Does capitalism need protection from big business? A UChicago economist says yes

Prof. Luigi Zingales argues for journalism as protection against ‘crony capitalism’

“One of the busiest corners of the globe at the opening of the year 1872 was a strip of Northwestern Pennsylvania, not over fifty miles long,” journalist Ida Tarbell wrote in 1902. In the span of just 12 years, those once quiet Pennsylvania hills were overrun with hardy young entrepreneurs seeking to make their fortunes from a new product: petroleum. But the days of bustling competition did not last.

“At the very heyday of this confidence,” Tarbell went on, “a big hand reached out from nobody knew where, to steal their conquest and throttle their future.”

The hand was that of John D. Rockefeller. By 1880, his Standard Oil Company controlled about 90 percent of the oil produced in the United States, including its transport, refining and marketing. Rockefeller pioneered market domination by undercutting prices across all areas of the oil business and buying up his competitors.

For a cohort of eight journalists on campus at the University of Chicago Booth School of Business last spring, Tarbell’s two-year, 19-article exposé on Standard Oil—widely considered to be the birth of investigative journalism—served as both inspiration and how-to guide.

Credited with exposing the deleterious effects of monopolies on society, as well as inspiring government efforts to counter them, Tarbell’s muckraking series “created the political demand for intervention,” Chicago Booth economist Luigi Zingales explained in an episode of his podcast Capitalisn’t. In 1911, the Supreme Court ordered the dissolution of Standard Oil into 34 individual companies. (Rockefeller, who referred to Tarbell as “Miss Tar Barrel,” became the nation’s first billionaire and spent the later years of his life giving away much of his fortune, including funds to found the University of Chicago.)

Journalists and business school professors may seem like strange bedfellows, but not to Zingales, the faculty director of the George J. Stigler Center for the Study of the Economy and the State. In 2017, he launched the Stigler Center Journalists in Residence program. For the reporters who participate, it’s a taste of the business school experience and a crash course in economic theory: they audit classes, meet scholars, and attend special events.

Why invest in the next generation of muckraking? Because, in Zingales’ view, capitalism depends on it. He believes investigative journalism is a major reason why American capitalism has historically been so successful compared to the “crony capitalist” systems that prevail elsewhere. Take his native Italy, where, he has argued, personal connections—not merit or competition—determine who wins in the marketplace.

The guiding idea behind the residency is that journalists in the trenches—filing pieces on the daily and weekly happenings of the business world and exposing special interests that aim to subvert markets for their own gain—help create a demand to keep markets free.

“Inquisitive, daring and influential media outlets willing to take a strong stand against economic power are essential in a competitive capitalist society,” Zingales wrote in the Financial Times in 2015. “They are our defense against crony capitalism. When the media outlets in any country fail to challenge power, not only are they not part of the solution, they become part of the problem.”

‘A period of great ferment’

The problem is the fragility of capitalism itself. Adam Smith’s invisible hand and the free-market laissez-faire approach so famously espoused by Chicago economists can easily be shackled by special interests. These include price-cutting monopolies like Rockefeller’s Standard Oil; competition-shy incumbents aiming to deter new market entrants; and rent-seeking corporations that look to the government for an advantage in the marketplace via subsidies or regulatory capture—that is, when laws increase the market advantage for the very firms meant to be regulated.

It was Nobel Prize winner George J. Stigler—the UChicago economist who founded his namesake center—who first questioned the impact of regulation on competition, and who in 1971 put forward the idea that industry “acquires” regulation for its benefit. His two-part hypothesis: one, industries will wield whatever political power they have to prevent new competitors from entering the market, and two, regulations will be written to slow those new entrants’ growth.

Before Stigler, regulation had been studied entirely from a content perspective—in other words, how the rules were written to prevent market failure and protect consumers from unfairly high prices. Not questioned was the assumption that regulation itself, particularly of natural monopolies such as public utilities, was necessary. So Stigler and his co-author Claire Friedland, AM’55, took up the study of electricity regulation, aiming to understand the actual outcomes of such controls, as opposed to the intentions. Did regulation keep prices for consumers down? By comparing areas with varying degrees of electricity oversight from the early 1900s to 1960, Stigler found that the price difference was negligible, casting doubt on the need for regulation at all.

The finding shocked economists. “I can’t tell you how important it was,” says Prof. Emeritus Sam Peltzman, PhD’65, a former graduate student of Stigler’s who took over directing the center after its founder’s death in 1991. “What happened next was a period of great ferment.”

Over the subsequent decades, economists followed Stigler’s lead in examining the real-world effects of regulation and stopped taking for granted that regulation accomplishes what it intends. Stigler’s 1982 Nobel citation states that his work “resulted in fundamental testing of the forces, purposes and effects” of legislation.

Overall, Stigler set in motion an understanding for which Chicago economics has become known: that the outcomes of regulation and government intervention, such as antitrust litigation, are complicated, to say the least—and, at worst, can end up hurting competition and hampering free markets.

