Capitalisn’t: A Turning Point in the History of Capitalism?

Jonathan Levy: With history, you get a more capacious view, and in some respects, some questions, especially the big questions that a lot of the book tackles, big questions happen to do with capitalism. What it is, how does it work? It’s a capacious view that has its own advantages. I think you can get more insight through it.

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: And this is Capitalisn’t, a podcast about what is working in capital-ism.

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.

Luigi: In our podcast, we tend to discuss capitalism and the pluses and the minuses on a day-by-day basis. Sometimes it’s useful to take a longer historical perspective, and we’re very fortunate that one of my colleagues here at the University of Chicago in the history de-partment has just written a book called Ages of American Capitalism that provides a history of the evolution of capitalism in America from colonial times to today.

Bethany: And part of his analysis addresses one of my key sticking points, which is that the study of economics is too often mathematical and reduced to models, particularly today. And so, in my view, bringing in the perspective of a historian who has thought about this in different terms, in the language of words and history, rather than the language of numbers and models, is a valuable added perspective.

Jonathan, I loved your book, and I was struck by a quote right at the beginning, which was this: “Today, mainstream economy follows a path of great mathematical rigor that does not make room for other accounts of economic life, including historical accounts.” And you’ve attempted to do something very different in this book. And I was hoping to start with a question of why. Why did you take such a different path in terms of trying to weave in historical accounts to explain what’s going on, economically speaking?

Jonathan Levy: Achieving rigor, at least one kind of rigor, often through the use of mathematics sacrifices other virtues, other intellectual qualities. So, oftentimes, to achieve rigor in that way, you have to narrow the scope of inquiry and treat the economy as a relatively restricted subject, whether emphasizing things like rationality or incentives or markets. I think the economy is a much bigger subject matter. If we think about economic life in the broadest sense, there’s other issues, other subjects, that need to be integrated into an account of whatever the economy is.

But I think with history, you get a more capacious view, and in some respects, some questions, especially the big questions that a lot of the book tackles, big questions having to do with capital-ism. What it is, how does it work? it’s a capacious view that has its own advantages. I think you can get more insight through it.

Luigi: I completely agree. One of my favorite lines is you can say nothing pre-cisely or precisely nothing. Much of economics these days is into precisely nothing, but I want to actually follow your path to try to get to the big waves in history, in the sense that I think that the big advantage of writing in history so long is that you can see some very long swings.

And one of the swings is this tension between kind of a plutocracy system and a populist system that goes back and forth. You start with Hamilton. Actually, let’s demolish Hamilton, because Ham-ilton, thanks to Miranda, has become this idol of the masses. But, in fact, he was the worst form of capitalist pig who took advantage of consolidation to make money. And he basically started the way in which you have a very powerful government that represents the interests of a very small group of people.

And then, you have the Andrew Jackson revolution that you seem to be relatively sympathetic to, in the sense that, of course, we all know that he did terrible things with Native Americans and so on and so forth, so we’re not trying to give a completely sort of positive view. But I think that I would like you to sort of . . . I can continue, but I would like you to discuss these swings in Ameri-can history.

Jonathan Levy: Yeah, but you started with Hamilton. That’s a moment in which politics doesn’t distinguish between, say, public interest and private interests. I think what you said is fair to describe a lot of what Hamilton did as corrupt. He benefited personally. A lot of his friends, fellow politicians, benefited personally from some of the policies that were employed, but they don’t really see it that way. They see public and private as always being enmeshed. The kind of view you espouse, I think, is a kind of Jacksonian view, that we have to keep politics and markets, at least to some degree, separate, otherwise one will corrupt the other.

Those two modes—I don’t know if they’re waves. I suppose they are. I haven’t thought about it that way. But those two modes—that public and private are always going to interact, let’s get the interactions correct, versus public and private need to be separated to prevent corruption—those two political styles are always present in American history. And you’re right. They do wax and wane. They do compete. Which one you prefer, I think, depends upon your sensibilities and your own political preferences.

Bethany: Did you come away with a sense of which one you prefer?

