‘Chicago School’ is a descriptor often used to signify conventional economic thinking. This week, our friend Luigi Zingales, a finance professor at the Chicago Booth School of Business, joins Nick and Goldy to find out where they agree—and where they disagree. They discuss wealth taxes, health care, student loan forgiveness, shareholder value maximization, the Green New Deal, and more.

Luigi Zingales is a Professor of Entrepreneurship and Finance and the Director of the Stigler Center at the Chicago Booth School of Business. He is the author of two books: ‘Saving Capitalism from Capitalists’, with Raghuram G. Rajan, and ‘A Capitalism for the People: Recapturing the Lost Genius of American Prosperity’. Luigi is also the co-host of the podcast ‘Capitalisn’t’.

Twitter: @zingales @zingales_it

A Capitalism for the People: https://www.indiebound.org/book/9780465085958


David Goldstein: I think that we used to have a very competitive ideological market, and now we don’t.

Nick Hanauer: The more genuinely competitive a market is, the better it is. In always it’s better for consumers. It’s better for the pace of innovation. It’s better for the political process, so on and so forth. So would you agree, we agree on those principles?

David Goldstein: Absolutely.

Nick Hanauer: Okay, so let’s try and find where we disagree.

Speaker 3: From the offices of civic ventures in downtown Seattle, this is Pitchfork economics, with Nick Hanauer, where we explore everything you wished you’d learned in econ one on one.

Nick Hanauer: I’m Nick Hanauer, founder of civic ventures.

David Goldstein: I’m David Goldstein, senior fellow at civic ventures. You know sometimes Nick, I think we may fall into the preaching to the choir trap on Pitchfork economics and that we have some ideas about how the economy does work and doesn’t work. And then we look for really smart, interesting people who generally agree with us. And occasionally in these conversations will make a little snide comment about the University of Chicago, the Chicago School, because that’s where Milton Friedman, and the whole neo-classical orthodox economics as we know it today-

Nick Hanauer: And in particular, deliberate attempt to animate the neoliberal there too. Yeah, absolutely.

David Goldstein: It comes out of the Chicago School. So we’re going to take a little diversion here and talk to an actual University of Chicago Cannabis.

Nick Hanauer: That’s right. Luigi Zingales is professor at the University of Chicago Booth School of Business. And he has been wavering a little bit.

David Goldstein: But technically, he’s the Chicago School economist, not in the sense that he’s necessarily of the Chicago School, but that he teaches at the Chicago School.

Nick Hanauer: I think he has economic views, which are, I don’t even want to call it more conservative than ours in general. But he has written persuasively about competition and about capitalism. And he’s a super smart and interesting guy and it will be fun to compare and contrast our views with his. He wrote this wonderful book called Saving Capitalism from the Capitalists in 2003. And in 2012, he published Capitalism for the People Recapturing the Last Genius of American prosperity.

David Goldstein: And that was the book that brought him to my attention. I read that book. Loved the title, loved some of the book, did not always agree.

Nick Hanauer: No we didn’t always agree.

David Goldstein: … on his solutions, but it shows at least he’s a creative thinker, a free thinker when it comes to at least examining the orthodoxy.

Nick Hanauer: Definitely.

David Goldstein: He’s also by the way, the co host of a podcast called Capital Isn’t. And you know here on Pitchfork economics we’re big fans of economics podcasts.

Nick Hanauer: Exactly. Which people should listen to all the time.

Luigi Zingales: I am Luigi Zingales. I am a professor of finance at the University of Chicago Booth School of Business. I’m a director of a center called Stiegler center whose goal is to study how vested interest are subverting the competitive market economy.

David Goldstein: So is it fair to describe you as an authentic Chicago School economist?

Luigi Zingales: No, because first of all, I don’t know what Chicago School is anymore. And then I was told that I cannot represent the Chicago school. So I think that I’m my own kind of economist.

Nick Hanauer: I love it. Good for you.

David Goldstein: Well good for you. That’s good. Because we usually use that term as a pejorative. So let’s start, in your book a capitalism for the people. You make this really important distinction between pro market and pro business. If you could just explain the difference as simply as you can to start with, that would be great.

Luigi Zingales: Sure. First of all, we hear these two terms are used interchangeably every day, especially in the political arena. And I think they are very different because a business man and business woman love competition and free markets when they want to enter a new line of business. The moment they are in, they want to increase the barrier to entry in order to make more profits. And so they all of a sudden their interest is to make markets less competitive, less functioning to gain more profits. And I think that this is not necessarily bad if that’s done at the individual level as long as we think about maintaining the system competitive overall. Is very bad when, as policymakers we confuse the interests of a businessman with the interest of the market itself and the community at large.

Nick Hanauer: I think this is a great point, and a distinction that is so important and understanding where policy went wrong. I’ve always phrased it slightly differently, which is confusing. The narrow interest of a few capitalists with the broad interests of capitalism, the two things often have almost nothing to do with one another and in fact are often at odds.

David Goldstein: And yet these terms have been used interchangeably when in fact there’s no profit to be made in a perfect market is there?

Luigi Zingales: Yeah. In a textbook definition of a perfectly competitive market, there are zero abnormal profits, which means zero profits above a proper turn to capital. But yes, there should be zero profits. In reality, we know that they’re not.

