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Published: November 27, 2012
 / Winter 2012 / Issue 69


Best Business Books 2012: Capitalism

Of Markets and Morals

Luigi Zingales
A Capitalism for the People: Recapturing the Lost Genius of American Prosperity
(Basic Books, 2012)

Michael J. Sandel
What Money Can’t Buy: The Moral Limits of Markets
(Farrar, Straus and Giroux, 2012)

Jonathan Haidt
The Righteous Mind: Why Good People Are Divided by Politics and Religion
(Pantheon, 2012)

The 2008–09 financial meltdown, and the continuing failure of the global economy to fully recover from that blow, has prompted legions of economists and social scientists to author books with recommendations on how to resolve what is now widely referred to as the “crisis in capitalism.” Unfortunately, those experts disagree about what caused the crisis, how to remedy it, and what the underlying problem with the system may be (or if there even is one).

Arrayed right to left across the political spectrum, the lineup of such works this year begins at one extreme with Why Capitalism? (Oxford University Press, 2012), by Allan H. Meltzer, a professor of political economy at Carnegie Mellon University. In his book, Meltzer concludes that the financial crisis was caused by government actions and has been prolonged by critics of capitalism focused on “property confiscation and redistribution” in the name of “equity and fairness.” He astringently argues that these types of moral values and ethical principles have no part to play in economic systems that are, and must be, amoral and evaluated by one metric only: their ability to generate economic growth. Hence, his solution to capitalism’s current crisis is simple: We need totally unregulated markets.

At the other ideological extreme is Joseph E. Stiglitz’s The Price of Inequality: How Today’s Divided Society Endangers Our Future (W.W. Norton, 2012), in which the Nobel Prize–winning economist basically rebuts Meltzer’s familiar libertarian arguments with equally familiar egalitarian ones. Personally, I doubt readers will find much that is useful in either of those books — or in the dozen or so other recently published ones that, similarly, are ideologically bent. Certainly, readers will find nothing that wasn’t said, and said better, decades ago in Milton Friedman’s seminal Capitalism and Freedom (University of Chicago Press, 1962) on the right, and in Arthur Okun’s classic Equality and Efficiency: The Big Tradeoff (Brookings Institution, 1975) on the left. Now, those books are worth reading, and that’s why I am eschewing the extremes and recommending three new books that are a bit closer to the center of the spectrum.

Crony Capitalism

In A Capitalism for the People: Recapturing the Lost Genius of American Prosperity, Italian-born University of Chicago finance professor Luigi Zingales — who, significantly, is a libertarian disciple of Milton Friedman — argues that the current crisis of capitalism stems from an unholy alliance of Wall Street financiers and Washington politicos. He claims the effects of this “crony capitalism” amount to about the same thing as having the government own the means of production and commissars set the price of goods and services. Either way, democracy is compromised and the economy is made inefficient.

Zingales says that the two political parties are equal offenders in this unholy alliance, the poster children for which are former U.S. Treasury secretary and Citigroup executive Robert Rubin and former Goldman Sachs chief and Treasury secretary Hank Paulson. The author offers evidence that conflicts of interest are the water in which such crony capitalists swim. More insidious — because they are less visible — are the thousands of corporate lobbyists in a symbiotic relationship with D.C. officialdom, both on the Hill and in regulatory agencies. The sum of all this mutual back-scratching amounts to old-fashioned corruption, perhaps not to the degree found in Zingales’s native Italy, but tending in that direction.

Most pointedly, Zingales claims the financial crisis was, and is, the inevitable outcome of a system in which large, publicly traded corporations operate in highly concentrated markets and thus have so much economic clout that they compete with one another more for political favors, such as subsidies and regulatory exemptions, than for customers. Thanks to a facilitating government, Zingales argues, market competition exists among global corporations today mainly in theory, and he believes the public’s trust in this system is now at the breaking point.

But Zingales parts company with his fellow economists on the right by firmly grounding his arguments in the language of values and morality. (“Most economists recoil at the word ethics,” he reminds us.) He believes the United States can have both fairness and prosperity; moreover, he says we are unlikely to get the latter without the former. Indeed, he sees the failure to provide both fairness and prosperity as the fuel behind the Tea Party and Occupy movements: Ordinary people at both ends of the political spectrum are outraged by government bailouts of incompetent financiers and the fact that egregious rewards consistently go to corporate executives who are better at exporting jobs than goods. Zingales also concludes that the current concentration of wealth and political power in the U.S. undercuts the equality of opportunity necessary for an efficient and just meritocracy.