Jonathan Levy: No. I mean, as a historian, I try to figure it out. I try to take my own opinions out of the matter. And so, I think I see it more as a tension that has to be bal-anced than perhaps choosing one or the other. But our politics aren’t necessarily organized around resolving that tension. Oftentimes our politics have to do with exacerbating that tension.

Bethany: Or exploiting that tension.

Jonathan Levy: Exploiting. Yeah. Yeah. Yeah.

Luigi: What I see you saying is there are important complementarities in in-vestment. So, if I invest alone, I can’t really make a good return and a big difference. But if we all invest at the same time, actually, this can be transformational. That’s what we economists would call complementarity. And so, here, when there is complementarity, there can be three things that trigger complementarity.

One is some state intervention. Two, other factors that drive investment. So, probably people did not cross the Atlantic only to have a better living—at least the ones who came voluntarily. They came here for something else. That was a big factor in the investment. And the third one, ironical-ly, is bubbles. Think about one bubble we all experienced, which was the one of the late ’90s. It was definitely, at least with the benefit of hindsight, a bubble, but it was crucial in advancing some technology and bringing a new level of technological advancement that we didn’t have before. So, how much do you buy into my interpretation of your book, and to what extent am I missing im-portant elements?

Jonathan Levy: I like your interpretation. I mean, as you suggest, investment as a critical factor and the account of investment is the heart of the book, and the relationship be-tween politics and investment is at the heart of the book. I would maybe state one thing first be-fore I addressed your three complementarities, which I liked, which is the way that liquidity pref-erence, and Keynes through liquidity preference, sets the scene for the book.

What Keynes suggested is actually owners of wealth don’t like to part with liquidity to bear the risk of investment, and instead save or hoard or invest in liquid assets, even for speculative purpos-es. So, the norm, right, is that we should see basically rentier capitalism. We shouldn’t see a very high rate of investment. We should actually see a very weak rate of investment.

I think, on balance, since roughly the 1980s, the investment regime we’ve had, very specula-tive, very short term, not very productive, very high level of liquidity preference for holding specu-lative assets in a financial sector that specializes in creating fresh supplies of liquid assets to hold and to profit from. And so, in that respect, I think the 1990s has kind of been the exception to the rule in our era.

Bethany: Are these factors that drive these periods where investors aren’t misers, where they choose to invest? It read to me as if it was an accumulation of small factors, not a series of choices by policymakers, but an accumulation of things in society and in politics that cause these phases. And I thought, if we’re trapped in one of these phases now, maybe trapped is the wrong word, but as Keynes wrote, “There’s been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest. The weakness of the in-ducement to invest has been at all times the key to the economic problem.” And if that’s where we are today, is there a solution for it, or does the solution for it come from a series of factors that can’t be predicted or manipulated because they’re too multifaceted?

Jonathan Levy: It’s a great question. I think the good news is, yes, it can be done. And when it was done, those are the major turning points in American economic history and the major turning points in the book. For many years, the abolition of slavery was thought to be so dramatic and revolutionary as to be impossible. It happened without compensation in the United States. Likewise, the New Deal is a moment of transformation, a moment of rupture, that creates new patterns of expectations around investment and moves capital into different directions. And then, finally, I said around the Volcker shock rather than the election of Reagan, but 1980s, anoth-er moment where you see another rupture.

It’s possible that we’re living through such a rupture today. We’ll see. I think you’re right that if you want to understand these dynamics historically, you have to have a very multifaceted explana-tion, to the point where you wonder, what is the kind of causal variable that could actually drive the system? With that said, I would point to the state and to politics as really being the central ac-tor on the scene that can determine new patterns of investment.

Luigi: But you seem to blame—and maybe I mischaracterize you, so feel free to disagree—but you seem to blame capitalism for this short-term liquidity preference. I would put it the other way around. I think that I see the liquidity preference as a part of human nature, and actually capitalism as the first system that tries to overcome that by providing a different way to save. And maybe, as you said, sometimes there is a need for a nudge from the point of view of the government. Sometimes, unfortunately, this nudge comes from wars, but the moment we want to maintain freedom, we have to cope with the fact that people do have a preference for liquidity. I don’t think there is anything bad about that.

