FORMS OF CAPITALISM—CURRENT AND PAST
A wide and diverse body of literature debates the causes, consequences, and typologies of global capitalism.14 According to Baumol and his colleagues, "no single and pure form of capitalism is likely to dominate any economy to the exclusion of elements of the other, the mix of different systems being what is the most important for the country's growth."25 A common theme to most research on capitalism varieties is an exploration of the influences of governance, employment, and/ or investment institutions on business activities.26 This chapter explores capitalism's variations based on business-government dynamics.
Depending on the philosophical foundation, one arrives at very different conclusions about the appropriate level of public sector involvement in business and economic development. National differences stem from government's role in business-development activities. These differences offer guidance to categorize the different forms of capitalism. Economic and political science literatures examine the growth of industrialized nations in terms of these relationships. Specifically, the literature focuses on a variety of institutional,27 industrial,28 and organized labor,29 or, a combination of all three characteristics.30
Lazonick31 and Pitelis32 provide a framework relating to the strength of business and national governments in industrialized nations' market formation. This framework shows four basic capitalism forms. Placement of nations within this model depends on the relative control public (government) and private (organized groups) have on the market.
The movement from a monarchy to a more democratic form of governance supports the transition from mercantilist to free market theory. A weak government's role assures that markets remain transferable so participants are not hindered from making transactions. Governments operating under the proprietary form of capitalism would not be considered a "principal" beneficiary of policies and laws. Adam Smith is one of the first to present a weak-state model.33 Under proprietary capitalism, individuals are free to make economic production and consumption decisions. The government's role is limited to performing tasks for the public good (e.g., national security) and to maintaining an environment that allows for a free-flowing economic system.
Smith's invisible hand assumes that the nation is composed primarily of small, sole-proprietary businesses. Each small business serves a small percentage of the total market. Government action interferes with the market's spontaneous order. Since small businesses dominate the competitive environment, organized societal groups also are assumed to be weak. No dominant group controls enough resources to influence the market (monopoly power). Chandler coins the term "proprietary" to describe this "weak state-weak society" capitalism form.34
Theory expansion from classical economics to neoclassical economics is sometimes credited to the Alfred Marshall's work on marginal analysis.35 The fundamental idea of Marshall's work is that the power of supply and demand generates market equilibrium. Market-price equilibrium occurs when the quantity demanded equals the quantity supplied at a given price and given time (the point where the market clears). This school of economics assumes that the market is free of imperfection.
An important variant stemming from the neoclassical theory is attributed to John Keynes.36 Keynesian economic intervention responds to high unemployment in England that contradicted the classical assumption of full employment (Say's Law). According to Say's Law, a wage rate always exists that makes full employment possible in a capitalistic system.37 Keynes argues that the employment level has no relationship to the cost labor; instead, an increase in aggregate demand serves as the primary incentive to hire more workers, which directly relates to the level of investment. Businesses will not hire more people to produce more products unless a demand for the surplus exists. The investment decision requires inducements such as: (1) the marginal efficiency of the capital (e.g., the best return for idle cash); or (2) the risk related to the loan payoff to finance the production that makes the rate of return acceptable. Through monetary (e.g., prime lending rate) or fiscal policy (e.g., state procurement policy) manipulation, the government affects total spending and total employment.
Support for proprietary capitalism comes from the Chicago and public choice schools. Milton Friedman and the Chicago School proponents express concern about any concentration of power. Essentially, they believe affecting trade for a public good is impossible.38 Unlike the Keynesian use of demand as an employment-level determinant, Milton Friedman focuses on the equilibrium of the money market (known as quantity theory). Equilibrium in the money market is believed to be the necessary market condition for expenditures on goods, services, and securities. The public choice school also supports a limited state role. Public choice proponents are critical of any government intervention. In the minimal-state model, the state's role should be limited to protection against force, theft, fraud, and enforcement of contracts.39 All other state actions violate individual rights.
Although the proprietary form is considered the theoretical foundation for United States' capitalism, this form has several shortcomings.40 At least three shortcomings associate with neoclassical theory.41 These shortcomings suggest that the existence of this form of capitalism is problematic.
First, neoclassical theory assumes preexisting markets where one individual or group has oligopoly or monopoly power. The automobile and commercial aircraft manufacturing as well as consumer retailing are examples of oligopolies. General Motors, Boeing, and Walmart complete against Toyota, Airbus, and Target, respectively. Small businesses trying to enter these competitive environments face insurmountable barriers. For example, Walmart's 9,700 retail stores had fiscal year 2011 sales of $419 billion.42 Even Walmart's suppliers are kept in line by the retail's purchasing power. In the mid-1990s, Rubbermaid raised the price charged for the company's products because a key ingredient's price increased by 80 percent. Walmart's solution was to give more shelf space to lower-priced competitors, forcing Rubbermaid to merge with rival Newell.43 Clearly, Walmart's size creates economies of scale enabling the company to sustain a cost leadership position.
Second, Pareto efficiency assumes rationality of buyers and sellers. Retail shopping behavior studies suggest buyer behavior does not support rationality. According to Point-Of-Purchase Advertising International, 70 percent of retail purchase decisions are made in the store; in-store displays encourage between 1.2 percent and 19.6 percent product lift.44 John Bargh's research on unconscious behavior helps explain this behavior.45 According to Bargh, most brain functions are done unconsciously and automatically and people are on autopilot for most functions. Rather than making decisions deliberately or rationally, consumers use their instincts.46
Third, neoclassical economics assumes state action neutrality toward all individuals or groups. What is government neutrality? Any governmental subsidy offers one stakeholder group an advantage. Do all members of society benefit equally from government intervention? The government-guaranteed loan to solar-panel maker Solyndra created 1,100 jobs and supported the clean-energy development. In this case, government policy makers felt the loan guarantee served national interests. Solyndra's recent bankruptcy filing leaves taxpayers and law makers with questions about whether or not all stakeholders benefited equally from the government-guaranteed loan.
Some evidence suggests that industrialized nations are moving even further away from proprietary capitalism. Examining Western European and U.S. economic growth from the 1930s to 1960s, Andrew Shonfield concludes government planning increased regardless of the country's historical relationship between business and government.4 7 Shonfield suggests centralized planning helps to take some fluctuations out of the market and allows for wider benefit distribution. The rewards appear to be even greater in the future as state and business planning methods improve.
Despite the proprietary model's limitations, the governmental trade policies remain influenced by neoclassical economic assumptions. For example, negotiations for a free trade agreement between Australia and China include the recognition the latter is a market economy, a condition for free trade negotiations.48 Arguably, free trade agreements are a two-edged sword. Ignoring these arrangements put domestic businesses at a disadvantage when competing against other foreign firms.49 Entering the free trade agreement exposes domestic businesses to foreign competition on equal footing. Countries with lower production costs have price advantages, and domestic production moves overseas to remain competitive. In this case, not all stakeholders benefit equally from government action. For example, organized labor unions see jobs disappear overseas from outsourcing related to free trade agreements.