This brings us back to the Stigler Center today, where Zingales is in the surprising position of arguing that the pendulum against antitrust and government regulation has swung too far.

“My claim is that part of the change in attitude is due to a change in surroundings,” he says. “The world today is completely different from the world in the 1970s.”

A little more than a century after Progressive Era figures like Tarbell and Sen. John Sherman intervened against Rockefeller, the economy has cycled through the Great Depression, the increasing regulatory environment of the 1950s and ’60s that Stigler studied, and the economic contraction of the 1970s. What followed “as a result, in part, of the triumph of the ideas of the Chicago school,” Zingales says, was a reduction in regulation and an era of innovation and economic expansion, lasting until the 2008–09 meltdown of the financial sector.

Now the Stigler Center has cast its gaze on Silicon Valley titans such as Amazon, Apple, Facebook and Google. This fall, wrapping up a large-scale effort to examine the current shape of economic concentration and its effects in the United States, the center issued its assessment: There is little evidence the market will, or can, rein in these companies’ increasingly unchecked power.

The finding drew from the work of 30 experts from across the country; representing the fields of business, economics, law, and political science, they spent a year researching and debating whether monopoly has reached a worrisome level. The ultimate question was what to do about, to use Tarbell’s phrase, the “big hand” of tech giants in the marketplace.

One surprising and much-debated conclusion was to create a digital authority to regulate the industry.

In May, Yale economist Fiona Scott Morton, who led the Stigler Center group that analyzed the market structure of the digital platforms, quietly delivered the recommendation to the U.S. Senate as part of hearings on digital advertising and competition policy. Zingales spent the summer getting traction on the idea of a digital authority. In September, The New York Times business section trumpeted, “Chicago School Professor Fights ‘Chicago School’ Beliefs that Abet Big Tech.”

As the economists, law scholars, and political scientists debate, one thing is certain: the Stigler Center’s journalists have been all ears. The purpose of the residency program, after all, is to educate the journalists. How they use what they learn is up to them.

Not very ‘Stiglerian’

All spring, Adam Creighton was on fire with the ideas he was encountering at UChicago. The economics editor for The Australian and a 2019 Stigler Center journalist in residence, Creighton filed stories and columns that bore the fingerprints of the classes he was taking and scholars he’d met during his 12 weeks in Hyde Park. In one piece he argued that patents create “artificial monopolies”; in another, a critique of Australia’s retirement savings system, he cited UChicago’s own Eugene Fama and Richard Thaler.

On campus, at the noontime seminar of the spring 2019 quarter, this year’s journalists gathered with Chicago Booth’s Austan Goolsbee, who chaired President Barack Obama’s Council of Economic Advisers and is the Robert P. Gwinn Professor of Economics. Xinning Liu of the Financial Times asked about the U.S.-China trade war, trying to understand the real-time and potential long-term implications of President Donald Trump’s proposed tariffs. Other journalists peppered Goolsbee with equally timely questions—about the outcomes of a recent Federal Reserve conference, the student debt bubble, the viability of the wealth tax, universal basic income, and his favorite in the 2020 presidential race. 

Asked what he thought of the idea of a digital authority, Goolsbee wondered aloud how it would work in practice.

After the session, Creighton gave his own take on the proposed digital authority: “It’s not very ‘Stiglerian.’”

The comment doesn’t faze Zingales. “I think, and I’m sure I’m not alone here, that the contribution of Stigler is great, but mostly to learn what we should not do,” he says later, back in his office.

Stigler’s work shouldn’t be used as a justification for sitting back and doing nothing, Zingales argues: “I think that the absence of regulation can be as bad as, and sometimes worse than, bad regulations. … I’m very happy to come to a conclusion, if you convince me, that maybe the intervention is not worth the effort. But starting with the presumption that nothing can be done? That’s the kind of ideological block that I would like to avoid.”

Zingales notes that Stigler’s views also evolved to fit the times, citing the economist’s 1952 Fortune magazine article “The Case Against Big Business.” In it, Stigler argued for breaking up large corporations when necessary, writing, “This, I would emphasize, is the minimum program, and it is essentially a conservative program.”

He lets Stigler’s statement sink in.

“Wait a minute,” Zingales says, “what is so conservative about that?”

In 1952, Stigler saw no economies of scale in big business and argued that it was better to break up than to regulate large firms. But those ideas evolved under the influence of another UChicago economist, the late Harold Demsetz, who established that big business tends to be more efficient. 

Zingales’ point: What’s conservative depends on the evidence and the context—and maybe what’s “Stiglerian” does too.

“If the world around you changes, you should change your prescriptions,” he says. “If you don’t, it’s called ideology. … I don’t say, ‘Whatever Stigler said in 1970, it cannot be changed.’ That’s religion, not research.”

—Adapted from a story that first appeared in The University of Chicago Magazine. Read it in its entirety here.