Skip to main content Skip to secondary navigation
Main content start

Faculty Talk: How “Free-Market Capitalism” is Overwhelming Democratic Institutions

CASI faculty co-director Anat Admati speaks at the Stanford GSB Alumni Women’s Leadership Conference.

Watch this event:


CASI faculty co-director Anat Admati brought her unique perspective on capitalism and democracy to an all-female audience attending the March 4 Women’s Leadership Conference held in the CEMEX auditorium at the Stanford Graduate School of Business (GSB). The day-long conference was hosted by the Stanford GSB Alumni Association.

Admati, who is the George G.C. Parker Professor of Economics and Finance at the GSB, began her slide presentation with a simple, probing question.

“Why is a finance and economics professor talking about democracy?”

Her interest, she explained, arose from an in-depth examination of the 2008 financial crisis with a focus on the power dynamics that led to it. “It’s not a word we typically use in a finance course,” she said, “but power matters.”

Power dynamics shape the financial system and determine economic and political outcomes, Admati explained. Effective governance opposes corruption in all its forms and is essential to a thriving democratic society.

She spoke about a recent course she co-taught with Dr. Heiner Shulz at the GSB. Their Power in Finance class explored the complex interactions among individuals, corporations and governments, and covered topics from regulating financial markets to whistleblowers and justice. The course featured several guests who came to class to speak about power dynamics, including former SEC Commissioner Allison Herren Lee, Founder and CIO of Safkhet Capital Management Fahmi Quadir and Tariq Fancy, the former Chief Investment Officer (CIO) for Sustainable Investing at BlackRock.

Admati emphasized that a major takeaway from the class was that the profoundly damaging distortions we have in the financial system are created and maintained by “enablers.” Included in her long list of enablers are banker managers, institutional investors, executives and boards of financial firms, auditors and ratings agencies. 

The people who work in the industry have no incentives to disrupt the system,” she said, “but there are people who are supposed to help society, and they, too, enable.” In this category, Admati included central bankers, politicians, the media and many academics.

She then offered a governance framework for the audience to think about when faced with power imbalances.

“Who has power? What information do they have?  What constraints do they face? And, what about their incentives?”

Admati shared a quote from American Economist Milton Friedman in his famous 1970 New York Times essay.

“The social responsibility of managers is to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

“So, basically, just play by the rules and make as much money as possible. That’s what we teach. We operationalize that through finance courses, and that’s what I did for 25 years in a little bubble, teaching and writing papers. Everything seemed fine in that bubble, but then the 2008 financial crisis hit and the Great Recession, and I decided to unpack what he (Friedman) was saying.”

 Admati explained that Friedman’s claim would be valid if:

  • Shareholders agree that managers should focus on “making as much money as possible” for them.
  • Markets are “free and competitive”.
  • Managers don’t engage in deception and fraud.
  • The “rules of society” (contracts, laws) protect everyone impacted by managerial decisions.

This protection extends to shareholders, employees, customers, creditors, and the public.  “But what if these assumptions are wrong?”  Admati asked.

“What if, instead, shareholders have other preferences and, or have limited impact on managerial decisions? What if governments fail to write and enforce proper rules to ensure competition and protect all stakeholders?”

“What if corporations actually help write those rules? What if they cause harm and nothing happens, and they get away with it? What then?”

Admati told the audience that this led her to write an essay in the October 2021 Oxford Review, titled: “Capitalism, Laws, and the Need for Trustworthy Institutions.”

“My conclusion was that in markets and in politics, deception is a tool, and if you can confuse people about what is actually going on, that is a way to make money.”

“This idea that markets are great, and governments are evil, that you have to choose between the two, is wrong,” she stated. “You can’t have corporations, let alone any market, without functioning legal systems and government.”

As with everything else we have in our lives, the markets really depend on having competent and effective government, she said.

Admati then flashed a quote on screen from Senate Mitch McConnell, who warned corporate America during an April 2021 debate on voting laws in Georgia and elsewhere, to “stay out of politics. It’s not what you are designed for … “

His quote included one clarification, “I am not talking about political contributions,” which prompted a ripple of laughter from the auditorium.

Admati pressed her case.  “Just stay quiet about these political debates, you’re just a corporation, make money, that’s it, ok? So, you see the ridiculousness of it.”

At this point, Admati turned to the notion of democracy. “Do we love democracy? Do we care about democracy?”

A healthy democracy, she said, requires committed citizens who support distributed power, informed debate, and compromise. A set of rules is also essential, ones that are enforced across interlocking institutions, including media, legislatures, and courts. This is the best way to guard against accumulation of power in the hands of a few.

“A lot of democracies are in crisis right now,” she said. “We have this dual crisis, but my thesis is that they are related. Part of what’s ailing democracy is the overwhelming forces of capitalism, that you can make as much money as possible by taking over democracy.”

Admati argued that effective rules can help build trust.

“We accept that we need rules. Rules are useless without enforcement. But there’s also the question of who writes the rules.”

She shared an image taken during a Golden State Warriors basketball game that showed the players arguing over a referee’s clearly unpopular call.

“There’s a game and the game has rules. There’s a market that has rules. No rules, no game. No rules, no markets.”

Admati offered as another example our use  of speed limits and the rules against driving under the influence. “We accept that if we disobey the rules, the police will stop us because we want other people to be stopped if they drive recklessly in the street. And that’s how we can function in a society. “ 

She claimed that another important guardrail is robust, truthful journalism. Journalism in the public interest is essential for transparency and accountability. Recognizing the power of corporate influence in politics and its potential to corrupt must be addressed to instill greater trust in institutions.

As Admati advanced her slide presentation, the question that began her talk appeared again:

Admati explained to the women in the audience that when the events of 2008 unfolded, she started to question how the global system could implode and why bailouts were needed.

“I actually started looking at banking and it was only then that I realized it’s a crazy world.”

Her book, “The Bankers New Clothes” was written a decade ago with co-author Martin Hellwig as a way to tutor journalists and the public about the complexities of the banking industry.  The book is currently being updated with new chapters and will be published next year.

“In 2013, we were just going to explain the basic stuff, the issues around risk in the global banking system and outline specific beneficial reforms. Now, we’re trying to say what happened during the last decade as vested interests, flawed claims, and capture prevail. And, we’ll add more context on the governance issues and challenges that go beyond banking.”

Admati stressed that we live in a post-truth world where we must be honest about facts. She said we can’t have hope otherwise. Admati encouraged the audience not to get discouraged, but rather to recognize “you actually do have power” and to asked themselves, “What would you change? What can you do? How can we (as women leaders) give power to truth?”

She turned to a quote from Arjay Miller, who served as Dean of Stanford Graduate School of Business from 1969 to 1979.

“Making money is the easy part – making the world a better place is the hard part.”

Admati concluded her lecture by showcasing the Corporations and Society Initiative (CASI), launched five years ago at Stanford GSB. Admati explained that she originally wanted to engage faculty on the issues with guest speakers and special events, but the students showed an even greater interest.

“The students are hungry, but the GSB is hard to change. Some of what we’ve taught students, without even realizing it, some of it may be causing harm.”

More News Topics