A Capitalism for the People:
Recapturing the Lost Genius of American Prosperity
By Luigi Zingales
Basic Books, 304 pages
For most of the 20th century, the chief danger to capitalism came from its opponents, who advocated replacing private enterprise with socialized ownership of the means of production. The dramatic fall of the Berlin Wall in 1989 marked the definitive collapse of this command-and-control alternative. At the time, many concluded—some triumphantly, others morosely—that socialism’s demise heralded the dawn of capitalism’s ever-growing, ever-lasting hegemony.
The economic prospects for the 21st century are far murkier. One lesson of the financial crisis of 2008, and the agonizingly slow recovery from it, is that capitalism is vulnerable not only to its worst enemies but also to its worst practitioners, the ones who exploit and sometimes ruin other people by taking advantage of asymmetries of political power, or a superior comprehension of legal and financial intricacies. Their actions discredit the idea that allowing individuals to compete, absent any master plan, to offer the best goods and services at the lowest prices will spontaneously generate order and prosperity.
Luigi Zingales, an economist at the University of Chicago business school, believes that capitalism’s defenders cannot leave the work of naming and shaming those who abuse it to capitalism’s critics. The triumph of 1989, he argues in A Capitalism for the People, “led to complacency and extremism: complacency toward the degeneration of the system, extremism in the application of its ideological premises.” To regain capitalism’s virtuous circle of growing prosperity and growing political support for markets requires moving beyond stale orthodoxies. “Trying to pit business and government against each other is increasingly a sideshow left over from 20th-century ideological debates,” he argues.
Zingales emigrated to America after he became disgusted with the necessity to curry favor and secure patrons to establish a career, even an academic career, in Italy. While Warren Buffett and Bill Gates became rich “in competitive businesses, not much affected by government regulation,” Italy’s Silvio Berlusconi “got rich in businesses that are highly dependent on governmental concessions.” Indeed, in many places around the world, the key to making a fortune is to cozy up to government.
Zingales dreads a future in which America is no longer exceptional in this crucial regard, but he sees unnerving evidence that we are coming to resemble the morally shabby and economically inefficient countries where capitalism is a racket, not a system. He discusses how Archer Daniels Midland, for example, turns “investments” in the form of political contributions into ethanol and cane-sugar profits, which depend on government subsidies and tariffs. The rot works through the economy as entrepreneurs in smaller firms, observing how fortunes really get made, tend to their political needs before their business ones: “When the primary concern of a startup is to devise a strategy to milk money from taxpayers—indeed, when a new company refines its lobbying strategy even before it defines its market strategy—it means that crony capitalism has corrupted American society.”
A Capitalism for the People offers a diagnosis and a remedy for America’s acquired susceptibility to cronyism. The diagnosis is that by blurring the distinction between a “pro-market system and a probusiness one,” we are vitiating the qualities that make capitalism both admirable and productive. The shift from supporting markets to being in favor of business puts America on a slippery slope. As we descend it, the profit motive deteriorates into a by-any-means-necessary ethos. Practices that are good for business (or at least certain businesses), such as seeking government subsidies or guarantees, are bad for capitalism.
“The true genius of the capitalist system is not private property, not the profit motive, but competition,” Zingales writes. Market competition means, in sports terms, putting the best team—the most athletic, motivated, and trained one—on the field. Competing enterprises win customers by offering value, in other words. When a pro-market system becomes a pro-business one, however, competition comes to mean superior proficiency at intimidating the referees, interpreting ambiguous parts of the rulebook, or cultivating protectors in the league office. Such competitors win not by offering customers value but by finding ways to succeed despite selling inferior goods and services at excessive prices.
The key to the Zingales remedy is to devise ways to redirect competition into channels that benefit customers rather than disregard or exploit them. “My proposals aim at harnessing the power of competition,” he writes. Most important, for competition to work, rules need to be “few and simple.” Our 60,000-page tax code, like the 2,319 pages of the Dodd-Frank financial regulation law, make clear what the government should not do. Few and simple rules, by contrast, reduce the incentive to lobby, “minimize the number of professionals dedicated to interpreting and manipulating the rules, improving the efficiency of the economic system,” and are “easier for voters to monitor.” Above all, “simple rules are necessarily rough, limiting their use to the cases where they are really necessary.” In sports terms, games are won and lost by the players, not decided by the referees.
The rules that matter, though, extend beyond government’s laws and regulations. Zingales discusses them in a chapter titled “The Need for a Market-Based Ethics,” arguing that “the trust people have in a random member of a group or society” is necessary for “markets to develop, trade to prosper, civilization to advance.” He draws, again, on his own life in two nations to make the point. He was shocked, during his first hurricane watch, by how dutifully Americans followed instructions to stay home and tape their windows. “If an Italian mayor had told me to tape my windows, I would assume that his brother sold tape.”
Zingales explains that Italy suffers, vis-à-vis America, from a deficiency of civic capital, “the values and beliefs that foster cooperation.” It is “as important a factor of production as physical and human capital,” engendering less corruption, greater public safety, and more efficient public administration. Economists, trained to reason about the behavior of an abstract and utterly rational homo economicus who seeks to “maximize utility,” seldom employ this anthropological framework. Though our understanding of civic capital is incomplete, “there’s evidence supporting the plausible hypothesis that the experience of successful cooperation enhances trust, and the experience of being swindled or betrayed diminishes it.” As a result, civic capital, like many good and necessary things, “is hard to build up but relatively easy to depreciate.”
On this point A Capitalism for the People, an otherwise valuable, persuasive book, disappoints. Zingales proposes to rebuild America’s civic capital by turning business schools into “the churches of the meritocratic creed,” so that they “lead the effort” to “discourage behavior that is purely opportunistic even if highly profitable.” Business schools will perform this moral instruction not only in the classroom but also after graduation, “by awarding prizes to outstanding alumni who adhere to economically useful norms, and by expelling from the network those who do not.”
This proposal is as unobjectionable as it is inadequate, and its weakness points to a larger difficulty. Capitalism, like democracy, cannot work in the absence of trust, which in turn is the residue of centuries spent establishing and enforcing norms of decent behavior. Few maxims have held up worse than Immanuel Kant’s assertion that “the problem of organizing a state…can be solved even for a race of devils, if only they are intelligent.” Kant took to its logical conclusion the faith that “powers of each selfish inclination [can be] so arranged in opposition that one moderates or destroys the ruinous effect of the other.”
A contemporary of Kant, James Madison, similarly believed in “the policy of supplying, by opposite and rival interests, the defect of better motives” but was more circumspect about the alchemies it could perform. “As there is a degree of depravity in mankind which requires a certain degree of circumspection and distrust, so there are other qualities in human nature which justify a certain portion of esteem and confidence,” Madison wrote in Federalist 55. “Republican government presupposes the existence of these qualities in a higher degree than any other form.”
What is true of republicanism is true of capitalism. Indeed, as Zingales argues: “What ultimately makes a capitalism for the people possible is a government by the people. Democracy is as essential to free markets as free markets are essential to democracy.” But essential to both are the human qualities justifying esteem and confidence. Those qualities were not wrought, however, in order that capitalism or democracy might succeed. They were, instead, cultivated so that men could live in harmony with one another, with their own nature, and with the cosmos. Seeking to replenish our reserves of civic capital for the sake of capitalism can, as the economists say, help at the margin, but will never suffice. The moral basis of a politically and economically free society was established, and will be reestablished, for the sake of morality, not for freedom.