Capitalisn’t: Ask Luigi Zingales Anything

Luigi: Hello, Capitalisn’t listeners. Our team took some time off for the holidays, but we didn’t want to leave you all without a new episode, so this week, we’re doing something special.

We’re going to share a recording of a live Capitalisn’t event we had here at the University of Chicago. This event was something a bit more fun and relaxed for us. It’s a live Ask Me Anything with me, Luigi Zingales. And as a fun twist, we had students from the university ask the questions.

We hope you enjoy. And thank you to everyone who listened to our show this year. This podcast is a labor of love to share important discussions about capitalism that will hopefully make our lives and the world a better place. Your support is crucial to helping us continue this mission. Data shows that the No. 1 way podcasts grow is through word of mouth. If you could please tell one or two friends, family members, or coworkers to listen to our show, it would mean the world to us. Thanks, and happy holidays.

Matt Hodapp: Hello, everyone. Welcome to the UCPN Podcast Festival and our “Capitalisn’t: Ask Me Anything,” with Luigi Zingales.

You scared? It’ll be fine.

My name is Matt Hodapp. I’m the producer of Capitalisn’t, among a couple of other shows on the University of Chicago Podcast Network. As you should know by now, this is the Capitalisn’t podcast. Luigi is a cohost with Bethany McLean, who unfortunately could not be here tonight to witness this AMA.

We launched the podcast almost six years ago. It’s been two seasons, 163 episodes, and almost 3 million downloads later, we’re finally excited to do our first live AMA with a couple of students here at the University of Chicago.

On stage we have Luigi Zingales, professor at the University of Chicago Booth School of Business, creator and cohost of the podcast, along with three undergraduate students. Do you want to introduce yourselves? We can start here.

Surya Gowda: I’m Surya Gowda. I’m a fourth-year in the college majoring in fundamentals, and I focus on political philosophy. I’m also doing a joint MA in the social sciences, and I’m a political theory concentrator.

Matt Hodapp: Wow.

Mete Bakircioglu: Hey, my name’s Mete, and I’m a third year in the college studying econ and cognitive science. Really interested in economic modeling, cognitive modeling, and I’m really happy to be here. Big fan of the podcast.

Giuseppe Di Cera: Hi, I’m Giuseppe Di Cera. I’m a fourth-year in the college majoring in economics and minoring in molecular engineering. I’m really interested in health economics. I do a lot of research with a professor here at UChicago, and I run my own startup as well. I’ve been watching for quite a few years. My favorite episode is “The Moral Case against the MBA.” I was actually saying it inspired me to apply to an MBA program, so thank you for that.

Matt Hodapp: Fantastic. Hopefully, we can talk a little bit more about that. Thank you all for being here.

I think legally I should have started with this, but you are being recorded, and this recording is going to be used on the podcast, so people can go back and listen to all the fantastic things we’re about to talk about again later.

We will have some time for the audience to ask questions, about 25 minutes at the end, as it is a true AMA. But we’re going to start . . . Each of the students will have about 10 minutes to ask questions. And we’ll start with Surya.

Surya Gowda: Well, my first question, sorry, was a devil’s advocate question because I am a philosophy major, so that’s what we do. But why, exactly, is competition good? Someone I’ve been reading and researching lately is Joseph Schumpeter. As you know, he has an interesting argument about competition and monopoly, and whether competition is coherent with creative destruction that drives economic progress. I just want to know what you think of these theories in this vein.

Luigi: Thank you. It is an excellent question, because from a philosophical point of view, I think it was a breakthrough of Adam Smith to think about competition as a positive element. Historically, it had always been seen as a negative. And I think it is really the mechanism that forces the pursuit of self-interest to work for the collective interest.

Of course, there might be some exception or potential counterexample. I think that when you’re saying Schumpeter, there is now a long debate about to what extent you need some form of market power in order to have some profits that reward innovation. I think there is definitely that element.

However, without competition, the pursuit of self-interest leads to tremendous distortions. And so, if you want the pursuit of self-interest to work for the common good, I think that it works for the common good only if there is competition.

I know you are a philosopher. I don’t know if you’re also an etymologist, but the interesting thing is that the word “competition” comes from, surprise, surprise, Latin. It is competere, “to seek together.”

In some languages, actually, the competition in a race and product-market competition have two different terms. In Italian, we use concorrenza when we talk about the competition between businesses, and we talk about competizione for a race. But the idea is that you have a system that forces people to seek something together, not one against the other.

Unfortunately, there are a lot of examples that we have seen, especially with Big Tech these days, where instead of having a fair competition, you have . . . Now, you’re too young to remember Tonya Harding. Have you ever heard about the story of Tonya Harding, a figure skater who had a boyfriend kneecap the competitor? That is the negative aspect of competition, when you are actually trying to sandbag, to handicap the others, rather than understand that we are in a common search for the common good.

Surya Gowda: I found the connection to Italian particularly interesting, because I wrote my undergraduate thesis on Machiavelli.

