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Good Capitalism, Bad Capitalism

Many people assumed that when the Berlin Wall fell in 1989, “capitalism” had won the ideological cold war and that “communism” had lost. But, while “capitalism” – defined as an economic system built on private ownership of property – clearly has prevailed, there are many differences among the nearly 200 countries that now practice it in some form.

We find it useful to divide the capitalist economies into four broad categories. While many economies straddle several of these, most economies fall primarily into one of them. The following typology helps explain why some economies grow more rapidly than others.

Oligarchic capitalism exists where power and money are highly concentrated among a few. It is the worst form of capitalism, not only because of the extreme inequality in income and wealth that such economies tolerate, but also because the elites do not promote growth as the central goal of economic policy. Instead, oligarchs fix the rules to maximize their own income and wealth. Such arrangements prevail in large parts of Latin America, the Arab Middle East, and Africa.

State-guided capitalism describes economies where growth is a central economic objective (as it is in the other two forms of capitalism), but attempts to achieve it by favoring specific firms or industries. Governments allocate credit (through direct bank ownership or by guiding credit decisions by privately owned banks), provide direct subsidies and/or tax incentives, grant trade protection, or use other regulatory devices in an attempt to “pick winners.”