University of Chicago economist Luigi Zingales often says that only an immigrant like himself can really appreciate American capitalism. In his native Italy, Zingales says what you know and what you do are far less important that who you know and what you do for them.
But in the last decade, Zingales says the United States has started to look more and more like the country he left. Now, he’s trying to save American capitalism from itself—and big businesses including Amazon, Facebook and Google.
- Watch Prof. Luigi Zingales' 2019 Convocation address
- Does capitalism need protection from big business? A UChicago economist says yes
- A Challenge to Big Tech and Antitrust Thinking in a Surprising Place—The New York Times
- How to rein in the power of Big Tech
Paul Rand: University commencement speeches don’t often get headlines in the New York Times. But the 2019 University of Chicago commencement speech from Economist Luigi Zingales did.
Luigi Zingales: In the Chicago tradition, I wanted the commencement speech to be a speech about research, about my research because, for those of you who don’t have the fortune to be Chicago alumni, you should know that Chicago is unique in having convocation speeches delivered by faculty and not by celebrities.
Convocation Speech: I’ve participated in enough commencements to know that I’m just the person between you and your well-deserved graduation party.
Luigi Zingales: You know, I was facing the competition of Angela Merkel at Harvard. That was not an easy thing to deal with. So I wanted it to be about research, but also that is in contrast with something that other Chicago faculty before me said.
Convocation speech: In true Chicago spirit my goal is to deliver a speech that is provocative, research based and relevant to you in this moment.
Paul Rand: Zingales’ speech was certainly provocative. It focused on many ideas and questions from his research, mainly, is American capitalism working or failing?
Luigi Zingales: If you grew up in Italy. But then I realized a lot of other countries, I know a lot of colleagues who grew up in different parts of the world, and they all at some point face this question of capitalism vs socialism, and what is right in capitalism, how do you create a better capitalism? It is a question that is basically with you all the time.
Paul Rand: The debate over American capitalism is shaping up to be one of the defining arguments of the coming decade. It is already one of central themes of the current presidential race. Democratic candidate Bernie Sanders have explicitly called for the country to move toward socialism, while candidates like Elizabeth Warren say capitalism is still worth saving, it just needs to change. Like Warren, Zingales wants to save capitalism and, as he said in his commencement speech, he thinks we have a shot.
Convocation speech: You want to save the planet, eradicate poverty, end racism but you find yourself working 10 hours a day for a company who’s only proclaimed goal is maximizing profits. Many of you feel powerless. Fortunately, this is not true.
Paul Rand: From The University of Chicago, this is Big Brains. A podcast about the pioneering research and pivotal breakthrough reshaping our world. On this episode, Luigi Zingales and saving capitalism from the capitalists. I’m your host Paul Rand.
Paul Rand: Love it or hate, when you grow up in America, you grow up under capitalism. It’s in the bedrock of the country. There’s no debate about it. But with presidential contenders like Bernie Sanders, that may be changing.
TAPE: Senator Bernie Sanders is making his case for democratic socialism.
TAPE: Economic rights are human rights.
TAPE: Tonight, we renew our resolve that America will never be a socialist country.
Paul Rand: But this tumultuous debate is nothing new to someone like Luigi Zingales, who grew up in Italy. What Zingales saw growing up in Italy was a dangerous marriage between the economic elite who used their wealth to gain political power, and the political elite who used their economic strength to control government. In a system like this, what you know and what you do doesn’t matter, only who you know and what you do for them.
Luigi Zingales: To me what was very revealing is, in my generation there have been a lot of Italians who came and studied here and all of them came here as super, super leftists. And when I say leftists, I don't mean Elizabeth Warren leftist, I don't even mean Bernie Sanders leftist, I'm talking about to the left of the Communist Party. I joke that you need a GPS in the United States to figure out how far left these guys are. So all these people came here, and all of them turn into the most extreme free marketeers. And I don't think was just being exposed to economics and studying economics etc. I think was also a system that at the time appeared and it probably, at the time, was much more fair.
Paul Rand: As a young adult Zingales saw freedom from the elites in Italy through American capitalism. And for many years he studied and wrote about this system’s ability to create jobs, lift people out of poverty and inspire immigrants the world over. Then things started to change.
