Customer Reviews

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

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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?

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.

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.

this is an eclectic and well written book. It debunks the popular notion that capitalism is just a scam to make the rich even richer at the expense of the poor. It is true that capitalism can in fact be used by white glove thiefs to "redistribute" joe sixpack's savings into their pockets, but that is not an inherent feature of the capitalistic system, as the authors explain.

What I like about Zingales and Rajan is that when confronted upon corporate malfeasance they don't change the topic to the excessive penalization of risk taking because crooked CEOs and Investment Bankers are not risk-takers.

Overall it is entertaining and persuasive.

I find these Chicago school economists closer to the Austrian tradition than their colleagues maybe that's why I find them so persuasive. They don't throw all capitalists into the same bag they distinguish between entrepreneurs (in the Austrian sense of the word) and rent-seeking "capitalists". Between self-made billionaires and billionaires by inheritance. While entrepreneurs must be defended with tooth and nail to preserve the capitalistic system, the others must be thrown to competition hell.

There are a few inaccuracies, for example up-to-date Forbes billionaire data by countries is available over the internet; and a few paragraphs must have been included out of "respect" for their intellectual tradition and not because of their relevance to their argument, for example the Efficient Markets Theory. I do not think markets have to be "efficient" (in the academic sense that prices have to follow some mathematical/fundamental model) to be preferred to any other institutional arrangement.

Some other paragraphs come across as exaggerating/overpromoting/overselling the influence of certain academics on real world institutions. Maybe they reflect some insecurity?

But the essential ideas, and the reasoning, more empirical and pragmatic than ideologic/axiomatic, make this book an instant classic. It is on the same level as Hernando de Soto's Mistery of Capital and Hayek's Road to Serfdom.

An excellent introduction and review of free markets and how, through finance, they are able to provide the best allocation of resources for all. Even better was the examination of how free markets are thwarted by interest groups who seek to carve out protected enclaves from competition. The book is not a right wing fantasy where gov't is always evil, in fact it acknowledges that the structure of gov't is highly important because interest groups will attempt to utilize any form of gov't to their own ends. In such a situation, government is all the more important because the right type of structure can channel such pressure away from market destroying measures.

This book, written by two heavyweight University of Chicago financial economists, was published during our last financial market "crisis" in 2003. This was the time of the post internet equity bear market, the time of the Enron, Worldcom and Global Crossing scandals. The thesis is that free markets, for all their benefits particularly to the poor and powerless, rest on precarious political grounds. The impulse of elites to curtail the functioning of markets is strong and always a threat, particularly in times of crisis when the public loses confidence in markets' fundamental fairness. . The authors fret about the dark clouds of 2003; the clouds are certainly darker today. Moreover, they show that the threat to markets often comes from the "capitalists" themselves, established incumbents who seek to use the power of government to curtail the free functioning of market to protect their entrenched position

Seems uncontroversial as a thesis. The "rent seeking" impulse in modern democracies has been elaborated before. Nevertheless, this book makes some new and worthwhile contributions. The authors are professors of finance and thus skew much of their discussion to the operation of financial markets. They show in accessible terms the benefits to society of smoothly functioning financial markets, and how in particular they benefit new entrants and indirectly enforce competitiveness in product markets. Oftentimes even reputable economists will rationalize nations' desire to protect domestic financial markets even while advocating openness in product markets. Rajan and Zingales show that this is typically the result of some politically powerful vested interest in the country protecting its own position. Indeed, open financial markets are arguably even more potent in bringing the benefits of capitalism to the masses. The authors explode the myth of the financier as economic parasite, and show how through the spreading of risk, required returns are reduced and productive investment increased.

They introduce an intriguing and, to me at least, novel theory that private property will be more robust as an institution in circumstances where property is held by those who are the most efficient users of it. The better part of an entire chapter is devoted to an explication of the emergence of the "Squirearchy" in Tudor England, and how it, through the increasing strength of Parliament, was able to suppress the power of the Monarchy and its arbitrary control over property rights. The argument is the that redistribution of land previously expropriated from the Church into the hands of efficient gentleman farmers not only helped create a free market in land, but buttressed the institution of private property because more efficient holders of land had both the economic power and the interest to defend their property rights. Although the argument feels slightly ad hoc at times, the question of why and how strong property rights emerged in some societies and not in others is an important one, and the authors' thesis is plausible and worthy of consideration.

Thus England emerged first among western European countries in establishing secure property rights and circumscribed government, and from there led in industrialization and the development of financial markets. The authors emphasize the importance of financial markets in nurturing industrialization and the importance of keeping governments and vested interests from rigging the financial markets for the benefit of a privileged few. Here however is where the essential argument becomes ambivalent. Developed countries have an advantage over the developing world in that their financial markets are well-established and tolerably transparent: they have established a functioning financial "infrastructure". For developing economies to emulate this, they need to establish similarly strong institutions to protect property rights, enforce contracts, prevent and punish fraud, etc. The implication for the authors seems to be that many of the trappings of modern Western finance are part and parcel of this minimum institutional framework for the stable operation of markets. Financial regulation via, e.g., the SEC, the FDIC, the Federal Reserve system, forms the essential infrastructure for efficient financial markets. But most of this regulatory framework is of reasonably recent origin (the Fed from just before World War I, the rest from the Depression era), and it is not at all clear why the authors assume that none of it is the result of regulatory capture by the incumbents they worry about elsewhere.

