Large firms are relatively risk-averse, not only
because they are bureaucracies, with layers of
Capitalism’s Best Mix
Many people assumed that when the Berlin Wall fell in
1989, capitalism had won the ideological Cold War and
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.
It is 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. This is where power and money
are highly concentrated among the elite. 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 elite do not promote growth
as the central goal of economic policy. Instead, oligarchs
fix the rules to maximize their own income and wealth.
Such arrangements prevail in large parts of Latin America,
the Middle East and Africa.
State-guided capitalism. Here govern-ments attempt to
achieve economic growth by favoring specific firms or
industries. Govern-ments allocate credit through direct
bank ownership or by guiding credit decisions by privately
owned hanks. They also provide direct subsidies or tax
incentives; grant trade protection or use other regulatory
devices in an attempt to pick their favorite winners.
Southeast Asian economies have demonstrated great
success with state guidance, and; until the late,1990s,
there were calls in the.US.to emulate their practices. But
the Achilles heel of state guidance is that once such
economies near the "production-possibility frontier,"
policymakers run out of industries and technologies to
copy. When government officials rather than markets try
to choose the next winners, they run a great risk of
choosing the wrong industries, or channeling too much
investment .into existing sectors. Such a tendency
contributed significantly to the Asian financial crisis from
1997 to 1998.
Big firm or managerial capitalism. This is characterized
by large firms — often called "national champions" —
that dominate pro-duction and employment. Smaller
enterprises exist, but they are typically retail or service
establishments with one or only a few em-ployees. Firms
get to be large by exploiting economies of scale, refining
and mass-roducing the radical innovations developed by
entrepreneurs. 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 commercializing
the radical innovations that expand the production-
possibility frontier and generate large sustained jumps in
productivity and thus in economic growth.
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 the United States'
productivity resurgence, driven by the information-
technology boom, that began inthel990s.
Entrepreneurial capitalism. Here, dynamism
comes from new firms that historically have
comercialized the radical innovations, which keeps
expanding the production-possibility frontier. Ex-
amples from the last two centuries include such
transformative pro-ducts and innovations as rail-
roads, automobiles and airplanes; telegraph, tele-
phones, radio and television; and the various tech-
nologies 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 realize its full poten-
tial only by Having entrepreneurial firms. The opti-
mal mix of firms contains a healthy dose of large
enterprises, which have the financial and human
resources to refine and mass-produce radical innova-
tions, along with newer firms.
It required Boeing and other large aircraft manu-
facturers, for example, to commercialize 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 in-
novations that have shaped our modem economy and
our lives would be in place.
The challenge, then, for all economies seeking to
maximize 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, China and Russia are already moving in
this direction to one degree or another. 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
— to replace the elites who now dominate these
economies and societies, and for whom growth is
not the central objective.
William Baumol is professor of economics and di-
rector of the Berkeley pntrepreneurship Center a:
New York University. Robert E. Litan is senior fel-
low in the Economic Studies and Global Eco-
nomics Programs at the Brookings Institutior. Cart
Schramm is a Batten fellow at the Darder. School
of Business at the University of Virginia. € Project
Syndicate.