Luigi Zingales: I saw that if you look in the last 40 years, the system has not delivered for everybody. While on average there was a huge increase in wealth, this increase was disproportionately concentrated in a small minority. And actually, the most scary fact is if you look at the salary of the median male worker in the United States, that salary and has not gone up in real terms for the last 40 years.
Paul Rand: Concentration started to make the country he had come to love look more and more like the country he had left. His research and writing started to interrogate a new question, what’s wrong with American capitalism and how can we fix it? The result was his 2012 book “A Capitalism For The People”.
Luigi Zingales: There is a natural, and in a sense, a healthy tension between a democracy and a capitalist system. A capitalist system does tend to reward disproportionately a few and reward more the more talented and the one who work harder. And so it does create inequality and that doesn't sit down very well with a democratic system that where you want to kind of redistribute and equalize. And I think that this tension is very healthy, but it is balance only under a number of conditions. And one condition is that the system delivers some benefits to everybody. There is as an opportunity to everybody to move up in the ladder and that the system is can consider relatively fair. It's particularly painful to be left behind in the game of life, It's intolerable if you have the perception that the game is rigged.
Paul Rand: You hear that system is rigged and just about every political commentary these days, don't you?
Luigi Zingales: Absolutely, but the irony I I think I said it before anybody else said it. And not only that, in my book it’s written pretty clearly, that given this populism is going to be inevitable. And then the question is, which kind of populists you're going to get? And I have to say, so far, we didn't get a good one. The irony is this, my book, as you pointed out, is partly autobiographic because it's the story of an Italian coming to the United States, seeing the United States as the model of the success of capitalism, etc. and seeing over the years this model deteriorate and getting worse and looking more and more similar to his country of origin, Italy, and not for the good aspect, the food and wine and the beauty that is around it.
Paul Rand: But the Berlusconi aspect.
Luigi Zingales: Exactly. You said the right word, the Berlusconi aspect.
TAPE: Mafioso, thief, go away. After supporting him at the ballot box for nearly two decades, the Italian people had nothing but anger for Berlusconi.
Paul Rand: For those of you who don’t keep up with Italian politics, Berlusconi was an Italian real-estate tycoon turned media mogul turned politician who became the Prime Minister of the country for nine years. Sound familiar?
Luigi Zingales: And so it was a natural evolution to say, look, if the United States are going to get along this this path, the natural outcome is a Berlusconi like figure. And I saw what, of course, everybody else later saw because for the Italians, it’s so obvious, this similarity between Berlusconi and Trump. They are both phenomenal salesman, phenomenally egotistic, obsessed with woman, obsessed with hair and a lack of and with a very distorted view of capitalism because they both started their business in real estate. Real estate is the least competitive system in the world, least competitive business in the world, it is most about connections at the local level and most about monopoly.
Paul Rand: And that’s the key idea for Zingales: competition. Almost everything in his work comes back to the way competition creates growth and disperses power to everyone.
Convocation Speech: For example, last year Google let a lucrative Pentagon contract expire because its key engineers did not want to help develop a technology that could be used to wage war. LGBT community rights were recognized first the business world not because of the open mentality of business leaders but because of their desire to attract the best talent. In a competitive labor market companies are fast to adopt if adaptation is required to attract the most qualified workforce.
Luigi Zingales: There was a brilliant and pathbreaking idea that Adam Smith brought with a wealth of nation. Is the fact that competition is the genius that makes sure that the pursuit of self-interests delivers the common good. And a lot of people have misinterpreted and mischaracterize Adam Smith by saying Adam Smith say that greed is good, that’s absolutely wrong. Adam Smith was a moral philosopher, in his other book he was pay a lot of attention to other feelings like empathy and etc. So he was very aware of morality. What his contribution is to say, look a system that does not rely on everybody being good is a more reliable and resilient system. And you know, in a world where everybody is a saint. We don't need the law. We don't need economics. But unfortunately, it doesn't exist.
Convocation Speech: Law firms have a tobacco career track for those lawyers willing to defend tobacco companies. Tobacco lawyers earn more and make it to partnership faster. While this may seem wrong it’s essential for the market system to work. Your reluctance to defend tobacco companies reduces the supply of talented tobacco lawyers thereby increasing their wages. When it becomes too expensive to hire defense lawyers, tobacco companies are forced to settle. It’s precisely because it becomes too expensive to behave immorally that companies without a conscience end up behaving as if they had one.
