Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity 8/13/04 Edition
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"Raghuram G. Rajan and Luigi Zingales . . . argue persuasively that free markets 'cannot flourish without the very visible hand of government.'"---Alan Murray, Wall Street Journal
"Saving Capitalism from the Capitalists will dismay both titans of industry and their foes across the barricades. . . . It's written for the rest of us."---Peter Coy, Business Week
"[O]ne of the most powerful defenses of the free market ever written."---Bruce Bartlett, National Review Online
From the Back Cover
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 economicgrowth.
-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.
- Publisher : Princeton University Press; 8/13/04 edition (September 12, 2004)
- Language : English
- Paperback : 392 pages
- ISBN-10 : 0691121281
- ISBN-13 : 978-0691121284
- Item Weight : 1.2 pounds
- Dimensions : 6.14 x 0.86 x 9.21 inches
- Best Sellers Rank: #1,362,862 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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Global imbalances, traditional ideologues and increasing distressed groups constantly threaten the pillars of the free market system. A highly criticized and least understood model (i.e. Capitalism) requires proper assessment by understanding its fundamentals in the context of historical examples thereby enabling constructive realignment.
Approach & section-wise themes
The book is broadly divided into four sections – The first section explains the benefits of free financial markets. The second section delves into how financial markets emerge. The third section explains the causes for market reversals (1930 – 1980) and finally it touches upon how free markets can position themselves as a politically viable model without compromising on economical sanctity. Here is a synthesized version of the arguments presented by Rajan and Zingales in Sections 1 to 3.
Section 1: Underdeveloped financial infrastructure benefits only the rich -> leads to untapped resources -> wealthy and well connected are not the only skill based resources. Expand financial access -> Spread risks widely -> increase disclosures/transparency. Developed financial sector -> Promote competition -> Foster innovation -> Increase growth.
Section 2: Impediment to free markets -> Rapacity of governments -> Relationship-based-lending. Emergence of a new class between owners and labor -> Competition from outside -> New Technologies -> Skill based lending -> Creative destruction -> Public interest prevails.
Section 3: Influence of neighbors on borders -> Bretton Woods agreement -> Exchange rate stability -> Selective passage of cross border flows -> Relationship Finance -> Muted growth.
The authors derive strength to support the above arguments by analyzing the economic models of many countries (France, India, Japan, United Kingdom & United States to name a few) across the globe spanning the pre-world war and post-world war periods.
Demystifying economic phenomenon
The book is not an easy read and I mean this as a compliment. Rajan and Zingales provide sufficient metaphors/stories to make us understand some of the complex economic phenomenon. They point to factors (however debatable some data points could be) that derive economic outcomes. It goes beyond the common narrative of eulogizing leaders (Reagan, Thatcher) and attempts to seek economic underpinnings that shaped decision making. In the process, it does not discredit them but provides context surrounding the decisions made. As an observer, it educates you to look at the principles behind the personalities and consequently apply those principles to other leaders.
Breaking the finance-politics nexus
With capital being tied so much to politics, is there a way out? The last couple of chapters provide a few ideas ranging from corporate governance and provision of incentives to establishing an inheritance tax and designing novel insurance methods. Capitalism engenders creative destruction and when that coincides with bust cycles, there is huge uproar. Failure is often attributed to malfeasance rather than bad luck or incompetence. Murphy’s law prevails and the benefits of capitalism achieved during the glorious years seldom get noticed. A momentary pause could be taken to look around the infrastructure built in the past 40-50 years. It may be prudent to apply a customized version of Hanlon’s razor here. Never attribute anything to malice that which can be explained by incompetence.
This does not mean to rest on past laurels and the distressed should be ignored. The book argues that safety mechanisms should be put in place not after the fact but before. Rhetoric and groupthink could mean that benefits reach the politically charged; not necessarily the most needed. Relief provided ex-post is not insurance but pure redistribution. Discerning readers can relate to several events that happened/continue to happen across the globe.
A political version of anti-trust law is also mentioned briefly. This is to prevent a firm from growing big enough to have domestic clouts that could eventually tame market forces. With the exorbitant rise in market valuation of certain technology companies today, this point can be further explored.
Ideas & Economic policy making
Prescriptions from pure market oriented forces and centrally controlled anti-market forces seldom do achieve the planned economic results across the society. A thoughtful combination of the intent behind Marx, Smith and Keynes is required. The law of unintended consequences does play out in skewing the benefits towards a certain section of the society. Ideas have driven the human race and this book plays an important role in collating, digesting, analyzing and advancing them.
Economic policy making is extremely complex with many variables that continuously change. Long term decisions need to be implemented with levers that can revise short term plans. It is like laying the strong foundation for a fully planned house with enough leeway to change wall and roof designs. The principles required to build such a sturdy yet flexible model are particularly challenging. It requires a thorough review of historical examples, detailed examination of existing academic literature and careful prognosis. On the first two aspects, the book makes great strides. Regarding the third, it looked like quickly put together. However, this concern could be possible since the preceding chapters were presented with painstaking detail providing great insights.
I wish I had read this book (originally published in 2003) earlier. However, the challenges posed are still relevant today and even more greatly so in some ways. Some of the authors’ fears regarding free markets being in danger which could have been viewed as absurd then have started taking shape in some (if not significant) form now. It is also a grim reminder that capitalism’s political enemies stem from within when the model becomes of the incumbents, by the incumbents and for the incumbents.
Their view on portability of skills across borders in many disciplines has greatly propelled this year when digitization witnessed maximum boost. Technology is increasingly enabling remote collaboration between many labor groups. The 5 day online Singapore (organizing authority, does location matter?) fin tech festival with participation from exhibitors and experts across the world is a case in point. Rajan and Zingales argue that developing and developed countries should perceive each other’s comparative advantage to collaboratively work together.
They state that bubbles are easy to recognize with the benefit of hindsight. However, murkier to identify in the midst of it. Its relevance to the current environment can be left to the reader.
Does it make the cut?
Towards the end of the book, they state that the book’s objective would be fulfilled if the public can be partly convinced of the issues that drive growth/progress (Emphasis included by me). In my opinion, it has considerably met that standard. It also lays down in theory certain suggestions to save capitalism from the incumbent capitalists and drive towards a more ‘financially-inclusive’ model. Although the term benevolent capitalism and compassionate capitalism can be used (and rightly so), I think it makes more sense to use the term financially inclusive as that is more in line with the ‘heart’ of capitalism.
In some ways, a truly good book is one that disturbs you. This is definitely one of them. It is often mentioned that capitalism results in the most efficient allocations of resources. I am convinced with a caveat that the rewards side of the equation can be improved. Sitting on the bedrock of capitalism, Rajan and Zingales have dispassionately dissected it. A model of competition across borders without cronies and cartels that result in co-operation is the need of the hour. It may be too much to wish for but Rajan and Zingales provide……hope.
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.
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.