I just got back from a week of lecturing in Singapore, where there is no financial crisis, no recession, and no extra economic pressure on entrepreneurs.
One of the topics that I was there to talk about was the U.S. innovation system. This is something I’m often asked to talk about in other countries, where there is a desire to imitate the U.S. system of creating high growth innovative start-ups.
Normally I don’t think much about the downside of the U.S. system. But with the current economic situation here, I thought a lot about the potential trade-offs between our system and that in other countries.
The U.S. has what some might call market capitalism. Our reliance on the market system has helped to create venture capital and IPO markets that are much stronger than elsewhere in the world and that has given us high growth innovative companies like Google. The downside of this system is that it can lead to excesses (current financial crisis) that we would have been better off preventing.
Other countries, like Singapore, have what some might call managed capitalism. They are much less reliant on the market system and much more reliant on the government to regulate and manage the economy. This approach minimizes the kind of excesses that we have seen recently, but at the expense of the kind of entrepreneurship that epitomizes the U.S. system.
I used to take the advantages of the U.S. system for granted. But now I am now wondering if managed capitalism might be better.
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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.
I think the fall of communism led to a certain amount of triumphalism and perhaps the loss of perspective that comes with that kind of perceived ‘success’. Capitalism became the only game in town and I think it has been taken to close to its logical extreme. The case against the kind of management or regulation you see in places like Singapore has always been the way the regulators couldn’t keep up with the ‘innovation’ being created by the market, and were therefore held to ransom by the market: “if you restrict us you restrict the amount of growth and value we can create”. There was also a veneer of credibility to the operators in the marketplace. It was full of the kind of people who seem so sure of their point of view and their thoughts on the future that the lesser paid (and perhaps less intellectually gifted) regulators gave way when they should have stood firm and not allowed something to go ahead if they didn’t thoroughly understand it. I’m not sure regulation is the way forward. I think good old fashioned humility rather than misplaced faith and arrogance in the market model is where things will settle. That may mean we have to settle for lower economic growth targets, but the climate change agenda was leading us there anyway.
“Managed capitalism” is precisely what caused the financial meltdown. Starting with the Community Reinvestment Act the federal government, lead by special interest groups, told banks the goal of universal home ownership was more important that making sound lending decisions. It was after all the American dream to own a home and everyone should have the opportunity regardless of their ability to pay. So they forced banks to write risky loans reasoning the rising home prices of the time would cover the bad debt and then covered up the growing nightmare by telling Fannie and Freddie to package and sell the debt. Can anyone with an ounce of business sense think that a loan with no income verification, or 5% down is a sound decision? Who came up with those loans? Those rules were imposed onto the market by regulators and special interest groups in the name of fairness. Other institutions purchase the debt from Frannie and Freddie because it was assumed to be grade A paper with the implied warranty of the U.S. federal government. The few regulators and congressman who did raise the alarm were quickly branded as racists and accused of wanting to kill the American dream of home ownership. Google mortgage melt down video and watch with your own eyes the testimony in congressional hearings and you will see that it is the medaling of government beaurecrats in the “free” market system that causes the issues. Watch how Franklin Raines is protected while the regulator responsible for oversight tries to report on the corruption taking place and the coming disaster. A totally free and open market is the best economic system the world has- not without issues-but the best we have. The issue is not the system; it was that the system was not allowed to operate by free market rules. If it had been it would have rejected most of the risky loans and the few greedy people who did make bad deals would have been driven out of business.
I agree with Chad. In a true free-market, the principles of self-regulation apply, somewhere where the fed cannot keep rates at 1% for a year, make universal lending promises, and regulate the market to destruction. Rates would have naturally risen and lending standards naturally tighten as the practices yield poor results. It is the promise of “never failure” that allows institutions to recklessly pursue rediculous profits without responsibility for their decisions. I’m a big follower of the Foundation for Economic Education (fee.org) and the information they have to say about free vs “managed” capitalism, an eye opener.
I still think a free market system is best.
We have bubbles every so often, and ordinarily smart and reasonable people get caught up in them and lose their senses. Corporate and bank employees are no different. Nor, sadly, are the executives that are on their Boards who were asleep at the switch. It’s a cycle.
I used to work in a bank — and a bad loan is a bad loan is a bad loan — period. Always has been, always will be. Every banker knows what a bad loan is and the government doesn’t tell anyone what underwriting standards to use. In fact, I used to be an attorney in a bank and can tell you that inordinate amounts of resources are spent trying to skirt the line of government regulations — if they choose to. I don’t consider it the government’s fault that bad mortgages were made. We had almost exactly the same situation in the late 1980s, and it was due to excesses.
But trying to control every excess will put a stranglehold on innovation and growth. Sometimes people have to lose their heads (figuratively speaking in a number of ways) for the pendulum to swing back and right itself, and reasonable business standards to prevail again.
I don’t believe in true 100% unfettered market forces and think some regulations are necessary for a functioning society and a thriving business environment. But I believe in a light touch when it comes to regulations.
