Wednesday, September 9, 2009

American Capitalism and the Corporatist Trap

At last a serious analysis of the current crisis and its origin in the development of the corporatist, crony capitalism. Luigi Zingales, Professor of Entrepreneurship and Finance at the University of Chicago, and co-author with Raghuram Rajan of Saving Capitalism from the Capitalists (a great book by the way) urges the government to support genuine pro-market reforms by appealing to the best of the populist tradition, and to limit the banks' and large firms' political connections that undermine the traditional American understanding of the difference between free markets and big business.

“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 the limits on the 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: 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.”

Bravo. Unfortunately, the European governments have precisely chosen this "alternative path" and it is no happenstance. Readers of this blog will make the parallel with my denunciation of “patronalisme” (systematic pro-business and anti-growth policies) which, I claim, explain in large part the dismal performance of the corporatist European economies (September 8, 2008, “L’erreur historique de Jean Peyrelevade”, also published in Commentaire, n° 124, Hiver 2008-2009, and see also my "La crise des capitalismes hiérarchiques" in Commentaire, also downloadable on my website).

For a first step in the direction of a return to a competitive (and ethical) capitalism, it is essential to make completely clear that a pro-market (or competition-enhancing) policy is quite a different thing from a pro-business one. A distinction that Europeans, raised in and accustomed to heavily corporatist and collusive economies, fail to understand. As a consequence they dub their collusive systems of big state and big business “ultra-libéralisme”, a characterization that is the exact opposite of the truth.

The Zingales paper is thus a must read here.

And I can only warn my American friends: do not follow the European way.

(Hat tip to Greg Mankiw for signaling the paper).

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