David Goldstein: So let’s get to why this distinction is important and why the impact that this confusion has had in leading us to the problems we have in American capitalism today. Where did this start and what has it brought?

Luigi Zingales: I think that, in my view is a deterioration that took place with the demise of the Soviet union and socialism and any fear of a communist takeovers, in the old days, not necessarily good, but the old days where there was a very strong, just stuck position between capitalist and socialist if you want to make it simple. The capitalists were forced to present a better picture, a better image, and to think more broadly about what is good for society in general and not just for a narrow set of a large business people.

Once that pressure disappeared and it became cool not only on the right hand side of the political spectrum, but even the left hand side of the political spectrum of being businessmen and being entrepreneurial and making money, then these two distinctions started to fade away. And I think that people started to use the two interchangeably. And policy makers both on the right and on the left took that being pro-business was a good thing. And I think that, that is a true to this day.

David Goldstein: So we used to have, I guess, a competitive ideological market and now we don’t?

Luigi Zingales: Yeah, absolutely. I think that, we used to have a very competitive ideological market and I think that, the competition was keep people more honest. And this is to put it in the context of the US tension, I think in the 60s or 70s for the democratic party to be seen as too cozy with business, would be anathema. And as a result, even the Republicans were forced to keep some distance. And in the mid 80s, when the blue dog Democrats and a clean turn came around as a young leader in the party and then eventually won the election, I think that what he was basically doing, he started to compete for who was more friendly to business and then was a really ways to the bottom.

Nick Hanauer: I think that that diagnosis of where we went wrong, a lot of it rings true.

David Goldstein: Yeah, the timing’s a little off because you see the shift happening really starting in the mid 70s. Not with the collapse of the Soviet union. It certainly accelerates after.

Nick Hanauer: And I think it has to be true. Certainly, As a progressive capitalist, I’m a huge believer in markets and capitalism and believe it’s the best social technology ever invented to create prosperity in human societies. But the flavor of capitalism that we accept, is the question at hand. And the neoliberal order that established the policies that we have today was conceived for good reason, which is that the opposing ideology, which was communism and Stalinism and some really horrible things, right? Like that was conceived for good reason.

David Goldstein: As a counter narrative.

Nick Hanauer: I would submit to you that there were a bunch of ideas that came out of the economics profession, a lot of it from Chicago that led people in both political parties to a policy framework that definitely ended up concentrating wealth and making our markets effectively less competitive. The idea that the only purpose of the corporation was to enrich shareholders. And by so doing, we maximize benefits to everybody being the canonical example of that. Don’t you think that the economics profession has some responsibility here and both birthing and then propagating these ideas?

Luigi Zingales: Certainly some of the ideas generated in the accounting profession had an impact and some of that may have a negative impact. But I think that what was remarkable was how this ideas were accepted not only if you want in the right and side of the political spectrum, but on the left hand side, I think that everybody talks about the Chicago school of antitrust, which is of course important, influential. But the irony is that not only one of the key exponent of the school was Robert Bork. And while he was trained in Chicago, he was a Yale professor and exercises the inference at Yale more than the Chicago. But more importantly, there were people like, Arida and Turner that were at Harvard. And they had a very similar approach. And they made this mainstream innocence bog for many years, was a Pyre in the profession.

Remember he did not make it to the Supreme court. So it’s hard to say that he was kind of this mainstream guy. The mainstream guy were Turner and Arida, who by the way were consulting at the time for IBM and they were pushing the point that there is no monopoly and if it exist is good for everybody and so on so forth. So I think that the real turning point is not that there were some conservatives that were pushing this line. The point is, on the other hand, there was nobody opposing it and it became a completely dominant and became no model that the secretary of state for Clinton became Robert Rubin. And is like the most normal thing that a head of Goldman Sachs is leading Democrats.

Nick Hanauer: Yes, absolutely. And I think you’re dead, right. The remarkable thing is that these ideas, we think of them as conservative political ideas today, but they may not have been birthed as conservative.

David Goldstein: Yeah, they’ve been unchallenged for so long

Nick Hanauer: But they completely dominated the policy thinking on both the right and the left. And that’s why we’re in the box that we’re in.

David Goldstein: So professor Zingales you welcome Bernie Sanders onto the scene. Then since he adds to the ideological diversity and competition here that’s good for the nation to have him there. Right?

Luigi Zingales: I think he’s good for him to provoke. Yes. I don’t agree with most of his ideas, but I think it is a useful challenge to the system and more importantly is interpreting a lot of dissatisfaction that is out there in America. And by the way, in the Western world. Because what is interesting in, we tend to in America to interpret everything as specific to America. But if you look around the world, many of the movements that we’ve seen here have taken place somewhere else. If you think about Tony Blair, he was a labor party leader, but he was very similar to Clinton, his approach to business and what is the result is now they have Corban that makes Sanders look like a moderate.

Nick Hanauer: Yes, absolutely.

Luigi Zingales: And then look at in Germany you had the leader of the SPD, the social democratic party, Schroder that after he stepped down, he became chairman of Gazprom for Christ sake. Not only chairman of a large oil company, but of a Russian oil company, of a country that is a threat to the Western world and this is unbelievable.