Luigi: Actually, I should recommend a paper to you that makes the connection between Machiavelli, Malthus, and Mandeville. And Malthus and Adam Smith. Because that’s the tradition through which you have the separation between a moral attitude . . . Before Machiavelli, everything, of course, was morality. Machiavelli is the first one to separate the two, of course, in political science. But then, Mandeville is the first one to start to understand that private vices can be public virtues, and that’s the step that leads to the intuition of Adam Smith. So, there is a common thread.

Surya Gowda: Yeah, I find the idea that selfishness on maybe the part of a leader, especially in politics when we’re talking about Machiavelli, I guess . . . and that that self-interest can actually align with the public interest, that is a really fascinating idea.

I think that relates to where I was going to go with your point about Big Tech. I guess one question that I had from previous podcast episodes, like the one on the Twitter Files, was this idea that private companies aren’t really acting in the public interest, but then, how exactly do we solve that? Is democratic governance of social media a possible solution? What do you think about proposals like that?

Luigi: I think that’s really the crucial point of a market economy. How do you create rules within which competition leads to outcomes that are desirable and not undesirable? I think that’s the No. 1 question.

The No. 2 question is, who’s going to write those rules? Imagine that we even understand that there are some rules. Who is going to write those rules?

I think part of the old Chicago tradition thinks that you can just ignore the creation of rules, because competition for rules itself leads to a good outcome. In the most extreme form, this is called anarcho-capitalism. And I think that’s a degeneration.

I think that, actually, the world of cryptos gives us a phenomenal real-world example of how things don’t work. One of my favorite stories that is actually a paper by a political scientist is the story about the Silk Road. Not the Chinese Silk Road, but the Silk Road website. Hopefully, you don’t know what it is, because it is a place where they used to sell everything possible, including every form of drug and et cetera. And, of course, you were paying with bitcoin.

This was the ultimate example of a market without laws, in which you have competition. Silk Road was a big website, but there were other websites that were competing. Ulbricht, I think, was the name of the owner of this website. He was a libertarian and an anarcho-capitalist. He said, “Oh, I set rules, but I set my own rules because competition will lead to good outcomes.” And one day, a customer blackmailed him.

The problem with all these virtual things is that they need an interface with the real world. Drugs are not that much fun unless you consume them in person. They need a physical delivery. And if they need a physical delivery, it means that you need to know who is buying those drugs. One of the suppliers of drugs had the list of all the customers. And so, he went to Ulbricht and said, “I’m going to reveal all these names unless you pay me $100,000.”

In a normal world, you would say, “No problem, I’ll call the police,” right? But if you’re an anarcho-capitalist, you don’t want to call the police as a matter of principle. So now, you’re in a bind.

Now, this is a test for you. You are all studying economics. You see this game. There is somebody threatening you with this. What are you going to do? What is the only outcome you have? Can you pay this guy?

You don’t know who he is. He’s threatening you. He shows you that he has the actual list of customers, and he’s going to post it on the internet two days from now, unless you send a certain number of bitcoin, et cetera. But if you pay him, he’s going to repeat the threat.

So, there is only one solution, which is to try to kill him. This guy, this anarcho-capitalist, who didn’t believe in violence, et cetera, actually hired a contract killer to kill him. He was stupid enough to actually contract an FBI agent, and so, he ended up in jail.

This is a long story to say that in the competition for rules, unless you have rules to rule the competition for rules, it is the law of the jungle, in which you go for the most violent ones, not for the right system.

In my view, democracy is the only solution to this because it is the governance ruled by the many, where in most situations, you hope that they choose something that is good for everybody and not just for one side versus the other. That’s the hope.

Now, in practice, there are a lot of distortions, of course, and that’s what we discuss in every episode of Capitalisn’t.

Surya Gowda: Sorry, are we talking about democracy of the public or democracy of the shareholders in these companies?

Luigi: Actually, democracy of everything. I am a big believer, for example, in referenda. I know that this is unpopular these days, especially after the Brexit referendum. But to some extent, that’s the example of how not to do a referendum.

First of all, England was a country with no traditional referendums, so people were not used to that. Second, the way the question was asked was the most stupid way possible because you had the choice between a reality and a dream. And, of course, the dream beats the reality because you can make up your own dream.

I generally don’t use Italy as an example, because it’s not a very good example in many things. But on abortion, for example, it was a phenomenal example because we created the law, and then, we put this law to a referendum.

The choice was, either you take this law where we allow abortion with some limitation, et cetera, or you abrogate the law, and you have no right to abortion. In 1981, a country that was overwhelmingly Catholic voted 65 percent in favor of abortion. And we have not discussed the theme of abortion ever since. That’s the example of how you resolve a moral issue.

I don’t understand why it becomes a partisan issue, because the two things should be unrelated. I think that you let people vote, decide, and you move on. I think that there is a long tradition of referenda that work very well in Switzerland, in California.

