Four Kinds of Capitalism

According to GoodCapitalism, Bad Capitalism, a book written by Baumol, Litan & Schramm, there are four kinds of capitalism. They all have in common the private ownership of (business) property.

The first is state-guided capitalism, in which government tries to guide the market by supporting particular industries. This model has been favored in Asian countries, where the state controls the banks and other financial institutions. The states underwrite low wage export oriented businesses to produce goods primarily for the world market. The problem with this kind of practice is that governments tend to overinvest in favored industries and underinvest in those needed for their domestic use. States are also notoriously slow in responding to the demands of a changing marketplace.

The authors distinguish state-guided capitalism from centrally planned economies, in which the state owns the means of production, sets wages and prices, often cares little about what consumers want, and provides no incentives for innovation.

Secondly, there is oligarchic capitalism. The economic system is nominally capitalist, but government policies mostly promote the interest of a small and usually wealthy part of the population. Economic growth is not a central objective, the main goal being to keep or enhance the position of the oligarchic few.

Along with oligarchic capitalism there is often informality. Individuals and firms do things that are constructive but technically illegal, such as lacking licenses, but without being outright criminal. Informal operators get much less access to legal protection and credit. The oligarchs do not consider more formal rights for informal operators to be in the oligarchs' narrow economic interest. The oligarchs don't want the competition.

Thirdly, there is big-firm capitalism. The big firms operate mainly in well-established markets and deal in large volumes. They often innovate incrementally with product and process refinements but usually not in radical or revolutionary ways. Many incremental improvements over a long period of time can amount to radical, comparing the start and end of the interval. Big firms are essential to mass-produce some of the innovations that radical entrepreneurs are unable to do by themselves. On the other hand, big firms may become lazy or influence government to help them or hurt the competition.

Lastly, there is entrepreneurial capitalism. Entrepreneurs can be radical or replicative. The majority are the latter. They more or less copy other business successes, usually in a new location. The authors do not mention franchises, but they surely fit this pattern. (McDonald’s is a great example.) The great breakthroughs in technology are usually brought to market by the radical entrepreneurs, individuals or small firms. This type of organization -- free of the constraints of big firms -- is better at creating new markets and opportunities.

The authors say the most successful economies are those that have a mix of big-firm capitalism and entrepreneurial capitalism. The more established firms -- often multiple generations removed from its entrepreneurial founders -- refine and mass-produce the innovations that entrepreneurs bring to market.