Nick Hanauer: Yes. Here’s the really interesting thing that I want to sort of zoom in on is I think that you and we are in violent agreement about certain things, I think-

David Goldstein: The problem certainly on the analysis.

Nick Hanauer: That’s right. And that we have made this terrible mistake of confusing what’s good for markets and capitalism generally with what’s good for business people and businesses specifically. I think that we were in complete agreement with that. And that the more genuinely competitive a market is, the better it is in all ways. It’s better for consumers. It’s better for the pace of innovation, it’s better for the political process, so on and so forth. So would you agree we agree on those principles?

Luigi Zingales: Absolutely.

Nick Hanauer: Okay. So let’s try and find where we disagree, which I think will be more interesting. So why don’t we try and punch through some of the most ambitious proposals of Democrats running for president today. A goal he raised Bernie Sanders, but if there are things that you think are egregious and not good for markets and capitalism, why don’t we try and talk about those things? Because I think that’ll be interesting.

David Goldstein: Yeah, we could start with the big eight, which is Medicare for all. Healthcare reform. You had a very different proposal in your book.

Nick Hanauer: Talk us through why you think Medicare for all isn’t good.

Luigi Zingales: So there are two points of view. One is what is the cost overall of the system? And, I think that the fear is that having a system that protects every body combined with the pressure to extend treatment and end of life is making room for a disaster in American. Imparted already doesn’t walk very well, is Medicare, right? Because, in this country we have a private system for the more healthy part of the market when people are young and then we socialize the losses when people are old and sick. The ultimate example is when it comes to, for example, people in dialysis that are extremely expensive, they’re not part of the private system. So if you have a kidney failure, you are immediately pushed into Medicare. It’s one of the few cases in which you can enter Medicare before 65.

So the system is privatized profits and socialize losses. Basically. That’s a system as it is. Now. Can we have a more market oriented functioning system? I think that, Switzerland seems to have achieved that, but I becoming more and more dissollusion about the possibility of moving toward that system. So I think that having a minimum level of care for everybody I think is probably the way to go. The question is what do you define minimum and how expensive this is going to be?

David Goldstein: I know that book was written in 2012 so it’s been a few years as I remember it, you basically advocated for health savings accounts, not for providing some sort of minimum level of universal care have you moved on this issue?

Luigi Zingales: I am not so sure that I would describe my position back in necessarily as just having savings account. I thought it was useful to create incentives to use medicine in a more effective way. But yes, I have slowly come to the conclusion that first of all it’s very hard not to provide a lower bound for everybody. I come from not only a country, a continent that has offered this to everybody and has become almost like a human right. So I think it’s very hard that the one of the richest country in the world does not offer that to its citizens in some form or another.

Nick Hanauer: Here’s the thing is that continent somehow has managed to provide health care to every citizen and provides it at approximately someplace between 45 and 60% per citizen… of the cost per citizen that the United States provides healthcare with outcomes, which are equal to, or better than ours. And every single one of those countries has found a different way of doing this. But none of them use our system, which is this ridiculous quasi private system, which largely amounts to the world’s largest price fixing scheme. Right. Which is what the American healthcare system is. And so to say that we can’t afford Medicare for all, which would be like imposing the Canadian system or the British system on the country, which delivers better healthcare at half the price seems disingenuous.

Putting aside the politics of it and the difficulty of pushing it through, it’s quite clear that if we did have the British system or the Canadian system or the Singaporean system or the French system, 100% of Americans would have healthcare collective. We’d spend about half as much per citizen and we’d get about the same outcomes. It seems like the market has failed dramatically when it comes to healthcare and we need to have to acknowledge that.

Luigi Zingales: Yeah, we do acknowledge it, but we also have knowledge that is not really a free market in a sense, the fact that we cannot reimport the very insulin that is produced here and it’s sold in Canada at a third of the price cannot be re imported back. This is no market.

Nick Hanauer: No, it’s a price fixing scheme.

Luigi Zingales: It’s a price fixing scheme. We agree on that.

David Goldstein: So that actually is a great segue into another topic, which is well power, political power lobbying reform, which you talk about a lot in the book. The reasons why we can’t import that insulin, why we can’t negotiate with the pharmaceutical companies on prices is because the pharmaceutical industry successfully lobbied Congress to prevent that. So I guess first, why is it important to reduce the power, the political power of corporations? And second how do we do that?

Luigi Zingales: Let me correct you just a tiny bit because it’s even worse than you described because the reason why we still have that ban of importation is that there was like a foul Osteon pact between the Obama administration and the pharmaceutical industry in which the Obama administration traded the support for Obama care with the pharmaceutical industry in exchange for that. And they said this is a lesser evil, but they went ahead with that. So it’s not just that they particularly lobby Congress is that they are so influential in blocking any change that even if you are well intentioned and we should give credit to Obama to be well-intentioned, if you’re willing intention at the end of the day you have to compromise in order to get something done.

And so I think that that’s part of the problem. The reason why in this country we don’t have some form of universal health care is because the entrenched power the incumbents was very strong. And this is two-man propose some form of universal health care in 48. And the American medical association lobby and advertise and scare everybody against that to the point that they now get pass.

