Book reviews

• William J. Baumol, Robert E. Litan and Carl J. Shramm , Good capitalism, Bad capitalism and the Economics of Growth and Prosperity (321 pp., Yale University Press, 2007)
• Robert B. Reich , Supercapitalism. The Transformation of Business, Democracy, and Everyday Life (272 pp., Knopf, 2007)

There is no alternative to capitalism, but there are alternative capitalisms. The notion that globalisation would force everyone to take the same path – in essence the American path – has not been fulfilled, nor will it. But there are general challenges that all societies have to overcome if they want to become or to remain prosperous. There are useful tools for discussing this in a nuanced way in the book Good capitalism, Bad Capitalism and the Economics of Growth and Prosperity (321 pp., Yale University Press) by the trio of William J. Baumol, Robert E. Litan and Carl J. Schramm, all of them active in the USA. Their basic starting point is that innovations create increases in productivity, and that different capitalisms vary as to how good they are in generating and utilising them.

They differentiate between four archetypal capitalisms. Real economies are often a mixture of these. State-guided capitalism can function during a build-up phase, but when the economy begins to mature, it becomes increasingly difficult to identify the winners, and with state intervention the risks in the form of huge bad investments become bigger and bigger. It is perhaps primarily the south-east Asian economies that exemplify this form. Oligarchic capitalism is dominated by elites who protect their own interests and often block development if it disadvantages them. Oligarchies are prominent in Latin America, the Arab states of the Middle East, Russia and Africa. Big-firm capitalism is prominent both in Europe, Japan, Korea and parts of the USA, with the difference that in the USA big firms arise and disappear to a completely different extent. The authors stress the significance of big firms. In many cases it is only they who can bear the costs of the gradual development of new technology. But they easily become rigid, and new impulses often come from entrepreneurial capitalism, which is dominated by small companies constructed around new ideas.

American productivity development has been better than the equivalent in Europe, but one should not draw the conclusion from this that Europe should, or is able to, imitate the USA. The best productivity, according to the authors, is provided by a combination of big-firm capitalism and entrepreneurial capitalism, but it may look rather different. Friends of shock therapy do not have a great deal to gain here; the basic thesis of the book is that change has to be gradual and begin at the margins. Nor is there any unambiguous proof that a welfare state and high taxation impede productivity, say Baumol/Litan/Schramm.

But a sluggish labour market blocks a dynamic entrepreneurial sector. If it is difficult to sack people, then the propensity to employ is reduced on projects which may go wrong but may equally prove to be very profitable. The authors do not advocate Europe drastically amending its labour laws, but that exceptions to them be made in a dynamic entrepreneurial sector. Will the idea of special conditions for a sector that in the long term can vitalise the entire economy and form the basis for general prosperity receive a sympathetic hearing [in the political debate] among politicians? Or will they talk of brute capitalism and exploitation?

It is not easy to create political understanding for something of this kind when there are so many conspiratorial notions of how capitalism works. It is more convenient to draw a picture of disreputable operators (who do of course exist!) than to scrutinise one’s own participation in developments. In this respect Robert B. Reich’s Supercapitalism. The Transformation of Business, Democracy, and Everyday Life (272 pp., Knopf) is particularly welcome. Reich, at one time Clinton’s Secretary of Labour, reminds us that this supercapitalism aims to take advantage of our interests as consumers and investors, and on closer inspection it is we ourselves who are putting ourselves under pressure. But the one hand does not want to know what the other hand is doing, and both are pointing the finger at some third hand.

Supercapitalism is defined primarily as the antithesis of democratic capitalism between 1945 and 1975. There was considerably less global competition then, and big firms who lived protected existences within national boundaries could afford to listen to their employees and to society at large. Wealth was distributed relatively evenly; careers had their relatively predictable paths for most people. There were no malicious powers or politicians like Reagan and Thatcher to shatter this world, says Reich; the changes had started before them. Not least technological development provided investors and consumers with an aggregated power which they had not possessed previously, and it is this which has produced supercapitalism: consumers who want goods that are ever cheaper and investors who want to have ever-increasing returns.

In other words: most of us participate with at least part of our being in this. It happens when we are standing in a shop choosing the cheapest alternative without taking into account other factors, or when we are sitting with our bank manager deciding to move our savings in order to get a better return on them. The other part of our being may be horrified at the fact that companies are cutting costs in every possible way – but that is precisely what is making possible our cheap product. We can complain about a CEO who closes a factory in a nearby town, but maybe it was moving our savings which contributed to putting pressure on the CEO to do this.

Development has favoured us as consumers and investors, but weakened us as citizens. Common political goals are not as easy to aggregate as are consumer power and investment; all the time the citizen within us loses out to the consumer and investor in us. Only when we realise this can we pose the real question, maintains Reich. The remedy is not corporate social responsibility but a revitalisation of the civic political sphere. Anyone who imagines that companies are in essence governed by anything other than a striving for profit will be disappointed, and as consumers we are seldom prepared to pay for taking consideration when this brings with it higher prices. It is the role of politics to formulate the rules of the game.

One might believe that Reich is refining his argument too much, and is not seriously asking the question of whether there are alternative strategies to companies. In order to get us all to realise that we are moral subjects in this process, he makes too little in the way of moral demands on companies. Nevertheless, his book is a welcome contribution to a non-conspiratorial analysis of power. We are in great need of something of the kind today if political discussion is to be revitalised.