Luigi Explains Capitalism For Da People!

Get ready, this is a really long one . . . I just finished A Capitalism for the People: Recapturing the Lost Genius of American Prosperity and it's one of my favorite books . . . not just because it's written by a guy named Luigi Zingales and I'm an Italian-American hailing from North Brunswick (home a da Carnivale Italiano! you gotta getta some zeppole) although Zingales' perspective, as an expatriate Italian, is essential to his critique of the current American Italian system-- he's like Tocqueville in that he can see things we take for granted . . . here are a dozen things I took away from his analysis and his solutions:

1) the thesis of the book is that the US free-market system has degenerated into crony capitalism, and Zingales uses Silvio Berlusconi as the paragon of this model; Berlusconi ran an insulated system of business and government corruption and comparisons between Berlusconi, who essentially ran Italy like his own private business, and Trump are inevitable and easy to make, so while the book was published pre-Trump, in 2012, Zingales does make the Berlusconi/Trump analogy in this episode of Conversations with Tyler . . .Trump succeeded in the real estate business, where it is more important to have strong relationships with government entities rather than creating something new in the market (and he's always relied on bankruptcy and the kindness of that system) and like Berlusconi, Trump has rewritten what is appropriate for a politician and member of the government;

2) Zingales starts with the proposition that fair markets are hard to manipulate and markets- while not perfect-- establish more efficient and accurate measure of value than say, an academic committee creating tenure requirements or statist regime doling out consumer products;

3) the problem is when large institutions, corporations, conglomerates and firms become "too big to fail" and both politicians and institutions recognize this because politicians, who aren't in office forever, would rather quell the chaos during their term-- avoid Armageddon, even if it's only a five percent chance of Armageddon-- with a bail-out, rather than be the person who lets the economy tank . . . but this doesn't allow the markets to do their job and accurately measure value;

4) he then explains how institutions that get "too big to fail" and understand this decimate the system-- he explains this with an analogy: if you play roulette yourself, you've got the same pay-out odds and vigorish whether you bet red/black or bet on a single number . . . for every hundred dollars you play, over time, you are likely to collect back $94.73-- the $5.27 is the amount the 0 and 00 extract . . . but if you pay an agent to play for you and promise him 20% of the winnings, but he doesn't have to pay anything if he loses, that agent is going to take risks and hope for a big payout . . . if he bets red with the $100 dollars, he only makes twenty bucks, but if he bets a single number, he stands to $700 . . . and if he loses, he loses nothing; so managers of funds take big risks, and the big investment banks encourage this because they know that either the lenders will lose out, as they are over-leveraged, or the taxpayers will bail the entire mess out;

5) lobbying is a monkey wrench in keeping markets fair and keeping large financial institutions and the government from becoming inexplicably intertwined-- and Zingales proposes something scary-- since the government controls trillions of dollars in subsidies and monies, the 3.5 billion spent by companies to lobby Congress and the 2.5 billion spent in political contributions may grow larger and larger, as business learns just how important it is to control the government . . . and this political climate of winner-take-all and fuck the other party isn't helping things;

6) with all this lobbying and bailing out and government/business intertwinement, we're not getting the beneficial long-term consequences of markets-- the accurate measurement of value and the benefits of competition . . . imagine that any time your kids are acting up and there's a conflict in the family, grandma and grandpa rescue the kids from any discipline . . . in the short term, these interventions lead to harmony and happiness, but in the long-term, you end up with spoiled kids and unhappy parents . . . Zingales uses another analogy to explain this analogy-- you gotta love all dese metaphors!-- he says that at the Grand Canyon, there is a sign warning people not to feed the wild animals, as if you do they lose their instincts and their ability to feed themselves . . . now the animals would love if people fed them but we need to "protect" them from the corruption of free food, for their own good . . . Zingales has seen this go down in Italy, and he sees America headed down the same road;