Nick Hanauer: Punch through the policy proposals made by Democrats running for president that strike you as counterproductive and bad for the economy.

Luigi Zingales: I am kind of fiscal conservative, so I would like to see the numbers of how you do this transition from the current system to the next one. I agree with you that all the other countries succeeded in having a lower cost of health care. And one of the things that actually pushed me to come to more in the direction of the universal healthcare is precisely see our increases over time of the cost of healthcare in America seems to produce less of an increase in life expectancy than in most other countries. Is not only that, the level, because the fact that, the way I like to say the fact that the in Portugal, Italy people live longer maybe due to the fact that they drink good red wine and they eat olive oil and they don’t shoot each other. So I think that those things have nothing to do with healthcare. 

Nick Hanauer: That’s the Mediterranean diet, red wine, olive oil, and not shooting at one another.

Luigi Zingales: Yeah, but in addition to that, you see that over time, every dollar spend more in medical care in Italy or Portugal, which are not model of efficiency by the way, I’m not using Switzerland or Sweden. It seems to have a bigger improvement in life expectancy in those countries than in the United States. So I think that there were enormous amount of inefficiencies, the problem is that, moving from here to there is quite complicated, especially because people want to be promised to retain what they have today. And I think that introducing universal healthcare will bring some form of redistribution and there will be a lot of tension. The fear that I have is that the way you tend to resolve those tension is to just pay the hell out of it, is be like Obamacare was introduced with a trade off in which you kind of cut down some of the costs of healthcare in exchange for expanding the coverage, but pretty quickly, the cost reduction got eaten away, especially over time. And then you have only the bill.

So I think that, I’m concerned about spending and it keeps spending at a car and brait especially in a world in which demographic increase seems to slow down. And also that our willingness to import people through immigration seems to be dramatically reduced. So the combination of these two factors I think should make us careful about expanding the debt to the extreme. And I come from a country that is struggling with a burden of a debt that finds it difficult to sustain and see the negative consequences of this. Are they large? So that’s where maybe I’m a different, I’m more fiscally conservative than many of the proposals out there by the Democrats.

David Goldstein: Do you think that the US is… the dollar’s position is the global reserve currency makes the US a little different in this regard in terms of how we look at deficits?

Luigi Zingales: Oh, definitely makes us different. I think that there is more scope for doing exactly what Trump is doing in a sense, expanded the deficits at a time when the economy is booming is quite crazy from a traditional economic stand point of view. But he’s doing the context in which, Europe is reducing deficits and debt, and there is a global tendency toward deflation. So I think is good at least at the moment from a compensatory point of view. But I don’t see these things as necessarily be there forever. I think that, there is a serious concern by other countries about the extra territoriality that the United States are trying to impose through the dollar. The fact that if you’re transacting the dollar, you’re subject to some extent to US legislation might be for a good reason, which is to fight terrorists.

But, I can tell you is not particularly loved by the rest of the world. And so they are trying to find an alternative and whether this alternative, maybe [inaudible 00:27:52] or might be Libra produced by Facebook or maybe another international currency, I think that, the risk of this happening I think are pretty high. Running large deficits may be the keys of death to that. I think this, what we economists call extraordinary privilege of having your liabilities in an international currency. They disturbed by everybody is an enormous benefit to the United States. And I think is right that you can use it. You don’t have to abuse it because you might lose it and that might be very costly.

David Goldstein: Speaking of expensive things the green new deal, can we afford that?

Luigi Zingales: What it means in term of numbers and what it means in term of allocation of money? What I’m concerned is about a lot of government money handed out fast to friends and family. This has been generally what a lot of these government programs are about. And this are kind of the dangerous. If you are saying we want to tax gasoline more in favor of reducing some taxes on alternatives, or even maybe create some small economic incentives for alternatives. I think that this is great if you are talking about doing some infrastructure and investment to reduce the consumption of a gasoline and in general CO2 emission. I think this is great. If you’re talking about trying to close down, I know this will not make me very popular in West Virginia, but thank God I don’t run for office, but closed down some coal plants. I think this will be fantastic.

I think that, coal is one of the most pollutant fuel we have and we should try to cut it down as fast as possible and so maybe dedicate some money to keep it in the ground and pay vote closing down those plan might be a good way to use the money. But I’m afraid that a large quantity of money that need to be allocated fast might lead to an enormous amount of waste

David Goldstein: This year it’s the 50th anniversary of the landing on the moon. And when Kennedy, I think it was 1962, was when he proposed going by the end of the decade and they did it by 1969. People use that moon shot analogy. If we made a commitment by the end of the decade, the next decade, to shift our electrical grid to renewables at an enormous federal expense, could we do that given the potential climate disaster that’s coming?

Luigi Zingales: It’s a very good question. The thing that surprises me is to the extent in which the push to go on the moon did not lead to fat contracts to contractors, but was done in an expensive way, not in a way that was corrupt and wasteful. I think that the NASA ran a pretty tight operation and with a really big, big push, I’m afraid that we don’t have the institutions to do that anymore. I always compare Sweden with Italy and they say, I’m much more willing to be for government eventually in Sweden because I know that the government intervention in Sweden will be done relatively well and relatively partially and with relatively little waste. I think that, asking for government intervention in Italy is masochistic because most of the money is wasted.