Even with abortion referenda in the United States, there were all these people that said, “Oh, that would be terrible,” but when people had to vote, every time, they voted in a very reasonable way. The people in Kansas said, “No, we want abortion with certain limitations.”

I think that I like direct democracy. Of course, there are some limitations with direct democracy. But direct democracy, I think, should be encouraged more. Unfortunately, in the United States, we don’t have it at the federal level.

I also like direct democracy in the corporate world, but that is completely shut down today. Actually, the Biden administration opened up the possibility of having a little bit more of a discussion of certain important things in corporate shareholder meetings. But traditionally, the SEC was blocking anything that had a vague social impact, and I think it was a real pity.

Matt Hodapp: All right, moderators got to moderate, so I have to keep us moving along. We’re going to move to the next student. Remember, Luigi, we don’t have the two hours we usually record that I cut down.

I’m just joking, I’m just joking. Go ahead.

Luigi: You can always cut out my answers. I’m used to that. I talk forever, and I need somebody to edit stuff.

Matt Hodapp: Go ahead.

Mete Bakircioglu: It’s cool to hear about referendums that work. Brexit is my biggest impression for a referendum. And I’m also Turkish American, so Turkey’s not great with referendums, either. It’s interesting to think about how it could actually be productive.

But we were talking about competition, and I wanted to ask a bit about antitrust. It’s really big with the new merger guidelines that you guys spoke about on your show a few episodes ago. My first question is related to an episode you did on the evolution of antitrust from August. You mentioned the European Commission’s ability to enforce antitrust decisions before companies get a chance to challenge them in court, which here might seem super radical, but it gives the European Commission a whole lot more bargaining power in enforcing antitrust decisions than the DOJ and the FTC get here. I was wondering, what do you think about applying that kind of model in the United States? On top of that, how do we ensure that economists, while providing valuable insight, don’t overshadow democratic values?

Luigi: OK, let me separate the two. For the first one, first of all, I need my lawyer. It’s mostly a legal question, and I’m not a legal scholar by any stretch of the imagination, so I’m afraid that I’m going to misspeak. But let me try anyway.

The tradition in Europe is much more interventionist in general, and the ability of prosecutors to act and impose injunctions or put people in jail ahead of time is broader. The tradition in America is much more protective of your rights. I think it would be very, very hard to import that tradition here in which the FTC can make injunctions and then, companies would have to go in front of a judge to stop the injunction of the FTC. I don’t see this happening anytime soon. I am not holding my breath for that.

However, there is an alternative solution, which is to make it easier to bring some cases. All of this is changing the status-quo point where you start bargaining, and this is incredibly important from a practical point of view and a political point of view.

One of our defects as economists is that we tend to be a little bit nonchalant, saying, “Oh, it doesn’t really matter because eventually things . . .” Eventually, we’re all dead, as Keynes said. I think the process is very important, and the merger guidelines actually are going in that direction. When we just say that if you own 80 percent of the market share, you don’t need to prove a lot of things, we just assume you are a monopoly. Prove otherwise. That is the way to go.

Some rebuttable presumption that makes it easier to bring some cases, recognizing the enforcement cost . . . The part that I find most shocking is that there is a long tradition, especially at the University of Chicago, but in economics . . . Do you know the name Gordon Tullock? Does it remind you of something? No, I think you have not taken my class. It shows. Because—

Mete Bakircioglu: But I hope to.

Luigi: He was actually a very famous economist lawyer who graduated from the University of Chicago, and some people claim he deserved the Nobel Prize when James Buchanan won a Nobel Prize. He was cut out of that deal. Apparently, he was not the most politically correct person, and he was very aggressive, and so, not a lot of people liked him. But the guy was really brilliant in many dimensions.

He was the first one to bring into economics—in 1967, a long time ago—enforcement costs and how much money we spend on enforcement. When you think about the officials of antitrust, I think one of the factors this should be put in place is not only what the final outcomes are, but how much money was spent along the way.

Let me tell you, all these enforcement costs are waste from a societal point of view. They make for good champagne and a nice life for lawyers. But from a societal point of view, it’s completely a waste of resources. Maybe it’s a necessary waste to enforce, but if you multiply that waste by a factor of three or by five, et cetera, the outcome might not change, but a lot more resources are wasted. I think that one of the secrets in rethinking antitrust is to bring enforcement costs into the picture, and so, changing the rebuttable presumption is very important.

Answering your second question, which is about the role of economists, one is being a bit broader with the definition of efficiency. We tend to be quite narrow-minded about what efficiency is. We exclude, for example, enforcement costs, or we exclude resiliency. Just-in-time production is very efficient until it’s not. In expectation, it might not be that efficient. So, that’s one thing.

The second is recognizing that people don’t only eat bread, but they also want some intellectual satisfaction. Increasing the amount of bread is important if you’re starving, but after a certain point, people are willing to give up some bread, metaphorically, for something else.

