This fear of centralized power, particularly in economic policymaking, means that the markets often don't work the way that we want them to and there's no one to hold accountable because there's no institution responsible for delivering.
I'm Bethany McLean. Did you ever have a moment of doubt about capitalism and whether greed's a good idea?
And I'm Luigi Zingales. We have socialism for the very rich, rugged individualism for the poor. And this is Capital Isn't, a podcast about what is working in capitalism.
First of all, tell me, is there some society you know that doesn't run on greed?
And most importantly, what isn't? We ought to do better by the people that get left behind. I don't think we should have killed the capital system in the process.
From the fall of the Berlin Wall to the Great Financial Crisis, the model of unfettered capitalism dominated the political scene, both in the United States and in most of the world. Free markets and limited government were supported not just by the right but also by most of the left. After 2008 and especially after 2020 the music has changed. Not only are an increasing number of people questioning the wisdom of unregulated markets but they are also envisioning a more active role for the state.
New terms are created to capture this renewed passion which is emerging on both sides of the political spectrum. State capacity libertarianism, new industrial policy and market craft. The last is a term invented by political scientist Kenneth Vogel to indicate that a core function of governments comparable to state craft is market governance. The state not only lays the foundation for markets with the rule of law and property rights, but it also shapes the market economies through institutions and regulation.
Wait, wait, wait, Luigi. State capacity libertarianism. I haven't heard that one. Where did that one come from?
Uh, actually Tyler Cowen is one of the main proponents of this idea.
Oh, interesting. That's unexpected. Um, I think he needs to come up with a better term, don't you? I feel like it's a mouthful.
It is a mouthful, but uh, we'll see.
Anyway, well, a new book in this genre called Market Crafters has just come out. It explains how businessmen, politicians, and government administrators have shaped markets for political goals time and time again. The book is a series of portraits from Jesse Jones to Lina Khan of people who shaped the markets at different times. The protagonists are not just left-leaning interventionists, but also libertarians like Alan Greenspan or conservatives like Hank Paulson or Bill Simon, or simply apolitical businessmen like Robert Noyce, the co-founder of Fairchild Semiconductor and Intel. But most importantly, the father of the US semiconductor industry. A core part of the argument is that markets are almost always shaped, even if we in more modern times have not necessarily acknowledged that shaping. And what is making it even more interesting is that was written by Chris Hughes, a Facebook co-founder who left Facebook in 2007 and now is finishing his PhD at Wharton and is the chair of the Economic Security Project, a leading nonprofit that is advocating for economic power for all Americans.
So, we had Cliff Asness on our podcast recently and he said that there's no such thing as a free market. And I thought that that jived with your point of view very very well and I was wondering how you think about that statement.
I think you know we have this cult of the free market this idea that supply and demand determines everything from the price of pizza to how much you're going to pay ChatGPT to use its technology. And in reality what we see is that most major markets in the United States are if not managed at least structured by the state directly. So banking and finance is an obvious one, one that's close to my heart and my own academic interests, healthcare, pharmaceuticals, airlines. I mean we could keep going through the list of industry after industry. If you add them up, you're well over half of GDP. And so my point in writing Market Crafters was not to say that like structuring markets is always good. It's just, hey guys, we do this. These markets are not mythical and self-regulating. We got to learn how we succeed and how we fail so that we can do it better in the future.
So in the conclusion of your book, you state that successful market craft requires a clear mission, a coordinating institution who can hold accountable and the investment of power in that institution to accomplish its work. Can you elaborate on why we need those conditions?
When you see public policy makers managing and guiding markets towards a public goal like making Americans richer, making their financial lives more stable, future proofing against climate, that is market crafting. So I go through all kinds of successes and failures in the book. The upshot is that when we succeed, it tends to be because we invest in an institution as you were saying with a clear mission. So for instance, the Fed has a clear mission, price stability and full employment. We give them a lot of power to do it and then we give them the discretion, the bit of insulation from the ups and downs of the political cycle to succeed. And so these institutions still fail. The Fed is clearly not perfect. But on balance, when we invest institutions with that kind of model, they're able to deliver on things like price stability, financial stability, and other bigger picture goals. But the problem is we tend to avoid creating these institutions in the first place. This fear of centralized power particularly in economic policymaking means that the markets often don't work the way that we want them to and there's no one to hold accountable because there's no institution responsible for delivering.
So where do you stop and how do you prevent market crafting from becoming a victim of the political process? The Fed in recent years became controversial perhaps for having too active a role in the US economy both through quantitative easing and through keeping short-term interest rates very low. And then the Fed also came under fire for its policies for meddling some would say in climate change and in other areas that people saw as outside the Fed's mandate. So who gets to define the market and how do you prevent that from becoming a victim of the political process that is then whipsawed back and forth through different administrations?
Well, the Fed has a boss. It's Congress. Congress decides what the mandate of the Fed is and what its tools are to get that done. And that's a work in progress. Like the Fed was founded in 1913, completely reorganized in 1935, and in the late '70s, Congress set a clear mission for the Fed for price stability, full employment, and moderate long-term interest rates. And the Fed believes that financial stability is an additional goal that while it's not in the legislation is important to deliver on that mandate. And so you talk about something like climate change. Well, the Fed actually of all the global central banks has been the least involved in thinking about the impacts of climate change, but it did make the decision in the late 2010s and in 2020 to start thinking seriously about how climate risk could change the nature of insurance markets, could change the nature of banking and finance, believing that was part of its mission. It set up internal kinds of stress testing exercises for large institutions to think about climate changes and catastrophes. It was not doing things like other central banks have done like buying green bonds and this and that because it didn't believe that it had the authority to do it. So what I'm trying to say is that you need these institutions that have the discretion to think about how to fulfill their missions and when and if they overstep that is the role of Congress to redefine what those boundaries are. In other cases it might be the courts, in some cases it might be the media. There are these methods of accountability that are important to have.