Nick Hanauer: I’d make the same comparison between Chicago and Seattle. There’s very little corruption here.

David Goldstein: Absolutely. I’d love to know the difference. And actually it’s one of my favorite question is why Seattle is so little corruption and Chicago so much? I think is a fascinating question that we don’t have a complete answer in the literature of why that’s the case. But I think is a super important question and I think he still plays a role, you know, that the city of Czar that was the base of Al Capone has changed it’s ethnic composition twice because at the time of Al Capone, and I was surprised it was populated by Italian American. And then after world war two, there was a huge influx of Eastern Europeans and by now we have mostly sort of a Latin American.

And in spite of this double change is still the most corrupt city in Illinois, which is a corrupt state. So, there seems to be an enormous amount of a persistence in this corruption, which we need to understand and especially find out how to uproot.

Luigi Zingales: One of the big differences between the actual moonshot, and a green new deal moonshot is that they had to invent all of the technology they were using. And there were a lot of benefits that came out of that. The modern computer industry largely rises out of the advances made during that program and the scattering of the engineers and programmers from NASA. On the other hand, a lot of the technologies we need, they already exist. We have very efficient wind and solar. We have new great technologies. We could be building a lot more of that right now if we just had the will and the money.

But I don’t want to idolize the past. My impression is back then there were much fewer revolving doors, for example. One thing that I recently discover is up to the early 80s was fairly rare for a retiring Congressman, retiring senator to become a lobbyist by now has become the majority outcome. In fact, if you take out the people who are too old to walk, then the vast majority of senators and congressmen who retire become lobbyist. And the same might be true for the military. I think that, even if [inaudible 00:34:20] spoke about the military industrial complex, I don’t know how many retired journalists were becoming board members of a defense contractor the next day. And today is basically everybody and then you keep going. And so that’s what I’m talking about. I am less confident of a massive, push that will be so effective.

And I’m all in favor of it. It was molding centers. I think that, I know is not as popular, but a gasoline tax can go a long way and a coal tax can go a long way to deliver the nice outcome, not only without spending money, raising some extra money, which as I said is not a bad idea.

Nick Hanauer: What do you think about wealth taxes? Senator Warren and Senator Sanders have proposed them?

Luigi Zingales: I’m not ideological opposed to wealth taxes. I think that it could be an interesting way to rebalance the burden of taxes. And in particular it could be a good way to avoid, a lot of tax illusion. I have my own version of wealth tax, which is the following. Imagine you take a Senator Warren Wealth tax, but you say that if you can prove that you have paid all your taxes on the income at the level of your wealth, then that’s this counter from your wealth tax. But if you cannot, because you use all the values, loopholes and et cetera, a lot, then you pay your wealth tax according to the one plan.

Nick Hanauer: So it’s sort of AMT?

Luigi Zingales: Yes. A massive AMT for super rich people.

Nick Hanauer: Yeah. Yeah. Like you’re either paying 40% on all your income or there’s a wealth tax?

Luigi Zingales: Yeah. The dangerous part in my view is that this Leaper’s lope in a sense. I think that, I don’t feel particularly paying for the billionaires who have impose the tax, but of course, where do you stop in that process And once you start to go down, then there are many, many more people that are affected more and so on and so forth. So I think that the people are in my view, afraid of once you introduce a principle where you stop and also the double warming. If you are paying fully your tax, your income taxes at that level, you’re paying a lot of money and then you have this double warming. So I think that having this mega alter the minimum taxes is a good idea.

Nick Hanauer: Where do you come out on things like free college or-

David Goldstein: Student loan forgiven.

Nick Hanauer: Student loan forgiveness. How about student loan forgiveness?

Luigi Zingales: I’m very much against the generalized student loan forgiveness because, I don’t understand why you want to target gift only to a few people. In essence, if you’re willing to give a gift, why don’t you give it to everybody? It is an expulsive gift and is not particularly, I think well designed. I think that the having an expansion in state schools that can provide a college at a cheaper rate is a great idea. Cracking down on for-profit colleges that we really take advantage of many students by having them accumulate a large amount of debt with not a lot of value added. I think that, in part that the problem is that many young students are confronted with a proposition of people saying everyone education is a priceless and here’s the loan and you cannot fail.

And the truth is, is not true. I think that the truth is that, a lot of college tuition is not worth it, at least for a number of people and, uh, and might be excessive. So I think that giving free tuition expose or for giving loans exposed creates a terrible incentives, including for colleges that needs more competition to reduce their tuition. So I think that is the, the wrong recipe even if justified by a lot of good reasons. And honestly, I think that the biggest problem in America in view is that the high school does not prepare most students enough. If a lot of the job that people do in college were to be done in high school collectively as a nation will save an enormous amount of money.

David Goldstein: In your book, you make the case for school vouchers to address a failing public schools, do you still support that?