When people say, “Oh, but it’s irrational to vote for Brexit because GDP will go down.” I said, “No, it’s a choice.” If you know that you prefer not to have interference from the rest of Europe and be a little bit poorer, but be more free, who am I to make the decision for you? I think as economists, we have to accept people’s preferences. And people’s preferences might be that they prefer to be poorer but allegedly free. I’m not sure what they’re free from, but you see what I mean.

Mete Bakircioglu: Yeah, I know you were speaking a lot about litigation costs on the merger guidelines in episode two. And how there’s skepticism about, sure, the guidelines look nice, and they seem to be revolutionizing the antitrust landscape, but when Google or whoever, a multibillion-dollar company that has these multibillions of dollars, then how can the DOJ do something about it?

That brings me to a question I wanted to ask about a hub like Silicon Valley, where the business model is . . . or a part of the business model is for startups to just be a supernova and come up with a big idea and get acquired.

That seems to have worked for a while. A lot of smart minds are in the business of coming up with that idea. I was wondering if you could speak a little more to what you think these revised merger guidelines, implemented in a place like Silicon Valley, will look like. Are you skeptical? Do you think that the companies are really just going to do what they want and outsmart the regulation, or is this really looking like a change and maybe a stop to the model that I described?

Luigi: First of all, we have not even seen the final merger guidelines. As you know, what was presented was a proposal. The period for comments ended, and now, they have to revise the proposal. And so, let’s see what is done.

Second, it is just a starting point from which the DOJ or the FTC will start in determining whether they challenge a merger or not, and then, we’ll see how the judges will react to that. It’s very early to say what the consequences of this are, and particularly, we don’t know how the judges will receive that.

It’s very important to understand that the goal, of course, is not only not to damage innovation, but ideally to promote more innovation. I think there is a model that has been dominant in many cases for startup companies that develop an idea just to be bought. That’s a legitimate business model, with a couple of caveats.

One is that the kind of technology you develop is different. I can only develop a new idea that is compatible with Amazon’s business model, because if it’s incompatible with Amazon’s business model, I’m not going to be bought by Amazon.

For a long time, I taught entrepreneurship, and the first class was about how you start a business plan. One of the first questions I had for students is, you need to plan the exit now. They said: “We didn’t even start the company. How do you plan the exit?”

“No, no,” I said, “it’s fundamental.” The way you build the business is a function of how you expect to exit. There are not a lot of ways to exit. One is to be acquired. The second is to go public, and the third is to do a management buyout and cash out. But if the business does not support a lot of that, the third is out of the picture. So, at the end of the day, you have only two options, an IPO or a sale to the existing businesses. And when the existing businesses are very limited, then you start from day one to say, “I’m going to plan this.” If you don’t have the IPO option, the only thing is, I need to build a business that is compatible with Amazon.

That’s not necessarily the most creative and innovative business because the really disruptive innovation is the one that changes the business model. If I only develop ideas that are compatible with the existing businesses, I am curbing innovation. We want to maintain the vitality of people that revolutionize the way you do business because that’s the way innovation comes about. That’s the purpose.

Now, does this mean we should prohibit Amazon from buying anything? No. But we shouldn’t make it particularly easy for them to buy, especially early on at a low price, when people don’t even know what they are, and monopolize the market even more. I think that, to me, would be the goal. Now, how to achieve this goal is not a piece of cake.

Matt Hodapp: All right, contestant number three, come on down.

Giuseppe Di Cera: Lucky winner. Thank you.

Let’s talk about energy. I want to talk about financial markets as well, but I was really interested, as all the conversation was going on . . . Entrepreneurship is great. But I’m curious to hear, as the world transitions away from fossil fuels, how do you think that the switch to green energy will affect global energy markets? Will we see the same fluctuations in energy prices that we did in the oil shocks of 1973, 1978, 2021, or will greener energy bring more stable markets?

Luigi: I guess it depends a lot on what you intend by green energy. If you limit it to solar and wind, I think that there is a fundamental difference, which is the scale of production. Fossil fuels tend to require a large scale of production, and so, that leads naturally to more concentrated markets where it is more difficult to have a reliable price.

When California liberalized the energy market at the end of the ’90s, early 2000s, it was a freaking disaster. Why? Because they didn’t understand that while there are a lot of producers, at the end of the day, the marginal producers were few because the market is concentrated. And those could easily manipulate the market by shutting down for renewal or cleaning, et cetera, one particular producer at the right time. That was really, really a huge power in the hands of producers.

The great thing about green energy is that, at some level, we can all be producers. The market becomes really fragmented, and so, it becomes more competitive. Now, for this to be the case, we need to have a very good grid system. You know that today, the biggest obstacle in moving to green energy is not lack of incentives to go green. It is a lack of access to the grid. If tomorrow, you want to transform half of the production of energy in Illinois into green energy, you don’t have access to the grid. And so, what you do with the energy? You eat it, which is not particularly useful.

