Customer Reviews

Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity

5 star:		(4)
4 star:		(12)
3 star:		(7)
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1 star:		(1)

 

 

The distinguished authors of this slim volume attempt to answer the age-old economic question of why some countries prosper and others stagnate. This question has been explored by others, most recently by David S Landes in The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor and Jared Diamond in Collapse: How Societies Choose to Fail or Succeed. Landes and Diamond sought cultural and geographical explanations for economic growth and prosperity. The current authors are skeptical of those explanations, and look more toward capitalist institutions. They have identified four models of capitalist economy.

The first is capitalism guided by the state, otherwise known as mercantilist capitalism. This model has been favored in Asian countries, where the state controls the banks and other financial institutions. The states underwrite low wage export oriented businesses to produce goods primarily for the world market. The problem with this kind of pratice is that governments tend to overinvest in favored industries and underinvest in those needed for their domestic use. States are also notoriously slow in responding to the demands of a changing marketplace.

Secondly, there is oligarchic capitalism. This is when a wealthy elite uses the state as its personal fiefdom. This was the case of Russia shortly after the fall of the Soviet Union. However, the oligarchs are now in retreat, Putin is moving the country toward state-guided capitalism. Both of these models can work for a period of time. Russia, which is blessed with large amounts of natural resources, can probably get away with it for a longer period of time. But this is not enough to sustain long-term growth and prosperity.

Thirdly, there is big-firm capitalism. This was the model used by Japan and Europe during the postwar era. Big firms can produce solid growth for many years, but as they mature they tend to settle for the status quo, rarely do they produce innovation or breakthrough technologies that foster dynamic growth.

Lastly, there is entrpreneurial capitalism, clearly the authors' favorite. William Baumol, the primary author, is arguably the doyen of innovation economists. The great breakthroughs in technology are usually brought to market by individuals or small firms. This type of organization - free of the constraints of big firms - is better at creating new markets and opportunities.

Most countries practice a combination of the above models. According to the authors, the US is so successful because it is a blend of big firm and entrepreneurial capitalism, arguably the optimal combinaton. Many countries have entrepreneurs with grandiose ideas, but lack the capital and infrastructure to realize their goals. The entrepreneurial capitalists is the US enjoy the financial, legal, and educational framework that is needed.

The authors also point out that the US may be in danger of losing its edge due to increased regulation and risk-aversion. They argue that we must not only keep the right balance of big firms and small firms, but also maintain a conducive regualtory environment to keep the economy prosperous and growing. Although much of this material is not new, the authors' presention of it is very orderly and refreshing.

I thought that this book was an interesting take on how government policy can promote or hinder economic growth. I like how they combine together developed countries with undeveloped countries (although there is far more focus on the former). Most books on this subject focus exclusively on the one or the other.
Others have summarized the book well, so I will cover only a few points. I like how they show that there is not one type of capitalism, but many. I would have liked it if they broke down the State-Guided Capitalism a bit more. It seems to me to be a little broad a generalization to lump Japan, Denmark, France, Greece and Poland all into the same category.
A little more analysis of the Oligarchic capitalism would also be nice. It is not clear to me what metric was used to show that economic wealth was concentrated in the hands of a few and that government policy is only for their benefit. Some people claim that USA and Japan also have that problem, so how do we differentiate.
And their focus on USA as the form of entrepreneurial capitalism (mixed with big corporation) makes the book a bit lopsided. It is not clear that there are really other nations in that category, so how do you know how much of it is American culture and how much is institutions.
What I like best about this book is how they offer different perscriptions for different countries based on their category. And they also tailor their advise to reform around the margins and to avoid taking on powerful interests with radical reform.
Overall, I would recommend this book.

Baumol et al are strong defenders of capitalism, crediting it with the growth of average American purchasing power by 10X over the last 100 years, and the only real hope for improvement in the future. "Good Capitalism, Bad Capitalism," however, exposes readers to a closer ad more objective look at capitalism than most had already experienced. There are four versions, per the authors, with some good and some bad.

Another valuable insight is that "innovative" entrepreneurs (producers of a new product or service, or creators of new methods for producing an existing product/service), not "replicative" entrepreneurs are the key to rising standards of living. Most successful economies have a mix of innovative entrepreneurs and larger, more established firms that refine and mass produce the innovators' products.

Four elements contribute to an economic growth machine. 1)A relatively easy means of forming a business; business abandonment is also easy. 2)Society rewards socially useful entrepreneurial activity. 3)Government discourages activity that aims to divide up the economic pie rather than increase its size (eg. criminal behavior; lobbying and frivolous lawsuits to transfer wealth). 4)Government ensures openness to trade, and provides effective anti-trust enforcement.