Luigi Zingales: Yeah, I think that, they are potentially very good solution in the book. I explicitly said, and I think that this pot should be expanded to make that vouchers contingent on how difficult is for those students to find the right school or overcome some natural disadvantage. So if I am a recent immigrant with a not a very good background, I don’t know what the good schools are, et cetera, I am a relatively more difficult student to train. And so the voucher I receive should be more valuable so that competition among schools will generate a more of an interest to hire me or have me as a student to compensate the bigger challenge,

David Goldstein: How much of the problem in our public schools is the current funding mechanism where it’s largely based on local property taxes in most of the country. I grew up, in the suburbs just across the city line outside of Philadelphia in an affluent district where we did then and they still today spend twice as much per kid than they do in the Philadelphia school district where the needs are much higher, quite frankly, than where I grew up. There are great school districts throughout the country and they tend to be well funded. Could we fix this just by, through more equitable funding?

Luigi Zingales: I completely agree. I think that the funding of a public schools in the United States is one of the most crazy things of the US system. And I’m sorry to say, I think that is a very big racial segregation element behind it. And, and I think that I see the voucher system as maybe the easiest way to go around that. And I think that, we need to change the system because is tearing the country apart and I don’t know what is the easiest way to go at it, but it’s not going to be easy because, in a lot of suburbs there are people defending, their privilege and their separation with the oldest strength. But I completely agree that we need to fix that problem. And I think that actually the voucher system is not a bad idea in that direction.

My problem with vouchers has always been that it seems inconceivable to me that the voucher amount will ever equal that amount of money that you actually need. I use as, for example, my own children, I send to a private school that costs on the order of $40,000 per year per child public school kids in my state.

David Goldstein: This is in Seattle?

Luigi Zingales: Yeah.

Nick Hanauer: Wow. I thought they’re all in New York and those cities.

David Goldstein: New York is in a different class.

Luigi Zingales: No, no, no that’s not true. That’s not true. That’s not true. That’s not true. All of the private schools in Seattle cost between 35 and $40,000 a year. They just do.

David Goldstein: They’re cheaper than childcare.

Luigi Zingales: Yeah, they’re all priced approximately the same and then like you pay tuition and then you’re supposed to donate to put that aside. Whereas in the public schools, I think the typical kid gets about $13,000 a year, and I find it inconceivable that we can solve this problem of higher need by simply vouchering a third of what it costs to educate my children to everybody else. Like I’d be all for school vouchers if this voucher amount equaled the price that it costs to get into the best private school in this state, because then you would know that everybody had available to them the amount of resources equal to the best system. Or at least the system that the market says is the best system.

David Goldstein: But of course not every school can be the best school. And Not every teacher can be the best teacher. And every-

Luigi Zingales: No, but the $35,000 per, you can be pretty sure that you get a pretty good outcome because look, the market has landed on a number in a place like Seattle. In fact, the market has landed on the same number in every major city in the country.

David Goldstein: In fact, if you look at the way in Seattle, in Washington, actually we do it better about 75% of the funding comes from the state, 25% from local property taxes and the state caps, how much the districts can raise locally. But it doesn’t cap how much the PTSA can raise. And what you find in elementary schools in the Seattle area is that the PTSA is, are raising 1200 that the wealthiest schools are raising 1200 $1,500 more a year per student. And in the poorer schools, they raised nothing. Yeah. So if that 1500 is being raised on Mercer Island or Stevens elementary or wherever that tells you the market is set, that price that we need an extra $1,500 per student

Nick Hanauer: At a minimum, for the rich kids who don’t have any special needs. Anyway, I, I want your thoughts on one more thing, Luigi, which is a shareholder value maximization. Shareholder capitalism and the emerging notion that we need a new definition or a new way of constraining, the capitalism and a new way to think about what the responsibility of executives is. Do you have thoughts on that? Have you thought that through?

Luigi Zingales: Yes. I actually have a lot of thoughts on my, these upon you here, but my views are a kind of at all with both the mainstream and the main just alternative in the sense that, let me start from the beginning. I think that in a competitive market system, so that’s a big if, because today a lot of sectors are not very competitive in a competitive market system walkers and customers have freedom of choice. So they don’t like the way you’re treated, you go somewhere else. You don’t like the way the product looks like as is charge. I go somewhere else. The only people that don’t have this choice, ah, the shoulders because it’s true that I can sell my share. But when I sell, I pay, I receive what the value of the share is, which is affected by the decision that the company is made making.

So imagine that I make a decision and this case is not an hypothetical because it’s actually a real case that was debated in court. Imagine that I am Craiglist and I decides that I, my goal is to give a service to all Americans and not to make profits. If I am a shareholder of Craiglist maybe a minority shareholders at Craiglist I pay with profits, lack of there off is service that is provided to everybody else. If I’m not paying enough as a employee at Craigslist, I can leave. But if I’m not paying off as a investor in Craigslist, I cannot leave because if I leave, I receive the price that reflex the fact that profits are much, much lower because Craig decided, Craig Newman decided to run the company particular way.

And so I think the shareholders have the right to be represented because if they, are not represented, they can be taxed without representation. It says business decision to forgive profits in exchange for a greater goods are a form of political decision whose burden is paid by the shareholders. And so while I do believe that companies can, and sometime, should have greater objective, the just that profits, I think that who should establish those objectives are the one who end up paying for it, I.e the shareholders. So this is not, the management is not a society at large, but the shareholders that they want to pay the cost.