Jonathan Levy: Just to underscore one of the points you made about wars being really central to these shifts. Of course, wars are awful, destructive events, so that it’s hardly what . . . I hope that we don’t have to live through another world war before we see a rupture, a discontinuity, in moving capitalism in the direction that we would like.

First, you’re right that a capitalist financial system does have ways of mobilizing savings into productive investment that precapitalist systems didn’t have. With that said, I think the extreme liquidity preference is irrational. I mean, I think the desire to keep all investment, all speculative investment options open, immediate entry and exit into any and all asset classes, I think that does undermine for the economy as a whole long-term productive investment. We could debate that, but that’s a kind of position that I put in the book to get out there.

And then, finally, on the politics of this, it goes back to our first point of, if you agree with the argument that the state has to be involved because of the weakness of the inducement to invest, there’s lots of different ways to do that. The way the US has tried to do it is through tax incentives in the tax code. Tax cuts often being presented. Trump did this. Reagan did this. Didn’t work. Or tax rebates, tax incentives. That’s mostly the way the US state has tried to shift both the composition of investment and the rate of investment.

I don’t think it’s been very successful if you look at the historical record, and that poses the question of perhaps other mechanisms. Public-private mixed mechanisms being discussed today in terms of green energy or potential programs for investments having to do with climate change. So, I think that is one place where something like the Hamiltonian tradition of public and private could get you a new regime of investment that would have more public dimensions that could triumph over liquidity preference that might still have scope and room for a very large role for private in-vestment.

Bethany: Let me try another possible reading of your book, and see if you agree with this, but that plays off what you just said, which is that I actually thought your book does offer a way to bridge some of our dysfunction, some of our current split in ways of thinking about the economy, in that you do have, in very simplistic terms, on this one hand, these very hardcore group of people who say, “The free market must rule.” And on the other hand, this group of people who say, “No, the government must determine what we do.”

And I think part of the compelling argument in your book is that there never has been a time where a free market existed apart from some form of government rules. And you even have a great quote from Adam Smith, that supposed father of the free market, that he theoretically thinks about what the free market would look like in the absence of the state. But it was only an intellectual argument, because he knew state policies mattered. And so, I thought perhaps that a broader read-ing of your book also offers a middle way forward in which we all accept that state policies have to have a role. Does that make sense?

Jonathan Levy: It makes sense to me, certainly. You quoted Smith. I mean, I think that what one could say about Smith, you can say about general equilibrium economics. It’s a thought exercise that establishes its own limits. It’s just that, and it’s a helpful thought exercise, but it can’t be taken as a description of the world we live in as such. And I think you could say the same thing on the opposite end of the spectrum of people who say, “The state, the state, the state.”

The problem with that kind of more middle path is it’s very messy. There’s no neat and tidy theory of it. It means you have to write a very long book if you want to give an account of that sort of messiness and the richness of that messiness. And it means when you enter the realm of policy that things are complex. It often means you have to go case by case, and you don’t have a covering explanation for every single phenomenon that you’d like to understand.

So, really, we’re talking about an integration problem, right, of how you integrate markets with the government, how you integrate the state with the economy. And that’s a never-ending pro-cess, right? It never ends. We’re always working on it through, hopefully, democratic processes that recognize our fundamental political and economic values that we all share. That, to me, is the ideal. Not a kind of final statement that one could make about what it would mean to get any of these matters right for once and for all time.

Luigi: But I think we all agree the state has a role in putting rules in place and also in ensuring that there is competition. Not every economist agrees, but I think that the three of us probably agree on that. Where the question is, is what is the role of the state in what today is called industrial policy? You seem to suggest that the state should have an important role in industrial policy. The question I have is twofold. Number one, to what extent does this end up being a success? Number two, to what extent do we avoid the corruption of the Hamiltonian state? Because every time you give the person in power the ability to spend a lot of money, inevitably that money will go to his friends or her friends—historically, they’re mostly his friends—and also entrenches himself politically.

The three of us live in the city of Chicago, and Chicago is kind of a developing country from a political point of view, because there was, and maybe there still is, the Daley machine that is in-trinsically corrupt. There’s no alternative. The last Republican mayor, I think, is more than a hun-dred years ago, and the city doesn’t work well, and so on, so forth. So, if you look in a microcosm, this power of the state doesn’t seem to be doing so well.

