For a while I had trouble trying to figure out who is the target audience for William Baumol, et al. Good Capitalism, Bad Capitalism (2007). It’s not really technical enough for a serious economist. Yet it lacks the marketing hubba hubba you’ve been conditioned to expect in this sort of book.
But I think I’ve got it: this is the study guide to The Economist weekly. It’s the background/framework you need to understand the magazine’s economic agenda.
This characterization is at least a half-baked compliment. As I’ve said elsewhere, I like reading The Economist, if less than I did a few years ago. The catch is that pegging the book as a study guide is a reminder that it is a sort of a catechism for a certain kind of establishment wisdom. And any such complex of received wisdom is bound to look a little silly, oh, say, five minutes after it is uttered.
Baumol et al. predicate their analysis on a linchpin of mainstream economics: the “Red Queen” paradox, in which we run faster and faster to stay in the same place.* It was never so well expressed (though without the tag) as by Albert O. Hirschman, in his account of “the basic paradox” in “the model of perfect competition:”
[S]ociety as a whole produces a comfortable and perhaps steadily increasing surplus, but every individual firm considered in isolation is barely getting by, so that a single false step will be its undoing. … [Such a view yields] a syndrome,, namely, to man’s fundamentally ambivalent attitude toward his ability to produce a surplus: he likes surplus but is fearful of paying its price. While unwilling to give up progress he hankers after the simple rigid constraints on behavior that governed him when he, like all other creatures, was totally absorbed by the need to satisfy his most basic drives. Who knows but that this hankering is at the root of the paradise myth!**
[The authors note the paradox with tantalizing indirection, recognizing that competition only makes sense where it does not work, i.e., where somebody succeeds in creating or capturing some economic rents (51).]
By “entrepreneurship,” the authors denote, broadly, new and productive ideas: ex nihilo invention, new combinations of familiar stuff, new ways of packaging and delivery. They distinguish what they call mere “replicative entrepreneurship,” which, I think, is just a fancy name for “self-employed.”
In keeping with what you might expect from an economist, their model is almost entirely instrumental: entrepreneurship is good because it works. This is convincing enough when cabined on its own ground, but it does permit them to sidestep a lot of issues which they might dismiss as (merely?) “moral.”
For example, when an inventor argues for the prevention of “invention,” he may argue that invention is good for the world. He is far more likely to argue that his profit in his invention ought to be protected because it is right, dad-rat it, and the other arguments can go hang. This opens up a whole raft of responsive questions. For another example, if protection is a matter of right, then why not protect IP rights forever—something that is accorded to no patent or copyright (though it may work for trademark or pure trade secrets). For another, are all “inventions” really alike? As the authors acknowledge, Henry Ford didn’t invent the automobile, nor Bill Gates the computer operating system: their contribution, if any, was in marketing and distribution which often looks suspiciously like ripping off the original inventor as much as it may look like a creative innovation. Third, how to sort out the “rights” (if such they are) of competing inventors—recognizing, as is now commonly understood, that simultaneous discovery is probably more the rule than the exception, and that the guy who gets credit for a new invention may very likely be (as George Stigler suggested) the last guy to invent it, not the first.
It is also not entirely clear how to characterize a whole range of economic innovations that seem to owe far more to chance than to anything like entrepreneurship. The “call center” which has done so much to bring riches to
It’s worth emphasizing that the authors, in their Economist mode, are very far from exposing themselves as hairy-chested libertarians. They like liberty: they want to lower trade barriers, costs of hiring and firing, costs of registering property, and other such items on the free-market menu. But they’re positively hospitable to protection against downside risks: soft bankruptcy laws, safety-net health insurance, etc. And while they seem to oppose high taxes on low and middle-income workers (who may be sources of entrepreneurship) they don’t seem to lose so much sleep over taxes on the rich (where, presumably, entrepreneurship is less likely to be found).
None of this is terribly radical, nor even terribly implausible. But that may be precisely the problem. Their case is so well laid out and so persuasive that you can’t help but suspect how five years from now we will look back on this sort of argument and say: my God, how could we have missed (X)—X being whatever central insight, invisible to us now, that we will come in time to embrace.
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*They cite Elias L. Kahlil, “The Red Queen Paradox: A Proper Name for a Popular Game,” Journal of Instiutional and Theoretical Economics 153 no. 2 (June, 1967) 411-15.
**A. O. Hirschman, Exit, Voice and Loyalty 9 (1970)
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