Nick Hanauer: But it’s simply not true that shareholders can’t leave. You can sell at any time.

Luigi Zingales: I told you, you can sell by you pay the cost. It’s like saying you have no tax because you can leave.

Nick Hanauer: Okay. But as a worker, you also pay if you leave, right, you take enormous physical and personal and economic risk. If you leave, you lose pay. When you’re in between jobs. You might have to take advantage of a better offer. You might have to pick up and move your family elsewhere.

Luigi Zingales: Your capital is more liquid than labor is.

Nick Hanauer: Capital is very a liquid exander before you sink in. But once I’ve invested my money in let’s say Craiglist, I can not get out of it without paying a deep costs quick list is mismanaged. On the other hand, think about the computer scientists who work for Craigslist, they can walk on the other side of the road and get a better job so they’re very eloquent.

David Goldstein: Yeah, I can do the same thing. I can take my money out of Craigslist. I can sell and invest in one day by some other site in one second. I can buy some other stock that I think will do better.

Nick Hanauer: Yeah. So I acknowledge that shareholders are an important stakeholder in a capitalist enterprise and should be represented. I think the question is we have built an economic system where shareholders are the only stake holders that are represented.

David Goldstein: Or are you saying Luigi that under current laws and rules, the, the shareholders themselves don’t actually have much voting power in terms of determining how the company is run?

Luigi Zingales: I definitely say that, but I also want to point out that, the fact that today most corporations are for-profits is not something that is imposed by law is imposed by free choice. Today, in particularly, it’s possible to create a benefits corporation where you put other objective in line and nothing prevents a new company to have a statue that say that a Walker should be represented on the board. Did they just choose not to do that? And why they choose not to do that is probably because it’s not very efficient to do that. Otherwise they would.

Nick Hanauer: No, I mean it has nothing to do with efficiency. It has to do with profit. You don’t want workers represented on your board because if they, if they were represented on your board, you might have to pay them more. And if you have to pay them more than you get to pay yourself less, that has nothing to do with efficiency. That has to do with power and profit. Right. It’s not more efficient.

David Goldstein: If we are two starting organizations and we know that, I’m able to attract better workers at a lower compensation because I promise more in the future if I give them voting rights. And so if this is a better organization, again in a competitive market, this form of organization should prevail. We know that in Southern sectors, take the university sector, for example, call polities walk pretty well because most of university out kind of not legally by de facto, some corporate run by faculty and and we have entry a for profit corporation. They have not done particularly well in this, this scheme. So we do have example of on corporatives think about a law firms and law firms. We have a seamless situation in which a group of workers the partners who have vote voting rights.

Nick Hanauer: I guess the thing is that a corporation is not a product of free choice a corporation is the product of politics, right? Like civil society grants corporations, limited liability in exchange for generating benefits to the society. You could just as easily say that it should be legal for corporations to dump any pollutant in the rivers because the people who live in the community can move and the shareholders can’t get out if they don’t get to dump the pollutants. Right? Like it’s the same, it’s the same.

Luigi Zingales: No, no, no. I completely… No, no, no, no. It’s not the same. I think that externalities should be regulated and I’m very much in favor of regulation-

Nick Hanauer: Here is an externality, like if I’m paying my workers so that they can’t survive without public assistance, I have generated an externality if I’m paying my workers so little that they need to have three jobs in order to survive and therefore can’t supervise their children, can’t help them with homework. I’m creating an externality. If I’m paying my workers so little that they live in despair and take up drugs to make up the difference. I’m creating an externality. Like there are all sorts of externalities that are created by giving corporations the power to exploit people.

Luigi Zingales: First of all the pouch was Floyd arises only in a world where there is not enough competition. So, maybe we fix the problem with competition to begin with, which exists. But second, if the problem is too low wage, the easiest way to fix it is with minimum wage is not obvious why you want to give power to employees to obtain that was off the point is there is nothing that prevents labor to hire capital rather than capital to hire labor. In many situation, we see this as the case and I give you the university to some extend as an example. So why we want to upset this expose in a sense, if you want to say that once a corporation is successful, then we should tax that corporation and we distribute the money to its to its workers.

Okay. But it’s a form of taxation. I don’t know why you don’t accept the fact that there are different forms of organization and there is an increase in number by the way of companies that set themselves up as cooperative, or assess themselves up as a benefit corporation. So people are paying attention. But even the most aggressive, and liberal and progressive data firms in the Silicon Valley, they tend to set themselves up as for profit corporation. And that means something, right? Is why because they need to attract capital and that that capital will come only under certain conditions. And because we’re in a competitive market, if they could provide alternatives they would, but the dominant form to attract that capital is to give that Capitol voting rights.

David Goldstein: You know what, I’m going to need to cut off this because we’ve taken you way too long already so, maybe we’re going to have you back again and have a more focused argument between you and Nick.

Nick Hanauer: Yeah. I think this is enough of the issue is how you conceptualize the role of the stake holders in society and how we call certain things, standards and other things, tax, how we think about what efficiency is or, and I would just respectfully push back on that. I don’t think it exists. I think that efficiency is like a market is a complex adaptive ecology and those systems aren’t efficient. They can be effective if they’re well structured. And I think that’s what-

David Goldstein: Yeah, markets are incredibly inefficient. My God, they’re wasteful.