The book describes the precariousness of a regime of mostly free markets and documents "the great reversal" of the 1930's and beyond when hostility to capitalism and free markets led to a backtracking on the longer historical trend of increasing freedom and expansion of markets. They document how deeply the development of financial markets were set back, and for how long - by many measures in much of West they still had not reached their pre-WW I level by 1980! And they show how many of the measures instituted, in Italy, in Japan and in the U.S., were bald sops to the established interests of incumbents and not, as advertised, public-interested reforms to protect the majority of the populous.

The point is well-taken, but the authors don't take it far enough. At one point they write:

"It is worth dwelling on this last point, for it goes counter to the belief that the securities legislation in the early 1930s, with its emphasis on disclosure and transparency, was entirely focused on laying the foundations for a vibrant, competitive financial system. **It may have broadly done that**, but particular interest groups also shaped the legislation for their own benefit. The legislation on securities issuance offers an example of how seemingly innocuous changes in laws can limit competition severely" [Emphasis added.]

Isn't the securities legislation of the 1930s the very financial infrastructure the authors cite elsewhere as essential to well-functioning financial markets? They repeatedly make the point: "a little government good, too much government bad". But nowhere do they attempt to distinguish the good from the excessive regulation, the stuff of smooth modern markets as distinct from the detritus of rent-seeking incumbent opportunists.

Alas, in the end, the book does not live up to its subtitle, for nowhere will the reader find the answer to how we can "unleash the power of financial markets to spread opportunity" while keeping the incumbents and their government enablers at bay. The last chapter offers the authors' suggestions, but it feels little different in character from the typical policy recommendations of mainstream economists. Ensure economic power is not concentrated for that gives incumbents more latitude to tilt the field their way. Build a social safety net so the general public will not turn against free markets during downturns. Keep borders open to trade in goods and capital. Educate the public on sound economics. The authors seem to forget themselves; how in the real world of self-interested political dealing do they think these high-minded ideas will be put into force?

The worries that the authors express in this book are valid and important. The "capitalists" of the title are meant to represent the vested interests of the status quo and the real world evidence of the politically connected writing the rules of the game to their own advantage under cover of "public interest" is overwhelming. The arguments Rajan and Zingales marshal in favor of openness, in particular in financial markets, are convincing and more relevant today than ever. However, in these days of bailouts of elite Wall Street firms and special handouts to politically favored unions, one wishes they had some useful recommendations on how exactly to save capitalism from the capitalists.

I learned of this book because it is referred to in the excellent How Markets Fail: The Logic of Economic Calamities by John Cassidy.

It was interesting to read this book in 2010, since it was written and published before the great meltdown of the past couple of years. The authors are big fans of the free market. They recognize that their conception of a free market does not exist in the real world and has probably never existed. It is an idealization. Yet unlike the idealization of pure socialism, which they recognize also never existed in the real world, they think that it is possible, in the real world, to achieve a pure free market system. This might have something to do with the water in Chicago where they are professors. It seems like most economists from there believe the same thing.

The idea of free market expounded in this book is not what one might think: they are not suggesting a "wild west" or "jungle" style of free market would work (and it seems the evidence is in that is *hasn't* done that great of a job lately...) but are suggesting one with a significant role for government in setting and enforcing rules of the road, and providing a safety net for those who are "dislocated" by the actions of globalization and "creative destruction." So at least they are realistic about the human cost of capitalism and the tendency of markets, when left completely on their own, to favor incumbents at the expense of competition and the rest of society. One of the more interesting themes explored in this book is the way in which incumbents can influence government policy in order to coopt reforms in times of great change, and also tend to form cynical alliances of convenience with those who are dislocated during those times (cf corporate support for tea party movement)

All in all, this is a very intelligently written and thoughtful book. Nevertheless, I do feel it has a lot more of that Chicago-flavored free market fundamentalism than I would have liked. Just when I was getting comfortable that the book was written from a relatively non-ideological point of view, they'd throw in some market worship for good measure. Of course market forces are powerful and they have to be taken into account and intelligently used by economic policy makers, but especially in light of the past couple of years, it seems naive to believe that markets solve all problems of allocation all by themselves. At least the authors recognize that markets are not inherently stable and require social and governmental institutions to function, and they do a great job of explaining some of the failure modes, however they seem slightly too smitten with markets as a panacea for my taste, and then there's that recurring belief that seems to keep cropping up that pure free markets are even possible, or would be desirable in all areas even if they were.

"Saving Capitalism" is a book with a simple and even intuitive thesis -- that capitalists don't like competition. Since competition is the heart of capitalism, then capitalists don't really like true capitalism. Though simple, it is innovative because no one thinks of capitalisms biggest enemies as the capitalists themselves.

The book goes to great lenghts to demonstrate the truth in this thesis, drawing examples from different countries and showing what rational behavior by capitalists leads to such a negative situation. The thesis is well defended and makes a reader -- especially an economist as myself -- question the very foundations of economics.

However, the authors also expose the reasons why capitalism has survived, especially in the West, despite such threats. It leads to the conclusion that one must fight for freedom in a wide sense, including economic freedom, meaning well oiled financial markets, open trade barriers, and low regulation to increase competition in as many markets as possible. Competition, whatever the source -- for capital, for labor, for markets, for foreign exchange --, is the heart of capitalism and should be defended by all.

Had to buy this book for a class on capitalism and regulation. Each chapter was enjoyable to read and was insightful to the last page. The authors' final conclusions were also thought provoking and well-reasoned.

While written in the Worldcom era. This book is a great read in the 2010 economic times as it clearly shows how the "to big to fail" cries of the established were once again, the entrenched minipulating the government into protecting a failed business model instead of allowing market forces to digest the assets and see them reborn more efficient than the model it replaced.