Today we are witnessing a world historic competition. After the failure of communism in the USSR, China adopted a combination of modern market commerce, state run large businesses with a single party political governance. China’s recent economic model is openly in competition with the 200 year old model of market commerce that has thrived in multi-party democracy in the United States.
In order to understand the dynamics of this world historic competition it helps to know the main writers on this subject. Five writers have offered explanations for the success, to-date, of the American-European multi-party democratic market commerce. Max Weber, a German sociologist; Mancur Olson, an economist and social scientist; Deidre McCloskey, a professor of economics and history at the University of Illinois; Matt Ridley, a businessman member of Parliament and myself a founder of MasterCard and global currency.
Weber, writing before WWI saw the different growth rates of market commerce in the U.S, Northern Europe, Southern Europe, India, China and Japan. He argued that the successful modern markets are driven by individuals who are part of a secular society that believes in Protestantism, with little regard for spirituality. Market activism was particularly strong among Calvinists and Baptists These individuals encouraged hard work, thrift and acquisition of wealth as routes to and evidence of salvation.
Later in Weber’s life he added to his theory the idea that rationality grew out of Protestantism and was an important ingredient in successful market commerce. Similar to Matt Ridley a century later.
To this day, the most successful market economy is the most Protestant one, the U.S.
Mancur Olson published in 1965 his The Logic of Collective Action. The book explained why small businesses have unique innovation qualities and large businesses have strong motivations. In 2000 he published Power and Prosperity. Olson argued that the ideal government to generate a productive commercial market was neither too weak (as is common in many parts of Africa) to enforce laws and operate a functional judiciary nor too strong that innovation was captured for the benefit of the people with government power with state run businesses. A moderately powerful government, that enforces contracts, is best for market commerce.
Deidre McCloskey, since 2006, has written three volumes on ‘bourgeois’ history and its relation to modern commerce. The ‘bourgeois’ are the merchants, business owners and entrepreneurs. They have raised the average per capita income, in countries where they prosper, from $3 per day to over $100 in a little over a century.
McCloskey attributes their rise to their values of prudence, doing good and fortitude. The greatest factor in the rise of the ‘bourgeois’ has been their role in using innovation in modern commerce.
Matt Ridley has a science research background. In 2010 he published The Rational Optimist: How Prosperity Evolves. He argues that economic democracy promotes cooperation and trade, natural human qualities; humans use collaboration to increase individual skill sets and specialization. He views changes in technology as incremental but inexorable sources of market commerce and prosperity.
I, Michael Phillips, was a founding organizer of MasterCard in 1967 which used multi-bank cooperation to create the modern credit card. Multi-bank card issuance made card currency the first form of international personalized payment. I also founded the first business network, in the San Francisco area, in 1974; the Phillips model was based on small business cooperation with each other, a model copied widely around the U.S. and Northern Europe.
My own work with new businesses and entrepreneurs around the world led me to see that meritocracy was a driving force in modern commerce. Only a few nations have social systems that reward meritocracy. Meritocracy is suppressed in unionized markets, in nations with strong centralized governments, and in societies with hereditary families and tribes.
Looking, historically, at the most stunning market growth among nations, I see that Britain with its colonies before WWII offered a chance for members of a highly hereditary British class structured nation a way for the meritocratic young to escape and become entrepreneurs throughout the colonies. Winston Churchill is an example of one aristocrat who got his start in India.
The greatest nation for the meritocratic young to escape the hereditary class structure was the great Western frontier of the rapidly growing United States in the 19th Century. This allowed innovation to flourish in a large open democratic market.
A new thrust of meritocracy came after WWII in the U.S. when American technology dominated the world and innovation became popular behavior. The U.S. was a society where the hereditary class became so weak that the last class generated Blue Book was published in 1960.
In 1955 Fortune moved from its 50 largest U.S. companies to the Fortune 500. By 1995 service companies were put on the list and comprised more than half the 500.
It is important to see that meritocracy is a source of market innovation and thrives in a market multi-party democracy. Innovation in commerce is rarely found in tribal societies. It is rarely found in societies with strong non-democratic central governments.
I identify meritocracy as the key element of commercial innovation and I find it most associated with the most classless societies.
All in all, the writing and thinking, to date, on the relation of innovation, modern commerce and government would support multi-party democracy with a weak or non-class social structure. Not the Chinese model.
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