The economic sections of the election manifestos of the opposition parties in particular are filled with laundry lists of ambitious, but vague, targets and empty promises. What is perhaps more critical than the deficiency of the debate on future alternative medium-term economic policies is the lack of discussion about the type of capitalist system that prevails in Turkey and the type it should be aiming for. Capitalism is not monolithic. What are the different types of capitalism, an economic system characterized by private ownership of property, around the globe? What is and what should be the type of capitalism in Turkey? According to a book titled “Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity” by William J. Baumol, Robert E. Litan and Carl J. Schramm (Yale University Press, New Haven & London, 2007) published two months ago, there are four archetypes of capitalism: (1) “state-guided capitalism,” in which the state tries to guide the market by picking and promoting would-be “winners” (national champions) among different industries and even individual firms; (2) “oligarchic capitalism,” in which most power and wealth is concentrated in the hands of a cadre of individuals and families; (3) “big-firm capitalism,” in which huge and powerful companies carry out the most important business activities; and (4) “entrepreneurial capitalism,” in which small innovative firms play a critical role.
This classification of four prototype variants of capitalism is based more on the description of the different outcomes of these four types than on the required inputs to achieve those outcomes. Within and across economies and over time the dominant type of capitalism will vary. At different stages of its history, an economy will be characterized by different mixes of the four types of capitalism.
(1) Under state-guided capitalism, public ownership of banks, either explicitly, as in China and India, or implicitly, as in Japan and South Korea, often plays an important role in the centrally directed allocation of resources toward the objective of maximizing economic growth. The state can guide capitalism in other ways by using incentives such as subsidies, issuing exclusive licenses to create monopolies, imposing import restrictions, discriminating against foreign-owned firms, etc. State-guided capitalism, dominant in Turkey after the foundation of the Turkish Republic in 1923, has begun to lose dominance since the 1980s as the economy moved from inward-oriented import-substitution industrialization toward outward-oriented export-promotion with much reduced reliance on five-year development plans of the State Planning Organization (DPT). Accelerating privatization and inward foreign direct investment (FDI) under the Justice and Development Party (AK Party) government has also decreased that dominance. Although state-guided capitalism can provide initially significant benefits, eventually its drawbacks, such as excessive investment, picking the wrong “winners and losers,” failure to generate radical innovations, widespread corruption and the inability to redirect resources from less productive activities to more productive ones, become dominant.
(2) Oligarchic capitalism -- often confused with state-guided capitalism because of heavy state involvement in both cases -- is common in Latin America, Africa, the Arab Middle East and most former Soviet Union states. Oligarchic capitalism in Russia, notorious for its billionaire oligarchs in the 1990s, was relatively short-lived, replaced with state-guided capitalism. The major objective of oligarchic capitalism is not economic growth, as in state-guided capitalism, but serving the interests of a very narrow segment of the population, the oligarchic few that owns most of the country’s wealth. Oligarchic capitalism is characterized by extreme income and wealth inequality, stagnant growth, pervasive unregistered economic activity, widespread corruption and heavy reliance on natural resources as in oil-exporting countries. It is, in short, “bad capitalism.”
(3) Big-firm capitalism, prevalent in continental Europe, Japan, South Korea and less so in the US, is dominated by large enterprises in which ownership, diffused among many shareholders, is separated from management. This gives rise to the “principal-agent,” problem, the potential conflict between the interests of professional managers and shareholders. Another characteristic of big-firm capitalism is its oligopolistic structure, with few firms benefiting from economies of scale and possessing pricing power in their highly concentrated markets. Giant corporations in big-firm capitalism can easily finance internally continuous and incremental technological improvements and innovations, based on routinized research and development (R&D), with their large cash flows. They can become, however, also so bureaucratic and sclerotic that, lacking in entrepreneurial zeal and activity, they resist change, ignore breakthrough technologies and fail to innovate radically when they must. Big-firm capitalism has not yet developed fully in Turkey because family-controlled conglomerates such as Koç Holding and Sabancı Holding -- with limited public ownership in terms of the free float of their shares listed on the Istanbul Stock Exchange (İMKB) -- still dominate the economy. It is also worth noting that these and several other Turkish conglomerates have been major beneficiaries of Turkey’s state-guided capitalism.
(4) Under entrepreneurial capitalism, small innovative firms started by entrepreneurs, play a critical role in the creation of new products and processes that radically change the economic landscape and improve standards of living drastically. Entrepreneurs recognize and exploit an opportunity either to sell a new product or service or to sell an existing product or service at a lower cost by using a new way of producing or delivering it, as explained by the great Austrian-born thinkers Joseph Schumpeter and Peter Drucker. Not all small businesses are entrepreneurial; in fact, most small businesses are not. Therefore it is a mistake to equate entrepreneurship with starting a new small business since most small businesses sell existing products and services using existing processes, i.e., they are started by replicative entrepreneurs who imitate but do not innovate. Research shows that radical innovations tend to originate disproportionately with risk-taking innovative entrepreneurial individuals or new startup firms. Increasingly dominant since the 1990s in the US, the UK, Ireland, Israel, China, Taiwan and India, it is the most conducive among the four types of capitalism to seminal technological breakthroughs and radical innovations, and hence the most dynamic and competitive type of capitalism. It is “good capitalism” in its outcomes but it combines entrepreneurial vigor with high risk in the way it works. It is also most effective when blended with big-firm capitalism; they are complementary in terms of their reinforcing radical innovations and incremental improvements. In fact, entrepreneurial capitalism by itself, without the support of big-firm capitalism to generate and spread incremental improvements based on radical innovations, cannot ensure sustained economic development.
In my next column I will, focusing on the importance of entrepreneurial capitalism in the economic development of Turkey, discuss the major problems Turkish entrepreneurs encounter and how at least some of those problems might be solved by the government.
