The political economy of financial systems: Explaining varieties of capitalism

Capitalist economies can arrayed along a spectrum between liberal market economies and coordinated market economies: firms depend more heavily on markets in the former and more on non-market mechanisms in the latter. Whether the financial system privileges markets (securities markets) or non-market mechanisms (banks) offers a powerful indication of the capitalist system more broadly. Thus, to explain varieties of capitalism, I ask a narrower question: why do countries have different financial systems?; Since WWII, countries such as the US, UK, and Canada have depended more extensively on securities markets for mobilizing capital, while countries such as Germany, France and Japan have relied more heavily on banks. Prior to WWII, however, France and Japan were more reliant on securities markets.; In contrast to arguments based on legal institutions and alternative interest group explanations, I argue that the structure of a country's financial system, and its capitalist system more broadly, primarily depends on the political power of large firms, who usually prefer markets, relative to that of labor, farmers, and small firms, who generally prefer banks. The implications of the argument extend to our understanding of economic growth, the nature of technological innovation, globalization's varying effects across nations, and corporate governance. My argument is supported with econometric evidence from industrialized nations between 1950 and 1990. The dissertation also presents evidence from the history of financial regulation in France and Japan since the late nineteenth century, using a mixture of quantitative and qualitative analysis.