Wednesday, November 4, 2020

Review of Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity by William J. Baumol, Robert E. Litan, Carl J. Schramm

This review was written by Eugene Kernes

Book can be found in:
Genre = Economics
Intriguing Connections = Capitalism, Socialism, their Alternatives and Critiques

Elaborate Description

With the end of the Cold war and the fall of the Berlin wall, capitalism triumphed over socialism. The authors recognized that there are different types of capitalism. The capitalistic systems can be generalized to four which are state-guided, oligarchic, big-firm, and entrepreneurial. As the title suggests, the authors favor the big-firm and entrepreneurial capitalism over the state-guided and oligarchic capitalism. The book is mostly an exposition of the benefits of having an economy that incentivizes entrepreneurial activities for the purpose of growing the economy.

Economic growth is important for living standards and sources of income. Growth via technological advance has the added benefit of preventing diminishing returns. Entrepreneurship is key to sustainable growth. Entrepreneurs can either imitate products or invent new products. Imitating products helps but only gets a country so far, while entrepreneurs need to take a lot of risk developing new products. To incentivize new products, the inventors need to be able to be compensated for the ingenuity and risk by way of increased income via a patent.

Patents can help bring new advances to light, but having very strict patents can retard adaption of new products. Patents which have little improvements or are made after a product is wide spread can disincentivize entrepreneurs due to the increased risk of a heavy fine. Patents are only one way to incentivize entrepreneurs, another is to have a safety net. As new products are competitors for consumers, there will be products which will no longer be supplied. A safety net to help the victims of change can help reduce the cost of risk taking, thereby enabling more risk taking. The safety net is culturally constructed, but it should not be strong enough to prevent risk taking.

Growth being paramount in this book, the capitalisms which incentivize growth such as big-firm and entrepreneurial are the good types, while bad capitalisms such as state-guided and oligarchic have other priorities than growth. State-guided capitalism advantage is that the industry or firm that government selects to aid and be the producer has huge production enabling economies of scale for low cost production; the disadvantage being that consumers do not get the products they want, the aided firms can be over invested at the expense of others, and difficulty removing the aid. Oligarchic capitalism has the advantage of economies of scale; the disadvantage is having a huge informal sector as formal entrants would compete with the oligarchs. Big-firm capitalism benefits from trying to compete with others and economies of scale; the disadvantage are higher priced products, and new products are not common with the potential of the firm to profit from existing products rather than invent new ones. Entrepreneurial capitalism has the advantage of a diverse knowledge base which creates breakthrough innovations; the disadvantage is having a lack of economies of scale. There four capitalisms are generalizations and economies exhibit a mix of these capitalisms.

The state can help facilitate growth only so far, it required the entrepreneurs to make growth sustainable. States can incentivize entrepreneurial activity such as supporting imitation of products and disincentivize unproductive activities such as lobbying government for policies with narrow benefits rather than society wide benefits. Changes to the incentive structure are inherently political and should be done incrementally rather than in a shock-therapy manner. Incremental change will give time for the participants to adept to the new policies. A policy which facilitates entrepreneurial activity is external, welcoming foreign products and ideas. Foreign products and ideas can provide any country with new sources of income and innovation.

There are a few problems with the biases exhibited toward favoring privatization and technology. The authors make a claim state-guided capitalism is a bad system due to the crises it causes, and that it may take another crisis to learn that state-guided capitalism is a bad system. If crises are only supposed to occur in state-guided capitalism, then there should not many crises in the big-firm and entrepreneurial capitalism. As there are many crises in non-state-guided capitalisms, the authors misrepresent the ideas for and against state-guided capitalisms. One such misrepresentation is the claim that that government is bad at picking winners without reference that the market makes many mistakes as well. Another bias of the authors is being over optimistic of technology. Their analysis of technology seems to be that entrepreneurs will develop technology to fix everything. Even if technologies to solve every problem may come, they may be too late to solve the problem, or come with many more problems. Technologies also rely on markets for their production, and markets have problems of their own which do not incentive the production of certain technologies.

The authors do not provide a panacea for economic woes, but a historical lesson in which entrepreneurs are the key to growth. Culture and policy impact whether and how entrepreneurship is accessible in the country. Many people have skills, but it takes an appropriate institutional structure to utilize the skills. Advancement in products and services can be found in many foreign countries. Foreign expertise should not bring fear as those products and services will make it to other countries who will be able to utilize them. Out of the four generalized capitalisms, the big-firm ad entrepreneurial capitalisms are those which enable sustainable growth.

Book Details

Edition ISBN:  9780300109412
Pages to read:   290
Publication:     2009
1st Edition:      2007
Format:            Paperback

Ratings out of 5:
Readability     4
Content          4
Overall           4