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

Rajan, Raghuram G.; Zingales, Luigi

 
9780609610701: Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity
Hardcover
ISBN 10: 0609610708 ISBN 13: 9780609610701
Verlag: Crown Pub, 2003

Inhaltsangabe

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.

•Vibrant financial markets threaten the sclerotic corporate establishment and increase corporate mobility and opportunity. They are the reason why entrepreneurship flourishes and companies like The Home Depot and Wal-Mart―mere fly specks a quarter of a century ago―have surged as they have.
•They mean personal freedom and economic development for more people. Throughout history, and in most of the world today, the record is one of financial oppression. Elites restrict access to capital and severely limit not only general economic development but that of individuals as well.
•Open borders help check the political and economic elites and preserve competitive markets. The greatest danger of the antiglobalization movement is that it will keep the rich rich and the poor poor. Globalization forces countries to do what is necessary to make their economies productive, not what is best for incumbent elites. Open borders limit the ability of domestic politics to close down competition and to retard financial and economic growth.
•Markets are especially susceptible in economic downturns when the establishment can exploit public anger to restrict competition and access to capital. While markets must be free to practice “creative destruction,” Rajan and Zingales demonstrate the political and economic importance of a sustainable distribution of wealth and a baseline safety net. Capitalism needs a heart for its own good!

There are no iron laws of economics that condemn countries like Bangladesh to perpetual poverty or the United States to perpetual prosperity. The early years of the twentieth century saw vibrant, open financial markets that were creating widespread prosperity. Then came the “Great Reversal” during the Great Depression. It can―and will―happen again, unless there is greater understanding of what markets do, who benefits, and who really wants to either limit them or shut them down.

Saving Capitalism from the Capitalists 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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Über die Autorinnen und Autoren

Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago's Graduate School of Business.

RAGHURAM G. RAJAN is the Joseph Gidwitz Professor of Finance at the University of Chicago’s Graduate School of Business. Dr. Rajan is one of the foremost academic experts on banking and comparative financial systems. He is a director of the American Finance Association, an associate editor of the American Economic Review, and a program director for corporate finance at the National Bureau of Economic Research. <br><br>LUIGI ZINGALES is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago’s Graduate School of Business. Dr. 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 re

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Does Finance Benefit Only the Rich?

For the political foundations of free markets to become stronger, society has to become more cognizant of how much it owes them. The first step in mounting a defense of markets is to create awareness about both their true benefits and their limitations. Because the free market system is so weak politically, the forms of capitalism that are experienced in many countries are very far from the ideal. They are a corrupted version, in which powerful interests prevent competition from playing its natural, healthy role. To defend free markets against their critics, therefore, we have to show not only how much of our plentiful lives we owe to them but also why the grim parodies of capitalism through much of even recent history are not truly representative of free market enterprise. And further, we will try to convince the reader that we are not faced today with the Hobson's choice between a corrupt socialism and a corrupt capitalism, as has been the case through much of history. There is a better way, and it is largely within our reach.

One group of markets, the financial markets, attract even more opprobrium than others. Few trained economists in the developed world today would be against free markets in goods and services, but a sizable number can still be found who would oppose free financial markets. Not only are financial markets more misunderstood than other markets, they are also more important because, as we will argue later, free financial markets are the elixir that fuels the process of creative destruction, continuously rejuvenating the capitalist system. As such, they are also the primary target of the powerful interests that fear change. Through much of the book, therefore, we focus on the financial markets as our representative example.

To mount a defense, however, we have to know what we must defend against. So let us now examine what the public believes financial markets and financiers do. One belief that is widely held is that Wall Street is a parasite living off of Main Street. At best, the financier takes from Peter and gives to Paul, while keeping back a significant commission to furnish a luxury apartment overlooking Central Park. Tom Wolfe's The Bonfire of the Vanities perfectly captures this view of financiers. Here is a passage from it in which Judy McCoy explains to her daughter Campbell what exactly her father, a bond salesman, does:

"Daddy doesn't build roads or hospitals, and he doesn't help build them, but he does handle the bonds for the people who raise the money."

