Saving Capitalism from the Capitalists by Raghuman Rajan and Luigi Zingales is one I didn't manage to read when it was first published in 2003. In a rather random way, I picked it up recently and found it interesting to read through the prism of the financial crash. For the book passionately advocates the importance of financial capitalism for economic development and widely shared prosperity. The main problem faced by poor people, it argues, is too little capitalism, not too much, and specifically too little access to finance.
Now of course, access to basic means of saving and transacting, not to mention the much-praised growth of the micro-credit industry, is very different from the baroque toxic instruments created on Wall Street and in the City. I'm certain that if this book had been written in 2008 rather than before 2003 its tone would have been very different – even though, as the title indicates, its authors were already alert to the dangers of all of finance being tainted by the excesses of the markets. They did have the warning of the 2001 tech crash fresh in their minds, not to mention LTCM and the Asian crisis. What's more Raghuram Rajan is famously one of the economists (and there are more of them than popularly believed) who warned in advance about the dangers of about the present crash.
Having said that, the book is still a useful reminder that finance is an essential tool for people who want to better their lot in life. This is especially true for those who are very poor indeed. A book I've raved about before, Portfolios of the Poor, spells out in great detail how poor people are hampered by not being able to save and spend money in safe and convenient ways. The success of MPesa, the mobile transactions scheme, in Kenya, and other mobile phone-based schemes, demonstrates the untapped demand (see this blog post by Tom Noyes, as well as our 2007 Vodafone report on m-transactions available from the Enlightenment Economics website). So does the growth of microcredit and online lending schemes such as Kiva.
This book's central argument is that it's a constant battle to make capitalism work for everyone because it is so often distorted by powerful interests to work for them – hence the need to save it from these 'capitalists'. Enforcing competition is a fundamentally important task, and one which often fails, especially in financial markets. But, as the authors acknowledge, it's difficult to sell the public interest argument for financial capitalism. A crisis causes public revulsion. And as they warn about the 1930s:
“The changed attitude to markets provided a convenient cover for the resurgence of private interests against markets and competition. While the proximate cause of the reversal might have been public disaffection with markets, the forms government intervention took and its duration are better explained by the machinations of the incumbents. It took over half a century to undo the constraints imposed on markets during those few years.”
Read now, the book is an argument for political support for markets against the power of vested interests. Is that what the outcome of the reaction to this crash will be? Or will powerful financial sector interests stack the operation of the markets in their own interests once again? Judging from how effectively they've got taxpayers to bail out their recent mistakes, I'm not optimistic about the prospects for a revival of effective competition in banking. We'll have to wait and see.
