April 18, 2005

Book Review: Saving Capitalism From the Capitalists

If you've seen 'Meet the Fockers,' you probably remember the scene where Greg's parents have constructed a shrine to him, full of 8th place medals and the odd 10th place ribbon. Greg apparently didn't do too well in competition, but his parents loved him anyway. Not everyone is so forgiving, and most people had competition. To rephrase that, most people hate losing at competition--winning is just fine, thank you very much. In a free market system as well, most firms and people don't like competition--it forces firms to respond to customers and people to work harder. However, the overall benefits to society are larger in a system where everything is competitive.

Saving Capitalism from the Capitalists, by Rashuram Rajan and Luigi Zingales, examines competition from an academic perspective, choosing to focus on financial markets. As you'd expect from two economics professors, they argue that markets are the most powerful economic invention of all time, and the solution to many problems facing us today is to make them more prevalent. However, the central thesis of their book is that markets depend on governments for vital infrastructure (rule of law, contracts, etc) and thus depend on politics. Because of the nature of politics the interests of a focused few can outweigh the interests of a diffuse many. This means that government regulation of markets can be easily hijacked by those with disliking competition to smother it.

The authors examine many cases where this hijacking occurred, from developed and developing countries and many different time periods. They focus on finance because free flow of capital has a magnifying effect on competition since upstart produces of goods often need capital. The focus is on incumbent firms, who are usually the party with the will and ability to influence the government to put the needs of the few over the needs of the many.

Other issues they tackle include the emergence of financial markets, whether finance benefits the rich disproportinately, and how the free markets of the early 20th century were rolled back in the 1930s and what replaced them.

Well written, if dense, this book would have been average had the last chapter, which proposes solutions to the political vulnerabilty of markets, been omitted. However, with their proposed solutions, which build on the foundation that they laid out in previous chapters, I feel that this book is a useful read for anyone interested in knowing how the world works and might work better. In addition, I think it's wise and brave of them to trumpet that current markets aren't really free but instead are usually hijacked by powerful incumbent firms. This is something that you don't hear economists acknowledge often enough.

Posted by moore at April 18, 2005 04:34 PM
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