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

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Princeton University Press, Aug 23, 2004 - Business & Economics - 369 pages
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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.

This book 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.

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Saving capitalism from the capitalists: unleashing the power of financial markets to create walth and spread opportunity

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Given the downfall of such corporate giants as Enron and Worldcom, other white-collar malfeasance, and today's bearish stock-market conditions, it may not seem like such a great time for capitalism ... Read full review

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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

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About the author (2004)

Raghuram G. Rajan is currently Economic Counselor and Director of Research at the International Monetary Fund. He is on leave from the University of Chicago, where he is the Joseph Gidwitz Professor of Finance. In 2003, Rajan was awarded the inaugural Fischer Black Prize for the most significant contributions to the field of finance by a person under 40. Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago's Graduate School of Business. Zingales is one of the foremost academic experts on corporate governance and is an inaugural fellow of the recently instituted European Corporate Governance Panel. He is a faculty research associate at the National Bureau of Economic Research and a research fellow at the Center for Economic Policy Research. In 2003 he won the Bernacer Award for the best European young financial economist.

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