Mr. Zingales, formerly President of the American Finance Association, is a finance professor at the University of Chicago’s Booth School of Business and directs the George Stigler Center and the Center for Economic Analysis. In addition to serving as a member of the American Academy of Arts & Sciences, he serves as a fellow to the National Bureau of Economic Research, the Center for Economic Policy Research, and the European Governance Institute. Among his four books are Saving Capitalism from Capitalists (2003) and A Capitalism for the People (2012). A recipient of the 2003 Bernácer Prize for the best young European financial economist, Mr. Zingales was named to Foreign Policy’s Top 100 Global Thinkers “for reminding us what conservative economics used to look like.” His work was recently detailed in a New York Times profile.
The Politic: How did you get into economics?
Zingales: That’s very simple. I grew up in 1970s Italy, where everything economically was wrong. I was born in ‘63, but by the 70s when I started listening to the news and understanding what was happening, inflation was at 20%. There was a big unemployment problem. It was the time when Italy had to ask for loans from the IMF guaranteed by some of the gold from the Bank of Italy. There was a huge devaluation. Everything that could go wrong went wrong at the time. That’s what made me interested
When you first arrived in the U.S. what was the most shocking contrast with the Italian economy?
When I arrived here, I think what struck me most was the level of trust people had in various transactions. When I was a student at MIT, I made the biggest investment of my life to that point. I decided to buy a computer in order to work at home. I remember it was $3,000 back then, which was a lot of money in 1990 dollars and even more for a student.
There was no “online” at the time. I bought the computer over the phone, and I was absolutely terrified that it wouldn’t show up, or that if there was a problem, it just wouldn’t work. Actually–it did show up, and it didn’t work. But I sent it back, and it did work. I can’t complain.
But I think trust was a big, big difference. In Italy, nobody would buy a computer like that over the phone. When I grew up, for instance, I learned never to send a check in the mail because it would be stolen and cashed by someone else. So, I think I was surprised by the level of trust in transactions.
Do you see the same level of trust now as when you first arrived?
I think it’s still higher than in Italy, but I think it’s been going down over time. I wrote Capitalism for the People in 2012, where I tell this story–which is true of an Italian like me–about coming to the U.S. and gradually discovering that the U.S. is starting to resemble Italy, and not for the good food and wine, but for the for the importance of connections and the influence of business on political decisions.
Reading some polls, it seems like a lot of Americans don’t trust the federal government or the Federal Reserve. How much worse is that in Italy?
It’s nothing by comparison. In Italy, people don’t trust their own institutions. We have so little trust that we effectively delegated the job of printing money to the Germans.
What do you see as root cause of that kind of distrust in Italy?
In Italy, there’s a long history of institutions that don’t work for the people. Nobody in Italy would recognize the notion of a ‘government of the people, by the people, for the people.’
Let me tell you a fact that would be funny, if it were not tragic. In 2012, there was a major cruise liner that sank in the Mediterranean Sea. It’s called “Costa Concordia.” Google it and you’ll see a huge ship in the middle of the sea, holed on the left-hand side.
As Costa Concordia was taking water on board, the captain said, “Everything is fine! Go back to your cabins!” We know, after the fact, that not everything was fine, and that people shouldn’t have gone into the cabin. The Italians, who do not trust any authority, when they heard the captain–an authority figure–they went to the deck, took out their life jackets, and they saved themselves. Meanwhile, the foreigners died because they trusted the captain.
Wow, point taken. Switching up a bit–mind explaining the idea of ‘Regulatory Capture’ and how it relates to your idea of ‘Economics Capture?’
Super simple. The idea of regulatory capture is a Chicago idea of George Stigler. If I’m a regulator, I’m spending most of my time talking to the industry I regulate. I need their information in order to regulate the industry properly, and if I screw up, it’s my mistake, so I really do need that. And then, when I step down, chances are I’ll get hired by that industry. All the economic incentives are pushing me to work for one of the large industry players, and not for the broader public. Regulators behave like this not because they are evil (most of the time they are very decent human beings), but because of the mismatched incentives.
My point is to take this idea, and to apply it to economists. To the extent that economists are in the same situation, they respond in the same way: They end up talking to rich people, consulting for rich people, and getting paid by rich people.
What’s a concrete example of that?
You can actually read a piece on ProMarket.org, an online publication produced by the Stigler Center. There’s a whole series of articles, but one in particular deals with Uber. It’s about how Uber has captured economists that are now part of Uber’s propaganda machine.
You give data only to people who study aspects of your company that you want to promote. Think about the value of flexible work schedules. You know if you give the data to an economist, they’ll find there’s a benefit to the schedule, so you’re going to give the data to an economist. Then they’ll publish in a prestigious journal, and their positive findings will appear in widely-read newspapers.
A colleague of mine wanted to study fatal accidents. Surprise, surprise! Uber won’t supply the data. As a result, there’s a selective body of information, the kind of narrative that emerges is very biased, and we’re not even aware that the literature is biased. I’m afraid we lack awareness.
Is there reason to believe that ride-sharing leads to more fatal accidents?
There’s a paper which documents this idea–that when any car-hailing service enters a town, the number of fatal accidents increases. This is correlation not causation, and there’s a lot of circumstantial evidence supporting the claim. Most people switch from public transportation to private transportation, not between different forms of private transportation, so there’s more traffic, and more traffic leads to more deaths. All of these circumstances tend toward a directional effect.
