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Restoring American Capitalism to Its Former Glory

August 8, 2012 6:00AM

From 1945 to 1948, the United States represented an unparalleled productivity machine. It had an educated workforce, advanced production techniques, well-organized institutions, and relative stability. A period of huge growth ensued—one that greatly benefited workers. "It was a virtuous circle that worked well for a long time," said Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance.

But other countries soon learned from its efficiency, and in recent years, the unfettered influence of business lobbyists has further eroded confidence in the US system. The last quarter-century has brought the largest creation of wealth in history, Zingales noted, but it has occurred mostly in developing nations.

The once-robust underpinnings of American success are getting weaker, Zingales told a group of Booth students at Gleacher Center during a Myron Scholes Global Markets Forum event organized by the Initiative on Global Markets. But the trend is not irreversible. In a plea to bolster free markets and not big business, he shared insights from his new book, A Capitalism for the People: Recapturing the Lost Genius of American Prosperity.

He also shared wry observations in comparing his homeland to the United States. Zingales was born and raised in Italy, "a country that invented the word nepotism," he said. His distrust of authority remained deeply ingrained after he moved to Boston years ago. When he was told that all residents should tape their windows shut as a threatening storm approached, Zingales recalled, his initial reaction was that the mayor's brother must be selling tape.

Americans didn't share that cynicism, and he was impressed by their faith in the US system at the time. That mindset has changed. Many factors contributed to this change. One is the falling behind of the middle class. The average real earnings increases began lagging behind productivity increases in 1975 and never caught up. "If you are a typical male worker entering the workforce today, you make less than your father," he said. "It makes people question why they should support the system."

To guide the United States toward a better market system—and increased prosperity—Zingales said regulation must be reduced, not eliminated.

What's more, those regulations must be as simple as possible to ensure they serve the general population instead of lobbyists. Zingales confronted mind-numbing complexity when he followed the Dodd-Frank Act—and gave up after it exceeded 2,300 pages. Before Congress can vote on legislation, the members should be required to take a multiple-choice test about it, Zingales said. Only those with enough correct answers would have voting rights. "That would dramatically reduce the complexity of legislation."

He also emphasized the need for data analysis to spur increased accountability for every institution. For unbiased analysis, that data must be made widely available. But power-wielders typically squelch the release of information that could make them accountable. Case in point: A bank in Italy told Zingales about an internal study that revealed that women were more productive than men, but were paid less.

Because all of the top managers were male, the bank didn't want to distribute that information, he said. Zingales acknowledged some institutions may have legitimate reasons not to immediately release information, but they should release it after an initial delay.

"If I publish hedge fund trades of three or four years ago, I don't think I damage anybody, but I bring a lot more transparency to the process, and I make people accountable," he said. "People anticipating that those trades would be revealed would be more careful."

In the quest for accountability, business schools don't escape his critical gaze. That means making distinctions between what's good for the market and what's good for a particular business. "We don't do that enough," said Zingales. "We are teaching people how to make money. We should also teach people how to make money correctly," he said. "If I become rich by creating loopholes, should I be considered a great businessman?" By stigmatizing behavior that harms the US market system, business schools can help foster social norms that guide the country toward prosperity.

Zingales' perspective resonated with Marc Andersen, an Evening MBA Program student. Andersen's concern about inefficiencies in capitalism drew him to the talk. It's an issue that has plenty of personal relevance, since he's currently assessing some entrepreneurial opportunities. He echoed Zingales' call for making more data available to the public. "Having data be more transparent is absolutely key," Andersen said. "I'm not a conspiracy theorist, but I think there's a lot of information the government has that perhaps isn't being released and may help us speed up innovation." —S. A. Swanson