By his own admission, Luigi Zingales might not be a conventional
pick for the Institute Advisory Board. He holds a chair in entrepreneurship and corporate finance at the University of Chicago
Booth School of Business, preparing MBAs destined for the “1
percent” on the home turf of Milton Friedman. Through popular
books, op-eds, the publication ProMarket, and the podcast Capitalisn’t,
the genial economist has built a reputation as a happy
warrior for capitalism and free enterprise.
But Zingales’ distinctive worldview flashes from the top of
his 2023 course schedule: “Crony Capitalism,” a class open to
MBAs and non-MBAs alike. As he sees it, the land of boundless
opportunity that drew him to the U.S. in the 1980s has grown to
resemble the Italian economy he viewed as stagnant and nepotistic.
Corporate lobbying—not free and fair competition—often
shapes who wins and who stays on top. An increasingly “winner-take-all economy,” he wrote in his 2012 book, A Capitalism for the People, “diminishes hope,” stifling innovation and inspiring
those left behind to elect leaders who further dismantle the
mechanisms of the market.
Building a more inclusive economy sits at the heart of Zingales’
battle to preserve economic freedom. “My approach overall
is to think about how to fix the system,” Zingales said. “Capitalism
in its pure form, to the extent this exists, is relatively good—not
an absolute good, and not in every situation. But relatively good.”
On the sidelines of the Institute’s fall research conference,
we discussed the connection between healthy capitalism and
On the heels of the Great Financial Crisis, you wrote in the
preface to your book that you were “scared that Americans,
in their justifiable anger about the way things have
gone, will choose a path that brings an end to American
capitalism as we know it.” Ten years later, how is support for
capitalism holding up?
I’m sorry to say that my book was more prescient than even
I thought at the time. There’s a chapter called “The Time for
Populism,” in which I said populism was inevitable. I was
looking at the economic trend that in the previous 20 years,
capitalism had not delivered [an improved standard of living]
for the majority of American people. If you start from that
premise, the question was not whether populism would succeed
or not, but which form it would take.
I was advocating for a form of pro-market populism that
unfortunately seems to have no space on the political spectrum.
I don’t think that you necessarily need to block the
market to succeed. In fact, my view is that we can all succeed
by designing rules that protect competition to the benefit of
everybody. The weakest lobby seems to be the pro-competitive
lobby—but that’s what I would like to represent.
The American public seems lukewarm on capitalism. In a
recent Pew survey, 57 percent of Americans say they have
a positive impression of it, down 8 percentage points since
2019. When asked if they think capitalism gives people
an equal opportunity for success, the positives drop to 36
percent. Women and low-income people take a particularly
dim view of capitalism. How do you win hearts and minds?
First you need an active policy to equalize starting points,
starting with primary and secondary schools. The system of
financing schools in the United States is a disaster because
it makes it easy for rich people to have good schools for their
kids and leave the rest in the lurch.
CAPITAL-LISTEN. Since 2018, Zingales has hosted the podcast Capitalisn’t with financial journalist Bethany McLean. Produced by the Chicago Booth’s Stigler Center for the Study of the Economy and the State, Capitalisn’t is committed to “analyzing capitalism, how it functions in contemporary society, and how it is subverted.”Courtesy of Stigler Center, University of Chicago
In the book, I put forward the idea of a “contingent”
voucher that is worth more for people who come from poor
backgrounds—adding progressivity to a voucher system. The
problem we have seen with vouchers where they have been
applied is that if parents are reasonably well-educated, they
know how to navigate the system to make sure that their children
go to the best schools. But if you come from a poor background,
nobody is looking out for you.
I was trying to think about a “capitalist” way to motivate the
actors, where we actually pay a school more if we send a low-income
kid there rather than a child of somebody rich. We need to
work to make the education system less regressive. Everybody
agrees in principle, but it has been difficult in practice.
How do you see inequality undermining the system of
capitalism and competitive markets?
A capitalist system provides strong incentives, and if you are
talented—and also lucky—those incentives make you rich. A
system that tries to minimize differences in outcomes is a more
equal system, but tends also to minimize incentives—less
innovation, less vibrancy, less mobility.
So, some inequality is a natural outcome of a capitalist
system. I’m particularly interested in the political economy
aspect: How tolerable is inequality at the margin? Inequality
has gone up in China, for example, but everybody’s so much
better off than the previous generation that people are not so
resentful. In the United States, on the other hand, when you
see that the median income did not go up in the last 40 years in
real terms, then you understand why there is so much resentment—
because some people really are left behind. It’s not so
much inequality per se, but increasing inequality in a world in
which we’re all lifted up versus increasing inequality when one
person is lifted up and the other stays down.
Do you see the anti-capitalist forces growing and pushing
for changes that would take us even further from the ideal
that lifts all boats and moves us faster together?
The outlook is not great because I think that a lot of people
feel they have nothing to lose. They feel left behind and don’t
see any change. I think that the willingness of a large fraction of the population to experiment with unorthodox leaders is
present throughout the West. You see it in England, you see it
in Italy. I think it’s a real reflection of the fact that people feel
the system is not working for them.