Several commonly held essentials for economic success are actually myths. For example, the existence of hard-working individuals is not sufficient - Russian and Asian immigrants do much better in the U.S., despite having been frustrated in their native land. Geography is also not the key - look at Singapore, and to a lesser extent, Thailand. (Some contend that tropical climate and diseases precludes economic success.) Finally, education and/or democracy are also not key - the former Eastern European countries disproves the former, and China the latter.

The four different types of capitalism include:

1)A state-guided government tries to guide the market, mostly by supporting particular industries it expects to be winners. Government-provided loans are a common means; tariffs are another. This version is vulnerable when the economy reaches the technological frontier due to its lacking experience in seeing into a totally unknown future. Other problems include a vulnerability to corruption and difficulty in pulling the plug on failed ventures into new industries.

2)Oligarchic - the bulk of economic wealth is held by small groups. Government tries to support them; problems include high corruption and income inequality.

3)Entrepreneurial - a significant role is played by small, innovative firms.

4)Big Firms - limited innovative entrepreneurialism.

Pre-capitalism is another category listed - in this version governments are weak (clans or tribes set the rules for most), and there are limited property rights.

Bottom Line: "Good Capitalism, Bad Capitalism" will broaden the perspectives of most readers.

This book is a description of the different ways in which advanced and emerging economies include the concepts of capitalism in their policies. There is really nothing new in it, but it is a convenient guide to economic policies in the selected countries. Lacking is a description of Classical capitalism, which would permit the reader to assess the aberrations adopted by each country.

In this book the authors discuss what they categorize as four different forms or types of capitalism.They evaluate all four different forms based on a track record of whether or not the particular form ended up producing superior economic growth rates.The particular form that the authors feel is the best type of capitalism is called "entrepreneurial ".
Unfortunately,the authors come to a queer conclusion-the best type of capitalism means that governments must reduce their regulatory apparatus that deals with safeguarding the public against market failures,undepletable,detrimental externalities and spillover impacts,as well as providing public goods.The authors need to reread Smith's Wealth of Nations,especially pp.735-741 in particular and pp.716-768 in general[Modern Library(Cannan)edition].Smith realized that the Invisible Hand Of the Market(self interest and the division of labor process) created both great wealth and severe detrimental externalities.Smith makes it crystal clear that only government action can reduce or mitigate the social,political,martial,moral,and intellectual negative spillover effects which impact the entire work force.Cannan's paraphrase is sufficient to convey Smith's conclusion:"Division of labor destroys intellectual,social,and martial virtues unless government takes pains to prevent it.In Smith's own words ,"...some attention of government is necessary in order to prevent the almost entire corruption and degeneracy of the great body of the people".(Smith,p.734;see also p.735,738,739,and 740 where Smith repeats himself again and again for emphasis).


The author's " entrepreneurial " capitalism needs to emphasize Smith's exemplary discussion concerning the necessity for the state to provide a full array of public goods,deal with numerous market failures,and promote activities yielding positive externalites while simultaneously eliminating or severely reducing private market activities that create negative externalities.The most serious negative externalities turn out to be by products of Smith's own Invisible Hand of The Market.

It is said that too many cooks spoil the broth. Each one wants to add his particular flavor to the recipe, causing the end product to become tasteless. When everyone demands to have a contribution, a project or concept loses focus, inevitably meets substantial delays, or even can be ultimately ruined by too much varied input. Maybe the authors who cooked this book were too numerous to set a discipline and a sense of direction upon each other. First thought as an essay on entrepreneurship, the book digresses into every aspects of economic growth and development, and purports to present a general theory of capitalism that ultimately fails to meet its objective.

Regarding the recipe of entrepreneurship, there is an indisputable chef: William Baumol is rightly credited for developing a place in economic theory for the entrepreneur, for integrating him into formal models of production and growth, and for making innovation fundamental to how firms compete with each other. In 2003, Baumol received the Global Award for Entrepreneurship Research "for his persistent effort to give the entrepreneur a key role in mainstream economic theory, for his theoretical and empirical studies of the nature of entrepreneurship, and for his analysis of the importance of institutions and incentives for the allocation of entrepreneurship."

The contribution of the two other coauthors is less clear, but they both acknowledge their connection to the Kauffman Foundation, presented as "the world's leading foundation in increasing understanding of and encouraging entrepreneurship". In particular, the Kauffman Foundation promotes the extension of data collection and firm surveys on entrepreneurship-related questions, although the authors make it clear that existing data do not permit the kind of econometric testing that would validate the hypotheses advanced in the book. It seems that the Foundation's activities are mostly centered on the US, where the virtues of entrepreneurship need no reminder, whereas the book also covers Europe, Japan, and the developing world, which follow different blends of capitalism.

