Interesting breakdown of how capitalism has evolved. VIEW: Good capitalism, bad capitalism— William Baumol, Robert E Litan & Carl Schramm The challenge for all economies seeking to maximise their growth potential is to find the right mix of managerial and entrepreneurial capitalism. Economies where entrepreneurs now flourish must not become complacent Many people assumed that when the Berlin Wall fell in 1989, “capitalism” had won the ideological cold war and that “communism” had lost. But, while “capitalism” — defined as an economic system built on private ownership of property — clearly has prevailed, there are many differences among the nearly 200 countries that now practice it in some form. We find it useful to divide the capitalist economies into four broad categories. While many economies straddle several of these, most economies fall primarily into one of them. The following typology helps explain why some economies grow more rapidly than others. Oligarchic capitalism exists where power and money are highly concentrated among a few. It is the worst form of capitalism, not only because of the extreme inequality in income and wealth that such economies tolerate, but also because the elites do not promote growth as the central goal of economic policy. Instead, oligarchs fix the rules to maximise their own income and wealth. Such arrangements prevail in large parts of Latin America, the Arab Middle East, and Africa. State-guided capitalism describes economies where growth is a central economic objective (as it is in the other two forms of capitalism), but attempts to achieve it by favouring specific firms or industries. Governments allocate credit (through direct bank ownership or by guiding credit decisions by privately owned banks), provide direct subsidies and/or tax incentives, grant trade protection, or use other regulatory devices in an attempt to “pick winners”. Southeast Asian economies have demonstrated great success with state guidance, and, until the late 1990s, there were calls in the United States to emulate their practices. But the Achilles heel of state guidance is that once such economies near the “production-possibility frontier”, policy makers run out of industries and technologies to copy. When government officials rather than markets then try to choose the next winners, they run a great risk of choosing the wrong industries, or channelling too much investment — and thus excess capacity — into existing sectors. Such a tendency contributed significantly to the Asian financial crisis of 1997-98. Big Firm or managerial capitalism characterises economies where large firms — often so-called “national champions” — dominate production and employment. Smaller enterprises exist, but are typically retail or service establishments with one or only a few employees. Firms get to be large by exploiting economies of scale, refining and mass-producing the radical innovations developed by entrepreneurs (discussed next). Western European economies and Japan are leading exemplars of managerial capitalism, which, like state guidance, also has delivered strong economic performance. But managerial capitalism, too, has its Achilles heel. Bureaucratic enterprises are typically allergic to taking big risks — that is, developing and commercialising the radical innovations that push out the production-possibility frontier and generate large sustained jumps in productivity and thus in economic growth. Large firms are relatively risk-averse not only because they are bureaucracies, with layers of management required to sign off on any innovation, but also because they are reluctant to back innovations that threaten to render obsolete the products or services that currently account for their profits. In our view, the limits of managerial capitalism explain why, after approaching US levels of per capita income in the late 1980s, both Western Europe and Japan failed to match America’s information-technology-driven productivity resurgence that began in the 1990s. This leads to the fourth type: entrepreneurial capitalism. Economies in which dynamism comes from new firms historically have commercialised the radical innovations that keep pushing out the production-possibility frontier. Examples from the last two centuries include such transformative products and innovations as railroads, automobiles, and airplanes; telegraph, telephones, radio, and television; air conditioning; and, as just noted, the various technologies responsible for the IT revolution, including both mainframe and personal computers, routers and other hardware devices, and much of the software that operates them. To be sure, no economy can realise its full potential only by having entrepreneurial firms. The optimal mix of firms contains a healthy dose of large enterprises, which have the financial and human resources to refine and mass-produce radical innovations, along with newer firms. It required Boeing and other large aircraft manufacturers, for example, to commercialise what the Wright Brothers pioneered, or Ford and General Motors to mass-produce the automobile, and so on. But without entrepreneurs, few of the really bold innovations that have shaped our modern economy and our lives would be in place. The challenge, then, for all economies seeking to maximise their growth potential is to find the right mix of managerial and entrepreneurial capitalism. Economies where entrepreneurs now flourish must not become complacent. State-guided economies can continue their rapid growth path, but ultimately they will need to make a transition to a suitable blend of the other two forms of “good capitalism” if they want to continue rapid growth. India and China, each in its own way, are already moving in this direction. The hardest challenge will be for economies mired in oligarchic capitalism to accomplish a similar transition. It may take nothing less than revolution — ideally peaceful, of course — to replace the elites who now dominate these economies and societies, and for whom growth is not the central objective. —DT-PS
Excellent write-up. Personally, I think the best capitalism would be one in which capitalism & communism merged. I think this would prevent the oligarchy capitalism you mentioned that is all too dangerous. I do think communism (in the case of too much concentrated power) is dangerous as well. Things, in my opinion, need to be kept at the small business level. Real equality means everyone gets to eat.
I'd think that oligarchy capitalism can be avoided with proper implementation of capitalism. Countries that have made capitalism work have been those that enforce the rule of law and property rights and privatized through oversights for example. Estonia used an interesting approach for their business privatization.
capitalism and economy are elaborate lies. humans don't really need full-time jobs and consumer products. the fact is that the Earth cannot sustain our economies and corporate powers take no considerations for systems of life that do not have the superficial, imagined "money". we as a species are not living within our means. we are taking ancient energy from the earth and, in return, contaminting it with toxins.