"Bonds?"

"Yes. Just imagine that a bond is a slice of cake, and you didn't bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that."

Judy was smiling, and so was Campbell who seemed to realize that this was a joke, a kind of fairy tale based on what her daddy did.

"Little crumbs?" she said encouragingly.

"Yes," said Judy. "Or you have to imagine little crumbs, but a lot of little crumbs. If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic cake."

Wolfe is not in a minority in deprecating financiers. Works ranging from Shakespeare's Merchant of Venice to Emile Zola's Money have financiers occupying a moral space considerably below that of prostitutes.

Even while many view them as leeches, others see them as too powerful. Consider these words of Woodrow Wilson during the United States presidential campaign of 1912:

The great monopoly in this country is the money monopoly. So long as it exists, our old variety and freedom and individual energy of development are out of question. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of few men, who, even if their actions be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who, necessarily, by every reason of their own limitations, chill and check and destroy genuine economic freedom.

Wilson recognized the importance of finance ("a great industrial nation is controlled by . . . credit") but lamented that its power was used to "chill and check and destroy genuine economic freedom." Are these two seemingly opposite perceptions--financiers' being useless while at the same time being too powerful--compatible?

They are, and they characterize financiers well, but only in an underdeveloped financial system--a system lacking in basic financial infrastructure such as good and speedily enforced laws, clear accounting standards, and effective regulatory and supervisory authorities. The reason why these beliefs are valid is simple. Talent and business acumen are worth nothing without the funds to put them to work. A good financial system broadens access to funds. By contrast, in an underdeveloped financial system, access is limited. Because funds are so important, the financier who controls access is powerful, but because access is so limited, the financier can make money doing very little. His role is simply that of a gatekeeper, keeping the rich within the gates safe while keeping out those who would compete for resources. He thus validates both Judy McCoy's view that he scrounges crumbs from the pie that others create and Woodrow Wilson's view that financiers "chill and check and destroy genuine economic freedom."

Why is finance so limited in an economy without financial infrastructure? Financing is the exchange of a sum of money today for a promise to return more money in the future. Not surprisingly, such an exchange can be problematic. First, even the most honest borrower may be unable to live up to her promise, due to the uncertainty intrinsic in any investment. Thus, financiers have to bear some risk. When the risk involved is substantial and concentrated, it becomes difficult to find people willing to bear it. Second, promises are hard to value. People who do not intend to keep them are more willing to promise a lot. Hence, the very nature of the exchange tends to favor the dishonest. Finally, even individuals with the best intentions may be tempted to behave in an opportunistic way when they owe money. In an economy without the infrastructure to mitigate these problems, financing becomes restricted to the few who have the necessary connections or wealth to reassure financiers. The financier can prosper simply by acting as a gatekeeper. As we explain in this chapter, the limited access to finance severely reduces the choices citizens have in determining the way they work and live.

In the next chapter, we explain why this does not need to happen. With the appropriate infrastructure in place, the intrinsic problems we describe can be overcome, so that the financier can broaden access to funds and enhance economic freedom. And this is not just utopian thinking. As we describe in Chapter 3, the revolution that has taken place in the U.S. financial markets in the last twenty years has already enhanced economic freedom greatly, placing the human being rather than capital at the center of economic activity. All this suggests that those who want to oppose free access to finance and the attendant freedoms it brings need focus merely on holding back the institutional infrastructure needed for a modern financial market. The problems intrinsic to finance will do the rest by restricting access. Once we understand this, we will be ready to embark on the rest of the book.

The Problems Instrinsic to Financing

Chance, ignorance, or knavery--in the jargon, uncertainty, adverse selection, or moral hazard--can intervene to prevent...

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Verlag
Crown Pub
Erscheinungsdatum
2003
Sprache
Englisch
ISBN 10 
0609610708
ISBN 13 
9780609610701
Einband
Gebundene Ausgabe
Auflage
1
Anzahl der Seiten
369
Kontakt zum Hersteller
Nicht verfügbar
Verantwortliche Person
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