Capitalisn’t: Revealing the Secret Architects of Capitalism

Chris Hughes: This fear of centralized power, particularly in economic policymaking, means that the markets often don’t work the way that we want them to, and there’s no one to hold accountable because there’s no institution responsible for delivering.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: This is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Bethany: From the fall of the Berlin Wall to the Great Financial Crisis, the model of unfettered capitalism dominated the political scene, both in the United States and in most of the world. Free markets and limited government were supported not just by the right but also by most of the left.

After 2008, and especially after 2020, the music has changed. Not only are an increasing number of people questioning the wisdom of unregulated markets, but they are also envisioning a more active role for the state.

Luigi: New terms are created to capture this renewed passion, which is emerging on both sides of the political spectrum: state capacity libertarianism, new industrial policy, and marketcraft.

The last is a term invented by political scientist Kenneth Vogel to indicate that a core function of governments, comparable to statecraft, is market governance. The state not only lays the foundation for markets with the rule of law and property rights, but it also shapes market economies through institutions and regulation.

Bethany: Wait, wait, wait, Luigi. State capacity libertarianism, I haven’t heard that one. Where did that one come from?

Luigi: Actually, Tyler Cowen is one of the main proponents of this idea.

Bethany: Oh, interesting. That’s unexpected. I think he needs to come up with a better term, don’t you? I feel like it’s a mouthful.

Luigi: It is a mouthful, but we’ll see.

Bethany: Anyway. Well, a new book in this genre called Marketcrafters has just come out. It explains how businessmen, politicians, and government administrators have shaped markets for political goals time and time again.

The book is a series of portraits, from Jesse Jones to Lina Kahn, of people who shaped the markets at different times. The protagonists are not just left-leaning interventionists but also libertarians like Alan Greenspan, or conservatives like Hank Paulson or Bill Simon, or simply apolitical businessmen like Robert Noyce, the cofounder of Fairchild Semiconductor and Intel, but most importantly, the father of the US semiconductor industry.

A core part of the argument is that markets are almost always shaped, even if we, in more modern times, have not necessarily acknowledged that shaping.

Luigi: What makes it even more interesting is that it was written by Chris Hughes, a Facebook cofounder who left Facebook in 2007 and now is finishing his PhD at Wharton. He’s the chair of the Economic Security Project, a leading nonprofit that is advocating for economic power for all Americans.

Bethany: We had Cliff Asness on our podcast recently, and he said that there’s no such thing as a free market. I thought that that jived with your point of view very well. I was wondering how you think about that statement.

Chris Hughes: We have this cult of the free market, this idea that supply and demand determines everything, from the price of pizza to how much you’re going to pay ChatGPT to use its technology.

In reality, what we see is that most major markets in the United States are, if not managed, at least structured by the state directly. Banking and finance is an obvious one, one that’s close to my heart and my own academic interests. Healthcare. Pharmaceuticals. Airlines. We could keep going through the list of industry after industry. If you add them up, you’re well over half of GDP.

My point in writing Marketcrafters was not to say that structuring markets is always good. It’s just, “Hey, guys, we do this.” These markets are not mythical and self-regulating. We’ve got to learn how we succeed and how we fail so that we can do it better in the future.

Luigi: In the conclusion of your book, you state that “successful marketcraft requires a clear mission, a coordinating institution who can hold accountable, and the investment of power in that institution to accomplish its work.” Can you elaborate on why we need those conditions?

Chris Hughes: When you see public policymakers managing and guiding markets towards a public goal, like making Americans richer, making their financial lives more stable, futureproofing against climate, that is marketcrafting.

I go through all kinds of successes and failures in the book. The upshot is that when we succeed, it tends to be because we invested in an institution, as you were saying, with a clear mission. For instance, the Fed has a clear mission: price stability and full employment.

We give them a lot of power to do it, and then we give them the discretion, a bit of insulation from the ups and downs of the political cycle, to succeed. These institutions still fail. The Fed is clearly not perfect. But on balance, when we invest in institutions with that kind of model, they’re able to deliver on things like price stability, financial stability, and other bigger-picture goals.

But the problem is we tend to avoid creating these institutions in the first place. This fear of centralized power, particularly in economic policymaking, means that the markets often don’t work the way that we want them to, and there’s no one to hold accountable because there’s no institution responsible for delivering.