Clearly, such a critique is uncharted territory for a libertarian economist; Zingales’s argument that the U.S. needs policies that are “pro-market” as opposed to “pro-business” would not convince either Meltzer or Friedman. Yet his proposals come primarily out of the libertarian canon. To increase meritocracy, Zingales advocates vouchers for primary and secondary education. To reduce the economic power of giant corporations, he favors more antitrust activity, tighter limits on copyrights and patents, and greater use of class-action suits (all in place of government regulation). To decrease corporate clout in Washington, he would put a progressive tax on political contributions. Most intriguingly, he would attempt to bring greater transparency to the system by requiring greater access to corporate data because the public “shaming” of corporations and financial institutions is the most powerful, and underutilized, way to instill the market-based ethics needed to restore faith in competitive capitalism.

In sum, the first half of Zingales’s pro-market, anti-corporation book makes the case that the U.S. is going to hell in a handbasket politically and economically; unfortunately, the proposals he offers in the second half appear inadequate to the task of redemption. As in Dante’s Inferno, it seems we sinners may end up having to abandon all hope.

The Amoral Market

Zingales’s most controversial proposal — to replace the current method of financing higher education through debt (loans) with equity financing, in which investors would own a share of the college graduates’ later income — illustrates his basic belief that there are market solutions to almost every social problem. Michael J. Sandel, a Harvard professor of government, agrees that market solutions are usually more efficient, but says that they often carry a heavy ethical price tag. In What Money Can’t Buy: The Moral Limits of Markets, he takes direct aim at the most basic assumption of libertarian economists, namely, that unfettered markets lead to the optimal and virtuous (because everyone benefits) allocation of goods.

Sandel argues that we are living in an era of “market triumphalism” in which everything is for sale, including the right to immigrate, admission to elite universities, and life insurance policies that are taken out on unsuspecting old and dying people by strangers. He worries that if the likes of Meltzer and Zingales have their way, we will end up monetizing and commercializing every activity relating to our health, education, public safety, procreation, recreation, environmental protection, and all the other social goods that were once the domain of families, communities, churches, and civic organizations. “Putting a price on the good things in life can corrupt them,” he writes. He not only feels this trend leads to irresponsible risk taking, but claims it undermines individual ethics and erodes the Tocquevillian “community capital” needed to bind people together in democratic society.

Sandel’s special talent is the use of simple, workaday examples to explain complex philosophical issues and to illustrate the corrosive tendency of markets. For instance, he tells the story of a day-care center that faced the problem of parents showing up late to pick up their children, necessitating paying a teacher to stay late until all the kids were fetched. To solve the problem in an economizing way, the center decided to impose a fine for late pickups to “incentivize” tardy parents to show up on time. The result: Late pickups increased. In another example, lawyers in one community refused to reduce their fees by 30 percent when a social welfare agency asked them to do so for impoverished clients, but the same lawyers later agreed to represent those poor folks pro bono.

Sandel uses such examples to demonstrate the powerful role social norms play in a community, and how readily those are lost when money enters into the equation. No radical, he calls for neither economic equality nor the redistribution of wealth; instead, he argues that values such as striving for fairness and holding certain things “sacred” (for example, national parks, human life, and access to education) need to be shielded from the market. When everything is for sale, he says the effect is to segment society between those who can afford access to basic and common goods and those who can’t — as the once democratic experience of attending a ball game has been corrupted by the ability of the wealthy to segregate themselves into the gated communities called skyboxes. “What matters is that people of different backgrounds and social positions encounter one another,” he writes, “for this is how we learn to negotiate and abide our differences, and how we come to care for the common good.” In essence, he is arguing that most policy decisions have moral as well as economic dimensions; hence, a reductionist pure market orientation will “crowd out nonmarket norms worth caring about.”