Jonathan Levy: Those critiques obviously resonate. You mentioned industrial policy. This is kind of, do we have industrial policy in the United States today? Not to the extent that other states certainly have tried to encourage manufacturing, export-led economic develop-ment, and have designed all kinds of economic policies. We don’t think of quantitative easing or asset purchases by the central bank as being a kind of industrial policy. But of course, it is, right? The effects of that policy have dramatic consequences for the US economy and dramatic conse-quences for the economic fate of a city like Chicago, in terms of how it affects real-estate markets, how it affects a variety of different asset markets, and also industrial employment and jobs. So, once again, I think we’re stuck with the best policies that would get us the economy we’d like to have, which I agree would have the least amount of nefarious corruption possible, as opposed to a kind of either/or.

Bethany: I often think we have a naïve, let’s-pretend policy in the US, where we pretend that it’s the free market that is dictating the outcome. The “free market,” since I’m not sure such a thing actually exists. But in reality, what’s dictating the outcome are specific poli-cies that we put in place. For example, our hospital sector, which has been allowed to become a completely disorganized, chaotic mess, and which we pretend operates according to the principles of the free market with for-profit hospital chains. But in reality, it is a system where hospital chains have, since the beginning of Medicare and Medicaid, made money off gaming the rules that the government has put in place. Or the same is often true of our energy sector. We have no energy policy because we like to pretend it’s the free market, when in reality, it’s America that had a law against exporting oil dating back to the 1970s. And that was obviously a government policy sort of negating the concept that we were allowing the free market to flourish.

Jonathan Levy: Well, yeah, I mean, I have two reactions to that. First, I love the hospital point. Our hospital system is defined by all kinds of networks of for-profit and nonprof-it, and also state funding mechanisms and organizational structures. It’s an extraordinary, complex assemblage that can’t be reduced to inside the market or outside the market.

Second, a lot of historians have thought that in the 20th century, the best thing that happened for capitalism was communism. A great communist historian, Eric Hobsbawm, made this point that we could explain the kind of postwar, post-World War II, social democratic glory age as capitalism being forced to respond to the challenge of communism and to humanize itself, the expansion of the welfare state being the leading example.

But sometimes I think that’s wrong. And especially in the United States, the Cold War just had horrible effects for American political discourse. The invention of the phrase “free enterprise,” right, the free market came from Cold War critics of communism, and I think rhetorically locked American politics into the kind of game that you’re suggesting we should stop playing, which is the kind of free-market-or-not. That kind of act as if it’s in the free market was a rhetorical device that was part of anticommunism. And what are we now, 30 years after the fall of the Berlin Wall? Maybe it’s time to not talk that way about economic questions and to develop more nuanced and sophis-ticated ways of doing it. I mean, hoping for more nuance and sophistication in our political debates is probably just that, a hope, but nonetheless, we can always hope.

Luigi: And so, if we are at a turning point, what do you see around the cor-ner?

Jonathan Levy: What’s new to our period roughly since the 1970s is fiat money. And before the 1970s, there’s a hard metallic standard. It creates a hard limit to the supply of money. Going back on the gold standard after wars was always a way to tighten money and to bring about a period of deflation. Since the 1970s, going off of the gold standard in 1973, we’re still in a trial-and-error phase here with monetary policy. Exactly how monetary authorities should control the quantity of money, if they can control the quantity of money, especially as we move into digital currencies, these are open, uncertain questions. I don’t have a prediction there so much as just to frame the novelty of the moment. And as we move into what looks like the repeti-tion of a past cycle, we do it in very different conditions than what occurred in the past.

Luigi: One quibble I have with your book is, imagine for a second that this is the only book that survives a destruction of civilization. Some future civilization, maybe some Mar-tians, read your book. My view—and it might be wrong, and I also would love to hear what Bethany thinks about this—but my view is that the Martian reading this will not come away with the suc-cesses of this period. And I go roughly, but in the period of your book, life expectancy doubled, per capita income was probably 30 times as big as it was in the beginning. The United States was able to accept what, over history, I go roughly, 100 million people from all over the world and trans-form it into more or less a vibrant democracy, maybe a little less vibrant today than in the past. Of course, there are a lot of negatives, and I think that in this podcast we go through all that regularly, but sometimes we . . . I’m afraid we miss the forest for the trees.