Good Capitalism, Bad Capitalism reminded me of those publications sponsored by international organizations that readers seldom buy, but get free online or through their workplace. Books published by international organizations like the World Bank or the IMF also have multiple authorship and try to look at a question from a broad and comprehensive angle. Indeed, Baumol and his coauthors quote the World Bank's World Development Report as well as the annual Doing Business report as sources of inspiration. These reports have their strengths, but also their weaknesses. One limitation is that because the World Bank is supposed to stay clear of politics, the authors of these publications have to tone down their criticism of bad policies, or use diplomatic terms to label some regimes as inefficient or oppressive.

The authors of Good Capitalism have no such qualms. They call some forms of capitalism good and others bad. In their opinion, the American model, which provides a balanced mix of big business and entrepreneurship, is the best one model. Small firms and entrepreneurs tend to develop radical innovations, whereas large firms focus their R&D on incremental improvements in existing technologies. Aggregate productivity growth will depend on both kinds of activity. Japan and Europe err too much on the side of big-firm capitalism, and could need a healthy dose of innovative entrepreneurship. Their development model was adapted to the phase of catching up with the US and reaching the technological frontier, but now that they have gone there they are faced with Eurosclerosis in Continental Europe (though not in the UK and Ireland) and prolonged stagnation in Japan. They have no choice but to foster innovation, as European leaders recognized in their so-called Lisbon agenda. For this the authors recommend a gradual approach to reforms: new institutional arrangements should be introduced at the margin without transparently threatening existing interests. The trick is for governments in Europe and Japan to remove barriers to new, potentially high-growth companies without directly challenging the way existing large firms do business or any protections their workers might now have.

Presenting a table illustrating the rapid renewal in the list of the top US firms ranked by revenue, with many firms exiting or entering the top ranking over the past several decades, the authors indicate that they do not know what a similar chart would look like for Europe's largest companies, although they suspect that there is much more stability at the top. In fact this list also exists for Europe. It is based on the Fortune 500 and, as other groundbreaking research on entrepreneurship, was produced some years ago by the Brussels-based think-tank Bruegel. More recent research by Bruegel addresses the dearth of venture capital in Europe, or the weak status of yollies (a new and trendy acronym, for young leading innovators). In more general terms, the authors would do well to review the literature on entrepreneurship in Europe or Japan more closely. Many limitations that they point out on firm data or survey methods are currently being addressed, and my impression is that Europe, lagging behind the US in nurturing entrepreneurship, is more advanced in terms of data collection and measurement issues. Researchers in France, for instance, have access to highly detailed firm-level data that allows them to empirically test hypotheses researchers elsewhere can only speculate about.

Similarly, the authors do not discuss the now classic distinction between relationship-based versus arm's-length capitalism, first introduced by Raghuram Rajan and Luigi Zingales of the University of Chicago. These two systems differ on fundamental respects: the degree of financial intermediation and the role of banks versus financial markets in directing the terms of transactions; the different degree of reliance on legal enforcement; the relative importance of transparency and the ability to see clearly into corporate dealings; and so on. This distinction helps make sense of the Asian crisis of 1997-98: a flood of foreign capital poured into and then retreated from Asian countries at a time when the institutional infrastructure was not adequately developed. Essentially, the arm's-length capital was lent to a relationship-based system that did not have adequate price signals to deploy the massive inflow of capital properly. The fault lines between these two systems helps explain the occurrence of financial crisis and provides a strategy for reform: rather than reconstituting the old monopolies and inside deals, Asian economies were advised to follow the U.S. example in the 1930s and take advantage of the financial crisis to improve transparency and accountability in their financial system.

Instead of focusing on the crucial distinctions between different forms of capitalism, the authors adopt a very wide angle and discuss at length why economic growth matters, or what are the sources of economic growth. They offer their opinion on every important economic debate: from the effectiveness of aid (they have their doubts) to the opposition between big bang and gradual reform (they advocate the second) or the virtues of microfinance (not a silver bullet) and the impact of inequality on growth (unequal societies grow more slowly). They only enter the heart of the matter, the US economy and what should be done about it, in the last chapter of the book. In addition, they adopt the bland style and technicality of professional economists, without conveying the thrill of discovery and the real-life test of the market that form the very nature of entrepreneurship.

This is an excellent book for people wanting to understand the different types of capitalism and how each version impacts economic growth.

The authors begin with the basic premise that economic growth is good. Would you rather be middle class in 1880 United States or 2007 United States? If you answer 2007, the benefits of economic growth has a lot to do with your answer. Would you rather be middle class in the United States or in Rwanda? If you answer United States, the benefits of economic growth has a lot to do with your answer. This does not mean the U.S. economy, or the U.S. version of capitalism, is perfect. It merely means that it is pretty good and the bad externalities (i.e., pollution and poverty), which are not limited to capitalist societies, need serious responses.