Nick Hanauer: Yeah. And the question is how do we structure those systems?

Luigi Zingales: The question is what is the alternative? [crosstalk 00:56:21]

David Goldstein: We are with you. This is the best, the market works better than-

Nick Hanauer: Any alternative. The question is how do we make it the most effective mechanism for generating a broad based prosperity and stable societies? So that’s the question.

David Goldstein: Before we let you go. Just we want to ask the standard question. We ask everybody at the end, why do you do this work?

Luigi Zingales: Because I love it.

Nick Hanauer: What do you love about it?

Luigi Zingales: Honestly, I think that this study of economics is a study of how to improve people’s lives. At least from an economic point of view. Of course there are many dimensional people lives, but I think that this is one that is very important. And being able to study how to do it is extremely rewarding.

David Goldstein: You have stated the only normative assertion we make in our economic analysis that the purpose of economics is to improve people’s lives. So we’re with you 100% on that.

Nick Hanauer: Well, thank you so much for spending the time with us.

Luigi Zingales: It was lovely. And I hope we have other chances.

Nick Hanauer: If you’re ever coming to town, please let us know. It would be so much fun to have you in the office and if not doing a podcast, just chat generally about political economy issues.

David Goldstein: Yeah, you should see what Nick has pasted to the wall of his office. He wants to show you that.

Nick Hanauer: Yeah. Exactly. Anyway, thank you so much.

Luigi Zingales: Looking forward.

Nick Hanauer: Okay.

Luigi Zingales: Bye bye.

Nick Hanauer: Thank you. Bye. So Goldie, the most interesting thing about that conversation with Luigi was that he had come farther towards us than I had expected. Do you agree with that?

David Goldstein: Yeah. So interestingly, I hadn’t realized when I read his book a capitalism for the people that it was from 2012 and there were some things in there like on healthcare where the, his big solution was health savings accounts and I was expecting to kind of force him to defend that, but he didn’t, he’s looked at the results since then over the past seven years. And he’s come to the idea that we need some to guarantee some sort of minimal level of government provided healthcare.

Nick Hanauer: Yeah. And we served him up what I thought were going to be all these softballs on the economic proposals coming out of the democratic primary. And I thought he would have been more harshly critical of those ideas. And he wasn’t, which honestly surprised the heck out of me. I thought he was going to really hate them and forcefully articulate why they were bad ideas or a bunch of them were bad ideas. He did not. And at the risk of sounding self-congratulatory, I think I at least, I would like to believe that that’s because smart people in the economics profession are moving from these rigid orthodoxies on the right to more rational views about the role of government in managing market economies and are beginning to recognize that a lot of the fundamental assumptions that they had used before just turn out not to be true.

David Goldstein: Right. You know, when you wrote that pitchforks piece back in 2014, this was in the midst of the $15 battle. We just pass $15 in Seattle. And it was roundly criticized even by some of our allies is going too far, too fast. A lot has changed since then. And one of the big things that’s changed is while we’ve had things like $15 and none of the bad stuff happened.

Nick Hanauer: That’s right.

David Goldstein: And we haven’t done things like this and the quality has gotten worse and it’s become clear that a lot of the orthodoxies that people just took for granted as recently as five years ago aren’t working out.

Nick Hanauer: Right. Exactly. And I do think that because it’s not just that the empirical evidence has mounted that these orthodoxies weren’t true, there has been, I think, a pretty robust, organized pushback against the narratives too. 

David Goldstein: Right. There’s a new theoretical understanding, new theoretical models that are being grouped together where we actually are beginning to have alternatives. You know, in our conversation with Luigi, he talked about at the time, neo-liberalism, uh, really just took hold of both parties. It’s because there, there wasn’t any alternative XX ration. And now we’ve been developing and really building this new narrative around these alternative ideas. And you know, you have to give you some economists like Luigi credit for being willing to question the role of new orthodoxy and coming around and I’d love to see all of the Chicago school. You’re welcome. We are a big tent here on the hetero docs side of economics. We welcome you all to question all of your core values and models and come to us with an open mind.

Nick Hanauer: That’s right. That’s right. And the thing about these orthodoxies, in fairness to these folks were that they were sort of like water, to fishes. In other words you don’t even know it’s there really. The Orthodox assumptions about human behavior and the dynamics of human social systems were just so embedded in people’s both consciousness and subconscious that you just, you didn’t even stop to question them. And it has been only in the last really, honestly, I think five, six, seven years when people have really begun to start to take a harder look at this stuff.

David Goldstein: Okay. So the summary of this is professor Zingales teaches at the Chicago school, not really an enemy. No.

Nick Hanauer: First traitor like me. Yeah. Interesting conversation though. And a great guy.

David Goldstein: So I don’t know how to say it in Latin, but on next week’s episode, tune in and we’ll talk about economic woman.

Speaker 3: Pitchfork economics is produced by civic ventures. The magic happens in Seattle in partnership with the young Turks network. If you liked the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook @civicaction and Nick Hanauer follow our writing on medium, @civic skunkworks and peek behind the podcast scenes on Instagram @Pitchfork economics as always, from our team at civic ventures. Thanks for listening. See you next week.