Saving Private Enterprise

Former Reason Editor Virginia Postrel has an excellent NY Times col on the fascinating recent book Saving Capitalism From the Capitalists, by Raghuram G. Rajan and Luigi Zingales. Writes Postrel:

Professors Rajan and Zingales argue that financial markets make the biggest difference between open, market capitalism and closed, relationship capitalism. Free financial markets allow outsiders with good ideas to raise funds, even when their businesses will compete with insiders.

"Free financial markets are the elixir that fuels the process of creative destruction, continuously rejuvenating the capitalist system," they write. "As such, they are also the primary target of the powerful interests that fear change."

The book, which I've read, has some rotten policy prescriptions at the end but provides a great history of the rise of property rights--and the curious way in which, in England anyway, the definition of those rights followed the massive expropriation of church lands under Henry VIII. From Amazon's description:

Capitalism?s biggest problem is the executive in pinstripes who extols the virtues of competitive markets with every breath while attempting to extinguish them with every action.

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.

Comments

[Jason Ligon]

Capitalism doesn't need to be saved from the capitalists, it needs to be saved from the regulators.

Corporations operate in an environment where your competition is trying to get a big handout, so you had better, because they will use the capital to beat you in the regular market.

Stop the farm subsidies, stop the tariffs. Your job, Mr. Regulator, is to ensure that contracts are protected, consumers are not lied to, and property rights are enforced.

I would add to the standard list the maintenance of REASONABLE patents and copyrights, though I suspect I might hear some opinions to the contrary hereabouts ...

[Brad S]

While capitalism may be a perfect system in theory, in practice, it is necessarily run by capitalists, who are human beings. Human beings, of course, are necessarily imperfect. So, you have a perfect system executed by imperfect people.

The result is a sort of prisoner's dilemma. Every capitalist is better off if every capitalist is completely free from regulators. However, individual capitalists can gain a leg up on all of the other capitalists if they can use the political machine to get the regulators to grant them some advantage over the other capitalists. As a result, every capitalist tries to get a political advantage over every other capitalist, and the outcome is the worst possible outcome for everyone (more and more regulations).

[Greg]

I have never heard anyone say capitalism is perfect. The genius of capitalism is that it is the best thing we have, creates the most wealth, and reasonably distributes that wealth. The US is a shining example. A person in "poverty" here would be a rich man in many countries.

Over-regulation has not helped the economy one bit; It has only hindered browth. Enron still happened, and the only way to stop that is to have honest tradesmen, and we should promote ethics as a culture more often, not stab-eachother-in-the-back-for-money.

[joe]

You people need to stop using "capitalism" and "free markets" as interchangeable. "Capitalism" is the political philosophy that the business of government is to look out for Capital. Sometimes this involves free markets, but there are a multitude of couter-examples, from the tarrifs imposed to protect American's infant industrial sector in the early 1800s to the crushing of labor agitation by federal troops.