A Capitalism for the People?

Recapturing the Lost Genius of American Prosperity
By Luigi Zingales
(Basic Books 2012)

In contemporary American political economy, we have two boxes: laissez-faire conservatism and liberal Keynesianism. This book thinks outside both boxes. That is its merit. Its weakness is that it falls between them.

Luigi Zingales is an Italian by birth who came to the United States to study economics and now is the Robert McCormack Professor of Entrepreneurship and Finance at the University of Chicago. His Italian roots are central to his argument: he holds that while Italy is dominated by crony capitalism, the United States has historically been more open to enterprise. However, the U.S. has moved in recent decades increasingly in the direction of crony capitalism. This book is his attempt to show the way back.

Logically, the book has two parts: One, The Problem; and Two, Solutions. Zingales is excellent in his exposition of the problem. We have increasingly in this country an economy dominated by huge corporations that use their muscle not only to control the marketplace, but also to capture the government so as to shape laws and regulations to serve their interests. This is manifest in the “too big to fail” phenomenon that led to massive bailouts of major financial corporations such as AIG, and manufacturers such as GM.

Another sign of our plight is the paradox of regulation. Legislators and regulators require information, which they get from the industries they propose to regulate. The inevitable result, in his view, is capture: lawmakers and rule-makers end up in bed with those they regulate. Add to that the well-known phenomenon of the revolving door, whereby people are constantly moving between government and private corporations, and the futility of regulation becomes clear.

In short, Zingales makes a strong case that in our capitalist economy, as corporations have gotten bigger, far from escaping regulation, they have assiduously lobbied to shape regulation to serve their interests. And the people in the legislative and executive branches that are responsible for regulating them, are in fact their cronies. Our economy is effectively “pro-business,” (his term) or more properly put, “pro-big business.”

What we need, he argues, is a “pro-market” economy. The second part of the book is about how to achieve that. Here is where he falls between boxes. He looks back approvingly at the Populist era, more than a century ago, and especially at muckraking journalism that did so much to expose “malefactors of great wealth” in Teddy Roosevelt’s memorable phrase. But what he really has in mind is not the mass movement of the rural poor that drove Populism, but the more middle class reformism of the Progressive era.

However, the Progressive movement led to most of the regulatory structure that he condemns as ineffective and subject to capture. Having established how ineffective regulation is in controlling predatory capitalism, he proposes—new regulations! He wants regulations to be fewer and more directed to solving the problems. But he has just shown us how the big corporations are able to control, subvert, and capture every attempt to regulate them.

Having established that the big corporations proceed without regard for the public interest, he argues that business schools need to do a better job of teaching ethics, as if that could counter the expectation that firms serve only their shareholders, and that somehow if every company does that, the public interest will be served.

This book’s major merit is that it exposes both the hypocrisy of the contemporary conservative call for less regulation and a “free market,” and the futility of the liberal panacea of regulation. But having exited both boxes, Zingales finds himself with no place to stand.

We know where tax cuts and deregulation lead under crony capitalism: we are now mired in the consequences. We have tried regulating crony capitalism, and it doesn’t work. We are not going to get rid of capitalism because there is no successful alternative. We need a capitalism in which no firm is too big to fail, in which corporations serve the public interest (for which they were chartered), and in which every person has a solid foundation for living a productive life. The only way we will achieve that kind of capitalism is under the leadership of a state more democratic than what we have.


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