Bethany: Where do you stop? And how do you prevent marketcrafting from becoming a victim of the political process?

The Fed, in recent years, became controversial for having perhaps too active a role in the US economy, both through quantitative easing and through keeping short-term interest rates very low. Then the Fed also came under fire for its policies—for meddling, some would say—in climate change and in other areas that people saw as outside the Fed’s mandate.

Who gets to define the market? And how do you prevent that from becoming a victim of the political process that is then whipsawed back and forth through different administrations?

Chris Hughes: Well, the Fed has a boss. It’s Congress. Congress decides what the mandate of the Fed is and what its tools are to get that done. That’s a work in progress.

The Fed was founded in 1913, completely reorganized in 1935. In the late ’70s, Congress set a clear mission for the Fed for price stability, full employment, and moderate long-term interest rates. The Fed believes that financial stability is an additional goal that, while it’s not in the legislation, is important to deliver on that mandate.

You talk about something like climate change. Well, the Fed, actually, of all the global central banks, has been the least involved in thinking about the impacts of climate change. But it did make the decision in the late 2010s and in 2020 to start thinking seriously about how climate risk could change the nature of insurance markets, could change the nature of banking and finance, believing that was part of its mission.

It set up internal stress-testing exercises for large institutions to think about climate changes and catastrophes. It was not doing things like other central banks have done, like buying green bonds, and this and that, because it didn’t believe that it had the authority to do it.

What I’m trying to say is that you need these institutions that have the discretion to think about how to fulfill their missions. When and if they overstep, that is the role of Congress to redefine what those boundaries are. In other cases, it might be the courts. In some cases, it might be the media. There are these methods of accountability that are important to have.

Luigi: As an example of clear mission and clear practice, I’m not so sure the Fed fits. Yes, it has a clear mission, but as you said, financial stability was something that the Fed introduced and interpreted in the way they wanted.

As you say in the book, they could have saved Lehman. They had all the authority to do so, but they chose not to. It’s not clear that they had the authority to do everything they did during the financial crisis.

During COVID, it was even worse. They made up stuff. They were justified by the political moment with a lot of arbitrariness. Congress was quite silent.

Ex post, actually, Dodd-Frank, to some extent, was an attempt to limit the power of the Fed to intervene, but it failed because then COVID came, and the Fed did with gusto what they’d done during the financial crisis, in spite of legislation like Dodd-Frank to limit them.

To some extent, the fear of this power is that these powers are used in a way that is not necessarily aligned with Congress. Sometimes it might be good, sometimes it might be bad, but it’s a little bit scary.

Chris Hughes: Well, there’s a lot there. To start with the Great Financial Crisis, I think you’re right to say that the Fed improvised, and they made a huge mistake in the Lehman decision.

As I go into detail in the book, we have this false dichotomy that institutions have to fail or they have to be bailed out, when there are all kinds of examples of structured bankruptcies that prevent the kind of market chaos that Lehman provided.

Alan Greenspan’s own Fed, a decade earlier, had done that with the largest hedge fund in the world, Long-Term Capital Management. That was a meaningful failure. And, at the same time, the Fed as an institution, that fall and over the coming months, working with Treasury and Congress on the TARP Bill, created a suite of programs that prevented even further financial meltdown.

Now, Dodd-Frank, you’re right, was a very illustrative moment of what I was talking about earlier, where Congress says: “Wait a second. We don’t want you to have the power to bail out any single one institution. If there’s a problem, you have to create a facility that a lot of different institutions have access to. Even then, it is an emergency power that you had.”

Later on, you saw, actually, further on in the SVB crisis, it was working within the constraints of Dodd-Frank that the Fed and the FDIC and others responded to that moment.

In the COVID crisis, I think you’re not exactly right. The COVID set of interventions and programs was audacious and big, but they were well within the law. Congress even said, “We want the Fed to have this power, and we want it to go further,” and be the custodian for the medium-sized lending program that it created.

The point I’m trying to make, though, is that these financial markets are not free. They’re not working on their own. The institutions of government are structuring them—not just in the bailout moments, in the moments of crisis, but in the moments that come after.

The quantitative easing that the Fed pursued for years after the COVID crisis, all of the lending programs that existed . . . We have this vision of financial markets that are more stable, and we create a whole host of institutions to deliver on that. That’s a normative political decision that has ups and downs. It’s not good in and of itself, but it is a market that’s crafted.

