Expert Zone

Straight from the Specialists

Is finance too competitive?

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The opinions expressed are his own

Many economists are advocating for regulation that would make banking “boring” and uncompetitive once again. After a crisis, it is not uncommon to hear calls to limit competition. During the Great Depression, the head of the United States National Recovery Administration argued that employers were being forced to lay off workers as a result of “the murderous doctrine of savage and wolfish competition, [of] dog-eat-dog and devil take the hindmost.” He appealed for a more collusive business environment, with the profits made from consumers to be shared between employers and workers.

Concerns about the deleterious effects of competition have always existed, even among those who are not persuaded that government diktat can replace markets, or that intrinsic human goodness is a more powerful motivator than monetary reward and punishment. Where the debate has been most heated, however, concerns the effects of competition on incentives to innovate.

The great Austrian economist Joseph Schumpeter believed that innovation was a much more powerful force for human betterment than was ordinary price competition between firms. As a young man, Schumpeter seemed to believe that monopolies deaden the incentive to innovate — especially to innovate radically. Simply put, a monopolist does not like to lose his existing monopoly profits by undertaking innovation that would cannibalize his existing business.

By contrast, if the industry were open to new players, potential entrants, with everything to gain and little to lose, would have a strong incentive to unleash the waves of “creative destruction” that Schumpeter thought so essential to human progress. In a competitive industry, only paranoid incumbents – those constantly striving for betterment – have any hope of surviving.

What money can buy

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By Raghuram Rajan
The opinions expressed are his own

In an interesting recent book, What Money Can’t Buy: The Moral Limits of the Market, the Harvard philosopher Michael Sandel points to the range of things that money can buy in modern societies and gently tries to stoke our outrage at the market’s growing dominance. Is he right that we should be alarmed?

While Sandel worries about the corrupting nature of some monetized transactions (do kids really develop a love of reading if they are bribed to read books?), he is also concerned about unequal access to money, which makes trades using money inherently unequal. More generally, he fears that the expansion of anonymous monetary exchange erodes social cohesion, and argues for reducing money’s role in society.

Is inequality inhibiting growth?

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By Raghuram Rajan
The opinions expressed are his own

To understand how to achieve a sustained recovery from the Great Recession, we need to understand its causes. And identifying causes means starting with the evidence.

Two facts stand out. First, overall demand for goods and services is much weaker, both in Europe and the United States, than it was in the go-go years before the recession. Second, most of the economic gains in the U.S. in recent years have gone to the rich, while the middle class has fallen behind in relative terms.

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