23 Dec A Capitalism for the People

Luigi Zingales teaches finance at Chicago Booth.

It is not exactly a secret that Glenn Hubbard was his research collaborator in the run up to the presidential election, or that Zingales was positioning himself for an economic advisory role for Romney before he lost the election. Nevertheless, he’s a lot smarter than Hubbard, and seems sincere. Right before the election, he went on a speaking tour to promote his book, A Capitalism for the People. I read it after attending one of his speaking events for Booth alums in NYC. In my opinion, it is the best of the worst of Chicago thinking.

What is good and true in Zingales’ book is his discussion of how power interests have corrupted our market economy. I particularly liked his analysis of why anti-trust law is important in the chapter “Crony Capitalism American style.” Not that it enforces the laws of micro-economics and keeps marginal pricing competitive, but that it allows firms to grow to be mega firms who can bend the state to their will. His observation is subtle, astute and hits the mark.

The poverty of his analysis shows up on p. 156 in his explanation of why competition does not cure predatory lending: most people do not pay attention to their finances, he says. From there, his argument takes a “right turn.” What we need is to reinstate generalized trust. To have generalized trust, we must simplify everything so that the system becomes more transparent again. But, Zingales has just conceded that market capitalism is not self-adjusting. Competition doesn’t prevent those who trust from being victimized or the sharpies from cornering the good stuff. Zingales has no idea of how to motivate the people who are running the machinery amok to do the right thing. Alas, his prescription addresses symptoms, not causes. To the contrary, the conclusion to be drawn must be to trust less. Or, as Reagan said, trust but verify.

I don’t believe the problem is that most people do not pay attention to their finances. Rather, most people do not understand finance. Including most finance professors. What is needed is for finance professors to stop professing to teach finance and open their eyes to how 21st Century finance works. They would discover that their courses, and indeed our entire market information layer today, are archaic.

Our financial disclosure requirements have become so thoroughly decoupled from our financial practice that there is no way to bring price and value into equilibrium in our markets. This lesson needs to be absorbed and synthesized into a solution that enables markets to regulate themselves through the disclosure of information. Either we must recognize that laziness and arrogance can lead to capture, no less than greed, or else markets cannot self-regulate via informational dissemination. And if markets cannot self-regulate through the dissemination of information, then market capitalism is a gigantic fraud.