Those of you who’ve watched Harvard law professor Lawrence Lessig‘s June presentation to the John Locke Foundation’s Shaftesbury Society might recall that Lessig opened his lecture with a plug for University of Chicago economist Luigi Zingales’ latest book. It’s called A Capitalism for the People, and its subtitle makes up the headline for this blog entry.
The latest National Review features a review of Zingales’ work. Among reviewer Nick Schiulz’s observations: Zingales finds clear distinctions between American capitalism and capitalism as practiced in Europe and Asia.
He contends that this distinctive form of capitalism is an essential component of American exceptionalism. He notes, for example, that America’s free-enterprise system developed when the federal government was relatively small. “At the beginning of the 20th century,” he says, “when modern American capitalism was taking shape, U.S. government spending was only 3 percent of gross domestic product.” When a similar system of market economics took hold in Western Europe after World War II, in contrast, government’s share of the economy in those countries was over 30 percent.
Why does this matter? “When government is small and relatively weak,” Zingales says, “the most effective way to make money is to start a successful private-sector business. But the larger the size and scope of government spending, the easier it is to make money by diverting public resources. … Thus in nations with large and powerful governments, the state usually finds itself at the heart of the economic system, even if the system is relatively capitalist.”
While Zingales does not mention it, there is a large body of economic literature demonstrating that the size of the state at the time an economy modernizes is correlated with how well the economy performs. The fact that the U.S. government was so small when it began to modernize helps explain America’s extraordinary economic performance and its dynamism.