According to the authors, any nation can have the economic richness the United States experiences. They differentiate four versions of capitalism: (1) State-guided capitalism (The state plays a central role in picking and supporting the winners - Japan, Europe); (2) Oligarchic capitalism (Private property is allowed, though concentrated in the hands of a few - Latin American); (3) Large firm capitalism (Japan, Europe, United States); and (4) Entrepreneurial capitalism (Entrepreneurs, who provide radical ideas that meet market needs, play a central role - United States). The ideal, according to the authors, is a mixture of Entrepreurial capitalism and Large firm capitalism, with the entrepreneurs developing most of the new ideas and the large firms bringing them to market.

What are the cornerstones for entrepreneurial capitalism?: (1) easy to form businesses and relatively easy to declare bankruptcy, (2) respect for property and contract rights of entrepreneurs, (3) economic policies that focus on economic growth rather than equal economic distribution, and (4) entrepreneurs get to keep most of the new money they generate [i.e., monetary incentives]

In terms of morality, capitalism, as an economic system, gets us to the higher ends of pergatory. To reach paradise, capitalists, including you and me, must behave ethically and solve those externalities rather than deny them.

Compare with William Easterly's book and Gregory Clark's book, "Good Capitalism, Bad Capitalism" is too weak. William J. Baumol and others argue that institution is the main factor of economics growth and it is my reason to give 5 stars. But Baumol argue that the best institution causes economics growth but why mixed institution capitalism system is the best for economics growth? William Easterly in his book "The Elusive Quest for Growth" give the definitive answer: It is the INCENTIVE that provide by the institution determine economics growth. If an institution does not provide the correct INCENTIVE, it will not lead to any economics growth. How do we know what mixed institution system will provide the best INCENTIVE system in different countries? On the other hand, Gregory Clerk argues that economics growth is the combined effects of Malthusian models and Darwin Natural Selection Evolution process. Institution plays only a minor role in Clark's model. Compare with William Baumol's economic growth model, Clark's model is more much radical and it creates more more problems than solved problems. Such as: Is gather hunter living standard is good as people in 18th century? Is rich people descendant have a better chance of survive under Darwin evolution process? Will this rich people descendants are the source of the Industrial Revolution and source of increasing livering standard and so on and on...? Compare with the other books, "Good Capitalism, Bad Capitalism" is not a breakthrough, so I give it 4 stars.

Chris Tam
Hong Kong

This book makes a persuasive argument why "entrepreneurial" capitalism yields faster growth than "big-company" capitalism. For the true believers, it doesn't contribute much to the debate, but if you haven't read a textbook on the economics of growth, it provides a concise summary of the many factors affecting growth.

The core of the book argues that Europe and Japan focused on big-company capitalism after WWII as a logical way to rebuild their war-torn economies and as a result, this form of capital still dominates these economies. It also postulates that cultures can likely be changed over the medium term (ten-ish years, perhaps). This leaves unaddressed the question why then haven't European and Japanese cultures evolved into faster growing "entrepreneurial" capitalism as the US appears to have over the last 15 years. (Prior to that, all three economies were growing at similar growth rates; if anything the US was growing slightly slower as the other economies caught up.)

I suspect the reasons are threefold. First, IT opened up a target rich investment environment. Second, both Europe and Japan face high costs to redeploy workers from old sectors of the economy to new growing sectors. The opportunity cost of leaving resources employed suboptimally (and the productive thinkers who guide them) significantly holds back these economies. Third, more equal income distribution substantially reduces risk taking as the propensity to save and invest grows significantly with income. The first dollars of savings are used primarily for housing (really a consumer good), then safe (big-company) financial investments (to stockpile for retirement) and lastly to underwrite entrepreneurial risk. As a result, the real cost of redistribution is its toll on risk-taking. By and large, only the very rich can afford to underwrite/finance the latter. These factors are given short shift by the book.

In fact, the book argues for more equal distribution while ignoring the very different but critically important causes of unequal distribution - economically misguided oligarchs who misappropriate it vs. successful entrepreneurs who rightly earn it. The book devotes all of 2 pages to taxation.

(My guess is that there are also positive feedback loops at work culturally where success causes others to desire success which in turn leads to a culture that embraces (business) success rather than shunning/criticizing it. And where critical masses of creative cutting-edge thinkers yield real synergies.)

In my opinion then, the book comes up short. It identifies the fact that entrepreneurial capitalism is desirable; but its prescriptions for how to achieve and sustain it are not very profound. Only a comparison to Europe and Japan that reveals why these cultures haven't evolved toward higher growth, like the US, can reveal the truth. Most of the prescriptions, such as protecting intellectual property, enforcing anti-trust laws, reigning in unmeritorious litigation, etc. are largely identical between the 3 societies and hardly "ground breaking."

This book is very informative, and easy to read. For the person who is just learning social sciences, the text allows you understand and comprehend the principles of economics. A copy should be in everyones library.