“The US is becoming more like Italy every day, except for the food and the good wine”

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Luigi Zingales, what’s the problem with capitalism today?

In the book “Saving Capitalism from the Capitalists”, which Raghuram Rajan and I wrote more than 20 years ago, we argued that in order to work, capitalism needs rules. Over time, these rules have been weakened by many capitalists themselves. As a result, the system started to go adrift, with two massive consequences. First, it is creating more inequality. Second, it is giving the impression, and maybe not only the impression, of being unfair. So, capitalism is losing legitimacy and generating resentment. The two things combined are particularly dangerous. It ain’t pleasant to lose out, and it ain’t pleasant to see people that make much more than you, but you’re much more willing to accept it if you think that the system is fair. After all, we don’t complain too much if Shaquille O’Neal makes so much money, because we see how great he is. The moment you start to doubt that the system is fair, inequality becomes difficult to tolerate.

 

But are we really living in a capitalist system? I would argue that it is better described as “crony capitalism”, a term you have used.

We are living in a crony capitalist system, there’s no doubt about that, and it is becoming more so by the day. To be fair, there is an intrinsic tendency of capitalism to degenerate into crony capitalism. That’s the reason why I think that democracy, and even more so direct democracy, is a powerful obstacle to that drift. We definitely need an effectively democratic system to temper the excesses and distortion of capitalism. What I see in the last twenty years is that temperament has disappeared. You can blame capitalism or the way democracy is being practiced for that – in the end, you blame both because one of the reasons democracy is not working well is that it has been purchased by capitalists. The question of who is to blame for this sort of corruption – the people paying or the people accepting the pays –, is beside the point. They’re both in bed together.

 

What’s the reason that the system is getting more crony capitalist by the day?

First of all, this is a global phenomenon. It’s particularly strong in the United States, in part because the United States are always ahead of everybody else – in the good and the bad. Before the 1970s, lobbying in the US was more individually organized. After that, there was a clear plan by business, which was executed very well. Part of that plan was to capture the Supreme Court. That had a big impact in shifting democracy as we interpret it today. The Supreme Court then deliberated in the direction of allowing more access to money in campaign financing, which in turn increased the influence of business. It’s a spiral.

«The United States are always ahead of everybody else – in the good and the bad.»

 

Do we see the same in Europe?

Yes, although at least in the countries that I know well, campaign financing is a bit better and the courts are not completely captured in this way. When I grew up in Italy in the 1970s, there were multiple sources of authority. You could be rich and use wealth as a source of authority. But you could also be the head of the Catholic student organization, or the head of a union or the Communist Party. These were powerful positions, but the authority didn’t come from money. You could sit in front of the richest man in the country and discuss peer to peer. There was no way he could buy you.

 

And today he could?

Yes. Although this rarely happens directly. Of course, there are cases of politicians running away with a stash of cash, but those are not too frequent. What is more corrosive these days is a different scenario: Suppose I’m a prime minister, and you are a big finance guy. I know in the back of my mind that I could start working for you when I retire. At that point, I am in a position of subordination. This is becoming common all over the world. Tony Blair is basically working for the most corrupt heads of states, peddling their business all over the world. Gerhard Schröder is another example. The former Italian Prime Minister Matteo Renzi is even worse: He’s still in politics, and he’s on the payroll of Mohammed bin Salman. It’s unbelievable! Of course, he’s not doing anything illegal. But not everything that is legal is good.

 

In your book “A Capitalism for the People”, you describe how you left Italy to escape the system of crony capitalism and came to the US. Do you feel that the US is becoming more like Italy?

The US is becoming more like Italy every day, except for the food and the good wine. Actually, I wrote the book when Trump first played with the idea of running for president. As an Italian, I immediately saw how similar he was to Berlusconi. So, in the first draft of the book, I made a comparison between the two, arguing that the United States came to resemble Italy so much that somebody like Trump could become president. One of my colleagues read the first draft and told me: “It’s very interesting, but this stuff about Trump is so outrageous, so unbelievable that it undermines all the seriousness of the book.” I then decided to cut this part, which turned out to be a huge mistake from a publishing point of view. (Laughs)

 

Was the election of Trump a symbol of crony capitalism or rather a reaction?

When Trump was running in 2016, I was teaching the lean startup method. Startups have all the disadvantages vis-à-vis the established firms. They have only one advantage: They can change very fast. As a startup, you need to keep trying and changing until you find your market. Trump did exactly that. He was a novice at campaigning, he did not employ an army of people as Hillary Clinton did. He tweeted constantly, looked at the reactions, and went where the reaction was. As a result, Trump found many sources of discontent which the traditional political system was not capturing.

