Zingales: We Need to Restore American Capitalism

Big business endangers American capitalism, but the problem can be eliminated by closing tax loopholes.

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Populist movements, including the Tea Party and Occupy Wall Street, are examples of a growing frustration with the American system. Luigi Zingales, an economics professor at the University of Chicago's Booth School of Business, says American capitalism, and by extension democracy, is in decline because big business interests have become entrenched in Washington. In A Capitalism for the People: Recapturing the Lost Genius of American Prosperity, the pro-market economist argues that the current decline is reflective of the "crony capitalism" found in his native Italy, and he provides solutions for restoring America's political and economic institutions. Zingales recently spoke to U.S. News about what's behind the events that have angered Americans of all political stripes and what he says can be done about it. Excerpts:

Is America still a capitalist country?

Definitely. The question is which type of capitalism, and I always thought that the United States had a very special brand of capitalism that was different than the one prevailing in most of the world, which is kind of a crony capitalism.

What makes American capitalism special?

A unique combination of broad popular support for the idea of a free market that made it more difficult for the political system to interfere with daily business life, and even for business to be so influential in determining the political outcomes.

[See a collection of political cartoons on the economy.]

And what is crony capitalism?

It's a system that is designed by and run for a small elite group of people rather than people at large. I think that the notion of a government of the people, for the people, by the people is not just rhetoric. It's an important element of American democracy, which is not true in much of the world. And the same can be said of the economic system.

What's so great about capitalism?

I think that the great idea behind the capitalist system that goes back to Adam Smith is that competition can transform the pursuit of self-interest to the creation of common good. And this is true only if we have a very competitive economy and if the government does not distort this economy to the benefit of the few. So one thing that my book wants to achieve is to explain to people that being pro-market doesn't necessarily mean being pro-business. This distinction has been lost since.

[Read more Book Club interviews by subscribing to U.S. News Weekly.]

How was the distinction lost?

A huge factor has been the fact that the Democratic Party became more pro-business. In the '70s, when the Democratic Party was really anti-business, [it] was keeping the Republicans in check. Now they both compete for business support and business money. And it's a race to the bottom.

Is this an inevitable development in a capitalist society?

I don't think it's inevitable. If you would look at the United States at the turn of the 19th to 20th century, you would have made the same conclusion that it was inevitable. You had businessmen like Rockefeller that were running the show, and there was a sense of disenfranchisement of the average American. And there were a lot of reports about how the Senate was completely corrupt. And there was a populist revolt against that that led to what we now know as Progressive Era legislation that really improved the way capitalism was run. And I think America became a better place.

[See a collection of political cartoons on Occupy Wall Street.]

What's the problem with public-private partnerships?

The problem is that business is very successful in channeling taxpayers' money to their own interest and is particularly good at doing that when this enterprise is covered by an image of doing good work. There is always a need for a sort of intellectual cover and the better the intellectual cover is the more dangerous the process is.

What's an example of such a partnership?

There is a very long list. Fannie and Freddie is an example of this. And the very idea of bailing out large corporations is, in a sense, an example because you portray this as a social goal—we don't want to create a financial collapse—but the reality is we are protecting the interest of the few at the expense of the many.