I think that there is a desperate need to create a reliable grid that is also able to accept diffuse production, because we want a system that rewards the producers at the proper price. And in most places, if you inject energy in the network, you are paid a fraction of what others are paid.

There is really an injustice against green energy, but this is not necessarily due to the fact that people were conspiring against green energy. It might also be because of that, but it is mainly because the grid is so poor. This is a typical example in which in order to have a good market system, you have to have good infrastructure, and that infrastructure needs to be publicly provided in some form because it tends to be a common good. You need to have good infrastructure in order to have a good market. And the future, honestly, is much better than the past because the past is concentrated. We had a lot of wars for oil, and hopefully, we’re not going to have any more wars for sun, because it’s everywhere.

Giuseppe Di Cera: That’s interesting. Yeah, just background, I did some research, I asked ChatGPT the same question, and it basically said something similar, along the lines of, there will be less volatility. But putting our UChicago econ brains on, questioning that, if I expand green energy to maybe include batteries, and that includes ship manufacturing, can you see a situation where geopolitical issues really get into affecting financial markets in this particular way? Considering this huge transition in the automotive industry towards electric vehicles, that sort of transition, how do you see that playing out in the markets as well?

Luigi: Certainly. I’m not an expert in the sector. I don’t know exactly all the materials that are needed to produce the batteries, besides the lithium that even I know that is necessary. But if you are telling me that there are a bunch of rare-earth materials that are only present in one country in the world, then that’s problematic, because that country will have some form of monopoly power. And so, that will create geopolitical tension, of course, and all the things that come with it.

If that’s not the case, I think that the future looks brighter than the past. However, what is important—and we’re not used to thinking about it in those terms—is that at some point, we need to switch.

Think about electric cars. We’re slowly creating infrastructure to supply energy for the electric cars. It took a long time to have all the gasoline suppliers along the way, et cetera, et cetera. There will be a moment in which the gasoline suppliers start to disappear, and then there will be a fast death of the combustion-engine car. If you don’t have suppliers all over the place, it’s not worth driving. It’s too dangerous to drive. But there will be a switching point.

There are nonlinearities in the process because once the mass of users is going to be small enough, then the support network, especially in the countryside, is going to disappear. If, let’s say, 60 percent of the cars are green-energy-based, EV, then do you want to have a gasoline supplier in the middle of the countryside? Probably no. And then, at that point, you start saying, wait a minute, do I want to have a combustion-engine car? Because if I had to drive a long distance . . .

Now, one of the big advantages is I can drive a long distance, and no problem, but now, I need to figure out where the gasoline distributors are, and they are going to die sequentially. And so, at some point, people will switch dramatically into green energy. The process is not going to be linear. It’s going to have some bumps in the road, but I think that the direction is there.

And the other benefit that people don’t talk enough about is, we’ll make our cities much cleaner. I spent a month in Milan, and it is hard to breathe. You can feel the pollution in your lungs when you go around. Thanks to German car producers, the standards in Europe are much more tolerant than the ones in the United States. Milan is in the middle of the plain, so it gets all the smog stuck there, but it’s really, really painful. The beauty of having Italian cities that are small, and everybody’s on top of each other, not having smog is going to be a game-changer.

Giuseppe Di Cera: The fog could also come from the Derby della Madoninna, you never know. Milan versus Inter, always good stuff.

But changing topics, I want to talk about shadow economies. I’d be curious to hear your opinion on . . . In some countries, the shadow economy makes up a huge percentage of the country’s GDP. In Bolivia, it’s over 54 percent; in Italy, it’s over 23 percent of GDP. How can countries resolve this issue? It seems to be very prevalent in many countries around the world.

Matt Hodapp: In five minutes.

Luigi: OK, that’s an excellent question. We’re going to discuss this in my class. I think it is a very delicate process in which you slowly need to force people into the formal economy without choking them.

Giuseppe Di Cera: What does that mean?

Luigi: It means that if you are a very, very poor country and you impose the US level of regulation, nobody can operate. And so, you kill the economy. You can’t go to Haiti and say you need to have the standards of safety that you have in the United States. People die in the street every day, so it’s not even worth it for them to have that standard of safety. But also, it will really kill the economy . . . or even in Bolivia.

On the other hand, if you are not careful in slowly nudging these firms to become part of the formal sector, you have a level of unfair competition and less of a push to increase productivity. I think one of the reasons, in my view, why Italy has not been growing in productivity is because you have a shadow economy that competes with a formal economy, and the shadow economy, by design, needs to be constrained.

For example, I cannot use a lot of ICT in the shadow economy, because ICT, by definition . . . ICT, sorry, information communication technology. Because it leaves a trace. If I am in the shadows, I want to use cash, I want to be under the table, I want there to be no record. And so, I cannot take advantage of a lot of modern innovation in order to basically evade taxes.

Now, we are in a situation in which you have too many businesses that compete not paying taxes, not following regulations, and make it difficult for the ones who want to be on the up-and-up to compete. That’s very dangerous.

