Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity [Hardcover]

Raghuram Rajan (Author), Luigi Zingales (Author)

Book Description

Publication Date: February 18, 2003

Capitalism’s biggest problem is the executive in pinstripes who extols the virtues of competitive markets with every breath while attempting to extinguish them with every action.

Saving Capitalism from the Capitalists is a groundbreaking book that will radically change our understanding of the capitalist system, particularly the role of financial markets. They are the catalyst for inspiring human ingenuity and spreading prosperity. The perception of many, especially in the wake of never-ending corporate scandals, is that financial markets are parasitic institutions that feed off the blood, sweat, and tears of the rest of us. The reality is far different.

•Vibrant financial markets threaten the sclerotic corporate establishment and increase corporate mobility and opportunity. They are the reason why entrepreneurship flourishes and companies like The Home Depot and Wal-Mart—mere fly specks a quarter of a century ago—have surged as they have.
•They mean personal freedom and economic development for more people. Throughout history, and in most of the world today, the record is one of financial oppression. Elites restrict access to capital and severely limit not only general economic development but that of individuals as well.
•Open borders help check the political and economic elites and preserve competitive markets. The greatest danger of the antiglobalization movement is that it will keep the rich rich and the poor poor. Globalization forces countries to do what is necessary to make their economies productive, not what is best for incumbent elites. Open borders limit the ability of domestic politics to close down competition and to retard financial and economic growth.
•Markets are especially susceptible in economic downturns when the establishment can exploit public anger to restrict competition and access to capital. While markets must be free to practice “creative destruction,” Rajan and Zingales demonstrate the political and economic importance of a sustainable distribution of wealth and a baseline safety net. Capitalism needs a heart for its own good!

There are no iron laws of economics that condemn countries like Bangladesh to perpetual poverty or the United States to perpetual prosperity. The early years of the twentieth century saw vibrant, open financial markets that were creating widespread prosperity. Then came the “Great Reversal” during the Great Depression. It can—and will—happen again, unless there is greater understanding of what markets do, who benefits, and who really wants to either limit them or shut them down.

Saving Capitalism from the Capitalists breaks free of traditional ideological arguments of the right and left and points to a new way of understanding and spreading the extraordinary wealth-generating capabilities of capitalism.

Editorial Reviews

From Publishers Weekly

Rajan and Zingales take the Chicago school of economic theory in a new direction with an erudite, comprehensive defense of the free market system, steering a course between conservative isolationists and liberal antiglobalizationists. Only unfettered markets, rather than protectionism, they argue, can provide an environment supporting competition, innovation and economic growth. When businesses suffer losses or fail completely, it means competition is successfully weeding out the incapable-and the authors have nothing but harsh words for governmental attempts to prop up sagging industries through subsidies or tariffs on foreign competitors. They're honest in acknowledging that their "tough break" approach to failure offers little consolation to downsized laborers, but gamely suggest the economically "distressed" should recognize their options and look beyond obfuscating corporate rhetoric about "saving jobs." The book draws strong historical parallels between the half-century market clampdown following the Great Depression, when the public recoiled at the consequences of unmanaged economic risk, and the pessimism fostered by recent high-profile failures and corporate excesses. Because the authors view political support for the free market system as always tenuous, they offer suggestions on how to combat antimarket sentiments by promoting a stronger international market, which would reduce the ability of economic "incumbents" to persuade governments to suppress competition while offering workers some protection against the risks of failure. They argue their case well (though general readers may find some of the more academic passages tough going) and provide a clear new definition for the terms of the free market debate.
Copyright 2003 Reed Business Information, Inc.

From Booklist

The authors, both professors of finance at the University of Chicago's graduate school of business, take an in-depth look at the advantages and shortcomings of free financial systems in a historical context. They argue that although free markets are often reviled, especially during economic downturns, the inherent risks involved and the propensity for some individuals and corporations to corrupt the system can be overcome somewhat. When markets are suppressed, as happened after the Great Depression, competition is stifled, and trade tariffs that are intended to benefit individual nations ultimately harm worldwide economic health. What role, then, should governments play in overseeing financial markets? Historically, so the authors show, respect for individual property rights is the essential first step, and when property is available to the widest classes of people who can actively manage it, the groundwork for free financial trading is laid. For advanced financial systems such as that found in the U.S., the authors propose a balanced approach of government participation, including both measures to provide incentives for free markets and insurance for safety during times of crisis. David Siegfried
Copyright © American Library Association. All rights reserved

See all Editorial Reviews

Product Details

• Hardcover: 384 pages
• Publisher: Crown Business; 1st edition (February 18, 2003)
• Language: English
• ISBN-10: 0609610708
• ISBN-13: 978-0609610701
• Product Dimensions: 9.8 x 6.5 x 1.3 inches
• Shipping Weight: 1.4 pounds
• Average Customer Review: 4.5 out of 5 stars  See all reviews (16 customer reviews)
• Amazon Best Sellers Rank: #1,132,357 in Books (See Top 100 in Books)

More About the Author

Raghuram Rajan is an academic with substantial current and past business and policy experience. He is a professor of finance at the University of Chicago. From 2003 to 2006, he was the chief economist at the International Monetary Fund. He is currently an economic advisor to the Prime Minister of India, on the advisory board of the Comptroller and Auditor General of the United States, and on the advisory boards of a number of financial firms and consultancies. Rajan is President (elect) of the American Finance Association, a fellow of the American Academy of Arts and Sciences, and the inaugural winner of the Fischer Black Prize awarded to the best financial economist under 40. His past books include Saving Capitalism from the Capitalists, with Luigi Zingales.

