Making Capitalism Work for Everyone |
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| Authors: | Raghuram G Rajan Luigi Zingales |
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| Institution: | raghuram rajan;is the Economic Counselor and Director of Research at the International Monetary Fund. He is on leave from the University of Chicago where he is the Joseph Gidwitz Professor of Finance at the Graduate School of Business. luigi zingales;is the Robert C. McCormack Professor of Entrepreneurship and Finance at the University of Chicago's Graduate School of Business. He is also an inaugural fellow of the recently instituted European Corporate Governance Panel, a faculty research associate at the National Bureau of Economic Research, and a research fellow at the Center for Economic Policy Research. |
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| Abstract: | Capitalism–or, more precisely, the free enterprise system–is the most effective system for allocating resources and rewards. For this reason, most economists tend to believe that capitalism is bound to spread from the U.S. to all parts of the world. But the authors argue that the triumph of capitalism is far from certain. Part of the problem is that the forms of capitalism that are experienced in most countries are very far from the ideal. They are a corrupt version in which vested interests prevent competition from playing its socially bene. cial role. What's more, as many economists fail to recognize, and as has become clear from the experience of many countries in recent years, a market system cannot. ourish without the very visible hand of the government, which is needed to set up and maintain the infrastructure that enables participants to trade freely and with con. dence. But this in turn gives rise to a political, or collective action, problem: Even though we all bene. t from the better goods and services and the equality of access that competitive markets make possible, no one in particular makes huge pro. ts from keeping the system competitive and the playing. eld level; everyone has an incentive to take a free ride and let someone else defend the system. In this sense, a competitive market is a form of public good, one in need of collective action to maintain it. In all nations, the main political threat to free markets comes from two very different groups: (1) “incumbents,” who want to retain their positions and thus have a strong incentive to suppress any potential source of competition; and (2) those who have lost out and would be happy if the rules of the game that caused their troubles were changed. The longterm feasibility of free markets depends on reducing the incentives and limiting the ability of both of these groups to work against the market. This can be accomplished not by expanding the power of the state, but through policies –including a strengthening of the “safety net” as well as removal of barriers to the. ow of trade and capital–that end up limiting the state's ability to take inef. cient economic actions that favor the few at the expense of the majority. |
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