Alternatives to and within capitalism

Baumol, William J., Robert E. Litan, and Carl J. Schramm. Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity. New Haven & London: Yale University Press, 2007.

Baumol et al. start from the common premise that, since the collapse of the Socialist bloc, "There is no alternative" ("TINA") to capitalism, by which they mean an economy where “most or at least a substantial proportion of its means of production -- its farms, its factories, its complex machinery -- are in private hands, rather than being owned and operated by the government." (p. 62) Socialized ownership of the means of production and central planning collapsed with the Berlin wall, and what they call “precapitalist” economies, as in Afghanistan and Somalia, where the only property rights are those defended by warring clans, are just not viable.

But, the authors insist, there are at least four alternative forms of capitalism, some much better at promoting growth and prosperity than others.

"Oligarchic” capitalism, where a few rich families own everything that produces wealth and make sure nobody else gets any, is “bad” capitalism. Not just because of its unfairness, but because the oligarchs are too ignorant, too indolent and too self-occupied to invest in anything productive. Of course, they really don't have a lot of margin -- after their country club dues, luxury estate management, imported automobiles, foreign vacations, and other obligations of their class, they have to spend much of their country's wealth on army and police to shoot, beat or intimidate those pesky peasants who want to change things -- which, as we have seen in El Salvador, Nicaragua, Vietnam and other places, can get very, very expensive if those rebels are serious, well-organized, and can get funded somehow.

“State directed” capitalism, where the state picks sectors or even particular firms to favor (e.g. by subsidies or high tariffs against competing imports), hasn't proven efficient either. A major historical example was the "import substitution" policy promoted by Argentinian economist Raúl Prebisch for Latin America. The problem is that governments -- being run by human beings with their own interests and prejudices and corruptibilities -- are not very good at making such decisions. Most likely, the minister of the economy will pick the companies run by his brother-in-law. Or, even absent corruption, the inertia of bureaucracy (and pressure from interest groups) will keep the government supporting a sector whose growth potential has passed.

"Big firm" capitalism, free from the strictures of government, is better (for promoting growth), since big firms have the capital and need to invest. But they tend to be cautious and (with a few exceptions, like Bell Labs in the old days and Apple today) discourage innovation.

"Entrepreunerial" capitalism -- meaning the kind that breaks into the market by inventing new technology or new marketing techniques -- is the real hero of this book. But the wild-eyed entrepreneurs can survive and grow only if they get the backing of capital from big firms, until they turn into big firms themselves. When that happens, they either have to make special efforts to keep the innovation going (e.g., Bell Labs or Xerox) or look outside to back and buy rights to inventions made by new entrepreneurs. That kind of marriage (big firm/small innovator) is what has given the U.S. economy its dynamism in recent years and is the best bet for other economies seeking to grow.

In the real world (as the authors recognize), every economy has some mix of the four forms. The U.S. (like France and other economies) protects its agribusinesses ("state-directed" capitalism), and "big firm" and "oligarchic" systems are sometimes hard to distinguish. (E.g., the big business families of Italy, or the Fords in the U.S., where business power is hereditary.) The important question is which form prevails.

Baumol et al. also lay out four elements (they like that number) that they think are necessary to encourage such big firm/small innovator successes:

1, ease of forming or abandoning a business (if a company cannot declare bankruptcy if things go wrong, then the risks may be too high for anybody to start up in the first place);
2, rewards (they mean big money payoffs) for ”socially useful entrepreneurial activity." They specify "socially useful" to exclude such entrepreneurial activity as cocaine production and distribution, hedge-fund manipulation and other big money-making enterprises.
3, economic growth should be favored over redistribution of existing wealth -- which sounds like, Let the rich get richer as long as they invest in things that will make us all richer.
4, continuing incentives to companies to innovate and grow.

The most important thought I took from the book was what they call their “fundamental proposition”:
that economies are complicated systems that cannot be reduced to one or two central driving forces, and cannot be turned around by applying one or even a few of the policy prescriptions various development economisys or institutions have recommended over the years. (p. 59)
In sum, I found the book useful in clarifying categories (such as those four types of capitalism), though its arguments are too general and abstract, and say too little about the political forces involved, to explain much about the current world recession, or the surge in the price of oil, or what's at stake in the Georgia-Russia conflict (we know economics is a big part of it, but just how?) or other issues.

I'm not convinced that "There is no alternative," that growth and prosperity are impossible unless all major means of production are in private hands. We'll have to see if China, for example, can continue to innovate with its mix of capitalism and socialism. Or if Hugo Chávez's "Twenty-First Century Socialism" (which so far appears to be another mix of state-ownership and private enterprise) matures and survives. But it is obvious that there are many alternative systems within capitalism.

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