The two types of capitalism
Probably most of you already know that Edmund Phelps won the 2006 Nobel prize for economics (the real name of the prize is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2006).
Being an economist myself I remember when I used to study his theories, mainly about the relationship between inflation and unemployment. In fact he was awarded the Nobel “for his analysis of intertemporal trade-offs in macroeconomic policy”.
Now, while I will not cover Phelps’ economic framework here (else I would lose some readers already after the first few lines…) I want to point you to an interesting article he wrote for the WSJ.
The main argument is that the Western society presents two types of capitalism. The one we find in the US, UK and Canada is a “private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development”.
Then we have the capitalism found in Continental Europe (mainly France, Germany and Italy) which is also “based on private ownership but has been modified by the introduction of institutions aimed at protecting the interest of “stakeholders” and “social partners”.
Phelps defends that the Anglo-Saxon model is more dynamic and thus facilitates the appearance of innovative ideas believed to be technologically feasible and profitable. I agree with him (no shit, the guy just won the Nobel!) and I think the Continental capitalism system is less innovative because it has a strong “paternalistic” structure.
Some European nations, like the Nordic ones, are already understanding the need for a more flexible and open economy. The result is a better equilibrium between the protection of social rights and the incentives for innovation and entrepreneurship.
You can read the full article here.
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This brings up a number of philosophical conflicts I have. On the one hand I believe that open systems always ultimately trump less open systems. I furthermore believe that the US/UK/Canada have over time developed some of the most sustainably open economic systems to date. This belief is why, despite the hype, China does not worry me. China is filled with violently closed systems, politically, economically, culturally.
On the other hand economic perpespectives reduce everything to a question of financial capital, and are blind to all other forms of capital. So while the Anglo-Saxon model might facilitate greater innovation and generate greater financial capital than other systems, what does it do for social capital, human capital, cultural capital?
So while more open is better than less open according to some measure, is it better according the mesaures that matter most: does the dynamism of anglo-saxon capitalism make happier, better people compared with other systems like continental capitalism?
Very good question.
Phelps answers it in the following way: “The U.S. economy might be said to suffer from incomplete inclusion of the disadvantaged. But that is less a fault of capitalism than of electoral politics”.
In my opinion the solution is a better balance between openness and social protection, but probably to achieve this we will need to completely review the structure of our economy.
[…] Last week Daniel over at Innovation Zen posted about the differences between continental and anglo-saxon capitalism. This brought up an old issue for me about the tension between open and closed systems. […]