It’s a very delicate balance that you need to start low and then up the ante constantly, and never too abruptly. If you make a big jump, then you have all of a sudden 10 percent of the economy that is killed, and, of course, there is a revolt.

When Mario Monti was prime minister 10 years ago, he started to tax the hell out of everybody, and the country revolted because you can’t overnight kill 10 percent of the economy. You need to slowly nudge the 10 percent to become first a 9 and 8 and 7 percent, and to slowly get into better opportunities.

Giuseppe Di Cera: That’s interesting. You still have time, right?

Luigi: Yeah, yeah.

Matt Hodapp: If you can do it in two minutes.

Giuseppe Di Cera: A slight follow-up. It won’t take that much time. If you eliminate cash, maybe you institute a digital currency, how much would that decrease these shadow economies? If, obviously, everything is under the table . . . You mentioned crypto earlier. I love crypto, by the way, so we don’t need to talk about that. But if you eliminate cash and just put a digital currency in place, is that a solution that could work?

Luigi: I think it helps. Now, you don’t want to eliminate cash completely. I have a 95, almost 96-year-old mother in Italy, and we gave her a credit card. Now, they require a PIN for the credit card, and she doesn’t remember the PIN for the credit card. And so, that is a big issue. It’s not that she makes major purchases, but I think that she would like to go out and buy some stuff. I think that we need to be respectful that cash in small quantities is very useful for a lot of people.

However, as you probably know, in Italy, there were some limits on the use of cash for purchases. And the first thing that the right-wing government did was to increase that level. That is really a subsidy to the black economy and to the criminals.

You go to Milan in the major streets, and you find everything written in Russian. Why? It is because they come from Russia, and most of them come with cash. They don’t come with credit cards. The moment you limit the purchases with cash, then you have the backlash of the stores, et cetera.

Giuseppe Di Cera: Interesting, interesting.

Matt Hodapp: Utsav, if you want to come down and get a mic, we are going to open it up for everyone to ask questions. I am going to take producer privilege and ask the first question. In our solicitation for questions, you asked everyone not to ask you about your favorite soccer team. So, what’s up with your favorite soccer team, and why won’t you talk about it?

Luigi: I’m a loyal guy. At age three, I asked my brother who he was supporting, and he was supporting International AC. And my sister was supporting International AC. And my father was supporting Milan AC. And I decided to equate the family to support Milan AC. And it’s being mostly a life of pain. First, it was a life of pain because during the years in which I was in Italy, Milan AC was doing terrible. It even ended up in the second division. It was really, really painful. Then, it was bought by Berlusconi and became phenomenal.

First of all, when I was in the United States, at the time when nobody was watching soccer, it was impossible to see the games, so I missed the magic moment. Plus, it was always ruined by the fact that Berlusconi was behind it. I thought that my love for Milan AC was stronger than my hate for Berlusconi, so I maintained my support for Milan AC. But I couldn’t rejoice as much as I would have. And now Berlusconi is gone, and Milan AC started losing again, and it recently lost 5-1 in the Derby against International AC. I think that was very painful.

Matt Hodapp: Sorry you have to deal with that. Raise your hand if you’d like to ask a question, and we’ll bring the mic around.

Audience: Good to see you again. I have a question about what you said about direct democracy earlier. I know de Tocqueville, I think in Democracy in America, talked about how his fear was that tyranny in the United States would come from a majoritarian system where the will of the majority terrorizes the minority. I guess to the theme of the podcast, if monopoly power is dangerous, if the concentration of power is in the demos, the people, is that in and of itself a danger as well? Should there be institutions to balance that power, or is direct democracy inherently a good thing, regardless of that concern?

Luigi: No, I think direct democracy relies very much on a lively market for information intermediaries. You were mentioning earlier direct democracy in Turkey. If you don’t have freedom of the press, if you don’t have a lively, free press, I think it’s very dangerous to have direct democracy, because then, it’s just rubber-stamping whatever is in power.

I think that if you have a large-enough educated public and large-enough information intermediary that provides alternatives, then there is not a set majority. The view on abortion, in my view, should be orthogonal to your view on the economy and your view on immigration because they’re different. And so, I don’t think that there is necessarily one coalition that does everything in one dimension. That’s what parties are about that tend to bundle ideas to form a stable coalition and keep ruling. And while I think parties play a role, of course, in democracy, I fear a tyranny of the party more than I fear the tyranny of the educated public at large.

Matt Hodapp: Great, thanks. In the middle.

Audience: Hi, professor, what do you think about the increasing aggressiveness of the SEC over the past recent years? I work for a financial institution, and we were recently fined for using WhatsApp, along with essentially every other business in the region. We didn’t really understand this to be illegal until we were fined for it. Do you think this is overreach, or do you think this is appropriately punishing Wall Street?

Luigi: That’s a very good question. Actually, in my class, I show a hearing with Gary Gensler, who was asked in Congress whether Ripple was a security or a currency. And he avoided answering for 15 minutes. I don’t remember who was asking him, but he was really, really aggressive.

