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

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Good capitalism, bad capitalism, and the economics of growth and prosperity William Baumol YALE UNIVERSITY PRESS, 2007

Since capitalism became virtually the only form of economic system available, it has become both necessary and possible to distinguish between different forms of it. The task of doing so has usually fallen to political scientists, sociologists, and institutional economists. This book is notable for being a contribution to the study of the diversity of capitalism from the stable of orthodox neo-classical economics. It is also unusual in being, as its title implies, a normative account, dealing not just in terms of relative efficiency or appropriateness for different tasks, but making the fundamental moral evaluation of good and bad.

The authors distinguish four forms of capitalism: state-guided, oligarchic, big-firm, and entrepreneurial. The first two are 'bad' and identified with various parts of the ex-communist and developing world; the third is rather bad, and is associated with continental western Europe; the fourth is good, and is represented by the US and other US-friendly Anglophone countries - though to be viable it has to occur in some unspecified conjunction with the big-firm model.

That oligarchic capitalism of the kind that has developed in Russia and some other parts of the former Soviet Union is 'bad', whether in a moral or efficiency sense need not be disputed here. Western neo-liberal economists who advised authorities in that part of the world that the crucial thing was to privatise, and that markets would surely follow, and that social and political institutions and infrastructure were irrelevant provided that economic resources were privately owned, have had long enough to ruminate on their error. Certainly these authors have absorbed all those lessons.

State-guided or developmental capitalism is far more problematic. It has been the model pursued, in varying forms, in a large number of states from Latin America to South East Asia, and it has both remarkable successes and disastrous failures to its account. Western social democrats have a disturbing tendency to point to the state-led character of economic growth in such places as Taiwan, Singapore and South Korea as some kind of justification of their own political preference for big government. It is not. In most examples of this kind of capitalism, at least in their formative stages, state power was used to suppress dissent, sometimes brutally, and to protect local elites and their often uncompetitive economic interests, with highly inegalitarian consequences. The economic success of some of these cases simply shows us that 'bad' capitalism can be successful, something that both left and right are reluctant to accept.

The authors of the volume under review, being of the economic right, have the opposite problem of social democrats: they have to argue that the state has not really been so important to the success of these countries (pp. 142-3). They do this in a highly unconvincing way, claiming that while government might have been important in the early stages of growth, it is so no longer. There are two problems with this position. First, the fact that in later stages of development the state might reduce its role does not somehow wipe out the reality of its contribution in earlier stages. Second, even if the role of the government becomes less directive in later stages, it remains highly active. Most typically, a protectionist role in supporting local capitalists against foreign competition gives way to an encouragement of foreign direct investment. But this does not usually take the form of a move to pure market forces: the inward investors are wooed with various fiscal and legal privileges, and enjoy elite relationships with the political class and with sections of the local economic elite with whom they will collaborate rather than compete. State-guided capitalism, whether in its early protectionist form or its current FDI orientation makes happy reading for neither neo-liberals nor social democrats. …