 

Why not?

Before candidates go through the primaries, they go through the financial primaries: They present their platforms to big donors. That’s why basically all Republican representatives were pro-free trade even though Republican voters are quite skeptical.

 

Trump, on the other hand, didn’t depend on big donors.

Exactly. Therefore, and because of his notoriety and unconventional methods, he tapped into new ideas. He exposed very important issues in American politics. Now, there are some indications that big money is moving towards Trump, and it’s going to be interesting to see whether his positions change.

 

The Swiss financial sector is shrinking. Do you think that’s a good thing for the country?

It depends on what contribution the financial sector brings. There was a time when a lot of people thought “the bigger, the better”, but I don’t think that to be necessarily true. In the United States, the banking sector does more and more consumer finance, instead of financing firms. In consumer finance, there are a lot of activities that tend to be more rent-seeking, rather than really adding value. So if what you’re shrinking is the rent-seeking part, that’s great. If you are shrinking something that is useful, like providing financing to firms, that’s a problem.

 

Would say that the financial sector is one of the prime examples of crony capitalism?

Not all of it. The relationship between banks and governments is a good example of crony capitalism. A lot of my colleagues and friends are very excited about the crypto world. I am much less excited. Before he went to jail, Sam Bankman-Fried was giving money to everybody, to Democrats as well as Republicans. He was buying his way through Congress, and had he not gone bankrupt in 2022, he would have had a regulation of crypto approved by Congress a few months later that basically he had bought and paid for. That’s pretty scary.

 

It could be argued that the crypto sector is a healthy form of competition to the traditional financial sector.

When it comes to international payments, there is an argument to be made. But a lot of crypto, especially Bitcoin, is incredibly inefficient from a climate point of view. Even if you go to other systems that are not so energy-intensive and wasteful, I think that the killer app for crypto has not arrived yet. Meanwhile, it is massively used for activities that we don’t want it to be used for, like money laundering.

 

But isn’t it good to have alternatives to fiat currencies? Ask people in Argentina or Venezuela.

Of course, but which currency are people in Venezuela actually using? For the most part, US dollar. The penetration of Bitcoin in the country is relatively small. And if there was a digital dollar, it would be even smaller.

 

There are privacy concerns regarding this kind of Central Bank Digital Currencies (CBDC)…

Yeah, but even in Switzerland, the bank secrecy is gone, so you have the same problem. One of the advantages of retail CBDC is that the banks could be circumvented. Today, whenever the banks are in trouble, you need to bail them out. At the end of the day, as Switzerland showed, you’re not going to let the bank fail, that would be too disruptive. If the balance sheet is all at the central bank, then the banks lose their threatening power. And there is a second advantage.

 

Which?

Retail CBDC could reduce the seigniorage of banks, the gigantic profits they make from getting money from the central bank and lending it to customers. Today, my money at Citigroup earns five basis points. The same money in the Citigroup’s transfer to the Fed makes 525 basis point at the Fed. So Citigroup makes 520 basis points in profits, simply from the fact of being called a bank –which, by the way, is a privilege that is granted by the central bank. This is outrageous. Once people understand the details of this, they’re going to go bananas. The system is simply not feasible.

 

Why is being pro-free market always kept conflated with being pro-business?

I claim that I am pro-free market but not pro-business. Unless you understand the reasons why you need to be pro-market, it is very easy to confound the two. And there is a huge amount of pressure to align with business because there are many rewards for this. If I am a communist, and I think that business is evil, being financed by business is out of the question, But if I think that business is the engine of growth, then it is much easier for me to tweak my position to be more pro-business than pro-market. The pro-market people are the natural prey of the business lobby, because they are not too distant and the benefits are enormous. It really undermines the credibility of the pro-market fraction. The diffuse backlash against the so-called neo-liberalism of today is coming from this distrust.

«The pro-market people are the natural prey of the business lobby,

because they are not too distant and the benefits are enormous. It really undermines the credibility of the pro-market fraction.»

 

How can trust be regained? You have argued for “free market populism”.

When I wrote about this in 2012, I said that populism is inevitable. The question was, what form it would take. I was hoping that would take a positive form, and I was completely wrong about that. Now, that kind of pro-market populism I would like to see emerge is much more difficult to sell.

 

What’s the alternative?

I don’t know. The only solution I see comes from a more representative democracy. That’s why I like the Swiss example, because direct democracy puts constraints on business power, which is the basis for restoring confidence in it.