Luigi: But maybe I’m a little bit misled by the term marketcrafting because it seems to me that you’re talking about market entrepreneurs that shape markets. The term marketcraft, if I’m not mistaken, was introduced by a political scientist, Vogel, who meant politicians make the market work for everyone.

I don’t see Greenspan making the market work for everyone. I don’t think the Fed, in general, is making the market work for everyone. In fact, I think the Fed, by and large, makes the market work for millionaires, not for everyone. To what extent is the Fed a marketcrafter in the Vogel sense?

Chris Hughes: I don’t think Vogel would say that the only way that marketcraft can apply is if markets work for everyone. I’m not even sure what markets, if any markets, work for everyone.

I think the point is that you can use public policy to shape markets in a particular direction. Obviously, we’ve been talking a lot about finance. I have several chapters in the book on semiconductors. There’s a political goal: “We need to make semiconductors here in the United States for national-security reasons.”

Then you use public investment, to some extent trade policy, you could use procurement, you could use stockpiling, in order to support that industry because you believe that market needs to be crafted, and, in this case, supported to meet your political goals.

This is obviously a recent story in the CHIPS and Science Act that began in the first Trump administration and then was passed in the Biden administration, but it goes back way further. I spend a lot of time in the book looking at Reagan-era industrial policy, Reagan-era marketcraft, where the semiconductor industry in the United States was under significant threat from Japanese competition at the time.

There, you saw the creation of a new institution, this one called Sematech, that not only marshaled resources, but more importantly, brought all the major American manufacturers—not just of the semiconductors themselves but of the components that went into them—to Austin, Texas, to coordinate, suspending the antitrust rules to say that we want this kind of collaboration.

You got a breakthrough. American chip production was going down, down, down for years. Then, by the time of the early ’90s, we’re back over 50 percent, and the Japanese were suffering.

Marketcraft is not just markets for everyone. In fact, when I see it working, it tends to be for a more concrete, specific political goal, which could be national security, financial stability, energy security, a lot of the different things that we can talk about.

Bethany: You tell the story in the book of Robert Noyce and America reclaiming semiconductor supremacy. At the heart of this story is lobbying—the semiconductor industry figuring out how to tell Washington what it needed. Did you come away from working on this book with a more benign view of lobbying than most of us might have, or a view of when lobbying is good and when lobbying is bad, to reduce it to very simplistic terms?

Chris Hughes: I think dialogue between the public and the private sectors is critical to making markets work. When that happens best, it’s public actors who have a clear mission. They’re talking to private-sector actors to learn what activities they’re pursuing, what works and what doesn’t work—not like a proper being lobbied by them to privatize public gains or things of this nature. The devil is very much in the details.

In the Noyce example, the national-security infrastructure in the United States in the 1980s was quite concerned about losing American advantage for semiconductor production and manufacture. They had an interest in seeing that industry supported. It was the Department of Defense that really leaned on the Reagan White House to pursue this industrial policy to support domestic construction.

Now, it also was clear that Noyce and others were lobbying on Capitol Hill very effectively to tell people that they needed to do this and in the White House. And it lined their pockets. It made their private companies, like Intel, which Noyce had founded, bounce back from some of the challenges. And it accomplished the public goal from the national-security perspective of producing these chips here at home.

That kind of dialogue, you do need it to accomplish public goals a lot of the time, but the marketcrafters, it’s their responsibility to ensure that giveaways to the private sector are minimized.

I will say, in doing a lot of the research for this book, you see what we call classic capture sometimes, but it tends to be rarer than I expected. But that’s maybe a result of the long-term historical arc of the book and not just the past few years.

Bethany: The last time I wrote about healthcare, I remembered being really struck by a statement that a doctor made to me, a healthcare-economist doctor. He said, “What often goes unnoticed is how we have societally constructed who gets to make money and who doesn’t, and therefore, that defines a lot of our healthcare system.” You write about healthcare as an example, for the most part, of marketcrafting gone wrong.

Chris Hughes: Yeah.

Bethany: Do you take away any broad rules from the book about when marketcrafting is good and when it’s bad, or what makes it go wrong and what makes it go right and create the kind of markets that we want?

