“Good Capitalism, Bad Capitalism” book
Earlier this year my father was invited to the Festival of Thinkers in the UAE. The idea is to invite great thinkers from around the world, including 16 Noble prize winners, and have them give lectures to local UAE students. The nice twist is that the audience includes all the accomplished thinkers sharing tables with the local students. Eventually, the organizers hope, the local students would learn that the thinkers are just ordinary people, and that high accomplishment is within the grasp of the students if they work hard.
I am not sure how well this work in practice, but I hope to attend next year. In the meantime, my father was given a copy of the book “Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity”. This is a fascinating book.
It talks about four kinds of capitalism, rather than the single homogenous blob of “Capitalism” that is discussed in the press:
- Oligarchic capitalism, which is predominant in much of the developing world, especially the Arab world (sigh), is where the state backs a few very wealthy individuals and their families. The welfare of these families means the welfare of the ruling family, and neither group cares if it is at the expense of the general population’s welfare, which it usually does.
- State-guided capitalism, which is predominant in countries like China and Singapore, is where the state determines the sectors to invest in.
- Big-firm capitalism, which is predominant in Europe and Japan, is where the state backs large companies. The welfare of these national champions is a proxy for the welfare of the national economy and holding onto jobs.
- Entrepreneurial capitalism, which predominates in the USA since the 1970s, after a couple of decades of Big-firm capitalism, is where the start-ups drive the economy.
The book’s authors believe that entrepreneurial capitalism is the way to go. They are quite persuasive with this point of view. Oligarchic capitalism is just plain bad (deeper sigh) but state-guided capitalism may not be the fastest way to grow even for fast-growing China. And neither that nor big-firm capitalism can allow growth when an economy is close to the edges of human knowledge. In other words, the authors explain, the stagnation of most European economies apart from those of the UK and Ireland is because they ran out of American innovations to copy. The authors’ argument is much more nuanced and sophisticated than my last sentence is, but that is the main idea.
The reason that entrepreneurial capitalism is that economic growth can only happen from innovative entrepreneurship. This is different from what the authors call replicative entrepreneurship, which is copying and locally applying someone else’s idea.
The authors outline four policies to encourage innovative entrepreneurship:
- Easy to start and grow a business: this includes cheap business registration costs, bankruptcy protection, and access to finance.
- Rewards for productive Entrepreneurial Activity: this includes the rule of law, avoiding onerous taxation, proper regulation (or deregulation), commercializing university inventions, and rewarding imitation (the use of an old idea in a new way or a new setting)
- Disincentives for unproductive activity
- Keeping the winners on their toes: this includes antitrust, and welcoming trade and investment.
Over the next few weeks I will be researching what it would take for me to start my own company in Bahrain. I have a couple of good ideas for start-ups, so the answer is important to me. But I find the USA fascinatingly good at keeping the winners on their toes.
For example, when I arrived in the USA the country 2-3 years was behind Japan in cell phone services, and 1-2 years behind Western European countries. But earlier this year Apple released the world’s most advanced cell phone, leapfrogging over Nokia, Motorola and Palm even though it had never before made any cellphones. And then Google announces its entry into the auctions to be a wireless provider, even though it has never been one in the past. The FCC responded by accepting Google’s proposals that the winner of the auction should make their network open to any device maker, something I have never seen a European or Japanese regulator do in response to requests from new entrants. The saga continues with Verizon’s response, announcing that its whole network would be open from next year.
Within one year the USA has overtaken Europe and Japan to become the second most exciting and innovative wireless market in the world. I still believe India gets top place, but that is because it is such a new market. But at the cutting edge, players in the US market have completely changed the rules and winners of the game, without the need for government intervention.
I can only dream of this happening in the Arab world.