Paul Rand: So today if you’re a young man in Italy or somewhere else, are you still looking at the United States and admiring the capitalistic system or are you looking at and saying that is not working?
Luigi Zingales: I fear, and this is hard to put yourself in the feet of a young kid today in a different part of the world, but I think that it is more difficult to sell that image. As a financial economist, I witness the financial crisis with particular attention and care because was part of my main area of expertise. And so I saw the devastation, I saw the effect, I saw all the distortions. And, you know, after the financial crisis, for a long time, most of the media attention was focused on beating on the financial sector. And after awhile I said okay, a lot of people are doing the job. They don't need me to beat on the financial sector that doing. I want to see what the next problem is. And I realize that a lot of what I saw in the financial sector was actually assembling in the tech sector and with some additional twist that made it even more dangerous to some extent.
Paul Rand: Why does one of the world’s leading economists think the tech sector is the new big threat to capitalism? That’s coming up after the break.
Paul Rand: If you blame a lack of competition for the decline of American capitalism, there’s one industry that’s going to draw your attention more than any other: the tech sector.
Convocation speech: There are some corporations, very small in number, but very relevant in size that do not face real competition. These are monopolies. It’s easy to see what a monopoly is. How many people in this audience use Bing as their main search engine. Please, don’t be shy. And how many people use Google?
Luigi Zingales: These entities, while they've been around for a while, they started to be studied as a different entity in economics only in the beginning of the new millennium.
Paul Rand: So we’re talking about Google, Facebook, Uber,
Luigi Zingales: Uber, Amazon, all this platform. And one of their characteristics is they naturally tend to become monopolies unless people can easily use multiple of them at the same time. So what is calling jargon multi-homing. I want to be where most of my friends are. And so I’m going to go where most of my friends are and that tend to be Facebook and that tends to reinforce the importance of Facebook, but also Facebook is very actively trying to make it impossible to multi-home. Ten years ago, there was a little company called Power Ventures whose business model was to help you manage multiple social media at the same time. So you will give the login and password to all your social media to Power Ventures and then you login in Power Ventures. You post your picture into Power Ventures and it goes on Snap, Instagram, WhatsApp, but you tell them they do it. So Facebook sued Power Ventures claiming that they were hacking and because they have good lawyers and Power Ventures do not have good lawyers, they end up winning and establishing that if I give you my login and password of Facebook and you enter my Facebook account with my permission you are committing hacking, which is a federal crime. So they really use this power of the law to block multi-homing. And then when you don't have multi-homing, you naturally tend to add these networks externalities, I want to be when other people are, and so you end up having enormous concentration like we have in Facebook today, which of course, has been exacerbated by the fact that they bought Instagram and they bought WhatsApp.
Paul Rand: It’s easy to see the concerns and issues these digital platforms present. It’s harder to come up with solutions. In 2019, Zingales convened a conference of economists, lawyers, journalists, venture capitalists and data scientists to do just that. After months of research and debates, they devised a list of possible solutions and even submitted that list to congress.
Paul Rand: So the interesting thing that I thought as I read some of this, is you guys came through with some pretty practical, applicable recommendations, i.e. let's come up with a new digital regulatory agency or a digital authority. Can you talk about that and maybe some of these other very practical systems.
Luigi Zingales: So are you surprised that academics can come up with something practical that we are not just dancing on a pin head and saying crazy stuff.
Paul Rand: Economists are never known for that.
Luigi Zingales: But actually, I would say that the idea of creating a new agency is probably not the most original idea is right, but it's not the most original idea. When there is a problem, you create a committee. And then I think there are potential risk involved in that, too. But the thing that, in my view, emerged the most and it's something that we need to pay a lot of attention is the power is in the data. These platforms control their own data. There is no regulator that has access systematically to those data. So we don't even know the facts. In the old days when there was TV, when TV was the thing. First of all, you add a Federal Communications Commission that actually look at the TV and oversee the TV sector. But also there were like, what, three channels? Everybody watch the same channels. Everybody could see if there was something wrong or if that something distorted in in those channels. Today, with digital platforms, I don't know what you see because what you see is different than what I see. And so if we have some ads that target a particular vulnerable sector of the population, unless you belong to that sector, you're never going to see that ad. So you don't know the problem. And there is nobody watching this. So is as if we have the best techniques to sell alcohol to the alcoholic or drugs to the drug addicts. And there is nobody watching.