Chris Hughes: Well, marketcrafting isn’t good or bad any more than tax policy is good or bad, or competition policy is good or bad. These policies can be pointed in the direction of different or normative political goals.

From where I sit, having a healthy citizenry that can live long and, ideally, fulfilling lives, that’s a pretty important political goal. I think most Americans feel that the current healthcare system is . . . I’m trying to use a vanilla term to not get the expletive warning on the podcast. Healthcare markets are extremely challenged and troubled.

I think we have to ask, why is that? If you zoom out and take the long historical view, in all the research that I did, I think there was a pretty clear, enduring answer. It is our fear of consolidating power in the federal government to deliver on equitable health outcomes for everyone.

What many people see as the big victory was in the mid-1960s: the creation of Medicare and Medicaid. I have to say, when I started doing the research, that’s what I thought was the big victory as well. These are important programs that have been massively helpful to millions, tens of millions, of Americans. They were part of a grand compromise where we said we’re going to rely on this balkanized, piecemeal solution for healthcare in the United States. We’re not going to provide it through a federal authority. We are going to provide some of it for the elderly through Medicare, some for the—at the time—indigent through Medicaid. Of course, that’s changed a little bit now. Then everybody else is going to rely on private markets to provide them what they need.

That kind of compromise set us up on this trajectory now, where we have this piecemeal system, which gets us to a point where we end up paying roughly double what other industrialized countries do for healthcare with health outcomes that are on par with others. I do think that’s a failed marketcraft where our hesitancy to really invest state power with the ability to deliver on that promise set us up on this trajectory.

The one last thing I’ll say on this is it’s no coincidence that this happened in the 1960s, and the debates were very much tied up in the questions around race. Wilbur Mills was the congressman from Arkansas who was incredibly influential. He and Southern Democrats feared most a federal government that would force white doctors to see Black patients or hospitals to be desegregated in the South.

These other things were what created a bright line for them to avoid creating any kind of institution that would have this kind of authority. For decades, who are you going to hold accountable when no one is responsible for delivering quality healthcare at reasonable prices to Americans?

Luigi: We all agree that good marketcrafting is good. The question is, how do you prevent the bad ones and allow the good ones? It feels to me that the current system is a system where, in general, it’s difficult to have the power to collect all the power to do what a good marketcrafter can do, except in extraordinary circumstances.

My reading of the book is the time when marketcrafting is most successful is when there is really a crisis. Think about, of course, the Great Depression, the Great Financial Crisis, even the oil crisis. When it fails, think about Medicare. There’s not really any imminent crisis, and so, it’s very difficult for Congress to find the strength to give so much power to one individual to craft the market, and it’s also maybe more difficult to have an overarching mission.

One thing that I got from your book, which I think is interesting and right, is that the successful marketcrafters are people with a very strong sense of mission. But it’s easier to have this sense of mission when you are entering World War II, when you need to build enough tanks to win the war, than when you are in the middle of the peace, and there are so many different interests that make it difficult to have a single mission.

Chris Hughes: Yeah, I think that’s right. Crises are particularly galvanizing because people of different political outlooks often temporarily suspend their disagreements and are willing to lock arms to fight it. You see that in a lot of cases.

One example, though, where that crisis then creates a new institutional reality is in the energy crises in the 1970s. These are often scrambled in the collective memory because we think, “Oh, in the ’70s, oil and gas prices went crazy, and there were long lines,” which is true in the second oil crisis in 1979. But the story at the beginning of the decade, during the Nixon administration in 1973, was actually very different.

I homed in on the story of this guy, Bill Simon, who was another avowed libertarian, a bond trader from Wall Street, who becomes deputy treasury secretary in the Nixon administration. He has no experience in energy markets and is given that portfolio because he doesn’t have all these political interests pulling him in a lot of directions.

Then, in the fall of 1973, the Yom Kippur War begins, and the oil embargo occurs. American oil prices had already been going up because domestic production had been going down. But talk about a crisis, this is a real crisis moment. People worry that . . . Home heating oil was still a primary method of heating homes in New England. If you could not get enough for the winter, people could freeze to death in their homes. Gas lines might be an “easy” problem to solve.

