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Which model of capitalism best delivers both wealth and equality?

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Abstract

Capitalism is the dominant economic system adopted throughout the global economy, but there are many different models of capitalism practiced depending on what the society decides “economic effectiveness” is. In this study, we assert that an effective economy simultaneously achieves two seemingly divergent outcomes: it (1) creates economic wealth efficiently, and (2) shares that wealth equitably. Employing insights from Whitley’s national business systems framework and fuzzy set analysis, we examine how national institutions collectively configure with respect to the overall level of equitable wealth creation within 48 developed and developing economies. We find that three configurations are associated with relatively high levels of equitable wealth creation, and another three are associated with relatively low levels. As such, our analysis supports the notion of equifinality – that there is no one optimal model of capitalism. Furthermore, we begin to demonstrate that these models of capitalism are constantly evolving, but their evolution is generally slow even when considering the practice of capitalism before and after the 2008 global economic crisis. We discuss the implications of these findings for the study of international business, with a special emphasis on considering a more holistic context for exploring how multinational enterprises interact with their institutional environment(s).

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Notes

  1. Whitley (1999) did identify six different types of national business systems, but the basis determining these configurations was never disclosed and the focus was on how economic coordination of industrial sectors within an economy is achieved. As a result, we were unable to relate our results to these six types of national business systems.

  2. In this study, we used nominal rather than purchasing power parity (PPP) adjusted GDP per capita since we are focusing on the production system of the economy, not the consumption system. Furthermore, PPP adjustment has been shown to be misleading when employed in the short term (Taylor & Taylor, 2004) and for countries that are relatively closed to foreign trade, or experiencing high growth rates, low inflation rates, and/or low nominal exchange rate volatility (Wu, Cheng, & Hou, 2011).

  3. Societal trust relations is a difficult construct to characterize within a society. Typically, it is a generalized perceptual measure collected by surveys. However, there are many forms of trust – within families, within groups, and within the overall society. We thank an anonymous reviewer for pointing out these challenging measurement issues associated with this construct.

  4. Because Hofstede’s database does not provide a power distance score for Ukraine, we used Taras, Steel, and Kirkman’s (2012) meta-analytic standardized cultural dimension scores for Slavic USSR to infer Ukraine’s power distance score. However, our empirical results did not change when we reran the analysis without Ukraine in the sample.

  5. In essence, this means that a configuration is considered “relevant” only when it is exhibited across two or more cases, or countries in our study (Ragin, 2000). Thus, the relationship between a certain configuration and equitable wealth creation was tested only for configurations that were exhibited among at least two countries. This allowed us to eliminate “one time” occurrences in the data, and as such, ensure that our configurations are robust, stable, and exist across nations. Indeed, the relative stability of our configurations is demonstrated in our subsequent robustness test in 2005. With that said, we acknowledge that this entails a potential limitation in that a smaller portion of the dataset is retained from the truth table for the Boolean minimization procedure. We have obtained a solution with one as the frequency threshold, and all of the configurations presented in this study were part of this solution. However, this solution yielded a plethora of configurations, and to keep our solution more parsimonious, we proceeded with a cutoff of two.

  6. FsQCA provides tools for deriving the two endpoints of the complexity/parsimony continuum, as well as tools for specifying an intermediate solution (Ragin, 2008). In intermediate solutions only remainders (i.e., configuration for which there are no cases) that are “easy” counterfactual cases are allowed to be incorporated into the solution in order to minimize the solution terms. Given that our analysis is exploratory, and because there is not much guidance in the literature as to how each causal condition should affect the outcome, we refrained from specifying any easy counterfactuals. Thus, our intermediate solution is similar to the complex solution. The complex solution is more “close” to the data and based on Boolean minimization by absorption and reduction (Kogut & Ragin, 2006). The parsimonious solution is based on all counterfactuals, which in our case are only “hard” ones. Given that our truth table data exhibits limited diversity (i.e., possible configurations for which there are no cases), using the parsimonious solution in deriving core vs peripheral conditions is a useful practice (García-Castro, Aguilera, & Ariño, 2013).

  7. Each institutional configuration is represented by multiple economies since we chose a frequency threshold of two.

  8. Interestingly, even the Scandinavian countries did not align into a single configuration in our study despite the fact that these countries are often grouped into a single model. Specifically, Denmark and Sweden appear to be following models of capitalism that are qualitatively different from the model pursued by Norway and Finland, based on our data and analysis.

  9. Excellent work on the ideological basis for institutions and institutional change may be found in writings by McCloskey (2006), Heilbroner (1986), and most recently, McGregor (2012). We thank an anonymous reviewer for bringing these pioneering books to our attention; and we encourage others who are interested in the ideological nature of institutions and capitalism to read them as well.

  10. This may especially be the case for our characterization of the role of the state, which focuses primarily on direct state expenditures within the economy. As Rodrik (1997) astutely points out, the role of the state is quite complex in East Asian societies. Furthermore, our proxies for manager and worker interdependence are rather crude, relying on the extent of collective bargaining conducted within the economy, similar to previous research. Hence future field work which fleshes out these two dimensions more precisely would be particularly important and interesting.

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Authors and Affiliations

  1. College of Business & Public Administration, Old Dominion University, Norfolk, USA

    William Q Judge

  2. College of Business, Florida International University, Miami, USA

    Stav Fainshmidt

  3. School of Business & Economics, Fayetteville State University, Fayetteville, USA

    J Lee Brown III

Authors
  1. William Q Judge
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  2. Stav Fainshmidt
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  3. J Lee Brown III
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Correspondence to William Q Judge.

Additional information

Accepted by John Cantwell, Editor-in-Chief, 14 February 2014. This paper has been with the authors for two revisions.

This manuscript benefited from ideas and feedback provided from Professors Jack Behrman, Peer Fiss, Michael Witt, Jeff Timmons, Sven-Erik Sjöstrand, Konan Seny Kan, and Cameron Guthrie; as well as the editor, John Cantwell, and three anonymous reviewers. Earlier versions of this manuscript were presented within the International Management Division at the Academy of Management Meetings in August, 2013; a Nordic corporate governance workshop at Copenhagen Business School in October, 2013; and as a research presentation at Toulouse Business School in December, 2013.

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Judge, W., Fainshmidt, S. & Lee Brown III, J. Which model of capitalism best delivers both wealth and equality?. J Int Bus Stud 45, 363–386 (2014). https://doi.org/10.1057/jibs.2014.13

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