Sunday, January 04, 2009

Capitalism, Death and Sex

One of the things I am truly grateful for with the internet is the access to great talks by great thinkers. TED, ForaTV, YouTube. It is a moveable feast and a great way to "sit in" on lectures around the world. I do realize, however, that watching videos of lectures is less popular than other forms of adult internet video entertainment.

A friend recently sent me a link on a talk with Hernando DeSoto, Joseph Stiglitz and Naomi Klein (well, two great thinkers and Naomi) discussing economic power and the financial crisis. The meta-topics of globalization, politics and economics. Stiglitz starts out the forum saying that the financial crisis has caused the death of "market fundamentalism." Klein is also well known for her antipathy to capitalism, which she calls Disaster Capitalism, and she too seems to think capitalism is gasping its last breaths. So, is capitalism dead? Is it truly a disaster? Or will it evolve and survive?

Not surprisingly, I find DeSoto's viewpoints the most convincing. In his view, unfortunately, the US is beginning to look a bit like a banana republic, where our promises (or "paper") are no longer trustworthy. But that is not a fatal flaw of capitalism, just of the way it has been practiced lately. Sick, maybe, but not dead.

I think the topic is more nuanced than Stiglitz and Klein present; there is not one way to do capitalism, anymore than there is one way to have sex, swing a golf club or brew beer. And some ways are better than others. Baumol, Litan & Schramm have classified four types in their book Good Capitalism Bad Capitalism; entrepreneurial, big firm, state-directed and oligarchic. And there are mixes of the four (they prefer a blend of entreperneurial and big firm). Here is a video link discussing the options (for capitalism, not sex, golf or beer).

Of interest on the political side is Paul Collier's recent work. Collier wrote the Bottom Billion in 2007 and offers a lot insight into why the poor countries have been left behind as the rich world has developed. He has more recently been poking around about the role of democracy in development, particularly with respect to commodities booms. As he pointed out at TED, commodities offer tremendous opportunity for development (commodities revenues dwarf foreign aid). But commodities revenues can have an adverse effect on development if governance is off. Even in democracies. The emphasis on democracy in the developing world has been on elections, not on checks and balances. His recent studies of commodities booms indicate that they are unhealthy for economies if they don’t have the checks and balances. It seems that there is such a thing as unprotected democracy. That the outcome of a quick election is not enough.

So, I think capitalism "is not dead yet," and I don't think that our recent experience was Stiglitz's "market fundamentalism." Some of Stiglitz's own data in this month's issue of Harpers seem to indicate we have been experiencing a blend of big firm and state-directed capitalism (with some old fashioned cronyism tossed in as well). This is hardly "market fundamentalism," as it is hard to see free markets at work in his data. Rather, it seems to be the effect of a number of political decisions (two wars, Medicare) which have increased the role of the federal government in our economy for years to come. To update an old (if misattributed) saying, “a trillion here, a trillion there…pretty soon you are talking real money.”

It is really discomforting to see how large the role of our government has become in our economy while there was a “Conservative Republican” in office. I sure hope the incoming “Liberal Democrat” administration proves to be as paradoxical, and moves us toward a policy favoring a more entrepreneurial capitalism. That is likely to be the better path for recovery, as opposed to an embrace of further government regulation of the affairs of business and society.


Robert Katz said...

In short, "it's the governance, stupid." Right? Commodity booms can be good, but without checks and balances they create Equatorial Guinea's not South Korea's. (Yes, vast generalization but I hope you get my point.)

I'm more and more conscious of this as we talk more about business in the BoP world. I'm starting to think that there is no magic sauce, no business model that can be "proven and scaled up" despite what all the development agencies and western orgs are saying.

Rather, you have to have good macro governance (i.e., a decent business environment in which to operate, less corruption than usual, etc.) and you have to have good micro governance (strong BoD, strong middle management, etc.)

Just because a business works in one place doesn't mean it's going to work elsewhere. And just because you have a competitive advantage (natural resources?) doesn't mean you can exploit those resources for the benefit of the entire economy without good governance.

Here's to governance!

Bopreneur said...

Thanks, Rob. I am still optimistic, but this goes to the "degree of difficulty" issue that you, Ryan and I have discussed (as written in Nextbillion and Richesforgood).
If you are starting an enterprise you want to scale, why would you start in Equatorial Guinea? Maybe because that is where you are from, or maybe because there is some specific advantage to starting there. But too often, the reason is not reasonable!
Better to start where you can, in Guy Kawasaki's words "get going," and then see if you can figure out a way to go to Equatorial Guinea- once you have gotten costs down, figured out marketing, etc.
I know Paul Polak disagrees with me on this, but often it may make sense for a business NOT to start with the "bottom billion."
But start ups are hard everywhere, and one needs to be very intentional about where to start when it comes to markets. Not just geography, but demography as well. The very large BOP contains some significant niches, and it is the entrepreneurs job to find the best places to lodge themselves in the early stages.
I think this is one of the things we have begun to learn at Envirofit.

Compassioninpolitics said...

The death of capitalism is absurd. We have too many radical individualists just in the US to ensure that this doesn't happen.

I think capitalism is smart enough to:
a) reform itself after crisis
b) seek government solutions as breaks to avoid a full-on collapse. (ie very slow leak vs. Titanic style)