On the merits

Blaming big government and big business, a finance professor calls for restoring competition.

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In his book A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (Basic Books, 2012), Luigi Zingales raises alarm bells that an optimistic credo may be in danger of disappearing. “The image many Americans have of capitalism,” he writes, “calls to mind Horatio Alger’s rags-to-riches-via-hard-work stories, which have come to define the American dream.”

Zingales, Chicago Booth’s Robert C. McCormack professor of entrepreneurship and finance and the David G. Booth faculty fellow, fears that Americans are losing faith in capitalism as the political and economic elite have structured it. Widespread disillusionment has spawned two divergent strains of politically influential populism—the antitax Tea Party movement on the right and the anticorporate Occupy movement on the left.

Zingales addresses some of their concerns. A Capitalism for the People includes, for example, a chapter differentiating “good taxes” from “bad taxes.” And while he sympathizes with Occupy’s frustration over corporate influence, Zingales rejects its ideas for government intervention and income redistribution as corrosive to individual motivation and productivity.

The emotions of both movements resonate with him. Surveying the current economic and political atmosphere, Zingales writes, he also feels angry and scared: “Angry because the idea of free markets has been increasingly taken over by entrenched business interests, fundamentally altering the equilibrium of American democracy. 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.”

American capitalism attracted Zingales to this country in the first place. The lack of merit-based opportunity prompted him in 1988 to leave his native Italy—where, he notes, “the word nepotism was invented”—to pursue his PhD at MIT.

He has thrived in the United States but now sees a society where the potential for people in similar circum­stances could be threatened. “I have been rewarded handsomely by being here and working hard,” Zingales says. “I want everyone to have the same chance.”

Inequality itself is not the issue—in a meritocracy, he says, “there is some inequality”—but the public needs confidence that talent and effort will be rewarded over connections and favors. Corporate influence and lobbying have taken such a predominant role in policy making that people across the political spectrum perceive a rigged game not based on free-market principles but the back scratching of crony capitalism. “Zingales’s fundamental diagnosis is right,” a Financial Times review of A Capitalism for the People notes. “Lobbying has run riot, capitalism has become probusiness instead of promarket and cronyism is a real threat. So what are the remedies?”

Zingales offers solutions that he calls “promarket, not probusiness,” a key distinction in a just economic system and one, he says, that has been overlooked in favor of a business-versus-government “sideshow leftover from 20th-century ideological debates.” A capitalist system, Zingales says, succeeds only when competition—both political and economic—flourishes. Some suggestions: eliminate all government subsidies, whether direct aid or tax breaks; mandate better data disclosure from government and business; strengthen support for whistle-blowers.

Implementing such reforms, he argues, would begin to restore the “moral foundation of capitalism,” directing regulatory and social pressure at the  system’s true threats. “These are the real contrasts that face us,” Zingales writes, “between meritocracy and inherited privilege, between accountability and discretion, between freedom and power, and between free markets and crony capitalism.”

The private sector, he says, doesn’t have a monopoly on cozy relationships. He cites public education as “perhaps the most destructive cronyism that uses lobbying to extract money from the American people in exchange for a product that doesn’t meet their real needs.” During the 2007–08 election cycle, he notes that the National Education Association, which represents public-school teachers, spent $56 million, the most of any lobbying organization. Yet American students, Zingales adds, scored below average in every subject but reading on an international survey over the past decade. Because of the correlation between quality of education and income, Zingales writes, “as the teachers’ union defends the status quo in education, it is killing the American dream for much of the population.”

Despite immersing himself in the political and economics climate that has compromised faith in the rags-to-riches American story, Zingales remains optimistic. “I have faith in the American people,” he says. “I also have faith in the strength of ideas.” And faith that, with policies that restore competition and opportunity, Horatio Alger could become a cultural touchstone once again.

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