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strategy and business
 / Winter 2007 / Issue 49(originally published by Booz & Company)


Best Business Books: Capitalism

This seems such obviously good counsel that it verges on motherhood-and-apple-pie advice. Yet Baumol, Litan, and Schramm feel the need to start their book with a chapter explaining why growth driven by capitalism is desirable, and in particular disagreeing with the view that, for the sake of the environment, economic growth cannot and should not continue in the future as it has for the past 200 years. Growth is essential to improve living standards, especially in poor countries, and to pay pensions, they say; technological innovations will provide the answer to environmental concerns, at least as long as the economy is organized so that entrepreneurs have the right incentives to innovate.

Plight of the Menhaden
In his book The Most Important Fish in the Sea, Bruce Franklin, John Cotton Dana Professor of English and American Studies at Rutgers University–Newark, illustrates compellingly why we should limit growth by telling a story that dramatizes the environmentally destructive effects of industries that are built on the consumption of natural resources.

His focus is the shrinking schools of fish called menhaden. These unattractive and inedible fish turn out to be unimaginably vital to the Atlantic Ocean’s ecology; they feed on plankton, thus controlling algae growth, and themselves are a favorite feast for tuna, cod, and swordfish. Industry also relies on menhaden; they’re ground up into animal feed and fertilizer and are an important source of oil for use in a vast array of products, from floor coverings to lipstick. To those ends, they are swept up in vast nets and processed in factories.

Economics has a term for anything that can, like the menhaden, be freely harvested to the detriment of the public good: the tragedy of the commons. According to Franklin, with this species of fish, we are on the verge of a catastrophe of the commons. He documents the staggering decline in menhaden numbers, and in commercial catches of them, since industrial-scale fishing began on the eastern seaboard of the United States in the 1850s. This fishing has been, since 1997, a monopoly activity of the Omega Protein Corporation, the U.S.’s largest producer of omega-3 fish oil and the last remnant of a once-competitive menhaden industry on the East Coast. (Via a sequence of mergers and a new name, Omega is the descendant of the Zapata Petroleum Corporation founded by George H.W. Bush in 1953.)

Enjoyable as it is to have a good villain in a story, however, it’s unlikely to be the monopoly that’s to blame for the plight of the menhaden. Indeed, a competitive industry might have overfished even faster. In the face of externalities of any kind, markets do not produce the most desirable outcomes. This is true in the case of the public good, which is why we have such a lively debate about the proper role of government in capitalist societies. It is also true of environmental externalities. The limitations of markets are clear, and although almost all economists are in favor of capitalism and growth, they certainly believe markets need to be regulated. Economists understand that completely free markets are an intellectual abstraction (like perfect competition); it is anticapitalists who think of free markets as the dangerous reality.

A Year in the Life of a Stock
One of Joseph Schumpeter’s tremendous strengths as an economist and advocate for capitalism was his passion for case studies. Many of his books before Capitalism, Socialism and Democracy contained detailed descriptions of particular companies and businesses. In Grande Expectations: A Year in the Life of Starbucks’ Stock, Wall Street Journal reporter Karen Blumenthal gives an extremely readable and informative account of how the modern stock market operates, as seen through the prism of one stock, the Starbucks Corporation (stock symbol: SBUX). Every reader will find something surprising in Blumenthal’s look at the links in the chain of transactions and relationships that connect coffee growers in poor countries to individual investors in rich economies. These chains are long and complicated for any com­pany, and that is what makes understanding the motives and actions of public corporations, and the relationship between operating performance and shareholder value, so challenging and fascinating.

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