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Good Capitalism, Bad Capitalism: Sometimes economics is not enough

In 2007 the US economy was still the world’s Camelot. It was the only real global economic behemoth, representing unquestionable testament to the triumph of a capitalistic economic system that, given the correct parameters, cannot but continue its steady growth.

At the time, the US was ready to incur absurd amounts of debt that the rest of the world was willing to buy off, armed with the thought that people are investing in the world’s most sound and secure economy.

Reading Litan, Baumol, and Shramm’s Good Capitalism, Bad Capitalism (2007) in 2010 gives the reader an enormous analytical advantage: hindsight.

In 2007, it would have only made sense to tout the US economy as the best oiled cog in a global capitalistic economy that has seen the rise and slow-down of Japan and the Asian Tigers, a tentative European experience, and disparate wealth elsewhere. The authors of the book did just that while grouping Ireland, Israel and Taiwan with the US as well.

Enter 2010. The US credit crisis has since sent the country to the brink of depression. Unemployment in the US has more than doubled. Most importantly for our purposes, the US government is taking a much more active role in the economy by pumping nearly a trillion dollars of stimulus packages, buying up financial companies, and taking a general pointed turn towards a state-led system.

While the book is not exclusively about the US, it is difficult to take heed of its implicit call for the world to follow their lead in the application of capitalism without a slight roll of the eyes. The re-published version of Good Capitalism, Bad Capitalism makes the cardinal mistake of releasing as it did in 2007.

Since then the world has been through one of the most pervasive and profound economic crises in recent history. The failure of a book–essentially a treatise on economic ideology and practical application–printed in 2010 to mention that collapse seems out-of-sort.

The authors, all qualified academics of the highest order, begin with the thoughtful and important assertion that capitalism is not a monolith. They document the failings and successes of many “capitalistic” post Cold-War economies by noting the differences in the conditions set in place that have either aided or hindered long-term growth and equitable prosperity.

The forms economies take as a result of these conditions in their analysis boils down to four distinct capitalistic manifestations: Oligarchic, State-led, Big Business and Entrepreneurial. The first of which is the universal “Bad Capitalism,” while entrepreneurial capitalism is their only universal form of “Good Capitalism.” The respective middle two are good in their propensity to encourage entrepreneurship and innovation–sometimes used interchangeably–and bad in their proclivity to hinder them when they stand in the way of their own interests.

From a neo-classical economic perspective, the book is based on a sound set of theories, observations, and individual recommendations. It sagely notices that it was only through innovation that we have been able to side step the Malthusian projections of mankind’s inability to cope with its continuing growth on an earth with limited resources.

Dr. Ahmed Galal, Managing Director of the Economic Research Forum, believes that the book was able to positively contribute to literature on the topic of economic growth. “The book touches correctly on micro-economic units of growth,” Gala said, adding that it is encouraging to hear economists speak of the need to conciliate constant government intervention and regulation to allow for continuing functional markets.

Much of the recommendations given by the authors would be useful for conscientious governments with the ability and will to encourage growth. As an economic book, it doesn’t contain a whole lot that is groundbreaking. The true problem for many countries, however, is when they lack the ability and/or will to apply these changes.

The book touches on, but doesn’t adequately deal with, many political precepts needed to create the overall conditions to enact some of the more specific recommendations it makes. “It does not deal enough with how the lack of democracy, accountability, and transparency needed to ensure an equitable and efficient transition to what they perceive as Good Capitalism,” Galal said.

Perhaps for Egyptians–whether or not they agree with capitalism as a concept–this is where any economic or political recipes become difficult to digest.  Some sectors of the Egyptian economy are open for innovation and entrepreneurship, mainly IT. There is room for medium businesses to grow.

“Crony capitalism” (oligarchy), however, remains the order of the day, according to Dr. Galal. “Many industries and non-tradable sectors are prone to a great deal of corruption and irrational protection.”

While the book discusses growth and a vague notion of “advancement,” it doesn’t discuss issues such as distribution of wealth, the lack of which is acknowledged as a stumbling block in the face of innovation.

Economists generally deal with the question of the allocation of resources. They take a body of data, decide or hypothesize which are the dependant and dependant variables, and try to discern a correlation, usually through econometric methods. Making the jump in attempting to apply this scientific method to a real-life interdisciplinary situation can be difficult, and is seldom universal.

Litan, Shramm and Baumol do not assume a universal solution and it would be difficult for a non-academic to question their methods. The book, however, does take an extremely broad topic and brushes a little too lightly on the socio-political aspects necessary to qualify the economics of the study. Along with being profitable, entrepreneurial innovation is assumed to be universally beneficial to society, which has not always been in the case. In fact many of the most useful innovations to humanity, such as the discovery of the use of penicillin, were not necessarily attached to commercial enterprise.

The book also assumes, without reasonable justification, there is a universal notion for quality of life that we are all striving towards. It bases its recommendations on that.

Readers, who wish to enjoy a lucid account of the kinds of capitalism and some specific conditions that could help encourage businesses and innovation, will find Good Capitalism, Bad Capitalism enlightening. Those living under the auspices of (at least) semi-benevolent governments who would like advice on how to encourage entrepreneurial activities will also find the read engaging.

Others not merely obsessed with the notion of “catching up” with the US and would like a more penetrating socio-economic perspective on the ills facing the less developed economies in a post-2008 financial environment, may have to supplement it with other readings.

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