A recent study has confirmed the importance of entrepreneurship in creating economic growth and improvement in the standard of living for Americans.

In their book, "Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity," William J. Baumol, Robert E. Litan and Carl J. Schramm have compared the different kinds of capitalism we observe in the world.

They first look at "state-guided capitalism," in which the government gives major direction to the market by supporting some industries. Japan's heavy regulation of industry is an example of this type of capitalism.

The study finds that government attempts to pick and then support winning industries is sometimes driven by politics rather than good economics. They also find that thousands of individuals making decisions about what to produce and where to invest do much better than a few bureaucrats buried in a government office. As a result, state-guided capitalism tends to result in slower economic growth, with recessions that last longer and consumers who experience lower standards of living.

The second type of capitalism Baumol, Litan and Schramm call "oligarchic capitalism." Russia is a clear example of this. It refers to capitalism in which most of the wealth and power rests with a few individuals and families with strong ties to government officials.

This is the worst type. New entrants with higher-quality/lower-priced products are blocked by government rules and regulations. Consumers are generally offered few choices and products of poor quality.

The third type of capitalism to which the authors refer is what they call "big-firm capitalism," in which giant firms carry out all the major economic activities. This type is the most efficient in delivering many products and services.

It even makes sense that Microsoft is huge because of "network effects" - that is, it is more efficient if most people use the same software due to the ease of communicating with other people.

The fourth type of capitalism studied in the books is called "entrepreneurial capitalism." They detail the dramatic benefits consumers receive by having many new competitors developing new products, finding better ways of dealing with problems and delivering new services. The authors conclude that the United States' entrepreneurial culture is the most important example of how this philosophy can be employed to improve the nation's standard of living and stimulate economic growth.

They point out that entrepreneurial capitalism requires strong protection of property rights. Entrepreneurs need to be protected from governments that are under political pressure to protect existing competitors. They also need to be protected from large, entrenched competitors stealing their ideas or crushing them through anti-competitive practices.

Entrepreneurial capitalism also requires that workers must be flexible. As new technologies are developed, workers in old technologies will lose their jobs. If union work rules or governments trying to prevent layoffs prevent old technologies from dying and new technologies from displacing them, in the long run consumers will suffer.

Baumal, Litan and Schramm also address the cleansing role of bankruptcy.

In many cultures, bankruptcy is horrific. People's careers are destroyed and the process is long and painful. Fortunately in the United States, our attitudes are much more forgiving. Entrepreneurs who try to start a business that ultimately fails are still very employable. Many employers feel such entrepreneurs have learned a lot and can help them avoid similar errors. The study confirms my feeling that entrepreneurship and what the economist Joseph Schumpeter referred to as "creative destruction" is absolutely central to improving our standard of living and individual lives.