How American capitalism really works: some lessons for developing countries.

Author:Lazonick, William

Defined as the act of forming a new business, entrepreneurship is viewed as a prime way in which individualism can contribute to economic development. Recently The Economist depicted entrepreneurs as "global heroes" who can lead us out of the current economic crisis. (1) Nevertheless, the same Economist report asked: "Why have so many once-celebrated entrepreneurs turned out to be crooks?" In either case, a focus on entrepreneurship emphasizes, for better or for worse, the individualistic character of the capitalist economy.

The history of successful capitalist development shows, however, that state intervention creates the fundamental conditions under which entrepreneurial individualism can flourish. A growing body of research has analyzed the symbiosis between the developmental state and high-tech entrepreneurship in different national contexts. Indeed, as I argue in this article, the national economy that most exemplifies this symbiosis is the United States of America.

Policy makers in developing economies have much to learn from the development experiences of rich nations such as the United States, but those experiences must reflect economic reality, not economic ideology. Operating on its own, entrepreneurial individualism will, at best, fail to generate economic development, or, at worst, degenerate into rent-seeking behavior. An understanding of how American capitalism really works calls into question the free market ideology that, for the sake of economic development, only individual activity is creative while collective activity is destructive.

The Developmental States of America

In all the advanced economies over the past century, first and foremost the United States where the ideology of 'free market' entrepreneurialism is most virulent, successful entrepreneurship has depended heavily upon government investment in the knowledge base, state sponsored protection of markets and intellectual property rights, as well as state subsidies to support business investment strategies. Scholars of the developmental state have tended to see it as a Japanese, and by extension East Asian, phenomenon, while neglecting the role of the developmental state in the United States, the world's largest and arguably the most entrepreneurial of the advanced economies. Yet, during the twentieth century, the US state has been far more developmental than the Japanese state. Scholarly works have been written on the evolution of particular US industries--for example, agriculture, airliners, aircraft engines, computers, the Internet, biotechnology--that support this proposition. Biopharmaceuticals provide a case in point.

Government Support for Innovative Enterprise

From the late 1990s to 2007, the US biotechnology industry was booming, with venture capital investment in biopharmaceutical start-ups at extraordinarily high levels. Comparing 2000-2007 with 1992-1999, the average annual number of private equity deals increased sharply from 214 to 351, while the average annual amount of investment in 2007 almost tripled, rising from US$ 1,419 million to US$ 3,856 million. Yet it requires about US$ 1 billion to develop a new drug over...

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