The Lexus and the Olive Tree

In Chapter 8, Friedman compares countries to computers, a metaphor that he uses throughout the book. Like computers, he argues that countries have “hardware,” “software,” and “operating systems” and that, just as computers might have the right combination of the three to connect to the internet safely, so must countries have the right combination to successfully integrate into globalization.

The hardware of a country is the shell around the economy, or the fundamental organization of the economy. The two primary types are free market, exemplified by the US, and communist, exemplified by the USSR, with hybrid states, such as those in western Europe, in between. The operating system of a state refers to its broad macroeconomic policies of markets and redistribution. These operating systems range from what Friedman calls DOScapital 0.0, or centrally planned states in the USSR, to DOScapital 6.0, or fully liberalized free-market states such as the US. In between are DOScapital 1.0-4.0 depending on how embedded market-distorting policies such as socialism, state-directed economics, and crony capitalism, are in the economy.

Finally, the software of a country refers to its legal and regulatory system that should ensure the sanctity of contracts and property, ensure that employment contracts are not too generous, and reject corruption and monopolies.