Jonathan Levy: I think that’s fair. I do have to say, I never imagined that it’d be the only book left on Earth. And I think that most of the books that try to tell a sweeping eco-nomic history of the United States tend to be too triumphalist for my taste, maybe for your taste, too. I don’t know.

Luigi: Yeah. No, no, I completely agree.

Jonathan Levy: That’s how I thought of it. But I guess the other thing I would say is I started writing this book after 2008. The book came from a moment in which many people, myself included, were reevaluating capitalism, I think were troubled with a lot of the tendencies and trends we’ve seen in the American economy, really since the 1980s, I think, I argue in the book. Certainly since 2000. The chapters in the book, certainly the chapters in the book that cover the 2000s up to the Great Recession, are pretty depressing. They were pretty depressing to write. I don’t think it’s been a very happy story the last few decades. And so, for that reason, the perspec-tive, I think you’re quite right to suggest, is critical.

Luigi: One thing I found strange is that you have the last phase of American capitalism, the age of chaos, starting in 1980 and continuing today. My choice would have been to stop exactly in 2008 and call the age between 1980 and 2008 the age of finance. It is not as chaot-ic as the world we’re in today after the great financial crisis. And I think that the great financial cri-sis is a turning point that is much bigger than anything else we’ve seen nearby.

Jonathan Levy: Well, so there I think we disagree, although this is definitely in the category of too soon to tell. I think there’s a lot of continuity across 2008, and I think COVID, I think this moment, once again, too early to tell, stands to be much, much more sort of a rupture. When we talk about these deflation-inflation cycles, I really see continuity across the 2008 peri-od.

Luigi: There’s a lot of continuity, you’re right, but there is continuity more out of inertia than out of people believing. And, of course, there are the seeds of change. Now, you can say the same about the late ’70s. In your book you’re very clear about saying that you can see the seeds of Reaganism, free markets, in the late part of the Carter administration. So, I think that it’s never such a discontinuity. But I think that you can see it both ways.

Jonathan Levy: And I think the sense since 2008 has been kind of crisis as the norm and just muddling through.

Bethany: Thank you. I thought that was fascinating. And I loved your—

Jonathan Levy: I enjoyed it. Thank you.

Luigi: And hopefully, you didn’t take it, and if you want, we can take it out at the beginning. But of my favorite sentence, when I say nothing precisely, I’m in that category among economists, to say nothing precisely.

Jonathan Levy: Oh, no. I understand. No, I understand.

Luigi: Because the precision comes at the cost of being irrelevant. And I think that I actually see an advantage of saying nothing precisely, because at least you can say something.

Jonathan Levy: No, I mean, I enjoyed this conversation, because you imagine when I present this book to historians, like this guy, understandably, someone who spent their en-tire life on the 1830s, and they just sort of read these two paragraphs and they’re just so mad, you know—

Luigi: Yeah, Of course, because you didn’t quote this nice statistic.

Jonathan Levy: Yeah. Yeah. That’s not right. And it’s like, well—

Luigi: That’s the reason why I stay away from that. Even on the part of the stuff that is more recent. So, I know something. Of course, I know nothing about . . . Actually, let me ask this, because I was curious, because I am listening to a lot of places where they are even rethinking the Founding Fathers, the Constitution, et cetera. And one in particular was saying that, really, the American Revolution was driven by people like George Washington who wanted to do land speculation, and to have land speculation, you need to take money, to take land, from the natives. And the British did not want to do that, not because they loved the natives, just simply because they didn’t want to have war or tension. And so that was part of the tension. Is there any basis for that or is it just—

Jonathan Levy: Yeah, that’s part of the story. I mean, the British, in 1763, they passed this law saying you can’t . . . limiting expansion westward. And a lot of those guys were land speculators, and they didn’t like that. I mean, you can’t . . . It’s like slavery. There’s lots of de-bates now about slavery as the cause of the American Revolution. I mean, it’s present. They know it. They’re thinking of it. Is that alone the cause of the Revolution? No. I think that would be a crazy thing to say.

