Capitalism, Laws, and the Need for Trustworthy Institutions

Oxford Review of Economic Policy, Forthcoming

European Corporate Governance Institute - Law Working Paper No. 598/2021

19 Pages Posted: 19 Jul 2021 Last revised: 17 Aug 2021

See all articles by Anat R. Admati

Anat R. Admati

Stanford Graduate School of Business

Date Written: August 11, 2021

Abstract

This article responds to the question: "Capitalism: What has gone wrong, what needs to change and how to fix it" for a special volume on capitalism in Oxford Review of Economic Policy.

Debates on capitalism get muddled by blind spots about essential institutions, particularly effective governments and legal systems that enable corporations to exist in their current form and markets to succeed at scale. Across regimes, incentives to maximize profits and power play key roles in determining outcomes, and all institutions are vulnerable to distortions from imbalances in control, information, and expertise. The key problems with capitalism today boil down to failed governance and confusions that obscure the issues and prevent beneficial changes.

In recent decades, the forces of “free-market capitalism” have undermined and overwhelmed democratic institutions, leading to intertwined crises in both capitalism and democracy. Deception and the manipulation of beliefs often distort both markets and political systems. The financial system illustrates starkly how key institutions have failed society and how flawed narratives enable recklessness and bad rules to persist.

Fixing capitalism must start with seeing the challenges for what they are. The devil is then in the details of improving transparency, norms, rules, and civic engagement so as to prevent the abuse of power and to create more trustworthy and less corruptible versions of capitalism.

Keywords: Capitalism, Narratives, Corporations, Legal Systems, Political Economy, Deception

JEL Classification: A12, A20, B12, D72, D73, D86, F55, G28, G38, K11, K12, K22, K4, L21, M42, P16

Suggested Citation

Admati, Anat R., Capitalism, Laws, and the Need for Trustworthy Institutions (August 11, 2021). Oxford Review of Economic Policy, Forthcoming, European Corporate Governance Institute - Law Working Paper No. 598/2021, Available at SSRN: https://ssrn.com/abstract=3886969 or http://dx.doi.org/10.2139/ssrn.3886969

Anat R. Admati (Contact Author)

Stanford Graduate School of Business ( email )

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