Saturday, September 12, 2015

NEW LAW REVIEW ARTICLE: Capitalism, Inequality, and Reform

Richard Delgado is one of the nation's foremost legal scholars. So, it is with great hesitation that I disagree with him. Nevertheless in the course of debating my book, Lawless Capitalism, we reached a fundamental impasse regarding the nature of capitalism and its adaptability to egalitarian reform under law.

I argue that because of its fundamental values of meritocratic competition, broad-based economic opportunity, and economic growth, capitalism can achieve durable egalitarian reforms under conditions of low economic inequality. On the other hand, high economic inequality means that powerful elites control sufficient resources to subvert law and regulation in their favor while short-circuiting any semblance of meritocracy and real economic opportunity for the mass of fellow citizens. Naturally, such behavior leads to retarded economic growth. Of equal importance, I argue that high inequality corrodes the rule of law, as economic elites wield more resources to free themselves from the constraints of law and regulation in ways that others cannot. With very high inequality the rule of law ceases to exist and instead elites use law as an instrument of oppression. Rule by law displaces the rule of law.

Professor Delgado is skeptical that capitalism can ever achieve durable reform under law. His disagreement is stated far better than I could summarize, here and here.

Lawless Capitalism constitutes a legal and regulatory case-study in how financial elites subverted law and regulation before and during the Great Financial Crisis of 2008. As such, it builds upon the work of Mancur Olson and the work of other high-profile economists that shows how high inequality subverts the rule of law. Essentially, elites gain control of the law rather than operating under the rule of law. Nowhere is this dynamic more evident that with respect to Wall Street megabanks today, as this blog has chronicled, here and here. Indeed, it is fair to say that this blog leads the world in cataloguing the abuse of the rule of law by those holding concentrated economic resources.

American capitalism can rightly be criticized for failing to reform itself in any meaningful way following the Great Financial Crisis of 2008. Yet, this is not an inherent flaw of capitalism as some, such as Richard Delgado, suggest. Historically, such as during the Great Depression, American capitalism did achieve egalitarian reforms. In other nations, such as Denmark and Japan, more egalitarian forms of capitalism have taken root. These more egalitarian forms of capitalism occurred within systems featuring much lower economic inequality than that which prevails in the US in recent years. This suggests that capitalism can devolve into lawless capitalism under conditions of high economic inequality, whereby economic elites can dominate law and regulation to entrench themselves in ways that retard general macroeconomic growth. This is consistent with theoretical and empirical work from economics. The article concludes that high economic inequality (not capitalism per se) presents a unique danger to core values of capitalism, such as meritocratic competition, sustainable economic growth, and a broad distribution of economic opportunity. This is all consistent with the thesis of Lawless Capitalism which posits that high economic inequality led to legal and regulatory subversion for great profit for small bands of financial elites and great cost to the entire global economy during the Great Financial Crisis of 2008. Further, the US now faces the prospect of an entrenched elite with massive economic power and the incentive to sabotage economic growth for profit.
The full article just came out in the Wake Forest Law Review and is available on SSRN for free download, here.

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