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The four capitalisms

The four capitalisms
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First Published: Fri, May 11 2007. 12 08 AM IST
Updated: Fri, May 11 2007. 12 08 AM IST
Capitalism... in the US is different from the capitalism... in, say, Singapore or Saudi Arabia. “Capitalism... takes many forms, which differ substantially... in their implications for economic growth and elimination of poverty,” three economists write in Good Capitalism, Bad Capitalism. The book identifies four strains of modern capitalism and argues the US version is particularly well-suited to creating and exploiting innovations that boost living standards.
This is a risky venture. Harvard’s Ezra Vogel celebrated Japan’s brand of capitalism in 1979, and Lester Thurow of the Massachusetts Institute of Technology warned ominously in 1992 that unifying Western Europe was a threat. Neither proved correct. Still, trying to explain US success at promoting and harnessing technological change in the past 25 years is a useful exercise.
The book was written by William Baumol, an eclectic New York University economist impressively energetic at 85-years-old; Carl Schramm, president and research director of the Kauffman Foundation and a recovering health economist and insurance executive; and Robert Litan, an economist-lawyer who was a budget and antitrust official in the Clinton administration.
Their taxonomy goes like this: In state-guided capitalism, the government decides which industries get investment, and it often controls the banks and usually emphasizes exports. No country falls exclusively in any one camp, but think of China, much of Southeast Asia and India and, to a degree, Japan. This approach has helped economies propel themselves from also-rans to the first tier. Problems emerge, the economists say, when these economies catch up and no longer have a clear path ahead. They tend to invest too much in the wrong places, stick too long with yesterday’s winners and fail to spot tomorrow’s.
In oligarchic capitalism, prevalent in parts of Latin America and the Arab West Asia, power and wealth are held by a few, and economies are organized to make them, not the general populace, richer. This approach has little to recommend it.
Then there’s big-firm capitalism, in which big private enterprises dominate. Think much of Western Europe, South Korea, with its chaebols, Japan, to a degree, and the US in the era of John Kenneth Galbraith’s 1967 “New Industrial State.”
Finally, there is entrepreneurial capitalism, in which small and innovative firms are significant. Think the US, Ireland, Israel, Taiwan and, increasingly, the UK. Forming a company is easy, socially useful entrepreneurship is rewarded, institutions provide incentives for innovation and growth—a catch-all that encompasses everything from openness to trade to sound bankruptcy laws to effective antitrust regulation.
Given the Kauffman Foundation’s mission to promote entrepreneurship, it’s no surprise Messrs. Baumol, Litan and Schramm conclude the “best form of capitalism” blends elements of the entrepreneurial and big-firm strains. The former provides the oomph to imagine and invent technologies that propel economies; the latter provides the money and organization to refine and mass-produce them. The secret to prosperity, then, is for other economies to find their own ways to be more like the US.
It all sounds great—and compelling. A capitalism that cannot spur innovation and/or display flexibility to reorganize itself cannot be a model. In their book, though, the three touch too lightly on an issue about which Litan has written previously. As he puts it in an interview: “An entrepreneurial society is going to be more of a high-risk society.”
These are edited excerpts. Write to otherviews@livemint.com
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First Published: Fri, May 11 2007. 12 08 AM IST
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