Then, a few days, later the SEC came down with the decision saying that everybody should have known that Ripple was a security. And so, you have, on the one hand, the head of the commission not willing to answer Congress because it’s a complicated thing, and then the next day, the commission saying everybody should have known from the beginning.

I think that especially when it comes to crypto, there might be a bit of an overly aggressive stand. I think that, historically, the SEC has not been very aggressive in its pursuit of corporate fraud. I think that maybe cryptocurrency is seen as the outsiders, and it’s easier to go after the outsiders than to go after the normal businesses. If you have to go after Google, that is one thing, but going after a crypto exchange is easier.

This said, I think that I am worried about the level of safety of most of the crypto world. What has transpired in the FTX case is that there are no rules. Now, if you believe in a world in which everybody can do whatever they want with their money, and we shouldn’t protect anybody, then you basically are saying you don’t believe in the SEC.

I think that, especially when it comes to savings, especially when it comes to retirement savings, because we’re forcing people to do it, and we are on the hook, because if they don’t have that contribution, at the end of the day, you and I have to pay the taxes to support them, I think a minimum level of scrutiny should be done. I was terrified, for example, when there were advertisements for IRAs that were investing in cryptos, because it seems to me that this is not the place where you want to put your retirement money. Now, there is a place to gamble, and there is a casino. Your IRA is not one.

Matt Hodapp: Great, thank you.

Hi, thank you, professor. I’d like to follow up about your answer about the shadow economy. And I’m intrigued by your answer that we should actually nudge the shadow economy to be more formalized. And I think my question is twofold. Perhaps the first part is, what does it mean by informal economy or shadow economy? I worked in a social-protection organization before, and we grappled with the real definition of shadow economy.

The second part is, I agree with you about the efforts of formalizing the shadow economy, but I have the reservation, especially when we work in a deep-culture economy where informal economies such as the culture of hawking on the streets gives a soul and meaning to the city. What does it mean by formalizing? Was it to be captured by the banking institutions or to be captured by the formal institutions of the state in terms of taxes, or organizing in a manner where we can see them in a centralized place? That’s perhaps my question.

Luigi: I think that the informal economy is the economy that takes place outside of the rules imposed to operate in a particular sector. And so, part of the trick is how tight you make those rules. If you sell marijuana today in Illinois, that’s the formal economy. But until, whatever, two years ago, that was informal, and not only informal, illegal, because it was outside.

So, it is very much a function of what you allow and what you don’t allow. My inclination is trying, especially when the externalities are not too big, to allow more things rather than fewer, because it’s costly to enforce, and because I want to facilitate people to be able to use the legal system to defend themselves.

One of the problems of the informal economy is that you cannot use the legal system when you have a dispute. And so, workers tend to be exploited because they can’t protect themselves. You find it difficult to borrow because you have no track record, and so on and so forth. I think that it is very important to give the benefits of the rule of law to as many businesses as possible. That’s the reason why I’m saying you want to bring as many businesses as possible into the formal economy.

Now, do you want to tax the young girl who sells cookies outside of the church? It seems a bit excessive, so you don’t want to be overdoing it. But as long as they remain marginal things. So, if they fundraise selling cookies outside, it is not a problem, but if they develop a business of cookie sales, and then some of those cookies might not be healthy or might even be impacted by E. coli or some other viruses, whatever, some other potential disease, et cetera, then, of course, you need to intervene.

I think I want to be as tolerant as possible, but also, at the same time, understand that there are some minimal rules of the game that you don’t want to tolerate people that abuse their workers because they are not official workers, that sell you defective products. To me, one of the most compelling arguments, for example, to legalize drugs, is that illegal drugs tend to be cut with a lot of dangerous stuff. And so, the vast majority of people who died of overdoses were dying of overdoses because they were injecting or smoking, or whatever, stuff that was not pure. It was not of decent quality. I think that it’s very important to have a degree of protection of consumers, for example. And you can’t have that protection without having some formal rules. I think that you don’t want to eliminate the rules. You don’t want to make the rules so tough that everybody is outside of the system.

Audience: I want to return back to the theme of cost of enforcement. I don’t know if you’re familiar with the studies where it shows that a certain degree of organized crime keeps crime down overall in the society. I guess the reasoning behind that is that the mafia is going to follow their own personal self-interest. They’re going to do more surveillance and protect their own interest, and therefore keep certain crimes down more. Basically, if you compare that to a current, traditional model of criminal justice, we have the government trying to enforce the law. We pay to do that. And also, it’s easy to corrupt. So, there are a ton of instances where it’s very easy to sway certain politicians or to evade laws with money and power.

I guess I’m wondering if there’s an argument to scale the model of organized crime as a third-party thing where there are incentives that are shifted to enforce that, like the way that the mafia is doing it. Not exactly the way the mafia is doing it but taking a lesson from that where they’re taking their own self-interest, and they’re bearing all the costs and all the rewards as well. Yeah. I’m wondering what your thoughts are on that.