Gut Feelings

In focusing on Zingales and Sandel, I have run the risk of implying that their books are representative of the numerous volumes published this year on the future of capitalism. In fact, there were no “typical” books on the subject. For example, Zingales’s and Sandel’s volumes are nothing at all like ethicist Rogene Buchholz’s Reforming Capitalism: The Scientific Worldview and Business (Routledge, 2012), a fine scholarly text that examines the role business education played in creating the system’s current crisis, nor do they have much in common with the passel of management-oriented volumes on such related topics as conscious capitalism, benefit corporations, social entrepreneurialism, social capitalism, and the like. And, as the reader may have noted, Zingales and Sandel actually seem to agree about a few things, which makes their books quite unlike the others by economists that found their way to my desk this year, books representing an unfathomably — and, I dare say, absurdly — divergent range of opinions. In all, 2012 was such a banner year for books about capitalism that many are deserving of serious review. Yet I doubt that reading more of them would help bewildered readers, like me, decide whose arguments are closest to being correct. So, how is one to know?

According to psychologist Jonathan Haidt’s The Righteous Mind: Why Good People Are Divided by Politics and Religion, most of us find the logic of the arguments presented by economists and other experts irrelevant to our own process of deciding which (or who) is right. He presents strong evidence that where we find ourselves on the ideological spectrum is based on our emotions, and not reason, and that our feelings are largely (but not exclusively) determined by our genetic makeup. In the words of librettist W.S. Gilbert, we are each born either a little liberal or a little conservative, and there is not much even a Nobel laureate can say to convince us we are wrong.

As Haidt explains, when we are faced with higher-level questions involving morals, values, and first principles, “intuitions come first, strategic reasoning second.” In other words, we immediately make up our minds about matters of right or wrong based on our gut feelings, and only later do we invent logical arguments to justify our positions (or to try to convince others).

Haidt demonstrates that “the mind is divided, like a rider [logic] on an elephant [intuition], and the rider’s job is to serve the elephant.” Moreover, he claims the elephant of emotions is “99 percent of the mental process,” and that’s why politicians who appeal to logic have so little success at changing the minds of the electorate. Indeed, Haidt doubts that more than a few people ever change their minds on the basis of logical reasoning about a moral or value-laden issue. Thus, because libertarians are hardwired to be “freedom loving,” liberals to be “caring,” and conservatives to value “loyalty, authority and sanctity,” how you and I respond to the arguments in the books reviewed above is preordained!

This conclusion is counter to everything we want to believe: We want to think of ourselves as rational beings. It is downright discouraging for those in the education industry whose entire endeavor is predicated on inculcating students with the skills of — and love of — reasoning. Yet Haidt cites study after study to support his skillfully crafted and engagingly written analysis and, in the end, I found it hard to deny the point he is making. I hate to admit it, but I can’t recall witnessing many people changing their minds on value-laden issues on the basis of logical reasoning. Nonetheless, I believe his analysis would have been more forceful had he drawn distinctions between what I believe are three separate levels of values: personal values, such as honesty, loyalty, and integrity; organizational values, such as service, quality, and innovation; and societal values, such as liberty, equality, and community. If, as I suspect, those are different orders of goods, isn’t there an analytical danger in treating them as fungible?

Indeed, because I so resisted Haidt’s unwelcome conclusions, I found myself arguing with him on every page. Doesn’t he draw too neat a distinction between liberals and conservatives? (Isn’t there a full ideological spectrum from left to right?) Doesn’t he come perilously close to advocating moral relativism? (Aren’t there some things, like racial and religious intolerance, that always are wrong?) But therein lies the book’s great strength: It engages, challenges, and ultimately informs the reader as the author effortlessly presents a concise overview of the most significant recent controversies concerning human nature.

I learned a lot reading this book. It helped me understand how I responded to the other books reviewed above and, thus, helped me appreciate why it is going to be so difficult to bridge the ideological divide in order to resolve the crisis of capitalism. That’s why I believe it is the best book of the year in this category. For my money, it is the best social science book since Philip Zimbardo’s The Lucifer Effect: Understanding How Good People Turn Evil (Random House, 2007). It is so good, in fact, that I am almost able to overlook the fact that Haidt’s method contradicts his own thesis: He successfully changed my mind based on his reasoning, and not on an appeal to my emotions! 

Author Profile:

  • James O’Toole is the Daniels Distinguished Professor of Business Ethics at the University of Denver’s Daniels College of Business and a contributing editor to strategy+business.
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