readings

Restoring an Economy for All

A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (Basic Books, 2012) by Luigi Zingales

By J. Duncan Moore Jr.
Published: Fall 2012

Zingales

The middle class is shrinking, all the wealth seems to go to the top few, and a kind of economic sclerosis has gripped the United States.

You can't solve these problems just by stimulating demand or unleashing the fetters on the free market, argues Luigi Zingales in his new book, A Capitalism for the People: Recapturing the Lost Genius of American Prosperity. Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance and David G. Booth Faculty Fellow.

Zingales contends that meritocratic capitalism itself, which he understands as a unique and particular outgrowth of the American social contract, is in peril. Only changes in the structure and rule-making machinery of the US economy will save us from sliding toward Italy.

Zingales' native country is the recurring dystopian alternative in his analysis of where the United States has gone off track. After earning a PhD at the Massachusetts Institute of Technology, he tried to apply for a starting academic position back home, but was shuffled aside because he lacked the support of persons of influence. The system was fundamentally unfair, he observed. "Italy invented the term nepotism and perfected the concept of cronyism. You are promoted based on whom you know, not what you know."

In this book, his second, Zingales' thesis is that the vaunted American free enterprise system is in danger of degenerating into crony capitalism not unlike that of Silvio Berlusconi's Italy. The "greed is good" ethos, he says, damages the social norms that must undergird a well-functioning capitalist economy. It leads to a breakdown in public support for free enterprise and competition, and arouses calls for more unproductive state intervention to right the perceived wrongs of an unjust economic order.

Incentives to cater to the goals of business or specific industries, at the expense of generalized economic efficiency, loom from every corner. Congressmen can be bought. So can economists, it turns out.

Entire industries, such as financial services, can grow so mighty and inbred that they are able to translate their marketplace advantages into political power, allowing them to extract more concessions from government.

The ultimate concession is the financial bailout in times of crisis. Zingales devotes a chapter to the pernicious consequences of the string of bailouts initiated by Robert Rubin, President Clinton's economic adviser. Maneuvers such as the Rubin-engineered bailout are becoming commonplace throughout US society, and are destroying the public's faith that the playing field is indeed level. Fannie Mae and Freddie Mac were protected by their bought-and-paid-for congressional connections from the consequences of their bad business judgments. Their executives walked away with nine-figure private fortunes, while millions of Americans lost their homes to foreclosure and dozens of banks failed.

After laying out the landscape, Zingales offers eight chapters of possible solutions, including placing limits on lobbying, increasing competition, simplifying regulations, revising the tax code, and reforming the financial sector.

While often political in its implications, Zingales' book is refreshingly devoid of stultifying liberal-versus-conservative dichotomies. Indeed, he writes, "trying to pit business and government against each other is increasingly a sideshow left over from 20th-century ideological debates."

Zingales prefers to elevate social norms as a behavioral guide for business leaders, rather than formal regulations or tweaks to the tax code. And from whence should this ethical revival emerge? "Business schools - the institutions with the greatest interest in the long-term survival of capitalism - could lead this campaign to apply market-based norms to business," Zingales writes.

Professors and students at Booth will learn that they play a supporting role in this morality play. The book is full of examples of behaviors exhibited in the classroom, at Harper Center, and in the faculty lounge. The Booth academic seminar, Zingales notes, carries a strong tradition of lively, but often brutal discussions, not unlike a colonoscopy - "unpleasant but good for you." 

Photo by Beth Rooney

Last Updated 10/4/12