Luigi: This is a tough question. I tend to be Weberian in this, and I think that the state should have a monopoly on the use of violence in a certain territory, precisely because competition for the use of violence is very dangerous. The part you don’t see of the mafia is that their position is temporary, and there are wars . . . Besides the war between the mafia and the government, there are even wars among mafia families, and those are extremely disruptive and extremely dangerous. Besides any moral consideration, even from a practical point of view, I’m not so sure that you want to have a system of delegation of that type.

I think that I much prefer having a centralized system of strong enforcement, and I think there are ways to minimize the corruption. One of my favorite mechanisms is the whistleblower reward system, in which you are rewarded when you bring information that really undermines a current situation, exposes current corruption, and so on and so forth.

Not only are you protected, that’s a minimum, but also, you are rewarded in that direction. And why? Because that really discourages people from even thinking about doing a crime. I think that’s the first part.

But the second is, you have to remember that order is a combination of repression and consent. The consent is a very important component. Because if we all decide that we don’t respect the law, there are not enough policemen to keep us in place. And when this happens in societies, it’s terrible. I think it’s very important to not only have a functioning system, but also a system that is legitimate in the eyes of the people around. Because without that legitimacy, people don’t buy into it. And if they don’t buy into it, it makes enforcement really hard.

The best way is when most people do it voluntarily. I think that in this country, most people pay taxes voluntarily, because we know from the statistics the probability of being caught if you don’t pay your taxes is really, really low. And I think that there is an element of consensual agreement . . . And that’s the reason why I always thought it was very dangerous when politicians in Italy were saying that, “Oh, the government is stealing money from people through taxes, and it is your right not to pay taxes,” because then you start to create a consensus on the alternative. Then, maintaining a functioning state under those conditions is very, very difficult.

Matt Hodapp: As his producer, he technically can’t leave until I end the episode. But I think we’re coming up on time. Maybe one more quick question, if someone has one.

Audience: Hi, there. We spoke earlier about antitrust law as one way to rein in some of the negative effects of the influence or power that big tech firms have. I’m curious about your thoughts about an alternate path. If individuals were given exclusive and perpetual rights to own their likeness and the metadata they produce through digitally mediated interactions, that would force interoperability and transparency. I’m curious what you think about that as a path, because it would address both the harms done by traditional big-tech firms, but then also firms that rely on aggregating data through other mechanisms, even if they’re media firms or things like that.

Luigi: I think it’s a very interesting idea. I do think that antitrust is not the only solution, and I am a big supporter of interoperability. The idea of empowering everybody with their data, first of all, technically we have that power to refuse today, but we give it away very easily, especially because you have to subscribe to something. A colleague of mine was saying, “I have kids at the Lab School and the homework for the kids is on Facebook, and I need to connect with Facebook.” And there are the terms and conditions, but if you were to read all the terms and conditions, you would not work because there are so many.

I think that my fear is just empowering the individual with that ownership might not be the right thing because of the ease with which we consent. And two, imagine that this was very, very effective. There would be significant costs.

One of the big advantages of big data is that we can find regularities, for example, in medicine, and cure diseases in a much more effective way. One of the things that people at Microsoft are studying, for example, is the first thing you do when you have a strange symptom is you Google. Now, if you are at Microsoft, you Bing, but nobody Bings. So, you Google.

And then, if you are able to connect the medical record of somebody with what they Google, then you find . . . Take pancreatic cancer, which is a killer, and it’s mostly asymptomatic. By the time you find out, you are dead, basically. If you can see some regularities that people who later on are diagnosed with pancreatic cancer early on had some symptoms, that could save an enormous amount of life.

I think that there is potentially too much protection of certain data. Now, I don’t want to necessarily put my identity in the face of everybody, but if there is a way to connect my medical information with my Google information without my name being there, this is something that I think is extremely good for society.

I think that the secret is how to do that effectively. And I’m sorry to say—or some people would say, I’m happy to say—I think that India is ahead of everybody in that dimension. They created a government-owned identity that is an individual electronic identity. They have created a system of payment which is available for everybody to use, so there is no monopoly by anybody, so there is interoperability. They are creating forms of sharing their data under certain conditions. I think that we need to experiment more.

Now, of course, in the United States, this has been made difficult because there are two or three behemoths who live off the ownership of this data, so any change would be super disruptive to their business model and their valuation. I think that we’re a bit more blocked by that, but I think that’s the direction to go.

Matt Hodapp: Thank you so much to our fantastic students, you were great. Thank you to our audience; thank you to everyone who came out.

If you’re a fan of the podcast, please tell a friend, a family member, someone to listen. That’s how these things tend to spread. Thank you to Luigi, good sport. You can always root for Miami FC, they’ve got Messi now, maybe it’ll be a little easier on you. But thank you to everyone, this was great.