This is a good four way division, but I would have appreciated an explanation of the difference between European social democracy and the American free enterprise system. Under social democracy most productive wealth remains in private hands, but it is taxed and regulated more heavily than in the United States. Also, there is a more generously funded public sector of the economy. I prefer social democracy even though I think it results in less economic growth and technical innovation than in the United States. In the United States economic growth increasingly goes to capital rather than labor, and to high earners rather than middle and working class people. Also, technical innovation frequently puts people out of work without providing jobs that pay nearly as much as what they were used to earning. When one says that something is good for the economy we should ask that person, “Whose economy is it good for?”
One problem social democracies will be facing is what will happen to them when their demographics change? Europe's Baby Boomers like America's are nearing retirment. This large loss of workers will affect the tax revenue used to fund those social democracies. Sweden has seen this which is why they've partially privatized their pensions.
That is a problem, but it can be dealt with by raising the retirement age. When people get frail with age they do need help. Would you rather let them die in the street? Also, countries in Western Europe spend much less than we in the USA do on the military. Our "strong national defense" tempts reckless presidents to start unnecessary wars. The US economy is losing ground to the economies of Western Europe. If this continues European social democracy will look more attractive to more voters in the United States. In the past those on the left in the United States made the mistake of idealizing the Soviet Union, or Communist China. European social democracy is less heroic, but it seems to work.
All Eyes on Slovakia's Flat Tax LINK -------------------------- I'am curious to see how the examples of Eastern Europe will shape the decisions of other countries looking for reforms. It may be Eastern Europe that may be leading the way for ideas on economic growth. Even Western Europeans are checking out countries like Estonia and Slovakia. So is Western Europe going to become the new model or is Eastern Europe?
Sorry but the definitions are litterred with uncertainties. How can I believe anything if you do not work from the facts up? It's like skipping a vital part when showing me how your worked out an equation.
Everything "The Scribe" said I agree with.And I will tell you as someone who has spent extensive time in Western Europe,they know how to do things right.As far as the US,everything that used to be done correctly has been removed or changed.The current form of US capitalism only benefits the top 1 percent,its really more like socialism for the rich.
Forrealz, What part does population size play with that? The U.S has 300 million people most Scandinavian countries have around 8 million. Isn't it easier to do what they do with those smaller populations?
Western Europe's potential future.They will have to find ways to deal with healthcare,poverty and pensions that aren't so demograhic dependent. The Lost Youth of Europe Newsweek Web Exclusive " But money for the young will have to come from somewhere, and tinkering with boomers' privileges presents a tricky political challenge..." http://www.newsweek.com/id/36470/page/2
Nothing personal,but forget about something that might be published in newsweek on the internet etc.Western Europe is doing just fine.No places are perfect,but the economic system is in Western Europe is about as good as you an get.Population should not be a factor.The US used to do alot of things like Europe did,no longer,thats why the US has sunk so low.
I will add that the US should not let its population get to high.One way of course is deporting all illegal immigrants,and start limiting legal immigration.
Let's wait and see how western Europe will be changed 8 to 10 years from now. Newsweek isn't the only news source that has touched on this.
well i think europe's privitization of its formerly national public transportation infrastructures is at least on aspect of its biggest mistake and from my perspective would appear to be taking it to hell in a hand basket. everywhere on the planet it isn't just the habitats of a wide range of non-human life forms that are being threatened. it may well be that the future of our own human species requires that people stop telling themselves the big lie that everything that doesn't kiss the ass of little green pieces of paper, i.e. SYMBOLIC value in some form, is neccessarily marxism or has anything to do with it. it is my feeling at any rate that this is the case. it is also my observation, that capitolism, in its corporate fanatacism, not only can, but has, become tyrannical. i'm not opposed to mom and pop retailing and unionised infrastructure, but i would prefer a world of trees, little people sized trains, computers, and as much or more of the remaining diversity of little furry creatures, to live, explore, create, and enable the real gratification of doing so, for everyone, to the very destruction of the entire foundation of life in any form, for the sake of a sybolic wealth, that cannot and will not, in and of itself, sustain life. =^^= .../\...
I agree, some restraint is necessary in order to protect the societal good. That has to include corporate oversight and control when their products, goods or services impact the infrastructure of the society. And that's what we've lost in the last 30 years, and much of it during the last 20. All done in the name of trickle down economics and market growth.
Overpopulation will be a problem in the future but it won't get to the "soylent green" point. Rates of population growth have already hit their peak and are slowing down and the trend will probably continue as much of the world's population sees an increase in the sophistication of their economy and less emphasis on squeezing out kids to help on the farm. As for socialism, the rich collectively own most of the country's businesses through shares. The best way to achieve collective ownership of the means of production is through the free market, not dismantling everything and handing it over to the state. The state is an enormous bureaucratic morass as it is without having to run the economy. We should slash regulations that prop up monopolies and the top 1% rich clique's source of income and wait patiently for market forces to solve all our problems.
