The keys to economic growth
May 15, 2007| By Nathaniel Ward
Conventional history argues that the Cold War was a battle between communism on one side and socialism on the other, and that American-style capitalism beat Soviet-style socialism in part through capitalism’s superior economic strength. Today, the story goes, capitalism dominates except in a few holdouts.
While this is true, economists Carl Schramm and Robert Litan said last week at The Heritage Foundation, there’s more to the story. The Kaufmann Foundation scholars posited that while American-style capitalism has enjoyed strong economic growth, other forms of capitalism are far less robust.
Capitalism, they argued, is not monolithic but instead comprises four primary variants. While all protect private property to some extent, they are in many ways very different, especially in their potential for economic growth.
- Oligarchic capitalism. This form of capitalism, where a small elite owns most property and controls the economy, dominates in Africa, Latin America, the Middle East and Russia. It is usually characterized by anemic economic growth.
- State-guided capitalism. Under this system, government makes broad decisions about the direction of the economy, though it relies on private firms to execute its plans. While it can enjoy strong growth by replicating others’ innovations, these economies stall in the end since they practice little innovation of their own. This form is practiced in Southeast Asia, India, China and, until recently, in Japan.
- Big-firm capitalism. Practiced in Western Europe, South Korea and modern Japan, this variant of capitalism can see economic growth through mass production, but it is often stifled by bureaucracy and big labor.
- Entrepreneurial capitalism. Epitomized by the United States, entrepreneurial capitalism can enjoy the strongest long-term growth. This “messy” capitalism involves substantial creative destruction, whereby old firms are replaced by innovative new firms. While formal job security may be lower than in other capitalist variants, such systems also enjoy far lower unemployment rates.
As Schramm and Litan explain in greater detail in their new book Good Capitalism, Bad Capitalism (click here to purchase the book online), entrepreneurial capitalism succeeds precisely because it is dynamic and innovative. Other systems stifle innovation to some degree or another, so all other things being equal, entrepreneurial capitalism will succeed where others stagnate.
Nathaniel Ward is the Editor of MyHeritage.org—a website for members and supporters of The Heritage Foundation.
