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- Paul Constant is a writer at Civic Ventures, a cofounder of the Seattle Review of Books, and a frequent cohost of the Pitchfork Economics podcast with Nick Hanauer.
- In this episode of Pitchfork Economics, Nick Hanauer and David Goldstein sat down with Luigi Zingales, a professor of finance at the University of Chicago. Zingales said that the US used to have a “competitive ideological market,” and that he thinks it kept people more honest.
- Now, both parties see being pro-business as a good thing. “It’s very bad when, as policymakers, we confuse the interests of a businessman with the interest of the market itself, and the community at large,” Zingales said.
- For more on this topic, listen to the latest episode of Pitchfork Economics.
- Visit Business Insider’s homepage for more stories.
In the latest episode of the Pitchfork Economics podcast, we sought to explore the idea of how our national relationship with regulation has changed. At one point in American history, regulations were understood as a positive — a force for the public good. But over time, that idea lost ground, with both Democrats and Republicans embracing the concept of unfettering markets as the only economic good. Nick Hanauer and David Goldstein had a long conversation about the shifting relationship between economics, politics, and business with Luigi Zingales, an esteemed professor of finance at the University of Chicago in the Booth School of Business. Zingales, the author of “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity,” is also the director of the Stiegler Center, which studies how vested interests are subverting the competitive market economy. What follows is an edited and abridged version of the conversation; for the full discussion, please download and subscribe to Pitchfork Economics.
David Goldstein: So is it fair to describe you as an authentic Chicago School economist?
Luigi Zingales: No, because first of all I don’t know what the “Chicago School” is anymore. And then I was told that I cannot represent the Chicago School. So I think that I’m my own kind of economist.
Nick Hanauer: I love it. Good for you.
DG: That’s good, because we usually use that term as a pejorative. In your book “A Capitalism for the People,” you make this really important distinction between pro-market and pro-business. If you could just explain the difference as simply as you can, that would be great.
LZ: Sure. First of all, we hear these two terms [“market” and “business”] used interchangeably every day, especially in the political arena. And I think they are very different, because businessmen and businesswomen love competition and free markets when they want to enter a new line of business. But the moment they are in, they want to increase the barrier to entry in order to make more profits, and so all of a sudden their interest is to make markets less competitive, less functioning, to gain more profits.
This is not necessarily bad if it’s done at the individual level, as long as we think about maintaining the system’s competitiveness overall. It’s very bad when, as policymakers, we confuse the interests of a businessman with the interest of the market itself, and the community at large.
NH: I think this is a great point, and a distinction that is so important in understanding where policy went wrong. I’ve always phrased it slightly differently, as confusing the narrow interest of a few capitalists with the broad interests of capitalism. Those two things often have almost nothing to do with one another, and in fact are often at odds.
DG: And yet these terms have been used interchangeably when in fact there’s no profit to be made in a perfect market, is there?
LZ: Yeah. In a textbook definition of a perfectly competitive market, there are zero abnormal profits, which means zero profits above a proper return to capital.
DG: So let’s get to why this distinction is important and the role this confusion has had in leading us to the problems we have in American capitalism today. Where did this start and what has it wrought?
LZ: In my view, a deterioration took place with the demise of the Soviet Union and socialism. In the old days, there was a very strong juxtaposition between capitalists and socialists. The capitalists were forced to present a better picture, a better image, and to think more broadly about what is good for society in general and not just for a narrow set of businesspeople.
Once that pressure disappeared and it became cool not only on the right-hand side of the political spectrum, but also the left-hand side of the political spectrum to be businessmen and be entrepreneurial and make money, then these two distinctions [between business and markets] started to fade away. People started to use the two interchangeably. And policymakers both on the right and on the left took that being pro-business was a good thing. And I think that is true to this day.
DG: So we used to have a competitive ideological market, and now we don’t?
LZ: Yeah, absolutely. We used to have a very competitive ideological market, and I think the competition was keeping people more honest. In the 60s or 70s, for the Democratic Party to be seen as too cozy with business would be anathema. Even the Republicans were forced to keep some distance [from business]. And in the mid-80s, when [Bill] Clinton came around as a young leader in the party and then eventually won the election, [the parties] started to compete for who was more friendly to business, and that was a real race to the bottom.
NH: As a progressive capitalist, I’m a huge believer in markets and capitalism and I believe it’s the best social technology ever invented to create prosperity in human societies. But the flavor of capitalism that we accept is the question at hand. The neoliberal order that established the policies that we have today was conceived for good reason: The opposing ideology, which was communism and Stalinism, did some really horrible things, right? It was conceived for good reason.
DG: As a counter-narrative.
NH: I would submit to you that there were a bunch of ideas that came out of the economics profession, a lot of it from Chicago, that led people in both political parties to a policy framework that ended up concentrating wealth and making our markets effectively less competitive — this idea that the only purpose of the corporation is to enrich shareholders, and by so doing, we maximize benefits to everybody being the canonical example of that. Don’t you think that the economics profession has some responsibility here in both birthing and then propagating these ideas?
LZ: Certainly some of the ideas generated in the economic profession had an impact, and some of that may have had a negative impact. But I think that what was remarkable was how these ideas were accepted — not only on the right-hand side of the political spectrum, but also on the left-hand side.
Everybody talks about the Chicago School of Antitrust, which is of course important and influential. But the irony is that one of the key exponents of the school was Robert Bork. And while he was trained in Chicago, he was a Yale professor and exercised more influence at Yale than Chicago. But more importantly, there were people like [Phillip] Areeda and [Donald F.] Turner, who were at Harvard, and they had a very similar approach that made this mainstream. Bork for many years was a pariah in the profession — remember, he did not make it to the Supreme Court, so it’s hard to say that he was a mainstream guy.
The mainstream guys were Turner and Areeda, who by the way were consulting at the time for IBM. They were pushing the point that there is no monopoly, and even if [monopolies] exist they’re good for everybody. So I think that the real turning point is not that there were some conservatives who were pushing this line. The point is there was nobody opposing it. It became completely dominant.
This is an opinion column. The thoughts expressed are those of the author(s).