Their taxonomy goes like this: In state-guided capitalism, the government decides which industries get investment, and it often controls the banks and usually emphasizes exports....They tend to invest too much in the wrong places, stick too long with yesterday's winners and fail to spot tomorrow's.
In oligarchic capitalism, prevalent in parts of Latin America and the Arab Middle East, power and wealth are held by a few, and economies are organized to make them, not the general populace, richer....
Then there's big-firm capitalism, in which big private enterprises dominate...."At its best, [it] generates sufficiently large cash flows to finance...continuing, incremental improvements in products and services," the authors write. "At its worst, big-firm capitalism can be sclerotic, reluctant to innovate, and resistant to change."
Finally, there is entrepreneurial capitalism, in which small and innovative firms are significant. Think the U.S., Ireland, Israel, Taiwan and, increasingly, the United Kingdom. Forming a company is easy, socially useful entrepreneurship is rewarded, institutions provide incentives for innovation and growth -- a catch-all that encompasses everything from openness to trade to sound bankruptcy laws to effective antitrust regulation.
Messrs. Baumol, Litan and Schramm conclude the "best form of capitalism" blends elements of the entrepreneurial and big-firm strains. The former provides the oomph to imagine and invent technologies that propels economies; the latter provides the money and organization to refine and mass-produce them. The secret to prosperity, then, is for other economies to find their own ways to be more like the U.S.Good stuff.