Safety nets and slower changes
Competition produces winners and losers.
You’re advocating for more competition,
which might raise overall welfare but
means more volatility in people’s lives. What
are we getting wrong in terms of supporting
the people who lose in the capitalist system?
First, we need to think seriously about how to
make it more difficult for business in the U.S. to
be “winner takes all.” Monopolies are bad from many points
of view, and a more fragmented system gives more opportunities
to more people. That’s the reason why I’ve become
much more interested in antitrust, particularly when it comes
to the digital economy.
Second, a good safety net is an essential element of the capitalist
system. You are more willing to innovate when you have
a safety net if things go badly. There is a narrative that safety
nets protect laziness, but you can design them in a way in
which most of the time they do not. I think it’s quite reassuring
for people that you have this safety net to catch them.
Transition costs are also very important, and I think in
economics we have completely ignored them. Consider
employment in U.S. manufacturing. If you look at it as a percentage
of U.S. employment, it’s almost a straight line down
since 1900—and there is nothing new about that. But if you
look at the level—the level of U.S. manufacturing jobs had
never gone down in the United States until 2000, when there
was a significant drop.
Why is that important? If you have decline in percentages,
that means that if I’m a manufacturing worker, my son or
daughter might have to become a web designer or a nurse,
which is perfectly doable. But if it’s a reduction in level, that
means that I, myself—the manufacturing worker, at age 40 or
50—have to become a web designer or a nurse. And that ain’t
easy. I think a lot of the resentment that we have seen in the
United States, particularly in the Midwest, is the result of an
opening of trade with China that was completely oblivious to
this kind of transition cost.
Is the solution something like more public investment in
retraining programs? The evidence on retraining, overall,
seems to be mixed.
No. I believe a lot in training when you’re young, but I think
that the evidence of retraining is not great.
“You don’t only lose income, you lose your dignity, the
satisfaction of work—all the stuff that makes society
stick together. The cost to society is very large, and
our cost-benefit analysis should factor that in.”
A different approach is to try to slow down the change. In
the case of China, for example, I think most people now agree
that we let China into the WTO [World Trade Organization]
too fast. And we need to think about what kind of initiatives we can use to channel the workforce with those skills into jobs—
creating activities that can employ them effectively.
If you know that you have some human capital that cannot
be retrained, think about that from an economic official’s
point of view: We want to employ people optimally, and maybe
supporting some factories here—even if they’re not the most
productive in the world—is better than the alternative when
the alternative might be that people are unemployed and get
affected by the opioid crisis, for example. I think that in economic
policy we need to think more about the slow transition.
You point out that our safety net, our unemployment
insurance system, is built to respond to cyclical bouts of
unemployment—not structural changes like globalization
The safety net works extremely well for idiosyncratic factors,
when you are facing a temporary period of unemployment. It
is not designed for when you have a set of skills and that set of
skills becomes obsolete. Then you don’t only lose income, you
lose your dignity, the satisfaction of work—all the stuff that
makes society stick together. The cost to society is very large,
and our cost-benefit analysis should factor that in.
We also have to be careful with fiscal stimulus. Because
if you stimulate, for example, construction of houses, some
of the people who should remain in the construction sector
remain there, but you also attract young people where this
might not be the most efficient use of resources. We need to
find ways to shift the old workforce while directing the new
workforce toward sectors with the brighter future.
Antitrust and inequality
One of your recent papers looked at the decline of antitrust enforcement in recent decades, which you trace
to increasingly powerful and sophisticated lobbying by
business. How does antitrust connect to issues that the
Institute cares about?
I’ll give you a simple example. If you look at the prices of cellular
phone services in the United States, they are significantly higher than in Germany or Denmark—other developed countries
that have a quality of service that’s comparable or even
better than the U.S.
INTEGRATING ETHICS. “Even when some business schools have separate classes where they teach morality, it is a bit like confession,” said Zingales. “You confess on Sunday and sin every other day.” Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.Josh Zich/University of Chicago
If you take the difference of the price and multiply by the
number of customers, you have the quadrangle of surplus that
producers are appropriating at the expense of U.S. consumers.
That quadrangle is $50 billion a year. This number, for Americans
earning less than the median income, is comparable to
the personal income tax they pay. It’s a huge tax.
For something that is essentially a life necessity now—a cell phone.
Exactly. High prices are attacks on consumers. This is a way
in which competition could really make people better off
from a personal economic point of view. In Europe, companies
can’t merge from four major players to three easily
because the Europeans know that when you end up with
three players, tacit collusion is very likely [and regulators are
more likely to block such mergers].
So—surprise, surprise—where you have more
competitors, as in Europe, prices are lower. In
my view they are also better off from a “freedom”
point of view. When it comes to digital platforms
that also have a news or information component,
it’s not only economic issues that are at stake. It is
also a very important political issue because you
restrict the space of freedom.