Paul Rand: In addition to a regulatory authority, they also recommend extending campaign disclosure obligations to digital platforms, imposing a fiduciary duty towards society on the boards of monopiles, and tightening many US antitrust rules. And that last point about antitrust, was a little controversial coming from a University of Chicago economist. We’ll find out why after the break.
Paul Rand: As we said at the beginning, Zingales’ commencement speech made headlines in the New York Times. And it was specifically because of his views about antitrust enforcement. Antitrust laws deal with how monopolies are regulated. When you hear people talking about stronger antitrust enforcement for tech companies, they’re usually talking about breaking them up. Split Instagram from Facebook, Youtube from Google. Zingales thinks this is a good idea. To understand why that caused such a stir, you need to understand the history of the “Chicago School of Economics”.
Luigi Zingales: So first of all, there was an evolution over time. So, in the 30s and 40s, the position was dominated Henry Simons, who wrote a very important pamphlet called the Positive Program for Lez A Faire, where antitrust and antitrust enforcement played an extremely important role in keeping the market competitive and making the system work. And ironically, some of his students, George Stigler, Milton Friedman and Aaron Director, who started from those positions, over the years became increasingly disillusion about the role of antitrust
Tape: The issue of anti-trust is long standing. The basic anti-trust legislative was enacted in 1890 and we’ve had many ups and downs in its applications. The law is supposed to promote competition but on the whole it probably does more to promote monopoly than it does competition. Moreover, it involves a very inefficient interference by the government into the dynamics of the economy.
Luigi Zingales: This was the position of Chicago in the early 50s. And I think over the late 50s and 60s, the disillusion with the antitrust enforcement, in particular, number one, the aggressiveness of the enforcement and the lack of a coherent idea of what the antitrust was trying to achieve. At the time, economics was expanding in other areas. And Aaron Director was crucial in bringing economic methods into the law. He said we need to have a very clear objective of what the law wants to achieve and we need to apply rigorously. And in particular, he was saying and I think it was absolutely right on this, who enforces this law? The judges. The judges are not particularly trained in this. So you need to have some principle very clearly spell out to have a consistent law, because the worst thing is to have it completely adhoc. And so this is where the use of economic methods in the law started to become important. One of the student here, Robert Bork, started to say the goal of the antitrust is just to maximize consumer welfare, to benefit consumers at large and a series of tools to measure this consumer welfare and to measure whether this wouldn't be maximized or not where develop they became the standard in antitrust. And this became known as the Chicago School of Antitrust. That ended up dominating the world. This is not just in the United States, but where you go to Europe, you go to Latin America, you go to Asia. Everybody knows the Chicago school and Chicago approach, I think was a fantastic innovation. But in economics, we learn that there are always tradeoffs so what they traded off is to be more precise, but less broad. And so the result was very strong attention on consumer welfare, ignoring other considerations and two, I think that they W\were so successful that basically, antitrust stopped to be enforced and for awhile was fine; I think we've gone too far. So the pendulum changes and my view is changes depending on the circumstances. There are some areas where concentration is a big problem and you have to fight it hard and some other times in which the opposite is a problem. iIn the 1960s, companies were becoming conglomerates buying unrelated line of businesses because they couldn't expand horizontally and the conglomerate acquisitions were terrible. So I think that there was a sense that maybe at the time things would have gone too much in one direction. I think that stuff has gone too much in the opposite direction now. So I don't see myself in in contradiction with the Chicago tradition. Quite the contrary. I see a tradition that is evolving and changing, like all good traditions, because we're not frozen into the 20th century.
Paul Rand: Zingales often says that only an immigrant like himself can appreciate how rare Americana capitalism really is. He still views it as the only system that can really spread wealth, power and opportunity. And he considers this battle against monopolies and the lack of competition they bring to be the central struggle of his work and his adopted country…
Convocation speech: This is not a republican or a democratic battle. It is an American battle. This country was born fighting monopolies. The Boston tea party was not, as often repeated, a revolt against higher taxes but a revolt against the unfair advantage enjoyed in America by Britons East India Company. The connection between American democracy and the fight against monoploidies was not lost on senator John Sherman who in the 1890s brought us the first antitrust law: if we will not endure a king as political power, he wrote, we should not endure a king over the production, transportation, and sale of any of the necessities of life. If there is one sentence from my speech I hope you will remember, this is the one.
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