In praise of cutthroat capitalism
AEIdeas
Consider one of the most notoriously cutthroat behaviors of capitalism that is exactly the kind of tactic that Trump seems to oppose: private equity buyouts. That is, a private equity group purchases a company and, as the story goes, ruthlessly embraces cost-cutting efficiencies. However, research using Census data on all nonfarm businesses from 1980 to 2005 found that although buyouts did lead to layoffs at some establishments, they also led firms to hire more workers at others. Overall, firms expand more-productive facilities and shrink or close less-productive ones. Preventing this type of cutthroat capitalism would mean lower productivity growth.
In addition, part of the slowdown in U.S. productivity can be attributed to more and more companies falling behind the “frontier firms” that are most productive. Research from Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda showed that the most productive firms aren’t expanding as fast as they used to, and the most unproductive firms have become less likely to close or shrink. This is an important driver of aggregate productivity growth, and helping existing unproductive firms through such moves as the Carrier deal will hurt highly productive upstart firms that are already falling behind.
Ozimek also points out low-skill immigration and the China trade shocks are yesterday’s problems — although that’s what the 2016 campaign seemed to center around. Beyond that, Ozimek’s use of “cutthroat” reminds me of this 2012 analysis by Daron Acemoglu, James Robinson, and Thierry Verdier, which argues it’s not really possible to have Europe’s “cuddly” capitalism without America’s more high-pressure and competitive variety:
As a matter of fact, given the institutional choices of other countries, if the cut-throat leader were to switch to such cuddly capitalism, this would reduce the growth rate of the entire world economy, discouraging the adoption of the more egalitarian reward structure. In contrast, followers are still happy to choose an institutional system associated to a more egalitarian reward structure. Indeed, this choice, though making them poorer, does not permanently reduce their growth rates, thanks to the positive technological externalities created by the cut-throat technology leader. This line of reasoning suggests therefore that in an interconnected world, it may be precisely the more cut-throat American society, with its extant inequalities, that makes possible the existence of more cuddly Nordic societies.
