Published in: Economics

LME vs CME: Coordinated Market Economy vs Liberal Market Economy

Author Blessing Peter Titus

Published on: January 18, 2023

How the various actors in an economy relate to each other is often determined by the type of market economy that exists. The two varieties of capitalism; liberal market economy (LME) and coordinated market economy (CME) represent distinct economies that are found in different countries. In this article, we shall look at LME vs CME differences and similarities.

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Understanding LME and CME

In order to effectively differentiate between the coordinated market economy and the liberal market economy, let us understand how each of these economies operates.

In a liberal market, individuals and corporate entities enjoy a high level of freedom. Companies independently decide the products or services to offer for sale, whom to do business with, how to invest their resources, where to establish their business and the prices of the goods or services they produce. Individuals on the other hand are free to spend their money at their own discretion, work where they want, and patronize any business of their choosing. Countries that are known to have liberal market economies include the United States, the United Kingdom, Canada, Ireland, New Zealand, and Australia.

Businesses in a liberal market economy usually invest in technological advancement in their sector to cut down costs of production and maximize profit. There is also a high level of innovation which leads to the emergence of new products and services. Companies compete with each other to have a comparative advantage over other companies that are in the production or provision of similar goods and services. Thus, relations between businesses are often short-term and adversarial as each company tries to increase its profits.

A coordinated market economy supports incremental innovation which leads to specialization in extremely narrow niches; this leads to the production of high-quality goods in the engines, capital goods, and auto industries. Companies within the same sector are often close-knit through the employer’s associations that exist. This aids in the exchange of industry-relevant information that furthers production processes. They also aid legal endorsements and technology transfer through interfirm collaborations. Companies are more focused on providing goods and services than on their current profitability.

In CMEs, there is a high level of work security, a good record of training and development programs for workers, and institutionalized forms of worker participation based on work councils. The economy is built on long-term relationships; this makes the market more stable as it eliminates unnecessary market disruptions. New businesses find it challenging to break into the market because access to funding is usually based on reputation and the rules and regulations present often make the market restrictive to a large extent. Coordinated market economies are found in Germany, Austria, Japan, and Sweden.

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LME VS CME Differences and Similarities

Before we delve into discussing the similarities and differences that exist between liberal and coordinated market economies, below is an outline of the differences.

Similarities between the coordinated and liberal market economy

1. Both are a variety of capitalism.
2. Both economies support various economic activities that involve buying and selling.
3. Both LMEs and CMEs comprise the government, producers, and consumers.
4. Innovation and innovative ideas are found in both economies.

LME vs CME differences

1. LMEs support the creation and emergence of new products, services, and industries. Hence, they are often associated with fast and radical innovations. CMEs support incremental innovation which allows for niche-specific specialization and process innovation.
2. Pharmaceutical, biotechnology, communication, and information technology industries thrive in liberal economies. Auto, capital goods, and engine industries are well-developed and established in coordinated market economies.
3. Industrial relations in LMEs are decentralized. Trade and employer unions rarely exist. Industrial relations in CMEs are well coordinated by the government. Trade unions and employer’s associations are very common.
4. Relations between companies are competitive, short-term, and mostly adversarial in liberal markets. Relations between companies are long-term and cooperative in coordinated markets.
5. Mergers and acquisitions in a liberal market economy occur between companies without prior relations, hence, hostility is quite common. Mergers and acquisitions in a coordinated market economy occur between companies with previous inter-firm relations, hence, hostility is rare.
6. The producers in a liberal economy are mainly motivated by profit. Thus, market disruptions are quite common. Companies are rarely concerned about their current profitability, hence coordinated markets tend to be more stable.
7. In LMEs, wage bargaining usually takes place at the company level directly between employers and employees at the time of hiring. Labor choices further influence the labor market and wages. In CME, wage bargaining is done through collaborative bargaining that involves employers and employee associations at the industry level.
8. The pricing of goods and services in liberal markets is free; based on the cost of production and the market forces of demand and supply. Production is also focused on meeting consumer demands. In coordinated markets, the prices of goods and services are mostly set by the government or the manufacturer’s associations.
9. LMEs are often self-regulating with little government intervention which is often restricted to preventing exploitation, illegal activities, and the rise of monopolies. CMEs are regulated by the government.
10. Employees in liberal economies mostly possess general skills; often based on formal education in high schools and colleges. This means that these employees can work in different industries. Further training and development of skills are often left at the employee’s discretion. Employees in coordinated economies are mostly highly skilled in the particular industries where they are employed. This is because apprenticeship programs and collaborative training schemes at the industry level are very common and usually organized by trade unions. Hence employees here are restricted to working in a particular industry where their skill lies.
11. Access to finances from investors and financial institutions in liberal market economies is based on share value and credit score. Access to finances from investors and financial institutions in coordinated market economies is often based on reputation and not on share value.
12. Companies in liberal economies seek the best supplies at the least possible cost. This means that relations between companies and suppliers are based on competitive bidding. Companies in coordinated economies usually have long-term relationships with their suppliers.
13. The level of job security in LMEs is low. Job tenures are mostly short and the labor market is quite fluid. There is a high level of job security in CMEs. Job tenures are longer and the labor market is less fluid.
14. When industry standards exist in liberal market economies, they are usually set by the government. In coordinated market economies, industry associations play a key role in setting industry standards. This aids interfirm collaboration and effective technology transfer and legal endorsements.
15. The open-market structure of LMEs encourages the rise of emerging entrepreneurs. The restrictive market structure of CMEs makes the rise of emerging entrepreneurs difficult.
16. There are few social welfare programs in LMEs, this leaves the vulnerable members of society such as the elderly and disabled at the mercy of family and friends. Well-structured social welfare programs exist in CMEs. This ensures that children, the elderly, the disabled, and other vulnerable members of society are well taken care of.

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Conclusion

Liberal market economy (LME) and coordinated market economy (CME) share some similarities and differences which we have discussed here. While a lot of people commend LMEs for the freedoms they afford to businesses and individuals. The fact that production is driven by profit is often considered a drawback. This is because the profit-motive could propel companies into ignoring certain ethical standards provided that they make a profit at the end of the day.

Coordinated markets are run through coordinated and organized interactions between the different market players. This is considered a pro by some individuals and a con by others. It is considered a pro because it aids inter-firm relations which leads to necessary technological transfers and improvements in the market. On the other hand, it poses a con to others since new businesses find it hard to access resources that are necessary for their continued existence and growth.