Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity

In the United States today, life really is better than ever for most Americans. The average American commands ten times the purchasing power of his great-grandparents at the turn of the last century an expansion of prosperity unprecedented in human history. And the story in the rest of the developed world is much the same.

According to Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity by William Baumol, Robert Litan, and Carl Schramm, America's prosperity over the last half century is directly attributable to the growth generated by our capitalist economic system. And not just growth in the sense of making more things for more people; in Good Capitalism, Bad Capitalism Baumol, Litan, and Schramm explain how "smart growth" — that is, radical entrepreneurial innovation in the way we make things, what we make, and how we distribute them — has and continues to be the foundation of our prosperity.

It is not unusual for an economist to think that proven economic models should be applied where others have fallen short. It's also not surprising to find these authors in particular promoting the value and benefits of entrepreneurialism: Schramm and Litan are senior executives at the $2 billion Ewing Marion Kauffman Foundation, which bills itself as "the Foundation of Entrepreneurship," while Baumol is director of the Kauffman-funded Berkley Center for Entrepreneurial Studies at New York University and has spent years working closely with the foundation on these issues. Their premise, that strong economic growth is vital to our future well-being, will seem obvious to most Americans; but, as the authors explain, it's not so evident to elites in other countries, where historical conditions and institutional biases have weakened the case for economic growth or caused it to be rejected altogether.

In part, the authors argue, that's because most people have been taught to think of capitalism as if it were a one-size-fits-all assemblage of economic and institutional choices. Not so, they say; instead, Baumol, Litan, and Schramm urge us to see it as four related, but strikingly different, economic systems, which they refer to as state-guided(think South Korea or China), oligarchic(Russia, much of sub-Saharan Africa, and the Mideast), big-firm(Europe, Japan, and the U.S. in the 1950s), and entrepreneurial(the U.S. today). While all four systems are rooted in capitalism, they have little in common beyond the basics: respect for property rights, exchange for profit, and wages based on market forces. Beyond that (and despite the ever-expanding reach of the global economy), the authors write, one man's capitalism is another man's kleptocracy.

Not so obvious is the authors' observation that not all elites are interested in promoting economic growth, which in turn has serious consequences for local economies as well as the global economy. Oligarchic systems are grounded in the ability of elites to extract wealth from the economy, leaving the vast majority of citizens impoverished; where there is economic growth in such a system, it tends to be difficult to sustain peacefully, leaving little room for political stability or institution building. Equally revelatory is the observation that many of the state-guided economies which have enjoyed phenomenal growth over the past quarter-century have likely peaked and will be hard-pressed to sustain that growth without allowing for bottom-up innovations and expanding both their markets and the means of production. Similarly, big-firm dominated economies with cradle-to-grave social systems like those of Germany and Japan are finding it increasingly difficult to maintain their living standards, create new jobs and markets, and attract entrepreneurs willing to invest in them.

The point here is to demonstrate how precarious and unsustainable economic growth is in countries that do not embrace the hybrid entrepreneurial/big-firm model the authors champion. Put another way, in the menagerie that is modern economics, Baumol, Litan, and Schramm are hedgehogs; they have one really big idea. That idea rests on the concept of entrepreneurial innovation — the kind of innovation that upends old ways of doing things, disrupts less dynamic systems of distribution, expands the economic pie, and stimulates people to dream of the next big thing. So it's no surprise, when they finally get around to describing their model, that it pretty much looks like the knowledge-based, technology-driven economic system with which the majority of Americans are already familiar.

And that's a bit of a let-down. Maybe it's because Baumol, Litan, and Schramm are working academics who understand that there's no silver bullet for our future economic success. Instead, Good Capitalism, Bad Capitalism is a careful survey of existing trends and conditions that only offers conclusions which can be supported by the evidence at hand. Even the author's evident sympathies for our own system are tempered by real concerns about aspects of the U.S. economy — from its reliance on massive farm and energy subsidies, to the widening imbalance in wealth distribution, to the growing influence on policy making of corporate lobbyists. At the same time, they make it clear that theirs is not a prescription for elites in other countries looking to energize their own economies, but rather informed speculation meant to prompt debate ahead of action.

That said, Good Capitalism, Bad Capitalism is a fascinating, highly readable examination of an important subject. Baumol, Litan, and Schramm do a terrific job of exposing the myths of modern economics as well as describing the great challenges — and opportunities — that lie ahead. And as partisans in a long-running war of ideas, their perspective is crystal clear: Without entrepreneurial innovation, the growth and prosperity of the twentieth century will not be replicated in the twenty-first.