Below is a book review / essay on the ideas in the book Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity by Baumol, Litan, and Schramm, in which the authors argue that “entrepreneurial capitalism” is crucial for economic growth. Other books were consulted but it’s difficult to paste footnotes into a blog post, so if you want all citations, email me.
Economic growth is desirable for all countries because it improves the material standard of living and spawns moral benefits, i.e. it “fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.” Of the various causes of economic growth, I believe one value is paramount: entrepreneurship. William Baumol, Robert Litan, and Carl Schramm call the importance of this value “entrepreneurial capitalism,” which is when small firms play a significant role in an economy. Countries which prize entrepreneurship make it easy to start a business by minimizing bureaucratic roadblocks. These economies also have cultures conducive to entrepreneurial thinking; they adopt entrepreneurship as a local value. I will briefly explore how the U.S. and China embrace this to different extents – and how Japan and Western Europe do not.
Whether by design or by necessity, Beijing has decentralized economic and political decision-making to the provincial and municipal governments, which in turn have used their expanded freedom to engage in productive ventures…Chinese officials have tolerated the formation of countless numbers of other entrepreneurial ventures that have sprung up largely in the eastern, richer half of China, and by at least one measure, small- and medium-sized enterprises by 2003 accounted for half of the economy’s GDP.
To be sure, government regulatory infrastructure there is not yet mature. A basic legal framework to protect inventions hardly exists. Corruption and other institutional failings plague the entrepreneur. Still, China’s amazing economic prosperity the past decade can in part be attributed to the rise of entrepreneurial capitalism; they ditched state-run banks for private ones, for example, and made it on average 13 days quicker per person to start a business.
Why the slow growth?
First, both regions are defined by dominant big firms, with small, innovative firms either not being started or not scaling to any meaningful size. Consequently, Western Europe lacks much “creative destruction”: of the twenty five of the largest companies in 1998, all twenty five were already large in 1960. Contrast this to the US, where eight of the top twenty five companies did not exist or were very small in 1960. When there’s not turnover, there is not enough destruction and creation and entrepreneurial dynamism. In Japan, it is difficult to identify any new company which has emerged of late; behemoths like Sony, Panasonic, and Toyota still dominate.
Second, entrepreneurial capitalism requires capitalism itself. But capitalism is not a given in some places in Western Europe. A survey of 22 countries reported that only France’s residents did not believe the “free market economy” was the best economic system. Capitalism also necessitates the free movement of labor, but both Western Europe and Japan restrict their labor market so that hiring and firing employees is exceedingly difficult. Some countries mandate 35 hour work weeks.
Third, economist Edmund Phelps has argued that Western Europe’s slow economic growth could be because of a lack of entrepreneurial culture. Culture is essential for entrepreneurial attitudes. Yet “culture” is nebulous – it is hard to pinpoint how mores become entrenched, and how one goes about changing them. To start, it seems obvious that no matter how much a country talks about shaping the hearts and minds of the next generation with a flair for entrepreneurship, in the end government policy and regulation matter most. The brightest entrepreneurial spirit will still be quashed by onerous government regulation or a capital markets system which disadvantages the small business looking for a loan or a labor market which prevents the hiring and firing of the best talent. It seems that the most important commitment places like Japan or Western Europe can make at this point is to align official government policy with its entrepreneurial aspirations, assuming they have them.
In summary, Japan and Western Europe need to move toward entrepreneurial capitalism if they’re to remain competitive against rising Asian powers.