Capitalism: Success, Crisis and Reform - Audio Douglas W. Rae

In this final lecture of the semester, Professor Rae gives a summary of major themes, thinkers, and cases covered in the course. He begins by reviewing some foundational ideas, including Adam Smith's invisible hand, Marxist historicism, Malthusian economics, and Schumpeter's notion of creative destruction. Professor Rae also reviews the importance to capitalism of the modern nation state, which guarantees property rights and contracts, and recalls Hernando de Soto's theories about the importance of formal property rights for developing countries. Various forms of corporate structure and ownership are discussed. Professor Rae concludes by introducing a case about water privatization in Bolivia.

Professor Rae discusses the case TXU v. EDF, about an electric company private equity deal that involves environmental interest groups. Professor Rae structures the discussion by contrasting the deal as viewed from the perspective of Austin, TX and Washington DC. Actors in both locations prioritize different aspects of the deal differently. The case highlights the importance of the "customer voter base," and the role of public opinion toward both companies and their associated politicians. Professor Rae highlights how private companies can ally themselves with environmental groups to achieve mutually beneficial goals.

Guest speaker Paolo Zanonni, partner at Goldman Sachs, explains a major deal in the European utilities market. Enel, a major European utility, attempted to totally transform its position by expanding into the Spanish market and acquiring the Spanish utility Endesa. The deal was exceedingly complex, and involved multiple European governments, intense regional politics, and a handful of enormous utility companies. The transaction shows the important links between politics and free-market operations.

Guest speaker Paolo Zanonni, partner at Goldman Sachs, discusses the firm's transition from a straight partnership to a hybrid partnership / joint stock corporation. The impetus for the transition was obtain the advantages of the joint stock corporation, especially in raising permanent capital, while maintaining the beneficial incentive structure of a partnership. The partnership selection process, which fosters leadership, entrepreneurialism, and conformity to the firm's corporate culture, has remained virtually unchanged since Goldman's IPO. Mr. Zanonni describes the corporate culture and values of the firm as seen from the inside.

Professor Rae begins by briefly discussing his recent trip to Washington, where he became more closely acquainted with the health care reform bill. Professor Rae uses this example to highlight the intimate connections between capitalist market systems and the government. Then, with the help of two guest speakers, Professor Rae discusses the dramatic downfall and planned revival of one of Yale's most iconic institutions: Mory's club. Various methods for increasing the club's relevance to the contemporary Yale community are discussed, including reforming membership rules.

In a videotaped lecture, Professor Rae discusses problems with using gross domestic product (GDP) as a measure for societal wellbeing. For example, GDP fails to capture wealth inequality and socially undesirable conditions that can increase GDP. He then touches on some of the "traps" presented in Paul Collier's book, The Bottom Billion, that are keeping the poorest of the developing countries mired in poverty. In the second half of lecture, a video of Paul Collier is shown in which the author urges the developed world to take as a model America's reconstruction package to post-WWII Europe. According to Collier, the developed world must rethink its aid and trade policies toward the developing world. Collier also discusses the relationship between democracy and the so-called "resource curse," and how the rich world can create institutions to support reformers in the poorest countries.