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Capitalism, Laws, and the Need for Trustworthy Institutions

Anat R. Admati
Oxford Review of Economic Policy
July, 2021

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.