Capitalism, Laws, and the Need for Trustworthy Institutions

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.