"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.
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.
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
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.