Capitalism in times of economic stress
I was lending a hand the other day to answer
a question sent in to the Minneapolis Fed by a
high school student, asking about the point at
which price increases become “price gouging.”
For many reasons, that’s a tricky one
to answer! Having thought a lot about how
companies exercise market power, how are
you looking at corporate profits and pricing in
relation to inflation right now?
If you try to explain the recent spike in inflation,
I’m not so sure market power can explain that.
Market power is very good at explaining the level
of prices, but not necessarily the changes in prices.
That said, looking over a longer period we know
that having a more competitive market makes it
easier to have a lower level of inflation in equilibrium.
For one thing, it makes it easier to pass
on reductions in prices. I remember when I wrote
that paper on the cell phone industry, I tweeted
some results and a fellow academic tweeted and
said, “Oh, but prices have dropped.” I replied, “Yeah, prices
have dropped, but they dropped much less than in Europe.”
When you have a technology that reduces prices dramatically,
companies are forced to rebate this to consumers if they
have competition. If not, they keep it. I don’t think that you
can blame companies for the current inflation spike, necessarily.
But we should work for more competitive markets to
make sure that inflation remains low in the long term.
We could be looking at a period of recession. What are the
potential impacts on attitudes toward capitalism if we go
through a painful contraction?
You said the right word: It is very much a function of the pain
and how this pain is distributed. Recessions are never a great time for capitalism because capitalism does generate inequalities
and tension. In boom times, everybody’s a capitalist! In a
recession, everybody starts to think about alternatives.
“Recessions are never a great time for capitalism because
capitalism does generate inequalities and tension.
In boom times, everybody’s a capitalist! In a recession,
everybody starts to think about alternatives.”
I think that a lot would depend on how deep, long-lasting,
and wide the recession is. It also matters what attitudes people
have to begin with—if we go into [an
economic downturn] with, already, a
sense of mistrust. This time, for example,
we have the FTX cryptocurrency scandal
in the news; people associate that
greed and incompetence with the entire
system. We can talk also about Theranos
[the defunct biotechnology startup], which
never had an audited financial statement—
and yet people gave hundreds of millions of
dollars to a dropout from Stanford without
even asking. That’s an indictment of how
badly money is managed.
Those episodes color the general public’s opinions about
capitalism and especially the financial sector, which is a
huge part of the U.S. economy at about 8 percent of GDP
but 15 percent of corporate profits. It adds to the public impression
that the financial sector actually hurts the economy—helping the rich get richer and helping themselves get
rich along the way. In your books, however, you make the
positive case for finance.
I think that a good financial system should actually reduce the
difference between the haves and the have-nots—even as it
exacerbates the difference between the can and the cannot.
If I come from a wealthy family, I have access to financial
resources no matter what, so I can start a new business—not
because I’m the smartest one, but because I’ve got money and
the right connections. A good financial system is one that gives
opportunities to people who are not born wealthy to access
resources and to innovate. That’s the healthy part that can help
equalize the haves and have-nots.
On the other hand, it can give a lot of rewards to the ones
who can—with the potential effect that those who cannot are
left behind. The financial system is not an equalizer. However,
it has the potential to reduce this asymmetry of starting points.
To what extent does the U.S. financial sector live up to that
I think it is a mixed review, but getting worse over time. The
venture capital movement was incredibly good because it gave
opportunities to many people. We have seen great success
coming out of Silicon Valley and beyond, although venture
capital is still much more cliquish than I would like it to be.
However, the average American does not really benefit
from it because we as average Americans invest in the stock
market. And in the stock market, the startups show up only
when others want to divest, which is generally not the greatest
moment to invest in terms of a return. I think that people
see a group of elites who are getting phenomenal returns that you and I cannot get. That’s part of this two-tier system that
needs to be addressed.
You have highlighted social norms as an important component
of a system that works for all. What is the responsibility
of economists and business schools to talk about ethics
and reinforce social norms?
We economists have done a disservice to business education
and economic education by pretending to be only positive
[that is, “descriptive”]. In fact, we are normative without disclosing
It’s very subtle. For example, economists say that not
defaulting on debt when it’s technically in your interest to
default is not “rational.” But most of us will say that is the moral
thing to do: If you have an obligation and you can’t pay, even
if you can get away with not paying, paying is still the moral
thing to do. It’s not non-rational—which becomes irrational,
with a negative connotation.
I think that the issue of morality is largely absent from
courses in business school. Even when some business schools
have separate classes where they teach morality, it is a bit like
confession—you confess on Sunday and sin every other day.
What I’m trying to do with my teaching is integrate these moral questions into my teaching of every subject.
If we neglect ethics and morality, as your argument goes,
we increase the longer-term risk that public resentment
will chip away at the benefits of a capitalist system.
I think that clearly the system will become more exploitative—with, of course, negative consequences.
Including negative consequences for MBAs.
For MBAs too. I hope that we can educate MBA and undergraduate
students who are not just into making money, but
into making the world a better place. If you can do both at the
same time, of course, that’s the goal! But it’s not easy.