Academic

Legal Theory Bookworm

By Lawrence Solum

The Legal Theory Bookworm recommends The Crisis of Capitalist Democracy by Richard A. Posner. Here is a description:

Following up on his timely and well-received book, A Failure of Capitalism, Richard Posner steps back to take a longer view of the continuing crisis of democratic capitalism as the American and world economies crawl gradually back from the depths to which they had fallen in the autumn of 2008 and the winter of 2009.

By means of a lucid narrative of the crisis and a series of analytical chapters pinpointing critical issues of economic collapse and gradual recovery, Posner helps non-technical readers understand business-cycle and financial economics, and financial and governmental institutions, practices, and transactions, while maintaining a neutrality impossible for persons professionally committed to one theory or another. He calls for fresh thinking about the business cycle that would build on the original ideas of Keynes. Central to these ideas is that of uncertainty as opposed to risk. Risk can be quantified and measured. Uncertainty cannot, and in this lies the inherent instability of a capitalist economy.

As we emerge from the financial earthquake, a deficit aftershock rumbles. It is in reference to that potential aftershock, as well as to the government?s stumbling efforts at financial regulatory reform, that Posner raises the question of the adequacy of our democratic institutions to the economic challenges heightened by the greatest economic crisis since the Great Depression. The crisis and the government?s energetic response to it have enormously increased the national debt at the same time that structural defects in the American political system may make it impossible to pay down the debt by any means other than inflation or devaluation.

And from the reviews:

The prolific federal judge and University of Chicago economist argues that competitive forces inspire financiers to take irrational gambles--especially when they're betting other people's money. We cannot trust them to put the common good ahead of profits, says Posner. As a result, government must step in to limit the risks bankers take and, occasionally, repair the damage they inflict. Posner, who less than a year ago began his dissection of the crisis of 2008 with A Failure of Capitalism, has enormous credibility when he casts a skeptical eye on Wall Street. As an influential free-market thinker, he helped shape the antiregulatory ideology that inspired so much public policy since 1980...Posner offers solid suggestions for change. He echoes those, including former Fed Chairman Paul Volcker, who would reestablish the Glass-Steagall Act's separation of commercial banking from proprietary trading and other forms of high-risk finance. That would insulate the financing of small and midsized businesses from the gales of Wall Street. He also urges eliminating the semi-official status of the big three bond-rating agencies, paring back their conflicts of interest, and beefing up the beleaguered corps of civil servants who staff federal regulatory agencies. Good ideas, all. In his final pages, though, the author can't muster much confidence that America will overcome its splintered politics, the "quasi-bribery" of campaign money, or the bipartisan myth that we can thrive indefinitely on low taxes and profligate public spending. Posner may have shaken off old shibboleths--and hurray for that--but at present he sees no reason to expect that courage or fresh thinking will prevail.
--Paul Barrett (BusinessWeek )herent instability of a capitalist economy. 

Full post as published by Legal Theory Blog on June 12, 2010 (boomark / email).