That kind of crisis brought disparate political parties together. Ironically, the avowed libertarian becomes incredibly successful at using state power to allocate resources to stockpile oil and gas imports, to use price controls so that the prices only go up bit by bit over time, rather than skyrocketing, as they did in a lot of Western Europe. He’s very successful. But out of that effort comes the Strategic Petroleum Reserve.

What I’m trying to say is we have this institution that comes out of a crisis, now well over 50 years ago, which endures and is one of the key reasons that energy stability has been so important. Crises are galvanizing moments, but out of them can come this kind of institution building.

Bethany: It’s interesting. Luigi sees the conundrum of the book as times of crisis versus times of normalcy, whereas I was thinking of the conundrum of the book as individuals versus institutions.

The irony to me is that you tell this story through individuals, and often very complicated individuals, who might be more about their own personal power and self-aggrandizement, like Jesse Jones in some ways.

If marketcrafting is a path that we want to take or embrace, how much do we want to have invested in individuals, and how much do we want to have invested in institutions? What are the limits on individual power?

Chris Hughes: Yeah. I like taking a historical perspective a lot of the time, and this is one of the big, lurking questions of history. How much does the person leading the institution matter, and how much does the institution itself matter? Then how do we make sense of the ideas that are circulating in the midst?

My take is that entrepreneurs, whether they’re in the private sector or the public sector, can make a lot of change. When you have a strong leader who has a clear vision and has the mandate to get it done, a lot can happen very quickly.

That’s why I call the book Marketcrafters, rather than Marketcrafting or Marketcraft, because the people are ultimately the individuals who are driving the change. They need the institutions to have the power and the expertise and the networks to get it done, but the individuals are critically important.

Jesse Jones is one that you mentioned, with the national investment bank that was called the Reconstruction Finance Corporation, which lasted for about 20 years between 1932 and the early 1950s. He is just this larger-than-life character. That institution, what we call the RFC, would not have existed with anywhere near the same kind of power as it did without Jesse Jones.

It begins by reinforcing finance and banking, saving those industries in a way where the Fed is not. Then, in a middle period, it is working to spur housing construction and do direct-to-industry loans. Then, in the war, it is responsible for so much of the armament, planes, synthetic rubber, pipelines carrying oil and gas from Texas to the Northeast because all of our tankers were being hit by German submarines. A very empowered institution with a lot of resources and a lot of success because he was at its head.

You need the institution, and in that case, you need the man. In fact, once he was gone, the institution frayed because it had not been set up for longevity. I think there are important lessons in that, that an entrepreneur can sometimes go too far if the institution becomes synonymous with them. They have to think about legacy building and succession planning if they really care about the thing that they’ve built.

Luigi: I’m struggling to try to find some generalizable lessons, which maybe is unfair. The first one, as I said, is you need the crisis. The second, I’m not so sure I agree about institutions. It is more that you need a powerful but smart but independent person.

Jesse Jones, basically, had no axe to grind. He was rich. He was not necessarily of one agenda in the housing market or in the war market. He wasn’t representing General Dynamics or Martin Marietta. He was a good American interested in America winning the war.

Bill Simon, again, is a rich dude that, as you said, has nothing to do with the oil industry. To some extent, that’s the saving grace. When you have people who are more interested in one side or the other, they are too biased.

Take, to some extent, Hank Paulson. Hank Paulson is a nice human being, but he was not particularly successful in marketcrafting. He had too much of a worldview in one direction to be a marketcrafter. Is that a fair characterization of your story, or am I reading too much into it?

Chris Hughes: Well, I want to make sure that I’m understanding what you said. You cut out a little bit. But I think what you were saying is that a lot of the most successful marketcrafters either come from business or have a lot of wealth or privilege or something when they come in.

Luigi: No, no. They are wealthy, but they are independent. They’re not representing one side. Bill Simon had no stake in the oil industry. Jesse Jones had no stake in the mortgage-market industry. The moment gives the mission, the quality of the man gives the opportunity, and the independence ensures this is not taken to a different goal. Also, I think Congress or the president, depending on who appoints these people, is more confident that this is not misused.

Chris Hughes: Well, you definitely need people who are not doing the bidding of industry. I think the marketcrafters that I focus on, the ones who are successful, are independent, but for a variety of reasons. Some of them, like Andrew Brimmer, the first Black governor of the Fed, who helped cultivate the eurodollar market in the 1960s, was a very independent actor who was a grandson of a sharecropper. The same thing goes with Brian Deese, whom I focus on in the later parts of the book, or Lina Kahn, both of whom come from middle-class backgrounds and who are not affiliated with industry, don’t have any other means.

