Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity Hardcover – February 18, 2003

In the Wealth of Nations, Adam Smith defended the new world order of market competition, but warned that businessmen did not like competition and will try to undermine it at every turn. They will do this by collusion, acquiring competitors, and asking the government to give them a monopoly position (rent-seeking). The authors relentlessly repeat Smith's theme and bring it up to date. The most important thing they do in this book is explain what a healthy financial system does for the economy (mainly keeping the cost of financing innovation and competition low), and explaining why so many countries have severely underdeveloped financial systems (the capitalist powers that be and their government cronies don't want competition, so they hate modern financial institutions).

The authors are accused by many reviewers of begin laissez-faire right-wing ideologues, but it is the reviewers who cannot get beyond left versus right. I recommend this book highly.

An extensive reading that brings satisfaction when one reaches the conclusion, which well synthesizes the ideas presented.
The historical and well-founded account of the constitution and consequences of the financial system helps the reader better understand the healthy limits for the capitalist to live more responsibly with capitalism.

"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.

This book was published a couple of years before the current credit crunch really began to make itself felt; I read this book a few months ago with a rather strange sense that the authors had warned about how fragile global capitalism can be and how easy it is for politicians to resort to bludgeon of Big Government to deal with crises. The authors show, for example, how financial markets can be captured by the dominant players in the field, who then use a crisis - often aided by governments - to carve out certain privileges for themselves. We are seeing that in the demands for strict regulation of certain institutions and the outlawing of tax havens, for example. The book is certainly not a starry-eyed defence of laissez faire; the authors believe markets require rules to ensure that the system works for the benefit of the majority rather than for a narrow elite, for example.

I have a few disagreements with the authors - they do not sufficiently address whether the existence of state central banks and fiat money may cause credit bubbles and crashes, for example. But generally speaking, this is a fine defence of the free market and an expose of the special pleading that often lies behind demands for greater state regulation. At a time when such demands are getting very noisy, this book pays a lot of study.

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.

Awesome book ... A must read for all