Luigi: Thank you very much.

Jonathan Levy: No problem.

Luigi: Nice talking.

Jonathan Levy: All right. Thank you.

Luigi: Bye-bye.

My view is that the book really lacks a bit of a big theme. The biggest theme he has is the fact that there is too little investment in general because there is this liquidity preference of people. This might be my approach as an economist, but I take the liquidity preference as a preference of individuals which I don’t discuss very much. It’s a constraint I have to deal with because people don’t want to . . . They might have some liquidity shocks and they might want to be able to with-draw the money. This has nothing to do with capitalism. It has to do with human nature. And, in fact, if anything, capitalism helps overcome this problem, because a lot of what finance is about is transforming assets that are long term into instruments that are short term. Think about banking. You lend long term, and you have liabilities that are very short term, so that people feel that they can withdraw the money whenever they need while the investment is investment in the long term. So, I see capitalism as addressing that.

Now, he might be saying that if you have the government doing all this work and all this in-vestment and the savings, then you don’t need to pay a liquidity premium. But then there are a lot of other problems with central planning that he doesn’t discuss. So, I see the book as criticizing the American capitalist a lot, but not providing any fix or any alternatives. What do we do after that? Suppose you buy everything he says in the book, what then?

Bethany: This is the problem, Luigi. Historians and journalists like to criticize. We like to look at the past and say, “See all the things you guys did wrong.” You economists are in charge of finding the future and the solution. You’re just too solution-oriented. That’s your prob-lem.

Luigi: It’s probably true. Probably true.

The part that I thought was missing is the embedding of the US economy in the international economy, which I understand this was a history of the United States, so you cannot do the history of the world, but it’s very difficult to explain the last 40 years without explaining what happens outside of the United States. And he likes to reduce all of it into some internal fight and the left and right, but the rise of China and the capitalization of China, the fall of the Berlin Wall, and the opening up of basically the rest of the world with the capitalist economy, and so, the admission of billions of educated people into the market economy, did bring, in my view, enormous imbalances in the United States.

My view of the world is that the so-called Glorious Thirties or whatever, the period after World War II that everybody now misses because there was equality, growth, and you name it, is in part the result of the fact that the United States were an island in a sea of chaos, so that you couldn’t possibly invest in France because you were afraid that the factory would be taken away. Imagine in places like Vietnam and Cambodia. And today, you can safely invest in Vietnam and Cambodia, and as a result, American workers in the past did not compete with French workers. Now, they com-pete with Cambodian workers. And so, I think that that has changed the equation in a dramatic way. And I didn’t see that serious discussion there.

Bethany: I think that’s fair, although I think that isn’t in some ways what he set out to do. And you can criticize the book for being incomplete, but it would have been another 500 pages had he done that as well. Right? But it also is, on a less positive note . . . Well, it has not been positive for US workers in some ways, but I also think that the whole move of US investment banks to London and the way in which European banking became a copycat version, in some ways, of US banking, it’s partly why the collapse . . . Maybe that’s too strong a word, but the clear revela-tion of problems in the US financialization of the world that was the global financial crisis has caused such a crisis of confidence everywhere. If the US model hadn’t spread so much, then per-haps it wouldn’t be the crack in the facade of the United States that it is. Do you agree with that?

Luigi: He’s right in pointing out the role of the so-called euro dollar in open-ing up the financial system. In the first 30 years after World War II, the international financial sys-tem was not working very aggressively and there was not really free capital movement everywhere. And I think that the creation of a euro dollar market in London, which was designed by the British to compete with the American financial market, was the beginning of the creation of the interna-tional capital flow. That clearly changed dramatically the ability of individual governments to run their own policies, because before, they were pretty much unconstrained by capital movements, and today they are massively constrained by capital movements, especially in small and medium-sized countries. Now, if you are a large country, that might be a different story. But in small coun-try, that’s certainly the case. So, I think in that respect, he’s right.