Customer Reviews

Most Helpful Customer Reviews

29 of 29 people found the following review helpful:

5.0 out of 5 stars Insightful, interesting, thought-provoking. Must read., March 31, 2003

By A Customer

This review is from: Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity (Hardcover)

Insightful, interesting and thought-provoking. Must read-even for a non-finance expert like me.

As a "lay" reviewer I strongly echo Business Week's recommendation that Saving Capitalism from the Capitalists is a great book for "the rest of us". The book starts off by explaining why free financial markets are critical and what the role of the financier is. (Many of my friends in Corporate Finance and Investment Banking should at least read this part as it explains what they do, why it is important and why they deserve the big bucks much better than they have ever been able to explain it to me!)

The book then goes much deeper to unpeel the layers of the onion and explain how financial markets develop, what conditions are required to keep them vibrant, what risks they face and who has vested interests in their development. This is key value of the book as I see it. The authors made me think more deeply about the capital markets that I take for granted. For example it seemed surprising to think of "saving" capitalism from capitalists, but after reading the book I must concede that the authors have a point. The very capitalists who initially benefit from capitalism are the ones who stand to lose the most if competition (i.e., new capitalists) enters their markets. Thus they incumbents are likely to vociferously oppose open markets--often masking their vested interests in the guise of humanitarian concerns like the working conditions of third world labor.

The book is very easy to read and the authors pull the reader along by summarizing their arguments intermittently. They encompass both developed and developing countries in their analysis and support their arguments with interesting examples from world history ranging from 13th Century Europe to modern day corporate America. The book does slow down a little in the middle, but if you persevere it picks up right back up again. By the end Saving Capitalism from the Capitalists leaves you informed, interested to learn more and makes you understand and think deeper about a subject that is extremely relevant to all of us.

Insightful, interesting and thought provoking-isn't that the hallmark of a great read?

13 of 13 people found the following review helpful:

5.0 out of 5 stars Excellent book, worth reading for the novice to the expert, May 23, 2003

By 

Varun Gosain (NY, USA) - See all my reviews

This review is from: Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity (Hardcover)

It is refreshing to see experts explain cutting edge ideas in a way that is accessible to all. This book explains why the free markets are important to all of us and why we cannot take them for granted. It also spells out in convincing fashion why the free markets are often at risk from those who at first might be considered their strongest supporters.
It is important for the common person to understand the forces at work and their own self interest so that they use their political force towards their own and the greater good. It is also very usefull for policy makers in designing systems that are not only more effecient but that are more resilient to subversion and grounded in stronger political support.
As an investment professional, this book is interesting as it points to the need to move away from the paradigm of free markets and unbridled competition to generate above average profits. The extent and liklihood of participants actually subverting the free market process and competition should be a part of the analysis in projecting long term profitability of sectors and companies.

10 of 10 people found the following review helpful:

5.0 out of 5 stars Save Me From My Friends - I Can Protect Myself From My Enemies, December 28, 2005

By 

Etienne ROLLAND-PIEGUE (Paris, France) - See all my reviews

This review is from: Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity (Paperback)

This book will be many things to many people at the same time. Economists can use it as a primer in empirical finance that will provide an overview of the field by two scholars who greatly contributed to its expansion. Business school students will appreciate the many case studies that illustrate the theoretical points and provide models for business ventures. More politically inclined readers will find a political tract in the tradition of Friedrich Hayek's Road to Serfdom, only with a different twist: the enemies that capitalism needs to be warded off against are not well-intentioned promoters of the welfare state - in fact the authors have kind words for European-style social protection - but the capitalists themselves, who may abuse their position of power to stifle competition and shackle markets. The book is also as essay in comparative economic history, shedding light on the fate of the Templars in early fourteenth century Europe, the transformation of the English monarchy under the Tudors and the Stuarts, or industrial development in Mexico and Brazil at the turn of the twentieth century. It is, above all, a paean to unbridled financial markets and an apology of their contribution to wealth generation.

Rajan and Zingales see the main threat to capitalism as coming from an unholy alliance between incumbent elites, bent on protecting their rents against competition, and distressed workers who suffer from the process of creative destruction. To those who might object that this alliance seems highly unlikely, the authors object that it has happened before, and that it had long-lasting results, explaining in effect the contrasting trajectories of Europe and the United States in the twentieth century. They begin by remarking that equity markets before the First World War were much more developed in England, Belgium and France than in the United States: so much for those who see in Anglo-Saxon culture or in the common law tradition the key to financial development!

They then describe what they call the Great Reversal that marked the fallback of financial markets from 1930 until well into the 1980s. This half century when financial markets shrank in size and cross-border capital flows were reduced to a trickle was in direct consequence to the Great Depression and the measures taken by governments to protect their markets and impose financial repression. The privileges obtained by incumbent monopolists in the guise of protecting workers from unruly markets long survived the politicians that were persuaded to put them in place.

One may not agree with all the ideas expressed by the authors and in particular put into question their blind faith in the levelling power of financial markets, which they describe as giving a fair chance to every individual, thereby "making power redundant." It may also seem overly alarmist to worry about the future of free markets at a time when formerly state-controlled economies have made great strides toward a market-based system. But Rajan and Zingales are right to remind us that free markets depend on political goodwill for their existence and that, because they have powerful political enemies but no natural constituency, their continued survival cannot be taken for granted.