Giving capitalism its groove back

The US economy has for years been held up as the ideal of a well-functioning, meritocratic capitalist system. But, says Professor Luigi Zingales, this “lighthouse” of free-market ideals and open competition is teetering on the brink of succumbing to the same kind of crony-capitalism that pushed him to quit his native Italy.

“If you care about freedom you should be equally concerned about excessive government and the excessive power of corporate business,” Zingales, professor of Entrepreneurship and Finance at Chicago Booth, told NUS Business School in a recent interview.

He points to the emergence of the Tea Party and Occupy Wall Street movements as “natural consequences” of the changing landscape. What he says is commonly overlooked is that paradoxically – while these two movements take starkly different stands – there is a common thread between them.

“The Tea Party movement is fighting big government and Occupy Wall Street is fighting big business, and what they don’t realise is that they are fighting two faces of the same Leviathan – which is the intermingling of big business with government.”

Zingales says he wants to “change the conversation” – a change he spells out in his recently published book A Capitalism for the People: Recapturing the Lost Genius of American Prosperity.

What’s needed, he says, is a rebalancing of the system, shifting the pendulum back from a state that has become unduly pro-business to one that is pro-market.

“Business has become too politically influential. For a system to be well balanced you must have a good democratic balance to the power of business and that paradoxically is true for business itself.”

Zingales sees the Tea Party and Occupy movements as warnings that, without urgent change, there is the danger of a damaging backlash.

He says business and politics are too closely linked, creating a monster that threatens continued prosperity in the world’s biggest economy.

It was that growing monster that prompted him to write his book.

“I started to realise that the United States is beginning to resemble Italy – not for the good food and wine, but for the importance of connections and the influence of business on political decisions,” he says.

Lobby power

Zingales points to one factor in particular that has changed the dynamic – the huge power of lobbyists.

protest280“Lobbying has changed from a defensive activity to an offensive activity” he says. Rather than simply a means of defending business from the interference of government, lobbyists have become “too good” at their job, shaping policy to the advantage of business.

“There is a very important distinction between what it means to be pro-market and pro-business,” Zingales says.

“Business men and women like free markets when they want to enter an industry, but the moment they are in, they want to put up barriers to entry to make more profits.”

At the same time, with politicians increasingly dependent on big business for campaign finance funds, regulators have become beholden to those they regulate.

And this relationship has served to undermine what he sees at its most basic “the genius of American capitalism”: competition.

“Competition is what makes capitalism work,” he says, delivering efficiency, choice, reducing inequality and free of political interference.

Not working

TA6 no borderWith business and politics so intertwined negative consequences are inevitable, Zingales says. Not least the rising sentiment that there are no longer opportunities, that the system isn’t fair, and that fundamentally capitalism isn’t working.

He points to Greece as a prime example, but he also sees serious problems in the years ahead for the US.

Left unchecked, he says, the system as it stands offers temptations “to rig the game rather than improve the game – and that’s why I’m so worried about the United States.”

Zingales’ prescription involves four steps, starting with simple, clear laws and regulations.

Many important legislative initiatives are so long and complex that even those who support any given bill may not know the impact.

“I want laws and rules to be so simple that even Congressmen can understand them,” Zingales says. Simplicity is important because it keeps politicians and regulators accountable.

Second, he says, the political process has to be accountable and free of bias. Third, government and business should support more, not less, competition.

And, finally, “The biggest difference is in rethinking the soul of doing business.” This, he says, is where educators – business schools in particular – come in.

Soul searching

With so few academics and economists having predicted the 2008 financial crisis, Zingales says a period of soul searching is needed “to analyse what went wrong in our profession”.

Academics tend to be insulated from outside pressure, but in spite of that he sees that many have lost their aggressiveness, inquisitiveness and become unwilling to criticise.

He feels that business schools in particular could have done more to expose and criticise dubious business practices and should do more to emphasise – or as he puts it to “rediscover” – the importance of social norms.

“We business schools have been extremely reluctant – to the point of being reticent – in pointing out some social norms that are important for the functioning of markets,” he says.

Zingales is skeptical of what he calls the “mouthwash” of offering ethics classes separate from the rest of the business school curriculum. Segregating ethics from the broader business context is not the solution.

He is critical in particular of the tendency among academics to take an ascetic approach in the teaching of economics and business.

He gives the example of teaching the economics of crime, where the benefits and costs of committing a crime are weighed versus the expected costs.

That’s great educational economics, he says, but by not qualifying that this is a positive rather than normative analysis, teachers induce in their students the perception that it is rational to commit a crime if the expected benefits are greater than the expected costs, and therefore irrational not to commit a crime.

The logical progression of that, he says, “is that if you don’t do it, you’re almost stupid! That’s not what we want to teach our business men and business women.”

Business schools, Zingales says, have a vested interest in the survival of capitalism and in particular of competitive, meritocratic capitalism and should work to preserve the social norms that keep the market place a level playing field.

“I think we should take a position on what is right and what is wrong and what constitutes good business practices and bad business practices.”

Not choosing or not taking a position, he says, is actually effectively “taking a subtle position that is even more dangerous.”

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