A Tip of the Hat to Entrepreneurs

Small companies can pat themselves on the back. That's because entrepreneurship is the reason for American's economic growth, says Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, a new book comparing different forms of capitalism. The book's authors, William Baumol, Robert Litan, and Carl Schramm, say that capitalism is not a monolith. Actually, the authors identify four types and, as you can probably guess from the title, they believe that some do a much better job than others of helping countries grow.

The four:

State-guided capitalism: Governments try to pick industries they think will be winners.

Oligarchic capitalism: A handful of people control enterprise in a society.

Big-firm capitalism: Giant companies dominant the economy.

Entrepreneurial capitalism: A number of small companies duke it out.

Countries, of course, will have different mixes of each. For example, an entrepreneurial economy still probably needs large companies for money and support. And every type of capitalism has good points as well as drawbacks.

But the economies dominated by entrepreneurs are the most likely to be vibrant and grow long term, the authors argue. Competition leads to the most innovation and constant one-upmanship, keeping a country from growing stagnant or getting stuck in an industry that's failing. Entrepreneurs are the most likely to take risks, and while they may often fail, the consequences are much smaller and they are quicker to recover than a big firm or a state-dominated company that makes a mistake.

So when you flip on the air conditioner this summer or board an airplane, you can remember to thank the little guys that developed those technologies and many others.