Good Capitalism, Bad Capitalism/Preface
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Many books take off from one core idea. This book is built on two.
The first notion is that capitalism is not a monolithic form of economic organization but rather that it takes many forms, which differ substantially in terms of their implications for economic growth and elimination of poverty. The implicit assumption underlying the idea of a homogenous capitalism, the notion that all capitalist economies are fundamentally the same, reflects something of the mentality common during the cold war when two superpowers, representing two great ideologies, were struggling for the hearts and minds of peoples of the world. On the one side were countries like the United States, whose economies rested on the foundation of the private ownership of property, and on the other were communist or socialist societies, whose economies essentially did not. This distinction seemed to divide the two economic systems, and not much thought was given to the possibility that there is much more to capitalism.
The fall of the Berlin Wall in 1989 seemed to demonstrate that capitalism (and a democratic form of government) had won and communism had lost. A number of American scholars celebrated this fact, one even suggesting that we had reached the “end of history.” The terrorist attacks of September 11, 2001, shattered that illusion, at least as to forms of government. But even before that tragic day, a number of economic developments began calling into question the notion that there was only one form of capitalism in operation.
The most important of these developments was the remarkable resurgence of productivity growth and innovation in the United States in the 1990s, made possible largely by new, innovative companies, and not by the established giants that had previously dominated the U.S. economic landscape. Something new was afoot, and to one of us, it was sufficiently important to merit a special label: “entrepreneurial capitalism,” a type of capitalism where entrepreneurs, who continue to provide radical ideas that meet the test of the marketplace, play a central role in the system. This apparently new form of capitalism differed from its counterparts in other countries, especially in Japan and continental Europe, where radical entrepreneurship was noticeably absent and where a combination of large enterprises, often “championed” by their governments, and small retail or “mom and pop” shops dominated the economy.
Drawing on this simple insight, we realized that capitalism in other countries took other forms. In some the state seemed to be directing traffic, hence our term “state-guided capitalism,” a form of economic organization that seemed for many—and may still seem—to be the key to jump-starting growth in less developed countries. In other countries, the state may also have played a role, but the leaders of government and the narrow elites who backed them (or feared them) did not seem to care as much about growth as they did about keeping the spoils of the economy to themselves. The economies were capitalist in the sense that private property was allowed; it’s just that it was highly concentrated in the hands of a few. These economies seemed to be best characterized as “oligarchic.”
At its core, this book is about these four different types of capitalism— entrepreneurial, big-firm, state-directed, and oligarchic—and how they affect growth. We believe these distinctions are important not only for their descriptive value but also for their normative implications. Hence the reference in the book’s title to “good” and “bad” forms of capitalism. Clearly, we view some forms of capitalism as worthy of promoting, others as systems to be rejected and eliminated. Our policy suggestions toward the end of the book are aimed at both of these goals.
A second insight or proposition is key to the arguments laid out in the pages that follow. Readers can well be excused if, from the brief recitation of the different types of capitalism, they jump to the conclusion that only the first form of capitalism—the “entrepreneurial capitalism” that has powered the U.S. economy toward a higher growth rate since the 1990s and which seems to be taking hold in other parts of the world, such as Ireland, Israel, the United Kingdom, India, and China, to name just a few— is the only form of “good capitalism.” But as one of us (Baumol) elaborated over a decade ago, it takes a mix of innovative firms and established larger enterprises to make an economy really tick. A small set of entrepreneurs may come up with the “next big things,” but few if any of them would be brought to market unless the new products, services, or methods of production were refined to the point where they could be sold in the marketplace at prices such that large numbers of people or firms could buy them. It is that key insight that led us to the conclusion that the best form of “good capitalism” is a blend of “entrepreneurial” and “big-firm” capitalism, although the precise mix will vary from country to country, depending on a combination of cultural and historical characteristics that we hope others will help clarify in the years ahead.
The foregoing insights would not have generated a book without much
help from other sources. Here we identify first and foremost the Kauffman
Foundation, the world’s leading foundation in increasing understanding
of and encouraging entrepreneurship. All three of us have benefited enormously
from the privilege of being actively involved in the management of
this foundation (two of us are officers, the third is a special advisor) and
having the opportunity to discuss many of the ideas in this book with our
colleagues, not just those at the foundation itself (with whom we have had
countless productive conversations), but with its many grantees in the academic
community. Because we have the good fortune to be able to direct
some of the foundation’s resources to further economic research about
the nature, causes, consequences, and policies related to entrepreneurship
in particular, we have over the past three years gained a worldview that
would not have been possible had each of us been on our own. We have
been inspired by the research of the scholars the foundation has supported,
as well as many others in the profession who have labored in related
fields. This book could not have been written without their contributions.
Baumol’s work, in particular, was also greatly facilitated by the
Berkley Center for Entrepreneurial Studies at New York University, of
which he is the academic director, one of the academic organizations generously
supported by the Kauffman Foundation.
This book also could not have been written without the exemplary assistance we received on a number of fronts from others to whom we owe our thanks and our gratitude. A team of researchers second to none—E. J. Reedy, Marisa Porzig, Dane Stangler, and Mark Dollard—helped us at various points along the way by finding essential information and offering key insights. Special thanks must also go to two other individuals: Alyse Freilich, who not only contributed to the research effort but also did an outstanding job in drafting the appendix to this book, which explains the many data difficulties that complicate the task of studying entrepreneurship; and Lesa Mitchell, another officer at the foundation, whose pioneering work devoted to understanding and helping to change (for the better) the commercialization of university-based innovation eventually will receive the universal recognition that it deserves.
We are also grateful for the production and editorial assistance of Glory Olson at the foundation and Sue Ann Batey Blackman (a longtime colleague of Baumol’s), and to Eliza Childs of Yale University Press. To our editors at the Press, Michael O’Malley and Steve Colca, we owe a large debt; they urged us to write this book on the strength of only the barest outline (which, in retrospect, bore only slight resemblance to the finished product). We take no credit for what we think is a great cover to the book; that honor belongs to Melody Dellinger. Finally, we are grateful for the comments and input we received on portions of this book as it gradually evolved from Zoltan Acs, Edmund Phelps, Robert Strom, and Michael Song.
We hope our readers will share the intellectual excitement that we have enjoyed in working together and in developing the thoughts presented in the following pages. As other coauthors know, it is rare when two authors of a book can finish and still remain friends. This book reflects a unique partnership of three individuals, each of whom brought different fields of expertise to the task and all of whom became much closer friends as the joint venture progressed. We are grateful to one another for being able to pursue this project together.
This site made possible through the generous support of the Ewing Marion Kauffman Foundation
