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April 08, 2003
Book Review: Saving Capitalism from the Capitalists
    by William Baue

A new book identifies what ails capitalism and proposes a panacea.

The book Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity may surprise readers by blaming two groups of polar opposites for hindering the successful development of capitalism. It may not surprise readers that the first group being blamed comprises corporate executives, the most visible of capitalists, but the reason why they are singled out may come as a surprise.

"Capitalism's biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action," write the authors, Raghuram Rajan and Luigi Zingales, both professors at the University of Chicago Graduate School of Business.

Truly free markets would unseat many of these "incumbents," the label Messrs. Rajan and Zingales give executives who occupy their seats of power not because of the kinds of innovative thinking that free markets reward, but because the executives have rigged the rules.

The second group that the authors blame comprises the victims of what the authors call "creative destruction." This is a kind of natural selection whereby free markets kill businesses that are founded on ideas whose time has passed. Instead of accepting their fate in this process, members of this group compromise capitalism by calling for the over-regulation of free markets.

Incumbents, on the other hand, compromise capitalism by opposing almost any regulation of free markets. This opposition is a disingenuous stance considering these insiders tamper with free markets from behind the scenes, according to the authors.

Messrs. Rajan and Zingales advocate sailing between the Scylla and Charybdis of free market regulation by enacting selective regulation. The authors posit that with too little regulation, free markets will lack the governmental infrastructure needed to protect them from corporate and political corruption. With too much regulation, markets will not be truly free and will be strangled by suffocating rules.

The authors' solution indeed walks a fine line, perhaps too fine to enact in reality. They admit that "there is no magic bullet," and their solution relies on a series of interdependent proposals.

"In isolation, each proposal may seem benign, or even counterproductive. But together, they become a force to foster free markets," write Messrs. Rajan and Zingales.

The problem with this approach is that in order for it to function properly, all of the solutions need to be implemented. Achieving any one of the proposals in one country may be a feat, but achieving them all globally would amount to a miracle. However, because there are few alternatives to capitalism , their complex solution becomes compelling if imperfect.

The authors propose reigning in the power of incumbents by enacting a political antitrust law that prevents large firms from unduly influencing politics. Instead of insuring firms against bankruptcy, they recommend insuring the people in those firms to create a safety net for the inevitable business failures of a robust system. They also suggest taxing inheritance to prevent the consolidation of power in a few wealthy families.

Some proposals are no-brainers, such as the suggestion to strengthen corporate governance and raise public awareness of the necessity for limited government intervention to ensure free markets. Other proposals are political hot potatoes, though. For example, the authors advise opening up capital markets globally and creating incentives for international trading zones, measures that fly in the face of the antiglobalization movement. But that's just what the authors intend, because they see the liberation of markets worldwide as the answer to capitalism's problems.


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