Home of the free?

18:24, Feb 25 2013
Nevil Gibson reviews A Capitalism for the People, Anti-Fragile and Positive Linking.



Basic Books hardback $45

The theory and practice of capitalism have come under close scrutiny since the global financial crisis, particularly from those who have supported market economics against the socialist alternative.

This has certainly been the case in the US, where Wall St has been blamed for financial collapses, bank bailouts, a slow-growth economy, rising inequality and high unemployment.

Capitalism has endured and survived crises in the past and only a minority in America would countenance the view that it no longer provides the core of values associated with a free society.


But, under President Obama, the US is also becoming more of a welfare state along the European model and the advocates of ‘purer’ forms of capitalism are on the back foot.

Italian economist Luigi Zingales contrasts his admiration of the American system with the country he left 25 years ago. Italy was then, and still is, rife with corruption and cronyism, and reward is not matched by effort.

He found in American capitalism a system that “believed in the possibility and promise of economic freedom and open competition” and where hard work pays off.

But confidence in this has been shattered for many and Zingales believes this is because business itself has taken advantage of growing government involvement in the economy. “As business started to control more of the political agenda, popular support for the free market system began to decline,” he says, mainly because it is no longer delivering the prosperity of the past.

Instead of a ‘fair’ distribution of wealth this has evolved into a system in which the government is handing out taxpayers’ money to business through subsidies, while restricting competition and choice through greater regulation.

Ironically, he sees the pro-business community joining hands with its most fervent opponents in a “perverse union” that benefits both groups at the expense of the majority. To counter this, Zingales proposes a populist, pro-market agenda that calls for substantial changes in tax policy and government administration that introduces more competition and reduces market distortions.

Although written for American readers about American conditions, there is plenty here for New Zealanders to appreciate, given the extent of government failure in many areas — such as education — and others where the private sector could do more to improve conditions, such as healthcare.

The depth of the analysis also reveals the extent to which New Zealand is better placed than the US to achieve greater prosperity. The tax system here is fairer and simpler, though this can change; the lack of overt subsidies is also another benefit that makes our political system cleaner and less susceptible to the ‘pork barrel’.

What does need to change, however, is a mindset that sees free market capitalism as inherently unfair and immoral — two charges that Zingales is anxious to disprove by renewing its underlying moral foundations. 



Allen Lane trade paperback $37

Readers of The Black Swan will need no encouragement to tackle this bigger and more complex book that explores how to benefit from uncertainty through a quality defined as the opposite of fragility.

Like Zingales, Taleb is horrified by the lack of ethics in modern investment practice and quotes a story involving a former top Federal Reserve official approaching him at the Davos summit to buy into a scheme that legally rorts taxpayers. This was possible because regulations had become so complex that those with inside knowledge had an advantage that reversed their purpose. Taleb ranges across the spectrum of human learning to find examples of how setbacks, crises and black swan events can create greater resilience and knowledge about how to avoid future disaster. While the topics covered are probably more extensive than is practical for one book, the writing is heavily anecdotal and provocative. This makes it less daunting than it appears, even if nearly a fifth of a 500-page volume is devoted to appendices and references. 



Faber trade paperback $37

The global financial crisis also hovers over this work by the author of The Death of Economics, Butterfly Economics and Why Things Fail. These all attempted to debunk the mechanical approach of mainstream economics — that events could be controlled and predicted like a machine — in favour of explanations based on biology, psychology and anthropology. Now, Ormerod adds networking effects to push his concepts even further by describing how networks have created a crowd effect that challenges the rational choices of individuals. These can take a direction that can often be difficult to predict, as a stream of given examples attest. Strangely, Ormerod largely ignores social media networks such as Facebook and Twitter that have made his explanations more acceptable in the age of the internet. Instead, he looks back into history for examples of networking and how these can be used by decision-makers to make better policies. As usual, Ormerod is generous in his attributions and conclusions while realising that no one person has all the answers.