Great Britain and the development of a liberal market economy

Seminar Paper, 2005

20 Pages, Grade: 1,3



1. Introduction
1.1. The Context of CMEs and LMEs as Varieties of Capitalism
1.2. Adopted approach and argument structure

2. The Development of the UK into a LME
2.1. Postwar Settlement and Welfare State (1945-1979)
2.2. Conservative Government (1979-1997): Market Capitalism
2.2.1. Conservative capitalism: the experiment
2.2.2. Conservative capitalism: an assessment
2.3. New Labor (1997- ): New Capitalism - a LME?

3. A Comparison Approach: CME vs. LME
3.1. The Power of Government
3.2. Business - Government Relations
3.2.1. Varieties of Labor Market Policy: Britain vs. Germany
3.2.2. Varieties of Corporate Governance: Britain vs. Germany

4. Conclusion


Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

1.1. The Context of CMEs and LMEs as Varieties of Capitalism

In an attempt to extend the perspectives of institutional variations that have dominated the study of comparative capitalism in preceding years, Hall and Soskice have developed a ‘varieties of capitalism’ approach, which presents further perspectives to compare and explain the different forms of capitalism.1

As part of their approach, they have conceptualized two types of political economies, liberal market economies (LMEs) and coordinated market economies (CMEs), by reference to the way in which firms resolve coordination problems as well as to the spectrum nations can be arrayed.

In CMEs non-market relationships allow for inter-firm coordination stressing strategic interaction among firms and other actors, among owners and managers, among employees and firms, and among top managers. Collaborative relationships contribute to building the competencies of the firm through extensive relational contracting and the exchange of private information inside networks. Regarding the corporate governance structure, generally different firm constituencies take part in decision-making processes, characterizing a stakeholder model.

In contrast, in LMEs demand and supply conditions of competitive markets set the equilibrium outcomes of firm behavior. Competition, hierarchies and formal contracting, rather than collaborative relationships, coordinate the firms’ activities. Market institutions and marginal calculations based on neoclassical economics influence the actor’s willingness to supply and demand goods or services. The shareholder model of governance prevails over the stakeholder model as shareholders have the main role in decision-making while other constituencies dispose of very limited influence only.

In an attempt to reconstruct the development process of the UK into a liberal market economy, the paper intends to describe and analyze key aspects as well as difficulties of economic policy making. Furthermore, it seeks to present and clarify strategic differences between the two political economies by comparing the presented varieties of capitalism with special emphasis on corporate governance and labor market policies as found in Germany (a CME) and the UK (a LME).

1.2. Adopted approach and argument structure

The paper is divided into two sections. The first section recreates Britain’s development into a liberal market economy. The analysis begins with the postwar settlement process initiated in 1945 by the Labor Government, outlining the measures taken by successive governments, which concentrated on Keynesian economic policies and transformed the UK into a welfare state until 1979. It continues with the modern Conservative capitalism of the 1980s and 1990s, focusing on key aspects of the Thatcher revolution, which made the development into a liberal market economy possible. Finally, Tony Blair’s New Labor government, empowered since 1997, will be shown to have maintained and further expanded the Conservative’s construction of a liberal market economy.

The second section focuses on the comparison of CMEs and LMEs, exemplified by Germany and Britain respectively. The different patterns of business - government relationship in each variety of capitalism shall be outlined, focusing on how the distinct institutional frameworks and public policies affect industrial relation and the corporate governance structure.

2. The Development of the UK into a LME

2.1. Postwar Settlement and Welfare State (1945-1979)

As generally known, World War II left the UK with severe problems of macroeconomic management, reflected in a monetary overhang due to forced savings during wartime, a major balance of payments problem and a high national debt to national income. These economic problems and the difficulties people had faced during war, contributed to the election of a Labor government committed to major increases in welfare spending and nationalization of a significant fraction of economic activity.2

Although the postwar settlement period and following years are characterized by several government changes between Labor and Conservatives, the overall postwar-settlement approach did not change significantly until 1979, when Margaret Thatcher introduced radical reforms. The settlement approach constitutes four key aspects. First, the process of nationalization of several important industries, such as steal, coal, airways, gas and telecommunication, intended to reorganize structures and accelerate-catch up growth. Tight central control was further reinforced by nationalizing even the Bank of England, which could no longer claim the former independence of government policy or the introduction of modern business methods to exercise sophisticated control over the economy3. Second, a macroeconomic policy based on Keynesian demand management, with a strong commitment to full employment. Third, setting up a welfare state, committed to the provision of a basic minimum living standard and further increasing welfare services to fit varying individual requirements. Especially the improvement and extension of the National Health Service serves as an example of the government’s concern in the field of social welfare. Finally, trade unions were strengthened and increasingly involved in dealings with government and business; the aim for a social contract with the trade unions was established.