I would say that I’m with you in that the most successful marketcrafters have a mission. They know what they’re trying to pursue. That clarity of vision can be very motivating and animating for their success. I’m with you on the fact that independence is important. I guess what I’m trying to say is the independence can have many different sources.

Bethany: Would you define Trump’s tariffs as marketcrafting or not as marketcrafting?

Chris Hughes: They’re market smashing. I think that they’re so impulse-driven that it is hard to see, in the broad-based tariff policy, marketcraft. Now, occasionally, you see it. The steel tariffs have a political goal. We want to support American steel. We want to do that for the jobs in that particular industry, and we want to do that for national-security reasons. That particular industry needs to be stronger, so here, we’re going to put 50 percent tariffs on it. That’s marketcraft.

An across-the-board tariff of 10 percent on everything from avocados to Barbie dolls isn’t marketcraft. That affects markets, but many things affects markets and don’t craft them. Tax policy affects markets but doesn’t craft them. Investment in schools affects markets but doesn’t craft them. For it to be a marketcraft, you’d need to have a political goal and then be using some of these policies of the state to pursue it.

For the most part, I do not see marketcraft. In these more targeted tariffs, I do. In the support for crypto, I do. There is a belief, on the part of this administration, that crypto is an important industry to support. I’m very much on the opposite side of that, so I’m skeptical of it.

But the creation of the Crypto Reserve Fund, the directive to the SEC to take a different path, even the president’s own “personal” activities around this, I think are very clear that they want to see that market cultivated. I think it’s a good example, though, of showing that just because it’s a marketcraft doesn’t mean it’s a good thing. It can be pointed to less-than-ideal goals.

Luigi: Exactly. That’s one example of my point. In this particular case, it doesn’t seem that President Trump is independent vis-à-vis crypto because he seems to have a lot of interests in crypto. That undermines the ability to carry this power with some trust from the rest of the country, which makes the job more difficult.

Chris Hughes: Maybe. I don’t know.

Luigi: Let me shift gears because you’re one of the founders of Facebook. I want to ask you, in what dimensions do you feel good about what you’ve founded? In what dimensions do you feel regretful and wish you had done something different?

Chris Hughes: The family of platforms that are all under the Meta brand now is so dramatically different from what I was a part of 20 years ago that it’s difficult to compare.

I left in 2007, a few months after Facebook had opened up, and went to work for Barack Obama. The company just feels very foreign to me. I wrote in a piece in The New York Times, now six years ago, that the concentration of corporate power in Meta had become a problem because social media and social networking had been, at the time, entirely consolidated.

Now, TikTok does exist, and they’re fighting out this case in the courts around whether or not Meta actually has a monopoly here. I continue to think that it does. I continue to think that structural separation is the best course of action. But I haven’t talked to Mark since that piece in 2019, so it feels pretty far away from my day-to-day now.

Bethany: A different version of Luigi’s question is, looking at the Facebook saga, or more broadly the social-media saga, where should government have crafted the market but failed? Are there specific places in that?

Then, as a follow-up to that, one of the things I’m thinking about and concerned about is that is it possible to see good marketcrafting in advance, or can you only see good marketcrafting after the market has played out? In other words, can you construct it prior to the market, or can you only look back and see in retrospect what should have been done differently?

Chris Hughes: I think it really depends on the second. Congress crafted social-media markets by giving blanket liability protection in the late ’90s. Congress said: “We want these platforms to grow. To do that, we’re going to say that if you own the platform, you are not liable for what gets posted there.”

That kind of blanket immunity existed in no other industry. If you slip at the mall, the mall has some kind of liability. If you want to go to healthcare companies, if you want to go to product liability, we could have a whole thing on tort law. That kind of blanket liability exists because Congress said that it should, believing that that was a key decision to make in order to support that market and have it grow. I think that has been a foundational error.

Luigi: Can I enroll you in a campaign for abolishing Section 230 because I think that—

Chris Hughes: Absolutely.

Luigi: —I agree 100 percent with you. OK. Let’s talk offline.

Chris Hughes: Absolutely. I’ve talked about this for years. I’m ready to . . . Yeah.

