Monday, September 17, 2012

A Capitalism for the People: Recapturing the Lost Genius of American Prosperity by Luigi Zingales

In the preface to A Capitalism for the People, Luigi Zingales recounts his departure from an Italian university for the wonderland of American academia. Here merit, neither contacts nor obsequious devotion to one's supervisor, is the key to success and Zingales' triumphs. He becomes an admired professor at the University of Chicago business school, a place he praises for its openness, its devotion to excellence and its rejection of status-based primacy (pity the poor dean, newly arrived from Stanford, who is devastated by the slashing comments of a junior colleague).

But the broader America he sees around him does not match -- in aim or reach -- what Zingales finds at Chicago. Zingales returns to the theme developed in his earlier writing: the United States is burdened with crony capitalism, the same social disease he sought to escape in emigrating from Italy. American business -- and American politics -- is dominated by corrupt elites who prefer protection and status quo to competition and innovation. Zingales introduces a neat distinction -- America remains pro-business, but it is no longer pro-market. And so Zingales seeks to reintroduce and reinvigorate competition in American economic and political life.

Zingales invites us to revive American populism -- and by this he intends the trust-busting populism of Theodore Roosevelt and not the proto-fascism of Huey Long nor the toxic nativism of the KKK. The focus is returning prosperity to the common American, and not further enriching Wall Street, Pharma, agriculture, government contractors, and the greater bulk of big business. Yet his populism is capitalist at heart. If the ties between government and business can be broken, new and vital businesses will thrive. Political life will improve as well, if the distortions and distractions introduced by lobbyists can be pruned back.

Zingales devotes considerable attention to the pernicious effects of lobbyists. He estimates the total spoils available from agricultural subsidies to be $11 billion. He then estimates payments to lobbyists and campaign contributions at $6 billion, and marvels that we do not experience even more K Street activity that we do. A public interest has little chance in such a climate. But enhanced regulation of influence peddling is no solution -- as the very prophylactic measures are themselves certain to be captured. Rather we need to cultivate stronger public morality -- what Zingales calls 'civic capital.' This may be deployed by virtuous lobbyists - or by emergent academic muckrakers.

Zingales clearly loves the academy -- but the American academy does not escape his critique. Here too he sees insidious signs of capture. Among the most compromised are his fellow economists, who are even more likely to pursue unrestrained self-interest. There exists of course easily identified opportunists, who provide congenial research results for their corporate masters. More insidious of course are the subtle and indirect influences exerted on less cynical, though more vulnerable academics. Academics are a large part of the problem -- but are also, for Zingales, a potential solution. A public-regarding academic (of the muckraking sort) could (perhaps) countervail the work of the lobbyists. And of course Zingales offers himself -- and this book -- as an example.

He examines the familiar terrain of the recent financial crisis -- and finds unrestrained 'crony finance' before, during and after. It was the Wall Street/Washington nexus that created the crisis -- through its aggressive embrace of risk, encouragement of irresponsible lending, and unbalanced housing policy. And it is the same nexus that designed the response: bailouts that left that structure intact.

In his quest for a new American populism, Zingales seeks to harness the anger underlying both the Occupy and Tea Party movements, yet better direct it toward meaningful reform. Zingales' stick is the possibility of shaming -- a technique that is occasionally successful in reeling in corporate excesses. His carrot is greater American prosperity -- which is certainly an attractive end to many, but by no means all. Zingales sees little advantage in the pursuit of redistribution. While he explores the new economy of superstars, he seems to accept winner-take-all as the natural order of things. In this, he is perhaps more Tea Party than Occupy, but that may be unfair. He is clearly more nuanced.

He has a host of policy fixes to sell: new models for corporate governance, a new Glass-Steagall for finance, tax reform. While he cloaks these proposals with the central arguments of the book, they seem little more than one policy-maker's clever reform ideas among many. His broader challenge -- to discover a viable roadmap to detach the American economy from rent seeking -- is less easily solved. More than the exuberant idealism of a Chicago professor will be needed.

A Capitalism for the People is longlisted for the 2012 Financial Times and Goldman Sachs Business Book of the Year Award.

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