If managed capitalism was so great, why do they want to imitate the US? Compare Singapore to the US over a period of time and where would you rather be?
You said ;
“I just got back from a week of lecturing in Singapore, where there is no financial crisis, no recession, and no extra economic pressure on entrepreneurs.”
You must be kidding ?
The Singapore index (EWS) is made of over 50% financial companies, and is down over 50% …..
Investors are pulling out their money from Singapore every day …..
Scott Fox, E-Commerce Success Blog
This tension between laissez-faire capitalism and “managed” capitalism is the challenge of our times. We can’t afford to stifle innovation but when incentives are unlimited, greed can overwhelm common sense and even ethics. And the constantly increasing complexity, interdependency, and cross-jurisdictional nature of our financial system dilute the effectiveness of regulation anyway.
Unfortunately, we don’t have a choice but to figure this out – American economic leadership depends on it.
Capitalism (or specifically liberalism in political economic terms) has proven to be incredibly flexible over the past 100+ years and develops in each country in tandem with the government and culture. This is the argument that Peter Hall and David Soskice make in “Varieties of Capitalism”. Historically Americans have been comfortable with wild swings of the market which allows for more growth, but less stability.
Other countries are more comfortable with less growth and more stability. That is, while the Singapore index may be getting hammered, the government and culture ensure that people aren’t losing their homes and entrepreneurs still have capital to operate. Though government programs in America (such as the CRA) may create conditions of moral hazard, it was the free markets in the late ’90s that created a series of steps that disconnected the people that made money off mortgages from the actual value of the mortgage.
In any case, the current crisis will certainly dampen the American enthusiasm for free trade and create more government oversight. However, I wouldn’t expect that to last for too long (especially looking at the other comments here). The question is, how much growth and efficiency in our markets justifies the violent changes that we’re seeing today?
Wonderful post with incredible, well written comments, on a subject that can and will be discussed until then of civilization as we know it. In the final analysis, there are two rules that will always govern markets.
1. Bulls and bears make money and pigs don’t
2. Supply and demand
One got us here and two will get us out. There was a lack of intelligence that got us here. And while governments may create legislation, they will never regulate poor business decisions and greed.
Bird & Fortune tell it with brilliant humor:
I don’t prefer with a managed capitalism. Nothing really beats than a free market. My goodness sake, it’s good that there will be regulations on the market but being a controlled freak in the government, I don’t think is good.
I am a supporter of laissez-faire capitalism based on an integrated system of ideas, i.e. a rational philosophy. I recommend you to read Capitalism: The Unknown Ideal. You will find three essays by Alan Greenspan.
Martin Lindeskog – American in Spirit.
That seems to be interesting, Martin. I am really into free market system but would love to learn how Capitalism really works.
Arthur Bland: Good to hear! If you want to learn more about how capitalism really works in theory and practice, check out the Business & Economics section at The Ayn Rand Center for Individual Rights. http://snipurl.com/5emnk-mini
As others has said, it’s a fallacy that the United States is a strict market economy. Not only does the fed attempt to manage the economy but we also have the influence of government subsidies. The entire agriculture sector is heavily managed. The financial services sector is also subject to tremendous regulation and, in my mind, rightfully so. Alan Greenspan has said recently that he was wrong to assume that self-interest would prevent players in the derivatives market from doing stupid things. He forgot about the power of greed. We need a certain level of government regulation. But how to find the happy median?
Thank you for pointing that out to me, Martin! 🙂
Arthur: You are welcome! 🙂
Joe: I recommend you to read Jonathan Hoenig’s book, Greed Is Good. The Capitalist Pig Guide To Investing.
I should think that the proper entrepreneurial attitude for our current situation would be: “I see an opportunity to create dynamic complex systems software which would warn folks early that something systemic is starting to appear foolish at the middle to upper market levels”. Once identified, movement of dollars would regulate. It would certainly drive transparency to lower levels as well. It might even pop bubbles before they get too big.
Being Asian and having traveled to Singapore annually for the past 15 years, I love Singapore.
As an academic or as an idealogue one can ponder and romanticize capitalism. However as an ordinary person trying to lead an ordinary life, I really like Singapore.
Singapore is a clean, beautiful city with the best airport in the world. It’s beautifully green and well planned. 80% of the population lives in lovely government housing making homelessness rare. The food is delicious and cheap. The two sovereign wealth funds ensures that Singapore has a foreign reserve surplus in the billions. The subway runs at a profit. Singapore airlines (60% government stake) is a dream and the best airline in the world. There are tax incentives to look after aging parents. Need I go on? Oh, personal income taxes are progressive from 0-20%.
For those, who want personal freedoms like pornography and guns, Singapore is not for you. I have never had a problem with information access through the internet or CNN/BBC.
I hope that one day, my government can make money with my medicare/social security so that we can adequately take care of the old/sick. “Managed Capitalism” from a “benevolent dictatorship” works! What does not work, is a handcuffed government and a chained down free market system run by greedy people who just do not care about other people.
I agree with Leila. Who should have the right to chew gum in their own country?
Gotta love those anti-gum chewing “benevolent dictators”