Capitalism After the Crisis

From Luigi Zingales writing for National Affairs.

The economic crisis of the past year, centered as it has been in the financial sector that lies at the heart of American capitalism, is bound to leave some lasting marks. Financial regulation, the role of large banks, and the relationships between the government and key players in the market will never be the same

Mr. Zingales goes on to discuss the difference between a pro-business and a pro-market approach to capitalism. America, for the most part, has favored pro-market capitalism vice pro-business capitalism despite lobbiest being pro-business. It is an important distinction as pro-business lobbiest tend to lobby for established businesses whereas pro-market forces tend to favor newly established businesses' ability to compete equally with established businesses.

Capitalism has long enjoyed exceptionally strong public support in the United States because America's form of capitalism has long been distinct from those found elsewhere in the world — particularly because of its uniquely open and free market system. Capitalism calls not only for freedom of enterprise, but for rules and policies that allow for freedom of entry, that facilitate access to financial resources for newcomers, and that maintain a level playing field among competitors. The United States has generally come closest to this ideal combination — which is no small feat, since economic pressures and incentives do not naturally point to such a balance of policies. 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.

Needless to say for somebody attempting to understand the current financial issues and what can and should be done about them, Mr. Zingales' article functions as an exceptional primer to understand the American form vice the European form of capitalism.

To read the complete article, click here.