Arnold Kling  

Four Types of Capitalism

Drum Roll Please...... Health Care and the Consumer...

In Good Capitalism, Bad Capitalism, William J. Baumol, Robert E. Litan, and Carl J. Schramm write (p.91),

Of the twenty-five largest firms in the United States in 1998, eight did not exist or were very small in 1960. In Europe, all twenty-five of the companies that were the largest in 1998 were already large in 1960.

The point is that capitalism is more entrepreneurial in the United States. For the authors (BLS), entrepreneurial means not just that you can start a mom-and-pop business, but that you can start a business that has the potential to overthrow a large incumbent.

Europe and Japan have systems that do much more to protect existing enterprises, lock in employment, and so forth. Banking is concentrated, and government has big influence on capital movements. The authors call this big-firm capitalism.

When government is even more involved with directing capital movements, the authors call it state-directed capitalism. They view China as an example. They prefer a combination of entrepreneurial capitalism and big-firm capitalism, but they believe that state-directed capitalism can work in the short run.

Finally, when only a few firms are given leeway to earn profits, the authors call this oligarchic capitalism. On p. 170, they defend Vladimir Putin, arguing that he is trying to move Russia from oligarchic capitalism to state-directed capitalism, which is a step forward.

It is interesting to compare the thesis of the book with the dichotomous view of North, Wallis, and Weingast. I think BLS have an easier time describing China, and they can differentiate Europe from the U.S. On the other hand, I think that NWW do a better job of explaining the link between oligarchic capitalism and oligarchic political systems. I think that Russia fits better with the NWW model of limited-access order than the BLS model of state-directed capitalism.

UPDATE: Kevin Hassett looks at countries that have economic freedom without political freedom.

the countries that are economically and politically free are underper­forming the countries that are economically but not politically free. For example, unfree China had a growth rate of 9.5 percent from 2001 to 2005. But China was not the whole story--Malaysia's GDP grew 9.5 percent from 1991 to 1995, Singapore's GDP grew 6.4 percent from 1996 to 2000, and Russia's grew 6.1 percent from 2001 to 2005.

Of course, my co-blogger would be happy to point out that there is no particular reason to expect democracies to have good economic policies.

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The author at Economic Investigations in a related article titled News of the World #34 writes:
    Elsewhere… Coercion Coercive Regulation and the Balance of Freedom, Edward Glaeser doesn’t pay attention to Klein definition either and conflates “coercion” with “use of or threat with force”. Ed Glaeser on Utility, ... [Tracked on May 13, 2007 5:28 AM]
The author at Freedom Democrats in a related article titled Four Types of Capitalism? writes:
    Arnold King dicusses the premise of a book called "Good Captialism, Bad Captialism". See here. The book contends that there are 4 kinds of capitalism in the world today: Entrepreneurial, Big Firm, State-Controlled and Oligarchic. An Example of the first i [Tracked on May 13, 2007 1:16 PM]
The author at The Free Thinker in a related article titled Authoritarians Get Rich, Democrats Stay Poor? writes:
    Kevin Hassett presents a disturbing argument along with a compelling graph that suggests that, given economic freedom, politically free countries have actually grown more slowly than countries with authoritarian regimes. (Hat tip: EconLog) I have some ... [Tracked on May 14, 2007 10:29 AM]
COMMENTS (8 to date)
Edgardo writes:

Arnold, you fail to address the relevant question: Do these simple classifications facilitate our understanding of different economies?
We can always pick up just one characteristic to argue that an economy fits into a category. I have not read BLS book, but I have read NWW several times and I have yet to find any insight on the cases they mention.

David Kendall writes:

There is exactly one type of capitalism, under which a small minority of exploiters appropriates the surplus created by labor, leaving just enough for the actual producers to survive. The exploiters dispose of the surplus to meet their private interests, regardless of social needs. Any other "definition" is a childish denial of documented fact.

liberty writes:

What about comparing with the Marxist definitions?

liberty writes:

Heh, I was a bit late, David Kendall just did it!

However, Marxists also have definitions for state-capitalism and state-socialism and without recognizing it, Lenin and Bukharin both admitted that state directed "capitalism" was essentially the same as socialism, just with a different guy at the helm. Hence Bukharin's dreaded Leviathan is exactly what they got when they implemented Lenin's Utopian vision. Oops.

John Pertz writes:

"There is exactly one type of capitalism, under which a small minority of exploiters appropriates the surplus created by labor, leaving just enough for the actual producers to survive. The exploiters dispose of the surplus to meet their private interests, regardless of social needs. Any other "definition" is a childish denial of documented fact."

Awsome, not only do we have a rather strong center left presence on this blog, but it looks like we may have our first full blown marxist. Here's to a happy near future of grand amusement reading Mr. Kendall's posts.

Wild Pegasus writes:

Hassett's contention that Singapore is a free-market economy is laughable. The amount of government regulation, subsidy, or outright ownership in Singapore is banana-republicesque. For example, almost no one owns their home on the island - the state owns almost all of it, and assigns housing.

It so happens that the Singapore political class is really good at economic governance, while most banana republics are headed by a grossly inept political class.

- Josh

Floccina writes:

I think that growth is in part a function of the amount of change. China may not be as free as the USA but China is much more free now than it was 30 years ago, not so the USA, so the growth in China is much more.

R. Richard Schweitzer writes:

There follows a post made to the WSJ publication of this discussion.

To this observor, our social order does not function economically as an ideology.


The uses of “…ism” and “…ist,” in any discourse carry implications of describing things in ideological terms rather than by analytical definitions. That conveys physical and emotional conditions of the kind we associate with nazism, fascism, Islamist, and even the benevolent, Catholicism, Romanticism, etc.

Our present system of modes of production and modes of exchanges of goods and services (distribution), and the relationships between them, continue to be described (seldom defined) as a form of “ism,” based on descriptive terms applied to ceratin of its elements by antagonists of the system, such as Karl Marx.

The systems we have today, in which entrepreneurial enterprise thrives, are based on freedom of access and openness (freedom) of choices, determined by individuals, within an open society. Commercially, the choices are expressed through prices, which reflect the exchange of services for services, both changed and balanced by forces of “competition.”

Here again, we should clarify what is meant by the term “competition." Competition is not necessarily an intended "contest" or "conflict," but, rather, a description of the results of forces put in motion by diverse choices, regardless of the intentions of those making the choices.

Example: When the people of Market 2 are willing to pay more and pay sooner for widget X for their children (or have the means to do so), than the people of Market 3; and the maker of X decides to satisfy Market 2 first, the people of Market 2 are not intending to "compete" by contest with those of Market 3. However, a competition has occurred.

In a social order of open choices (depending on the degree of openness) that is more often the nature of commercial competition than the form exhibited by outright contests.

Perhaps some term like resultant competition vis a vis contesting competition, would better describe the nature of what occurs in open, non-fabricated social orders, and what is disrupted when there are attempts to create constructs to achieve something other than what free choices in an open social order will produce.

Entrepreneurial enterprise generally seeks to open access to choices, or to increase choices, or both, thus generating resultant competition.

Our system, and any other like it, in which such enterprise can be open, in an open society, is not an “ism.”

R. Richard Schweitzer

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