Posted by Ilya Somin:
Luigi Zingales on threats to the Future of American Capitalism:
http://volokh.com/archives/archive_2009_09_06-2009_09_12.shtml#1252707430
Prominent finance economist Luigi Zingales has [1]an excellent essay
outlining some of the dangers facing us as a result of the political
response to the current economic crisis:
While everyone benefits from a free and competitive market, no one
in particular makes huge profits from keeping the system
competitive and the playing field level. True capitalism lacks a
strong lobby.
That assertion might appear strange in light of the billions of
dollars firms spend lobbying Congress in America, but that is
exactly the point. Most lobbying seeks to tilt the playing field in
one direction or another, not to level it. Most lobbying is
pro-business, in the sense that it promotes the interests of
existing businesses, not pro-market in the sense of fostering truly
free and open competition. Open competition forces established
firms to prove their competence again and again; strong successful
market players therefore often use their muscle to restrict such
competition, and to strengthen their positions. As a result,
serious tensions emerge between a pro-market agenda and a
pro-business one, though American capitalism has always managed
this tension far better than most....
We thus stand at a crossroads for American capitalism. One path
would channel popular rage into political support for some
genuinely pro-market reforms, even if they do not serve the
interests of large financial firms. By appealing to the best of the
populist tradition, we can introduce limits to the power of the
financial industry � or any business, for that matter � and restore
those fundamental principles that give an ethical dimension to
capitalism: freedom, meritocracy, a direct link between reward and
effort, and a sense of responsibility that ensures that those who
reap the gains also bear the losses. This would mean abandoning the
notion that any firm is too big to fail, and putting rules in place
that keep large financial firms from manipulating government
connections to the detriment of markets. It would mean adopting a
pro-market, rather than pro-business, approach to the economy.
The alternative path is to soothe the popular rage with measures
like limits on executive bonuses while shoring up the position of
the largest financial players, making them dependent on government
and making the larger economy dependent on them. Such measures play
to the crowd in the moment, but threaten the financial system and
the public standing of American capitalism in the long run. They
also reinforce the very practices that caused the crisis. This is
the path to big-business capitalism: a path that blurs the
distinction between pro-market and pro-business policies, and so
imperils the unique faith the American people have long displayed
in the legitimacy of democratic capitalism.
Unfortunately, it looks for now like the Obama administration has
chosen this latter path. It is a choice that threatens to launch us
on that vicious spiral of more public resentment and more
corporatist crony capitalism so common abroad � trampling in the
process the economic exceptionalism that has been so crucial for
American prosperity. When the dust has cleared and the panic has
abated, this may well turn out to be the most serious and damaging
consequence of the financial crisis for American capitalism.
The distinction between a "pro-business" agenda and a pro-market one
is a crucial point that I have often emphasized myself (see [2]here
and [3]here). Unfortunately, it is often ignored or misunderstood. For
the reasons Zingales points out, business interests regularly lobby in
favor of government intervention whenever they think it might protect
them from competition or secure them government-provided privileges.
Such lobbying is of course routine. But it is particularly dangerous
in the midst of a crisis atmosphere, when the combination of fear,
voter ignorance, and government officials seeking to expand their
power creates unusually attractive opportunities for interest groups
to lobby for special privileges for themselves under the guise of
emergency measures. I discussed these issues in greater depth in a
series of posts last fall (see [4]here,[5] here, and [6]here). So far,
little has happened to alleviate my concern that the combination of
economic crisis, voter ignorance, interest group lobbying, and united
Democratic control of the federal government is likely to lead to a
dangerous expansion of government power over the economy. In many
cases, that expansion is taking the form of measures that benefit big
business and other powerful interest groups at the expense of the
general public.
References
1. http://nationalaffairs.com/publications/detail/capitalism-after-the-crisis
2. http://volokh.com/archives/archive_2008_03_16-2008_03_22.shtml#1205819923
3. http://volokh.com/archives/archive_2009_05_24-2009_05_30.shtml#1243651525
4. http://volokh.com/archives/archive_2008_10_12-2008_10_18.shtml#1223872369
5. http://volokh.com/posts/1222192609.shtml
6. http://volokh.com/archives/archive_2008_09_21-2008_09_27.shtml#1222450700
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