What’s fascinating on this is the AI models, because they do not enjoy this liability, because their content is consider original or expressive content, they spend a lot of money preventing people from using the AI to create harassing content or to strip a teenager of their clothes for a virtual image where you could see her or him being naked.

The AI is obviously capable of immense amounts, and yet, the industry has put very meaningful investments in making sure it’s safe. It’s not perfect, but it’s a very different case study than what has happened in social media.

Bethany: I had thought two things before I read this book, neither of which is true. On some level, I think they make the book more interesting, but they also make it maybe less broadly instructive than I had hoped for.

I wanted the book to say that marketcrafting is either good or bad, and it doesn’t. But I think I also wanted the book and Chris himself to be a bit more prescriptive about . . . I can’t believe I’m the one saying this because I’m usually all about the stories first, and the book has so many good stories, but I wanted there to be more lessons about when marketcrafting is used for good ends and when it’s used for bad ends, and how we can apply that to today’s economy. Jeez, that makes me sound boring.

Luigi, what did you think?

Luigi: I agree with you. First of all, you had the great line that he should have had in his book, which is, basically, the principle that who makes money in the economy is a societal construct. It’s not something given by objective market rules or technology alone.

It has a phenomenal series of stories that are very interesting to read. I think the book lacks a bit of a, as you said, message.

Bethany: Yeah. I think it is really important to acknowledge that almost all markets are crafted. Even when you think about the freest of free markets, they’re still dictated by the existence of a limited-liability corporation, for instance, or by bankruptcy law in the United States.

Even the most ardent free marketeers would say, “What do you mean?” if you told them to let loose in a world without limited liability and without bankruptcy court. I think just Chris’s baseline acknowledgement of that is really important.

I was thinking that maybe there’s a lesson here that the government has to really explicitly craft because what we did with healthcare, which is where that line of mine came from, clearly didn’t work. The weird combination of private-market incentives and government policy has been a disaster for the American healthcare system.

But then I thought, even that lesson isn’t broadly applicable because that’s exactly what we did with Silicon Valley and semiconductor manufacturing. It was a combination of Department of Defense money and US government policy mixed in with free-market incentives.

I was searching for a distinction. Why did it go so wrong in healthcare, and why did it go so right in semiconductors? I don’t know. Do you have an answer to that?

Luigi: I think that the answer is that there is not an easy answer. That’s the reason why it’s missing from the book because it’s very easy to see things ex post. At the time, if you give too much power up front, it’s very easy for somebody to use that power for a very self-interested reason.

To some extent, at least, the message that I extract from the book is that this mechanism, in which the person has to grab power from Congress with a lot of difficulties, is often good because only when you have a clear mission and when the situation is bad enough, then Congress gives you this power, and you operate. It makes it more difficult to waste this power or abuse this power in situations that don’t have these characteristics.

Bethany: But yet, the semiconductor industry, even the entire development of Silicon Valley, would appear to fly in the face of that. I think you were biased coming into this conversation in favor of the idea that this works best in a time of crisis. Did anything about the book or about the conversation change your mind about that?

Luigi: I was biased. No, I think what changed my mind is that I thought that you needed people who were not self-interested. I think the case of Silicon Valley and the development of semiconductors is a very good counterexample.

But in the case of semiconductors, there was a crisis of, “Oh, we’re losing out to Japan.” I think you remember that moment in time when there was this big fear that Japan would take over the United States. When, later on, all the capacity went to Taiwan, there wasn’t a sense of crisis, so nothing was done.

In the example of healthcare, we never faced a major crisis. That’s the reason why we never had the ability to grab all the power and make all those reforms.

Bethany: How do you think of the institution of the Federal Reserve through this lens? How much accountability should these institutions have? Right now, the Fed seems to sit at the nexus of this question of how much independence they should have, how much accountability they should have. I don’t know. How do you think about that?

Luigi: I think I’m fairly critical of the Fed. I once made this proposal. It started as a joke, but I think the more I repeat it, the more I believe it. You know, the Fed cannot bail out all depositors unless there is a systemic exception. I said that, as a rule, in order to invoke the systemic exception, the chairman of the Fed has to resign because it’s an element that proves that something went wrong. The crisis became systemic because there was a problem, so somebody has to lose their job. I think it is a nice sorting condition to reduce that risk.

