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Thursday, May 10, 2007

"Good Capitalism, Bad Capitalism"

The Wall Street Journal's David Wessel looks at different forms of capitalism:

Capitalism's Vigor May Hinge On Confronting Its Risks, by David Wessel, WSJ: ...[C]apitalism as practiced in the U.S. is different from the capitalism practiced 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 U.S. version is particularly well-suited to creating and exploiting innovations that boost living standards. ...

The book was written by William Baumol, an eclectic New York University economist ...; Carl Schramm .. 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 ... 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...

In oligarchic capitalism, prevalent in parts of Latin America and the Arab Middle East, 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 (conglomerates), Japan, to a degree, and the U.S. in the era of John Kenneth Galbraith's 1967 "New Industrial State."

"At its best, [it] generates sufficiently large cash flows to finance...continuing, incremental improvements in products and services," the authors write. "At its worst, big-firm capitalism can be sclerotic, reluctant to innovate, and resistant to change."

Finally, there is entrepreneurial capitalism, in which small and innovative firms are significant. Think the U.S., Ireland, Israel, Taiwan and, increasingly, the United Kingdom. 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 propels 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 U.S. ...

In their book, ... the three touch too lightly on an issue about which Mr. Litan has written previously. As he puts it in an interview: "An entrepreneurial society is going to be more of a high-risk society."

The strengths of U.S.-style capitalism are apparent. ... But the risks are apparent, too: workers who lose jobs and find new ones that pay far less and lack health insurance, widening disparities between economic winners and losers, challenges posed by stiffening competition from low-wage, increasingly skilled workers abroad, and schools that aren't improving as fast as the economy is changing.

Preserving the strengths of American capitalism requires finding a way to reduce the anxiety and harm posed by such risks without losing the entrepreneurial vigor. That's the hard part.

Sounds like some "insurance capitalism" is needed in the mix of entrepreneurial and big-firm capitalism to make the blend more palatable.

    Posted by on Thursday, May 10, 2007 at 12:51 AM in Economics | Permalink  TrackBack (0)  Comments (20)

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