7) cronyism and unfair markets lead to winner-take-all scenarios, instead of healthy diversity and competition, and this is especially prevalent in the race to get into college-- while the number of people attending colleges in the US has skyrocketed, the size and amount of colleges has not . . . so there's winner-take-all competition to get admitted to the best schools and parents are spending much more time and resources on their children in order to get them in . . . this hasn't happened in Canada, where the admissions process isn't as competitive; so a tiny head-start when you are young can be very very important and wealth ensures this; Zingales uses a sports analogy-- if you allow professional teams to spend as much as possible, the riches teams will amass the best players and defeat everyone handily, which is great for one team but not particularly fun as a spectator or participant, so a salary cap-- which sounds non-competitive-- actually preserves competition . . . this is true for education and for lobbying, if money can buy success, then lots of money will be spent to ensure success and rules and social norms must be enacted to prevent this and encourage competition;

8) Zingales is certainly more conservative than me, and he's in favor of school voucher systems-- which I am not, for various reasons-- but I understand the logic of why he is in favor of the system, he brings up Finland, which has a much more rigorous method of selecting teachers-- in essence,  they have to be smarter than American teachers-- and this means you're going to have to pay teachers more to attract smarter people; I do agree with him on this account-- if we could just get rid of the worst teachers, the bottom ten percent, that would help things enormously; I think it's hard to measure the difference between fairly good and good teachers, because it depends on the metric . . . some teachers are better at improving test scores, others at making kids passionate about a subject, others at letting kids learn on their own . . . but there's no question that some teachers are just terrible and probably get too much protection from the union, and it's also true that the best teachers tend to be in richer schools, so vouchers can change this balance and create a "salary cap" situation that makes things more fair and competitive for more students;

9) if you can wrap your request for subsidies and protection in a noble cause, you'll really screw up the market . . . Zingales uses student loans and Pell grants as an example-- government-backed subsidies that have helped make the price of college double, as there is more demand, space constraints at elite colleges and a high cost and difficulty in starting new institutions;

10) the SEC and other regulators have had trouble enforcing inside trading, and Zingales sees the onus of responsibility for stamping out this on business schools and alumni networks: they need to publicly shame and disavow people who participate in these practices, instead of only celebrating whoever makes the most money . . . it's tough because those are the people that donate;

11) Zingales is in favor of fewer regulations and simpler regulations-- but not the Trumpian dismantling of all regulations without a counter-balance; the way to offset the removal of regulations is with Pigouvian taxes . . . so instead of having insanely complex environmental codes, which leads to employment for lobbyists and lawyers, and costs the taxpayers money in the form of the government agency and all the market distortions caused by the big-business lobbying . . . instead, tax pollutants, tax the amount of harm a factory does, and you are much more likely to capture revenue (or curb pollution) so this is a compelling example of a conservative thinker proposing a "good" tax . . . as opposed to a bad subsidy; subsidizing ethanol enriches ethanol producers, but a tax on gas could curb driving, could lessen greenhouse gases, could capture revenue, and could incentivize the electric car industry . . . without redistributing wealth and enriching the ethanol producers for doing nothing more vital than having a noble idea . . . I'm sure no conservative thinker has made it this far in the post, but this is a really important concept which Trump and his lackeys seem to be totally ignorant;

12) while it is in a voter's best interest to remain uneducated in most political forums-- it's not worth the time and effort-- Zingales does illustrate how shame, muck-raking, and a little bit of knowledge can go a long way in affecting policy and political outcomes . . . and deep into the book, he acknowledges that some people have an interest in public affairs, or they wouldn't have read his book, which tackles a complex subject in a detailed manner . . . anyway, these ideas are really important to understand; we need to harness the power of markets in America, often by separating big business and government; as anyone involved in sports knows, making things fair and competitive means more than simply removing all the rules . . . it takes thought, creativity, flexibility, and rigor; Zingales makes a fantastic case for a market-based ethic and hopes that breaches of this, in the form of cronyism and incestuous relationships between business and the government, will someday be stigmatized the way smoking is today . . . I hope he's right.