It’s very dangerous now to speak poorly of the Fed because in the age of Trump, you want to defend the Fed against Trump. But I think historically, it abused this power a bit. Most importantly, it has not been accountable because at the end of the day, the Fed is politically independent but very influenced culturally by the finance world. The objective function of the Fed has been much more aligned with the objective function of the 1 percent rather than of the 99 percent.

Bethany: Yeah. This is a little bit conspiracy theory and a little bit fact, but one of the fascinating things in the wake of the global financial crisis was the effort to point the finger at the SEC for what had gone wrong with the investment banks.

You had a number of really powerful economists writing op-eds saying that this was the failure of SEC regulation and the SEC’s failure to rein in the leverage at the investment banks. They blamed this 2004 rule change at the SEC for what had happened.

In fact, if you looked at it, the leverage at the investment banks was actually higher in 1999, so this rule change wasn’t to blame at all. I saw it, and other people saw it at the time, as this giant effort ginned up by the Fed to basically deflect any blame for their own regulation of the big banks heading into the global financial crisis. Instead, blame it all on the feckless SEC, essentially. You know, it kind of worked.

Luigi: Let me tell you a little secret. One of the reasons why it worked is because historically, the commissioners of the SEC tend to be lawyers, and the governors of the Fed tend to be PhD economists.

Economists are very supportive of their own tribe. They are much more critical of the other tribes. It worked really well because the entire group of economists closes ranks against the terrible lawyers.

Bethany: But it is interesting to think about the Fed through the lens of financial crises because you obviously do want the Fed to have some leeway—a fair amount of leeway, actually—so that it’s not completely dependent on Congressional approval in order to fight the fire of a financial crisis.

But that question of how much leeway, it’s a little bit like a version of don’t ask, don’t tell. We all want the Fed to be able to step into the breach when there’s a problem, and we don’t want to lay out the strictures beforehand, but then we want to pretend that there are strictures.

I think there is a lesson there more broadly about institutions that we might want to put in charge of crafting markets. How much power do you want to imbue them with, and how much accountability do you want to imbue them with? There really is no great answer to that.

Luigi: No, there is no great answer because if you give them too much power, they tend to abuse it. There is not enough of a discussion of all the cases in which this went wrong. You mentioned, at the beginning, the mortgage industry. That’s exhibit A of marketcrafting going completely in the wrong direction. I’m sure that if we think for five minutes, we’re going to find a lot more examples like this.

Bethany: I did think, by the way, that the conversation ended on a fascinating note, which I had never thought of. This idea that the AI models don’t enjoy the same exemption from liability provided to social-media companies by Section 230, and that that’s going to force AI to develop in a different way than the social-media companies have, I had never thought about that. I don’t know if that’s something that you have actively been engaged with thinking about.

Luigi: I think it’s not completely new, but I think it’s very important. What emphasized this even more so is how terrible Section 230 has been for the development of social media.

Bethany: Right.

Luigi: Without that, it would have been a completely different story. Do you call it marketcrafting? Do you call it lobbying? I don’t know. I think that somebody should study who planted that seed in the legislation because social media were really nonexistent at the time. It was the beginning.

What would have been smart is maybe a rule with some sunset clauses. I remember, at the time, for example, there was an exemption from sales taxes to promote—

Bethany: Right, I do remember that. Yeah.

Luigi: —but there was a built-in sunset because, at some point, we started paying taxes on transactions on the internet. The exemption could have been a good thing, maybe at the beginning, but it clearly was kept too long.

Bethany: It’s a really interesting question. If any of our listeners out there know, please feel free to email us because we’re really interested in this. If anybody knows the genesis of Section 230 . . . Speaking of conspiracy theories, was it actually a conspiracy theory by somebody with far-seeing ability about the power social media might have one day and how to lock in that power, in a way? Or was it just one of those momentary decisions that no one involved actually understood the enormous ramifications of it? If anyone out there knows, I would love an answer to that.

Luigi: But the thing that is for sure is that it did last too long. Whether it was planted by design or by accident, the ability to survive so long is the result of lobbying and pressures.

I think this is saying something about marketcrafting, that there is a risk. When you put too much power in the hands of an individual, unless this individual is above the fray, the risk that the rules will be crafted in a particular direction that is difficult to undo is a serious issue.