacity to acquire skills" was confined to those employed within the managerial structure and not extended to those employed on the shop floor [Lazonick 1995, 4].

14. Seymour Melman calculates the tremendous sum of $1,450 billion during the coming 20 years [Melman 1997].

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[Author note]

The author is Professor of Economics, Erasmus University Rotterdam. This paper was presented as the Presidental Address at the annual meeting of the Association for Evolutionary Economics, New Orleans, Louisiana, January 4-6, 1997.

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