What is interesting is the spillover of the financial crisis, the 2008 financial crisis. There was a direct spillover of German banks who invested in the US mortgage market and lost their shirts. That’s one spillover.

But I think the biggest spillover was fear everywhere, because you have a contraction in world trade, which is very dramatic, and is not simply justified by how much money Germany lost, or German banks lost, in the mortgage market. It was more like a contraction due to fear. In that sense, you’re right.

Bethany: Although I’ve always thought the spillover is, as I’ve said before, as much social as it is financial, in that, this is in too-broad terms, but up until the 2008 financial cri-sis, we all believed and the rest of the world believed that the big American banks had it together and understood what they were doing. And now we all know that that’s not true. And I think that that marks a pretty dramatic change in the world that is still filtering its way through all of our sys-tems.

Luigi: Oh, you’re right. And to give credit where its due, I think Jon makes this point by saying, and this is echoing Keynes, but saying that animal spirits play a very important role in these fluctuations. And I think that we economists tend to be more reluctant to embrace animal spirits, because they’re not “rational,” and so they’re more difficult to model formally. But I think that they do play a very important role in the ups and downs and the big cycles of not only the US economy, but the world economy.

Bethany: I wanted to go back to this notion of the miser. I thought this quote was fascinating, because I think it sums up a lot about where the American economy has been for a while, which is this chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest. The weakness of the inducement to invest has been at all times the key to the economic problem. Is he right that this is not a well-known part of Keynes, or is this better known than he posits in his book?

Luigi: The fact that there is a fundamental underinvestment problem, that’s straight Keynes. The fact that this inducement might be necessarily lower or higher, Keynes recog-nized animal spirits, and so, if the expectations are that there’s not a great future for the invest-ments, even if you have low interest rates, people are not going to invest very aggressively. That’s the so-called liquidity trap that resembles very much of what the West now and Japan since the late ’90s is about. It is sort of a world in which the savings exceeds the investment.

Now, one aspect that he does not emphasize in his book, but I think is super important, is the demographic aspect, the fact that people tend to save mostly between their forties and their six-ties, because before they are too poor to save, and later, they retire. And so, when you start to hit your forties, you start to see your retirement. At 25, you don’t. But at 40, you start to see your re-tirement, and then you start to save.

When the baby boom generation hits that age, you see an enormous amount of savings in most countries. If the generation coming later is not as numerous, then the need for investment is not so high. Japan got into this situation a long time ago and is still struggling, because the need for investment is not as big as the need to save for retirement, and that creates a disproportion. The West in general is fast approaching that situation. And, in the next 20 years, China will approach that situation, thanks to the one-child policy that they introduced, so they will face this issue in spades.

Bethany: Do you think that economists will read this book and see that there’s something brought to the study of economics by layering in the study of history that eco-nomics in its mathematical models doesn’t get at, or do you think his aim was too grandiose and that most economists will dismiss it as either not analytical enough or not solution-oriented enough?

Luigi: I think this is a great book for graduate students to read so as to have a broader perspective. I think that when I did my PhD, there was still a mandate at MIT to take an economic history class. But in many programs these days, there is no class, mandatory class, in eco-nomic history. You do it at your own risk or your own peril because you lose this longer-term per-spective. So, this book is very helpful to provide this long-term perspective. And I think that it’s an ideal text for a graduate student, because it is rich enough that you can learn a lot and, in my view, unfinished enough that you can get a lot of ideas to finish it.

Bethany: Why did that change? Why did graduate economics classes get rid of the requirement to study history? You would think that in an increasingly diverse world and one where we all get the multidisciplinary nature of most fields, that you would be adding that sort of thing, rather than taking it out.

Luigi: Part of it is that graduate school, at least in terms of courses, still lasts two years, and the field has exploded in terms of the production of stuff. So, if you want to teach more stuff, at some point, you have to give something up.

But the second is that the field of economics is becoming increasingly formalized. While now even economic history is more formalized, it tends to be less formalized than the rest. And so, it generally ends up being ignored, or at least not put in the same role. And also, this is what happens when you start to become old, but there is a range, a period, that is in between what you study in history and what you have lived in first person. And that’s generally the part you don’t know that well, and it’s quite important, actually, because all the periods that go from World War II to, in my case, the ’70s, for other people it would be the ’80s, it stuff that you generally don’t study in any economic history, because it’s too recent to be history, but you don’t remember it, and it’s quite important in shaping the present.