What we don’t know is whether this is purely a mechanical thing–more cars, more accidents, more pollution–or whether the average quality of the driver is lower, and as a result, we get more than our fair share of accidents. That’s why having the data would be helpful.
If your colleague had asked for job flexibility data instead of fatal accidents data, you think Uber would have happily handed it over?
I wrote a piece that I called the “Sherlock Holmes Principle.” I asked Uber to give this fatal accidents data to my colleague but they never replied. So, I decided that because Uber has the data, and because they only share the data when it’s favorable, that means they looked at the data and it wasn’t favorable. Uber’s silence is evidence that they’re the problem.
Wow, so you really think Uber has analyzed all that data already?
Absolutely–and unfortunately, it’s not just the private sector but the public sector, too. I don’t know if you’re familiar with the Public Company Accounting Oversight Board (PCAOB). They’re the monitor of the auditors. They have very good data as to which partners audited which scandal-ridden firms.
I asked PCAOB if I could do research by trying to document what happens to a partner after an audit, and I suspect for the same reason, they did not want to give me that information. They knew the outcome wouldn’t be good.
I would imagine there’s also an effect where, because companies like Uber don’t share unfavorable data, economists resort to alternative data sets that lead to worse estimates, and then companies like Uber say, “This is totally wrong!”
This colleague of mine who wrote the piece on Uber got severely attacked by the Chief Economist of Lyft–all the possible negative things. Of course, the study was not as good as it could have been, because my colleague didn’t get the data. Nowadays, the journal editors have very demanding standards, and as a result, only certain studies get published.
And then, if I’m one of these companies, I’m going to give the data to people who’ve been friendly to me in past studies. If I know you’re a huge pro-labor guy, do I want to give you Uber data? No, because I fear you might find something that reflects negatively on my company. On the other hand, if you’re always outspoken in favor of technology’s greatness and against unions, you’re more likely to get the data.
Now if you’re an economist, there’s one thing you must believe: that you respond to incentives. If you’re a doctor and you don’t respond to incentives because you just care about saving other people’s lives–then I might believe you. But if you’re an economist, you have to believe that incentives matter. If I write papers that are pro-big tech and anti-union, I get a lot of data that allows me to publish in prestigious journals. If I’m a pro-union guy, I get no private data as a result, and I have no great career. Don’t you think this will affect the economist’s perspective, at least on the margin?
Yes, of course.
My colleagues don’t think so. [laughing] They think that economists are unique types of individuals who don’t respond to incentives. They think we’re different because we have a framework.
Like how journalists think they can cover events objectively?
Yes–I developed these ideas studying media and the relationship between the journalists and their sources. The same is true for business cases. When I presented these ideas at a seminar in Cambridge, for instance, I had a lot of attendees from Harvard Business School who write case studies, where the same problem occurs. If you write well about a company, your case is released and promoted. But if you write negatively, your case does not see the light of the day. What was funny of that seminar was that economists believed the capture story as far as business cases were concerned, but not for other research data. Harvard Business School faculty believed the capture story for research data, but not for business cases.
I was thinking, “Guys!” [laughing] “Don’t you look at each other!?” I was laughing because the cognitive dissonance was so open. There’s that line from the Bible: “Why do you see the speck in your brother’s eye but fail to notice the beam in your own eye?” It was funny, if not tragic.
Wow, nobody else could see the bias.
I wrote a paper, “Political Limits of Economics,” which pushes the line forwards, in that we economists like to substitute ourselves in place of elected officials more than is legitimate or fair. Again, we have a lot of stories that make a lot of sense–but, we don’t understand how self-serving they are. It’s like, “These rules must be written by a group of technocrats, all of whom are economics PhDs, because we’re not subject to the biases of others, and because we have a long-term view.”
Economists want to substitute themselves in place of elected officials?
Are you familiar with literature on time-inconsistency and the role of an independent central bank? Underlying that model is the assumption that voters are somewhat stupid: They don’t understand that increasing the money supply today, in order to boost the economy, will lead to more inflation tomorrow. That’s the reason we have to subtract that decision from the hands of elected politicians and give it to economists who, of course, are not subject to that pressure and have a long-term view.
Wouldn’t many people argue that Jerome Powell and the Fed are already under President Trump’s thumb?
Clearly, when you see a President like Donald Trump, you get worried. But there’s also the opposite risk–a country run by technocrats who don’t respond to anybody. One of my favorite lines belongs to Clemenceau, Prime Minister of France during World War I, who said, “War is too serious a matter to let generals run it.” And if you think about WW1, it’s a typical example of a war that was run by generals and ended in disaster.
What’s the practical implication of economics’ political limits?
Again, the practical implication is that we should subject technocrats to political decisions, rather than the other way around. In a serious democracy, military men respond to elected officials. The other way around–it’s a military dictatorship. Why should it be different with economists?
Last question. What’s the most convincing argument for classical liberalism?
Actually, there are many different strains of classical liberalism. I prefer one version of the Chicago School teachings–that of Henry Simons. It was Simons who invented the idea of “narrow banking” as part of the Chicago plan. (Narrow banking is 100-percent reserve banking.) He was a very strong advocate of anti-trust laws, and he saw monopolies as the biggest enemy to democracy.