What turns one high tech start-up into a global company that will survive more than a century, and another into a mere shooting star that will burn up as it hurtles down through the skies? Harold James answers that early in his interesting new book [amazon_link id=”069115340X” target=”_blank” ]Krupp: A History of the Legendary German Firm[/amazon_link], identifying four attributes:

develop new technologies and new markets hand in hand;

cultivate a relationship with the state;

find a source of finance sufficiently large and committed for expansion;

develop an organizational structure that fosters loyalty and trust.

The book traces these four strands throughout the company’s history from its initial establishment as a small enterprise in 1811 and fragile early period, with scant profitability but sustained by family money, through a number of commercial and political ups and downs in the late 19th and early 20th century (including the 1848 revolutions, the Franco-Prussian war, the Spartacist years and hyperinflation), its close and subsequently toxic relationship with the government and wartime production in the Nazi era, and post-war rebuilding. The hundred years from the mid-19th to mid-20th century were not uneventful, to say the least. The Second World War and its aftermath formed, unsurprisingly, an uncomfortable episode (dealt with relatively briefly here: Alfried Krupp was arrested and imprisoned but subsequently amnestied in 1951). The capacity of an organization to survive that, and remain a productive and profitable enterprise is rather extraordinary. Harold James relates this resilience to the Continental model of capitalism. He writes:

“Modern management theory….treats managers…as individuals driven by isolated gain-maximizing strategies. It is diametrically opposed to the traditional German and perhaps European vision of a company as an embodiment of some over-arching value system, in which a corporation is a microcosm of a general social equilibrium.”

The Krupp history certainly puts an emphasis on avoiding short-term stock market finance as opposed to family funding and subsequently a relationship form of finance; and on the inevitable links between a large enterprise and the state. The Anglo-Saxon and Continental versions of capitalism ebb and flow in their attractions depending on the context – during the ‘Eurosclerosis’ era the latter did not look so attractive, although the balance has now tipped the other way.

One company’s history cannot deliver a verdict, but this book gives a fascinating insight into the wider debate. It places the company in the wider social context of the family, the local community, the national state and the global economy. Harold James, who is a terrific writer, had access to the Krupp archives for the book. There is more detail here than the general reader will want – an abridged version, though, would make a terrific ‘short’ because Krupp’s history offers a lens on both European history and the very live debate about the best version of capitalism. There is also a [amazon_link id=”3406624146″ target=”_blank” ]German edition[/amazon_link] of the book.

[amazon_image id=”069115340X” link=”true” target=”_blank” size=”medium” ]Krupp: A History of the Legendary German Firm[/amazon_image]

I was browsing through Tim Wu’s completely excellent book [amazon_link id=”B004DUMW4A” target=”_blank” ]The Master Switch[/amazon_link] this morning, and came across this rather inspiring 1787 quotation from Thomas Jefferson:

“A little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical. …It is a medicine necessary for the sound health of government.”

Thomas Jefferson

He of course knew what he was talking about…..

[amazon_image id=”B004DUMW4A” link=”true” target=”_blank” size=”medium” ]The Master Switch[/amazon_image]

I’ve spent most of the day writing a lecture, which took me back to a lovely book I read a decade ago, Roy Porter’s [amazon_link id=”014025028X” target=”_blank” ]Enlightenment: Britain and the Creation of the Modern World[/amazon_link]. It ranges widely over the sciences, arts, commerce, politics and philosophy but I particularly like Porter’s emphasis on Britain as a nation of intellectuals – given how anti-intellectual modern public discourse has been. Although maybe that’s changing again thanks to the excitement of technology, the blogosphere and the gathering of like minds on Twitter – not to mention the times we are in, which rather demand that any sentient person spends some time thinking about the world.

Anyway, I liked this concluding quotation, from William Hazlitt of the writer Thomas Holcroft:

“He believed that truth had a natural superiority over error, if it could only be heard; that if once discovered, it must, being left to itself, soon spread and triumph; and that the art of printing would not only accelerate this effect, but would prevent those accidents which had rendered the moral and intellectual progress of mankind, hitherto so slow, irregular and uncertain.”

Substitute ‘internet’ for ‘printing’ and it bears the test of time as a statement of enduring hopes.

[amazon_image id=”014025028X” link=”true” target=”_blank” size=”medium” ]Enlightenment: Britain and the Creation of the Modern World (Allen Lane History)[/amazon_image]

The new blockbuster by Daron Acemoglu and James Robinson, [amazon_link id=”1846684293″ target=”_blank” ]Why Nations Fail: The Origins of Power, Prosperity and Poverty[/amazon_link], has attracted a lot of attention. This is down to their stellar reputation for their academic work exploring the links between institutions and economic and developmental outcomes, work which has earned them a large club of admirers over the years. The paper Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution – published in 2002, with Simon Johnson a co-author – is a particular landmark in putting the quality of political and economic institutions centre stage in discussions about economic development.

