Conversations on Crony Capitalism – Interview with Professor Luigi Zingales

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Conversations on Crony Capitalism – Interview with Professor Luigi Zingales

Contributed By: Abhishek Gaurav
Edited By: J K Varshika

On the 20th of December this year, IIM Bangalore’s Research and Publication Division, and Chicago Booth’s Stigler Center organized a lecture by the eminent economist Professor Luigi Zingales on the topic “Crony Capitalism”. Here are the excerpts from the interview given by the speaker about the session.

Has there been an epoch in history when capitalism has been devoid of cronyism that we often blame it for? Is crony capitalism just the practical face of capitalism – capitalism in practice?

Clearly, there is a tendency in capitalism to go into the direction of cronyism. And, this is where a healthy democracy can be a good counterbalance. I do not believe in starting with perfection, I believe more in evolution and changes. So, if we look for example at American capitalists which of course has a longer history, there was a period at the end of the 19th century where capitalism was even more chronic than it is today. And, there was a swing back with the progressive era that ushered in a much more equal opportunity system and the system might have gone too much into the regulation dimeson in the 1970s and the Reagan revolution was the starting of a swing back. I was a kid at the time and a believer in the Reagan revolution back then because I thought it was the right time. Once Keynes was asked why you change your ideas and he said well yes, the facts have changed and so I change my ideas. Likewise, I think there is a need to be in sync with the times. If you read Paul Krugman’s column, he shall always propose more government spending but then all of us know that a broken clock is right twice in a day. There’s a chance that he is right. However, I think we need to be more adaptable in how we think about the issues that surround us.

What do you think are some of the most critical social factors that are extremely important to the sustenance of a capitalist system – soft social norms that push capitalism deeper into the fabric of society?

I think it’s a great question to which as economists we do not have a full answer yet. The answers are not straightforward. One driving factor is certainly more equality. Inequality, especially extreme inequality creates tensions in the democratic process and leads to easy capture of the system and is inimical to a level playing field. The other is an overarching trust in the system that is based on some form of shared social capital. I think that if in a society everything is up for sale then so can be the rules designed for the society. And, then what becomes important is who is the rule maker and gets to decide the rules.

Do you think that a country’s judicial system might have the answers to the ills of capitalism – especially relevant for a country like India where this judicial system may be broken for a large part with the humongous number of pending cases?

I am not an expert in the judicial system. My puzzle is why the judicial system of India is broken. With all the negative things that British left here, the British judicial system is not that terrible. What changes made the British system not work in India is a very interesting question to ponder over. Having said that judicial system is a very important part of a capitalist set-up. How do you get impartial courts is in many ways similar to the question, I also started out with. In the case of USA, judges in most places are elected by the people which may grant legitimacy to them vis-à-vis cases of appointment. Would you feel comfortable in India with an elected judge becomes a question then.  There is evidence of distortion in judicial decision driven by campaign finance. If judges are appointed instead, it may not necessarily be a better thing. A lot of people who become judges today do not represent the society at large. A proper judicial system is very difficult to obtain. And the undermining of trust in the judicial system is a frightening outcome for me which is why the current state of affairs in the US troubles me.

You constantly maintain that large banks should be penalized more than small banks for their wrongdoings. In light of this, what are your thoughts on the consolidation of banks in India?

I have a natural aversion to large banks because they become too politically influential. In India, you have the state-owned banks but there is also a possibility that you might end up in a situation where “you own the oil or the oil owns you”. And, therefore there is a big risk for the banks here which they ought to acknowledge.

Recently, one big industrialist in India celebrated the lavish wedding of his daughter. There’s a fundamental question here – should capitalists have the choice the spend the money the way they want to? This ties back to 2008 crisis where a section of the population was handed out money and they spent it in a way which was counter-productive to the society’s long-term interests.

It is a difficult question. After all, who am I to say how somebody is spending their money. So, whether you are a small individual or a rich individual, as long as you earn your money honestly, you should have the freedom to spend it the way you want to. Should we nevertheless, encourage people to spend money in philanthropy – absolutely.

I don’t see a dramatic difference between kids who spend the little money they have to buy the shoes signed by big celebs and Ambani who invites Beyoncé to the wedding. So, I think who am I to decide how and what he should spend. My biggest concern, however, is number one, whether he makes his money legally. And, two what I find very disturbing is that John Kerry and Hillary Clinton attend the wedding. Because it does give an impression of an international elite that plays different rules among themselves and leaves the rest of us behind. And, I think that is problematic. Do I judge him poorly as a person, if he does that – absolutely yes.

So, I was recently in Gwalior and we went to the residence of the former Raj and it was pretty sickening to see that he spent an extraordinary amount of wealth had been spent to create a personal railway to go hunting and he had a golden train to serve him. It is both lavish and stupid at the same time especially in spite of the massive poverty just round the corner.  If you are saying, do I admire this person – absolutely not. Do I think that he should he behave a bit differently – absolutely yes. Do I want to force him – no, because in a free economy you should be able to spend your money the way you want. I will be concerned more on how he got all that money in the first place.

Do you think that monopolies are inherently inimical to economies?

Yes.

But there is an alternate strand of literature by Coase and Williamson that large organizations can be beneficial as they bring in scale effects. What is that turning point where large organizations become counter-productive? Even literature says that there is an optimal scale of production.

I believe scale and concentration are not exactly the same thing. Especially in a large market like India, one can achieve large scale without being a monopoly. That is where having an open economy helps because you can be large across countries but not so influential in any one single country – this is one of the many things good about globalization.

Which is that one country that stands as an outlier to this whole debate on crony capitalism? A country which has shown to the world that a capitalist system can function without cronyism tendencies.

I think Sweden is a great example here. And, this is independent of the manner of distribution. You may like or may not like the distribution. However, what the Swedish system does very well is that it favours competition. And, on the other hand, it also has a mechanism of a safety net with an enormous degree of impartiality in rules. Sweden isn’t perfect, but it has got many things right.

Abhishek is a student of PGP 2017-2019 batch of IIM Bangalore and a member of the economics society, EconS. Prof. Luigi Zingales is a distinguished professor of entrepreneurship and finance at the University of Chicago, Booth School of Business.

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