Building up Social Welfare

After the end of the war society was confronted with fears of wage inflation and uncertainties regarding further developments, especially concerning employment. The overall approach government adopted gave high priority to redistribution income and focused on dealings with organized labor. Government established a cooperative ‘social contract’ with the trade unions, in which wage restrained was traded in turn for increasing spending in welfare, a commitment to full employment and non-interference with industrial relations. The design of social welfare should ensure that no man would fall below a certain minimum living standard. It lay in the responsibility of the government to prevent this from happening. Just after the war Labor Party installed the rule that the same public services were to be available to all, regardless of their financial circumstances. Conservatives did not question their approach, rather accepted the responsibility to further construct social welfare, responding to the needs of society. It may not remain unmentioned, that the governments approach towards building up a welfare state, where the right of trade unions were reinforced, bargaining was allowed as well as reinforced and ‘social contracts’ were established, prevented reform of industrial relations, which would have been essential to increase productivity and stimulate after war economic growth.4

Settlement and further approach

As the problems of relative economic decline show, managing a welfare economy turned out to be rather difficult. The excessive growth of the non-marketed sector lead to an increase in taxes and the detriment of investment, slowing down economic growth. Moreover, increased bargaining rights of unions, weak competition in labor markets and low unemployment resulted in low productivity equilibrium and a very long-winded catching-up process. As a result, nationalized industries lacked efficiency and productivity growth could not properly evolve.5

Government tried to approach these problems through a ‘planning’ process: “there was to be an ‘economic budget’ which would match the detailed objectives of numerous individual industries with the resources available, bringing them into a coherent design determined by a set of national priorities”6. Newly nationalized industries were each placed under the control of an independent board, which was connected to a ministry. Unfortunately not until the 1960s the government finally established a sort of coordinates policy, laying down a minimum figure for the financial return each of the enterprises was to achieve. In truth, this control system, with which the government could examine its own aims as an entrepreneur had several weaknesses and failed in many ways, especially in promoting long-term productivity and economic growth.7

Growth and productivity performance of the British economy remained rather disappointing throughout the entire postwar period and until the 1980s. Partly, these problems can also be explained in terms of the adopted Keynesian demand management, which resulted in a stop-go policy, thus destabilizing economy. The consequences can clearly be seen in the 1970s, when severe adverse shocks to both aggregate supply and aggregate demand as well as increasing stagflation emerged. Still, the biggest failings probably lay in the neglected areas of policy: the successive government’s unwillingness to confront industrial relation problems, especially concerning the inefficient use of labor and its inability to face up to problems that inhibited productivity growth.8

2.2. Conservative Government (1979-1997): Market Capitalism

2.2.1. Conservative capitalism: the experiment

In 1979 the Conservatives, who won the elections and remained in power for eighteen years, the first twelve with Margaret Thatcher as Prime Minister, replaced the Labor

Government. A phase of radical reforms was initiated: the post-war settlement and Keynsianism were abandoned - instead the focus was lead on addressing weak productivity performance and labor market failures by supply-side economics.9The rejection of corporatist and welfare capitalism, the pursuit of monetarism and the control of public expenditure characterize the Conservative’s commitment to “roll back the frontiers of the state” and establish a free market economy, moving citizens away from dependence on the state and stimulating individual initiative, competition and enterprise.10

Promoting Productivity Improvement

Privatization and deregulation, reform of industrial relations, restructuring of taxation and restraint on the growth of public expenditure constitute key elements of the new supply-side policy, with the merit to strengthen incentives and market disciplines. Through strong reductions in subsidies to troubled industries a rapid de-industrialization process was promoted, and at the same time foreign direct investments were encouraged.11Especially the privatization and deregulation processes stand for the re-orientation of policy towards modern growth economics and the freedom of private markets. The labour market, the financial markets and the housing market all were deregulated, council houses and a whole range of public utilities were privatized, creating a new set of property rights.12Besides privatization, changes in industrial relations, reflected in the worker’s reduced bargaining power, the end of the closed shop and a decline in multiple unionism, raised managers’ incentives to innovate and to raise productivity. Through opening the economy, the government intended to stimulate technology transfer and force managers to concentrate on cost reduction rather than rent seeking. The reduction of direct taxation and the endorsement of improvements in supply of human capital through a radical revision of vocational training and expansion of higher education, were intended to further contribute to the productivity growth and return to innovative effort.13

Eliminating the welfare state

As mentioned earlier, the government moved away from corporatist and welfare capitalism towards a liberal market economy.


1 See Hall/ Soskice (2001): pp. 1-2.

2 See Bean/ Crafts (1996), pp. 131-132.

3See Shonfield (1965), p. 88.

4 See Bean/ Crafts (1996), pp. 133, 141-142; Shonfield (1965), pp. 91-95.

5See Abromeit (1999), pp. 363-364; Bean/ Crafts (1996), p. 132.

6Shonfield (1965), p. 89.

7See Shonfield (1965), pp. 89-91.

8 See Bean/ Crafts (131), pp. 146-149.

9See Crafts (1998), p. 9.

10See Marsh (1992), p. 184; Hartley (1989), p. 104.

11See Crafts (1998), pp. 22-23.

12See Graham (1997), p. 119.

13 See Crafts (1997), p. 23.

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Great Britain and the development of a liberal market economy
European Business School - International University Schloß Reichartshausen Oestrich-Winkel
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Rouven Dresselhaus (Author)Stefanie Vielplanells, Cristina, Weltzer (Author), 2005, Great Britain and the development of a liberal market economy, Munich, GRIN Verlag,


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