Author: Dan Johansson
Length: 192 pages
Price: $22.00
Reading time: 10 hours
Reading rating: 7 (1=very hard, 10=very easy)
Overall rating: 4 (1=average, 4=outstanding)
Reviewed by Robert
F. Mulligan
Special to the Asheville Citizen-Times
Dan Johansson, a public policy economist at the Ratio
Institute in Stockholm, has produced an engaging and very interesting study
showing how economic policy can frustrate economic growth. Although the author deals with Sweden,
and Sweden's economic policies throughout the nineties have been different from
those of the United States, this book should draw special interest from
Americans for the light it throws on the high-tech buildup of the nineties and
its subsequent collapse.
Although Johannsson employs a new and fairly
pathbreaking methodology, this book is not so highly technical, formalized, or
mathematical that it cannot be easily understood by laypeople. Lay readers will probably want to skim
the statistical analysis and focus on the interpretations and policy
conclusions. Johannsson views
firms as business experiments which may either succeed or fail, but are always
essential components of economic growth.
Firms operate in an environment of high risk and
extreme uncertainty, a context where not to experiment is automatically to
fail. Entrepreneurs take on the
challenge of facing the market's risk and uncertainty, in competition with
everyone else who accepts the challenge.
Not everyone is cut out to succeed at entrepreneurial management, and
even some highly-talented entrepreneurs fail, simply because they are unfavored
by circumstance, or in other words, unlucky. Now, that's a risky environment.
Firms develop competence blocks to deal with
environmental uncertainty. No one
can make use of all available information, and successful firms specialize in
limited activities in which they can maintain a knowledge advantage over
potential competitors. A
competence bloc consists of interrelated and competent customers, who can make
good use of a firm's products, as well as the inventors, innovators,
entrepreneurs, and skilled labor, who are coordinated within the firm, and
venture capitalists who provide financing.
Economists have long understood that the entry of new
firms into various markets always accompanies economic growth. Some have believed that firm entry
causes growth. Johannsson points
out that an additional requirement for economic growth is the abandonment of
certain markets by some firms. In
extreme cases, a firm will go out of business completely. Firm exit is necessary to free up
resources, including workers, equipment, and money, for new enterprises which
are more responsive to, and better positioned for, market conditions. Valuable resources can be tied up,
acting as a brake on growth, if the government intervenes to prop up failing
firms in sick industries.
Next, Johannsson turns to government economic policy,
and finds few positive features.
In Sweden, government regulation discourages entrepreneurs from starting
new firms, and the government tries to encourage failing firms to stay in
operation. It also subsidizes the
least efficient industries, such as shipbuilding. Not only does this waste scarce tax revenue, but it keeps
resources tied up producing something the public does not want and will not
buy. Poor government policy seems
to be the main reason why Swedish economic growth has lagged behind that of
nearly every other industrial economy.
Particularly dangerous for economic growth is
"incompetent money," investment funds not coupled with market
knowledge provided by the government or unskilled venture capitalists, which
fund unproductive activities. A
notable phenomenon in the U.S. high-tech build-up of the late nineties, was the
injection of incompetent money, which enabled the stock values of worthless tech
firms to increase astronomically.
Especially interesting for the U.S. is that our incompetent capital came
mainly from private sources.
This is a penetrating, well-written study of the
technology sector. Though the
focus is on the Swedish economy, it offers many lessons for the U.S. Investors and policy makers can both
benefit from the insights offered by this book.
Robert F. Mulligan
is assistant professor of economics in the Department of Business Computer
Information Systems and Economics of the College of Business at Western
Carolina University. His research
interests are monetary economics and constitutional political economy. For previously reviewed books, visit
our web site at www.wcu.edu/cob/bookreviews.