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Good Capitalism Bad Capitalism, and the economics of growth and prosperity

Good Capitalism

The authors of Good Capitalism, Bad Capitalism explain why capitalism is not a monolithic construct. Before the end of the Cold War there was a perception that capitalist economies were generally the same, due to the stark contrasts between Western economies and Soviet-style command economies. Authors William J. Baumol, Robert E. Litan, and Carl J. Schramm draw out distinctions between different forms of capitalism and which models best promote growth and productivity. The four main types they identify are oligarchic capitalism, state guided capitalism, big firm capitalism, and entrepreneurial capitalism. While all of these systems respect property rights to one degree or another, the authors argue that there are significant differences among these types and how efficiently each promotes economic growth and expansion.

Oligarchic capitalism, which is prevalent in much of Latin America, Africa, and the Middle East, is to be avoided because it’s designed to promote the interests of the ruling few. State guided capitalism tends to be consistently behind the demands of market forces, as government makes many mistakes in trying to manage an economy. Big firm capitalism can at times be reluctant to change and can lag in innovation. Big firm capitalism typifies much of the super corporations of continental Europe and Japan.

Entrepreneurial capitalism is by far the best system because it promotes new breakthroughs in technology and innovation. The United States is by far the greatest example of entrepreneurial capitalism. “Without the entrepreneur, [scientific] knowledge might possibly have lain dormant in the memory of one or two persons . . . younger firms produce substantially more innovations per employee than larger more established firms,” the authors say.

This form of capitalism combines the entrepreneurial spirit within an economy that also hosts large, established corporations. In essence, it’s a combination of the entrepreneurial spirit with big firm capitalism. In fact, corporations are needed in order to refine and mass produce the innovations into affordable and useful products for the consumer.

More than half of the jobs in the United States are created by firms that are less than 5 years old. In addition, the authors propose some policies that will enhance the formation of a successful entrepreneurial economy. First, in an entrepreneurial economy, it must be relatively easy to form a business without expensive start up costs related to bureaucratic red tape. Incentives for growth are also seen as critical, as well as a commitment to free trade, and property and contract rights. Also, governments “must discourage activity that aims to divide up the economic pie” rather than to increase the size of the pie.

“The lesson we draw from this history is that without entrepreneurs, and without the right incentives for them to devote themselves enthusiastically and tirelessly to commercial use of their innovations, economic progress cannot be counted on and indeed is unlikely to occur,” the authors tell us.

Good Capitalism Bad Capitalism reinforces something many of us may already know -- the United States has been an economic force unlike any nation in the history of the world. But there is no immutable law that says it will always be so. Entitlement programs and a tax system in dire need of reform pose a threat to our long term prosperity and an ability to stay competitive. Ultimately, a strong commitment to financial incentives that allow entrepreneurial endeavors to succeed and flourish will go a long way in sustaining the United States as the economic powerhouse of the highest order.