Luigi: So, what are we doing for Capital-is or Capitalisn’t? What about the famous Biden package at $1.65, or $4-whatever trillion? The basic infrastructure bill is way overdue and is noncontroversial. For the rest, the potpourri is a combination of a lot of spending programs that some of them we might . . . I might agree with some of them. I might not. I don’t know exactly what it has to do with relaunching the economy. And not that it’s the only thing we need to do, but I think it’s a lot more redistributing, and redistributing to Democratic voters, not necessarily to poor voters, but to Democratic voters than anything else.

Bethany: I’m a fan of the infrastructure aspects of the bill, but there are things that I think that have happened in this whole negotiation process that prove, or at least re-inforce, the notion that we have become a crony capitalist state. And one of those to me is that lobbyists shielded carried interest from Biden’s tax hikes. I don’t understand that. I don’t under-stand how you come into office as the Biden administration and continue to reward the wealthiest people in the country for an activity, in my view, that does not do a lot to foster either job growth or real economic development.

Luigi: Actually, you’re absolutely right, Bethany. And let me add the failure to modify the so-called step-up base. The lobbyists have very aggressively said you don’t want to tax the poor farmers who see the value of their property go up. But the exemption now was set at $2 million. So, if you are a small farmer with more than $2 million in assets, then you’re not such a small farmer. And the failure to basically tax capital gains at the moment of inheritance is pretty abysmal.

Bethany: To me, the carried-interest tax has the potential to become the Boston Tea Party, right? Carried interest as tea bags. But it really is. That’s the sort of thing that fos-ters a revolution. I mean, people look at this and see what’s happened, and it is so obvious and so clear cut and so utterly depressing that I can’t say strongly enough how upsetting I think it is and how much it proves that crony capitalism continues even in this new regime.

Luigi: Actually, we should make a bet about which one is worse in terms of revenue lost.

Bethany: Ah, you know what? I am so upset about the theory of it that I don’t actually know. That’s terrible. I’m supposed to be a numbers person, and I haven’t even thought this through. But I’m so upset about the social repercussions that I haven’t actually even thought to look at the numbers and see which one is a bigger deal. Perhaps I’m complaining about something that in the scheme of your complaint is small potatoes.

Luigi: I think mine is bigger, but we need to make a bet and then see which one it is.

Bethany: We’ll give a special prize to the first listener to let us know which one is bigger. Luigi and I will figure out what that special prize is. You may not want it, but we’ll come up with something.

Matt Hodapp: If you were going to pass one policy that would help poor people the most, what would it be?

Luigi: I think that some form of universal healthcare would be a necessary step. There is too much anxiety. It also tremendously impacts the allocation of jobs, in the sense that you’re concerned about where you can get healthcare rather than what is the best job you can do. The matching between healthcare and employment is a leftover of the past and is com-pletely absurd.

Bethany: I think we have to stop having policies that contradict each other. For instance, the Federal Reserve’s ultra-low interest-rate policy of the last decade has been predi-cated mainly on reducing the unemployment rate. But, at the very same time, that ultra-low inter-est rate policy has helped foster an explosion in private equity. And I saw a recent piece of analysis that most of the retail chains that have gone bankrupt in the past decade have been private-equity-backed, and it’s come at the cost of something like half a million jobs. And so, if you’re going to have a policy that is predicated explicitly on increasing employment but is actually in some ways helping to do exactly the opposite, that’s a problem, and it makes me wonder who we’re actually trying to help.

Matt Hodapp: We have to do the great private-equity complaint at some point, Luigi. I know you don’t want to, but—

Luigi: No, no, no. We can do it. I don’t know why Bethany hates private equi-ty so much, but—

Matt Hodapp: You just don’t know why anyone hates... Anytime anyone brings it up here, you’re confused. How can they possibly hate private equity?

Bethany: I see it as everything that’s wrong with everything. It’s become my monster under the bed.