Good effort to popularize the new institutional growth theory

books:


	• Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity William J. Baumol, Robert E. Litan, ... Yale University Press, 2007 - 336 pages average customer review:based on 16 reviews view larger image
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highly recommended

Great for the novice economist

"Good Capitalism, Bad Capitalism offers an straightforward look into the world of entrepreneurial capitalism. It includes many basic points in starting a business as well as an in-depth look into the specifics in order to be successful.

As a novice in economics, I found the book to be a helpful tool in which to form my economic opinions. The format of the book allows for emphasis on major macroeconomic details that the non-economist would have otherwise missed.

Although I have no plans on launching a career in economics, I now have an appreciation of what it takes to be a successful entrepreneur. I suggest the book to those who desire a simplified understanding of capitalism without being intimidated by powerful terminology.

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Hail to the Entrepreneurs!

The book "Good Capitalism, Bad Capitalism" begins like a standard economic lecture and the authors are clearly in the neoclassical camp, although they are not ideological as they pass up the opportunity to endorse supply side economics (p. 37). Rather, in the first several chapters, they discuss the importance of economic growth to the well being of people and the things that cause economic growth, or more accurately, the debate about the policy choices that drive economic growth. This part of a book also includes a discussion of the now much-maligned "Washington consensus" on appropriate policies for developing countries. While they don't endorse the Washington Consensus in its totality they note that some of its critics are off base. The example of Argentina is discussed (p. 56) and the authors point that that the supposed poster child of the Washington Consensus didn't follow it completely but rather deviated significantly from some of the constructs.

In chapter four the authors discuss four types of capitalism, state-guided, oligarchic, big firm, and entrepreneurial. They note most states have a mix of the various forms; even the United States has employed elements of state-guided capitalism (such as agricultural subsidies). State-guided capitalism suffers because people overestimate government's ability to manage economies, it engages in excessive investment in some areas and it tries to pick winners and losers and frequently turn out to be wrong.

Chapter five briefly discusses the history of economic growth, noting that it has accelerated dramatically in the last two centuries. According to the authors, until the industrial revolution individuals or groups tended to acquire more wealth by taking it from others, often by force or the threat of force. However, the appearance of new institutions that established rule of law and put restraints on wealth grabbing activities, allowed for a different kind of wealth creation. Rather than seizing wealth from others, new innovators and entrepreneurs were able to create net new wealth by introducing new products or methods of production, which was infinitely preferable to the zero-sum game that existed prior to the industrial revolution. The authors describe the elements that are required wealth creation: Make it easy to start a business, allow productive entrepreneurs to be rewarded for their efforts, provide disincentives for unproductive (i.e. criminal or rent-seeking) activity and finally, keep the entrepreneurs and/or innovators on their toes. The last element is described as a "Red Queen Game" where individual cutting edge entrepreneurs must continue to struggle to stay ahead of their competitors. They invoke an historical analogy that was crucial to creation of modern capitalism. Monarchs from the Middle Ages were constantly draining resources from their kingdoms in order to finance conflicts, thus they were in constant competition from other monarchs to maintain armies to fight conflicts. In the case of the English kings, as they found it increasingly difficult to raise armies and collect taxes to finance their conflicts by decree or force against there citizens, they were gradually forced to grant rights to the individuals in ever greater numbers in order to gather resources.

The book's recommendations for less developed economies common include neoclassical prescriptions such as sound money and open trade but also universal education and guarantees of political freedom. The authors note the past ineffectiveness of aid from the developed world and attempts to promote entrepreneurship by multilateral organizations such as the International Monetary Fund. They also recount the economic dislocation and backlash against "shock therapy" employed in Russia and Eastern Europe after the fall of the Berlin Wall. They note both the virtues and limitations of micro lending, it can be liberating for the poor, especially women, but often goes to "replicative" entrepreneurs rather than innovators and the latter are really key to economic growth. Interestingly, China is somewhat of an outlier in the authors' narrative. They recognize it has done well without fully adopting many of their recommendations but seem to hope it will move in the direction of a more political freedom and incentives for cutting edge innovators.

In discussing the developed world, they analyze the United States differently from Europe and Japan, which tilt much more toward big firm capitalism and less towards entrepreneurial capitalism. To be sure, they note the benefits the latter societies have brought to be their citizens but also the excesses that are holding back their economies. While some of their recommendations come out of the standard "free market" playbook, they don't rail against taxation (rather they suggest much of the developed world will need to raise taxes to finance social benefits for their growing populations of senior citizens) or universal health care. They do zero in on often popular but counterproductive economic policies, such as rigid labor laws in Europe that lead to high unemployment or interlocking ownership between firms and banks in Japan.

Even if one doesn't agree with the authors' prescriptions in total, they clearly describe important aspects of modern wealth generation.

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Very interesting book

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.

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Good effort to popularize the new institutional growth theory

There is hardly anything new in this book, even the four types of Capitalism is a sloppy categoriztion (no cultural substance). But it is still a good attempt to explain Douglass North and Mancur Olson's theories in simple language. With their clear logic, those with "Post Autistic Economics" should feel bad about their confusion.

reviews: page 1, 2, 3, 4

Imagine this: a mere century ago, the purchasing power of an average American was one-tenth of what it is today. But what will it take to sustain that growth through the next century? And what can be said about economic growth to aspiring nations seeking higher standards of living for their citizens?
In this important book, William J. Baumol, Robert E. Litan, and Carl J. Schramm contend that the answers to these questions lie within capitalist economies, though many observers make the mistake of believing that ?capitalism? is of a single kind. Writing in an accessible style, the authors dispel that myth, documenting four different varieties of capitalism, some ?Good? and some ?Bad? for growth. The authors identify the conditions that characterize Good Capitalism?the right blend of entrepreneurial and established firms, which can vary among countries?as well as the features of Bad Capitalism. They examine how countries catching up to the United States can move faster toward the economic frontier, while laying out the need for the United States itself to stick to and reinforce the recipe for growth that has enabled it to be the leading economic force in the world. This pathbreaking book is a must read for anyone who cares about global growth and how to ensure America?s economic future.

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