No wonder everyone was so excited about this book. It draws together the authors’ body of work analysing the way institutions either contribute to or hold back growth. Its range is vast – all of human history is here, from Neolithic settlement via the Inca and Aztec empires to modern Britain. I read a lot of history, and yet learnt new things from this book. While already knowing a fair bit about the Glorious Revolution of 1688 (and welcoming the emphasis placed here on its often-underrated importance), I’d never come across the “Black Act” of 1723 before – to give it its full title, “An Act for the more effectual punishing wicked and evil disposed Persons going armed in Disguise and doing Injuries and Violence to the Persons and Properties of His Majesty’s Subject, and for the more speedy bringing the Offenders to Justice.”

The book’s thesis is of course that institutions are what matter for economic development. An early chapter dismisses the main alternative explanations – geography, culture, and policy ignorance. Specifically, the authors argue that a successful institutional framework needs two characteristics: it must be inclusive so that members of a society have some means of shaping economic allocations; and it must be sufficiently centralized that the state is effective. Unsuccessful economies are either exploitative and authoritarian or have a central political authority unable to take decisions that benefit the whole; in either case rent-seeking minorities are able to prevent the kind of innovation, and consequent redistribution of economic power, that in the long run is necessary for growth.

Accidents of history matter too – as one chapter spells out, a small divergence due to chance can end up taking two similar countries on completely different long run trajectories. They also point out that exploitative or extractive states can grow for long periods – the Soviet Union is one example, whose ultimate economic failure did not become really apparent until around 1980. Here is another excellent example of this point, comparing the two Koreas.

It is hard to argue with the basics of this argument, although worth remembering that most economists have only relatively recently become sensitized to the importance of institutions, and the intertwining of the economic and political. There have been honourable exceptions – Oliver Williamson and Elinor Ostrom of course in their different fields. I was surprised Acemoglu and Robinson did not make more of Mancur Olson’s contribution, especially as this book opens with exactly the same point as his famous article Big Bills Left on the Sidewalk (pdf). However, this perspective has become mainstream now.

Having said that, I was disappointed with Why Nations Fail. A minor reason is that it’s a baggy book in need of a vigorous old-fashioned edit – at various points I had read a few pages about some historical detail and then couldn’t remember why this was relevant. A more important reason is that they fail to define clearly, ahead of the historical detail, what kinds of institution count as inclusive, and what makes a state adequately ‘centralized’. That might even be a misleading word. It kept me wondering what geographies they had in mind – centralized over what domain and what powers? But what I think they mean is more the effectiveness of the state in its application of the law and its monopoly of legitimate violence. As for ‘inclusive’, in the end what they mean seemed circular – the countries which had enjoyed long run economic success were the ones that had successful institutions.The book is oddly less persuasive than their earlier academic work because of this vagueness.

Still, this book is to be welcomed for cementing the rebirth of political economy. The emphasis on how important it is to prevent narrow interests from capturing political power to exercise in its own economic interest is just as relevant to the financial oligopolies of the West as to the failed or failing states of Africa. It is possible to have an economy run by the elite for the elite at any level of development, as we can now see clearly. Policy makers in the US and Europe should read this as a warning.

Why Nations Fail is also a great introduction to this field for people who are not so familiar with it, and indeed for those who are sceptical about whether, post-crisis, economics has anything to contribute to public debate.

[amazon_image id=”1846684293″ link=”true” target=”_blank” size=”medium” ]Why Nations Fail: The Origins of Power, Prosperity and Poverty[/amazon_image]

I wrote this review before reading any of the others. But here are links to reviews by William Easterly and Nancy Birdsall (scroll down).

Economics is my vocation but I do realise that sometimes economists get excited about coming to an old truth in a new, analytically rigorous way, leaving normal people wondering why it took us so long to figure that one out. So it is now with strategic industrial policy. This is one of the effects of the great financial crash on the realm of ideas. The notion that everything can be safely left to the market has been recognised as little more than a justification for deregulation that left the coast clear for rent-seeking activities. Economists have certainly not ditched their insistence on the centrality of markets as a mechanism for efficient allocation; rather, it’s the old ‘markets versus state’ dichotomy that is crumbling.

In the new approach, the intertwined roles of state and market are rooted in endogenous growth theory. Increasing returns and the importance of spillovers give the state a role in co-ordinating private sector activity. In yesterday’s post, I noted that Steven Johnson emphasises the state’s role in innovation in his book [amazon_link id=”0141033401″ target=”_blank” ]Where Good Ideas Come From[/amazon_link]. There are many examples of public funding delivering massive innovative returns, when combined with private sector investment. The University of Sussex economist Mariana Mazzucato has a Demos pamphlet on this theme, The Entrepreneurial State, well worth a read.

But of course to non-economists, not to mention many industrial economists, this would have seemed obvious even in the absence of modern growth theory. Michael Best’s terrific 2001 book, [amazon_link id=”0198297459″ target=”_blank” ]The New Competitive Advantage[/amazon_link], is one example – it takes a comparative look at US industry versus other nations including Japan. Another is an intriguing 1997 book, [amazon_link id=”0674962036″ target=”_blank” ]Worlds of Production[/amazon_link], by Michael Storper and Robert Salais, which has a very ‘non-Anglo Saxon’ perspective. I can only say that we have dived through a wormhole into a completely new intellectual universe. Well, many of us.

[amazon_image id=”0674962036″ link=”true” target=”_blank” size=”medium” ]Worlds of Production: The Action Frameworks of the Economy[/amazon_image]