By Raghuram Rajan and Luigi Zingales
- The Third Pillar; How Markets and the State Leave the Community Behind (2019)
- Saving Capitalism from the Capitalists; Unleashing the Power of Financial Markets to Create Wealth & Spread Opportunity (2003)
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 anti-globalization 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.
Less-than-1-minute video explaining the title of the book:
Brink Lindsey on Cato Journal wrote:
"Saving Capitalism from the Capitalists is an ambitious probe into capitalism’s past, present, and future. Whereas Joseph A. Schumpeter viewed capitalism as doomed because it was losing its political and social supports, Rajan and Zingales see it more as threatened from within by established or 'incumbent' industrialists and financiers who become enemies of free markets. The authors contend that free financial markets foster economic progress while undermining the ability of incumbents to have their way. Rajan and Zingales may overstate the significance of 'the great reversal' of financial development in the middle decades of the twentieth century, and their evidence and interpretations are sometimes flawed. Nonetheless, they make a strong case for the fundamental importance of financial development for economic modernization and their warnings about the antimarket tendencies of incumbents are well worth pondering."
Daniel W. Drezner on The Journal of Politics wrote:
"This is an excellent book. It concerns a crucially important and poorly understood subject; it is timely; it is clearly and interestingly written; and its main argument is in all significant respects correct. At the heart of any economic system are the decisions about how to allocate capital among rival uses. Saving Capitalism from the Capitalists makes a powerful case for entrusting those decisions to competitive financial markets—as opposed to the alternatives of outright government control or clubby 'relationship capitalism' that predominate around the world in rich and poor countries alike. The book carefully analyzes both the benefits and the risks of financial liberalization and concludes that market-driven financial sectors offer sizable net benefits. In so doing, it provides an excellent synthesis of recent scholarship, including several important contributions by the authors themselves. This survey of some of the best recent work in financial economics is alone worth the price of the book. But Rajan and Zingales do not stop with demonstrating the superiority of financial markets over more centralized decision making systems. They proceed to wrestle with the fascinating question of why, despite that superiority, financial markets are so routinely suppressed and underdeveloped. Their thesis (hence the title of the book) is that market incumbents frequently use their political muscle to throttle financial markets because they fear the competitive uncertainties caused by open access to financing. In other words, the problem with capitalism is that, too often, the capitalists don’t want it. [...] They are able to present extremely complicated ideas in a very clear and reader-friendly way, and they succeed in situating contemporary policy issues in an extremely broad, centuries-long historical context. It is rare indeed in policy books to have authors who really know what they are talking about and really know how to say it. [...] After piling up the praise, allow me to make some critical comments. First, the concluding policy recommendations in Saving Capitalism from the Capitalists do not live up to the overall strengths of the book. [...] It is also possible to take issue with the authors’ assessment of the relative roles of ideas and interests in explaining the oscillations of political economy. [...] While the influence of interests is obvious, I would contend that the authors give short shrift to the importance of the climate of ideas."
Giovanni Ferri on Economic Notes wrote:
"In this book, Raguram Rajan and Luigi Zingales provide a vigorous defense of the value of open capital markets. Their argument for why capital account liberalization spurs greater economic growth is simple. Robust economic growth is strongly correlated with a high degree of “financial development”—i.e., the size, sophistication, and innovation of a country's equity markets, bond markets, and banking sectors. Skeptics assume that economic growth leads to sophisticated capital markets, not vice versa. However, Rajan and Zingales counter this argument by pointing out that financial development is robustly correlated with future rates of economic growth, increased productivity, and high rates of investment. [...] Of course, these results lead to the obvious question—if liberalization leads to greater economic growth, why do so many national governments shield their financial sectors from the global capital market? At this point the book's focus switches to comparative political economy. Rajan and Zingales' core political economy argument is that 'free markets depend on political goodwill for their existence and because they have powerful political enemies among the establishment, their continued survival cannot be taken for granted, even in developed countries.' [...] Very little in Saving Capitalism from the Capitalists will be new to political scientists. [...] Rajan and Zingales' value-added is their ability engagingly to synthesize the state of the art in the economics literature to stress the crucial role of free capital flows to this logic. [...] There remain empirical puzzles that Rajan and Zingales do not address. [...] Rajan and Zingales' model of political economy also suffers from a flaw similar to Rogowski's model: there is no satisfactory explanation for how governments ever manage to override the powerful interest groups that prefer the rent-seeking equilibrium of heavily protected markets. The book tries to address this question by looking at both seventeenth-century Europe and the collapse of the Bretton Woods system to provide an explanation. The answers provided are too historically contingent, however, to offer much theoretical guidance. Yet these oversights are minor compared to the book's benefits. For political scientists interested in learning what neoclassical economics can add to debates about the political economy of development, Saving Capitalism from the Capitalists is an excellent place to start."
"In my view, the book has many strengths but it also shows some weaknesses. Three stand out among the former. First, as said, avoiding to lean on either the market-failure or the institution-failure ideologies, RR–LZ take a fruitful pragmatic method. [...] The second merit of this book is making available to the informed public opinion the recent advances in the literature. The tone used by RR–LZ makes it readable to non-specialists. [...] Third, RR–LZ convincingly choose a multi-disciplinary approach. [...] Their use of case studies to support the proposed view gives the same dignity as economics to economic history as well as to political, societal analyses and assigns a role also to market practitioners’ reports. [...] But the book has also a few shortcomings. I will discuss three of these. In the first place, the two Boston–Chicago boys do not account adequately for how the evolution of free financial markets tends to happen in the country at the centre of the international economic and monetary order. [...] Second, over their own academic careers, the authors shift from recounting the virtues to pointing out the fallacies of relationship finance. It is not clear how they can offer a consistent reading of some of their earlier results [...] with the paradigm of financial evolution they propose in this book. [...] Finally, connected to the previous remark, are we sure that, in line with the interpretation proposed by RR–LZ, the financial evolution a la Goldsmith (1969) – from bilateral intermediation to the multilateral relationships of financial markets – is the best way to root capitalism?"
Conversation with Zingales about the Book
Table of Contents of Saving Capitalism from the Capitalists
Part I: The Benefits of Free Financial Markets
- Does Finance Benefit Only the Rich?
- Shylock Transformed
- The Financial Revolution and Individual Economic Freedom
- The Dark Side of Finance
- The Bottom Line on Financial Development
Part II: When Do Financial Markets Emerge?
- The Taming of the Government
- The Impediments to Financial Development
- When Does Finance Develop?
Part III: The Great Reversal
- The Great Reversal between Wars
- Why Was the Market Suppressed?
- The Decline and Fall of Relationship Capitalism
Part IV: How Can Markets Be Made More Viable Politically?
- The Challenges Ahead
- Saving Capitalism from the Capitalists