I think as an example of clear mission and clear practice, I'm not so sure the Fed will fit in the sense yes it has a clear mission but as you said financial stability was something that the Fed introduced in it and interpreted in the way they wanted. As you say in the book they could have saved Lehman they had all the authority to do so they chose not to. It's not clear that they had the authority of doing everything they did during the financial crisis. They did during COVID was even worse they made up stuff. They were justified by the political moment with a lot of arbitrariness and Congress was quite silent. Ex post actually Dodd-Frank to some extent was an attempt to limit the power of the Fed to intervene but failed because then COVID came and the Fed did with gusto what had done during the financial crisis in spite of a legislation like Dodd-Frank to limit. So to some extent the fear of this power is that these powers are used in a way that is not necessarily aligned with Congress and you know sometimes might be good sometimes might be bad but it's a little bit scary.
Well there's a lot there. So just to start with the great financial crisis I think you're right to say that the Fed improvised and they made a huge mistake in the Lehman decision. You know, as I go into detail in the book, we have this false dichotomy of like institutions have to fail or they have to be bailed out when there are all kinds of examples of structured bankruptcies that prevent the kind of market chaos that Lehman provided. I mean, Alan Greenspan's own Fed a decade earlier had done that with the largest hedge fund in the world, long-term capital management. So, that was a meaningful failure. And at the same time, the Fed as an institution that fall and over the coming months working with Treasury and the Congress on the TARP bill created a suite of programs that prevented even further financial meltdowns. Now, Dodd-Frank, you're right, was a very illustrative moment of what I was talking about earlier where Congress says, 'Wait a second. We don't want you to have the power to bail out any single one institution. If there's a problem, you have to create a facility that a lot of different institutions have access to and even then it is an emergency power that you had.' And so later on you saw in actually further on in the SVB crisis it was you know working within the constraints of Dodd-Frank that the Fed and the FDIC and others responded to that moment and in the COVID crisis I think you're not exactly right. I mean the set of interventions and programs were audacious and big but they were well within the law and Congress even said we think that the you know we want the Fed to have this power and we wanted to go further and be the custodian for the medium-sized lending program that it created. The point I'm trying to make though is that these financial markets are not free. They're not working on their own like the institutions of government are structuring them not just in the bailout moments in the moments of crisis but in the moments that come after the quantitative easing that the Fed pursued for years after the COVID crisis the all of the lending programs that existed we have this vision of financial markets that are more stable and we create a whole host of institutions to deliver on that and that's a normative political decision which isn't, you know, which has ups and downs. It's not good in of itself, but it is a market that's crafted.
But mainly, I'm a little bit misled by the term market crafting because it seems to me that you're talking about market entrepreneurs that shape markets. The term market craft, if I'm not mistaken, was introduced by a political scientist Vogel, who meant politicians make the market work for everyone. I don't see Greenspan making the market for everyone. I don't think the Fed in general making the market work for everyone. In fact, I think the Fed by and large makes the market work for millionaires, not for everyone. So, in what extent is the Fed a market crafter in the Vogel sense?
I don't think Vogel would say that the only way that market craft can apply is if markets work for everyone. I'm not even sure what markets, if any, markets work for everyone. I think that the point is that you can use public policy to shape markets in a particular direction. So we obviously we've been talking a lot about finance but we could there I have several chapters in the book on semiconductors. You know there's a political goal we need to make semiconductors here in the United States for national security reasons and then you use public investment to some extent, trade policy, you could use procurement, you could use stockpiling in order to support that industry because you believe that market needs to be crafted and in this case supported to meet your political goals. And so, you know, this is obviously a recent story in the CHIPS and Science Act that began in the first Trump administration and then was passed in the Biden administration, but it goes back way further. I spend a lot of time on the book looking at Reagan era industrial policy, Reagan era market craft where the semiconductor industry in the United States was under significant threat from Japanese competition at the time. There you saw the creation of a new institution, this one called Sematech that not only had Marshall resources, but more importantly brought all the major American manufacturers not just of the semiconductors themselves but of the components that went into them to Austin, Texas to coordinate suspending the antitrust rules to say that we want this kind of collaboration. And you got a breakthrough. American chip production was going down down down for years and then by the time of the early '90s we're back over 50% and the Japanese were suffering. So you know market craft is not just markets for everyone. In fact when I see it working it tends to be for a more concrete specific political goal which could be national security, financial stability, energy security, a lot of the different things that we can talk about.
You tell the story in the book of Robert Noyce and America reclaiming semiconductor supremacy. At the heart of this story is lobbying, the semiconductor industry, figuring out how to tell Washington what it needed. So did you come away from working on this book with a more benign view of lobbying than most of us might have or a view of when lobbying is good and when lobbying is bad to reduce it to very simplistic terms.
So I think dialogue between the public and the private sectors is critical to making markets work. You know when that happens best it's public actors who have a clear mission. They're talking to private sector actors to learn what activities that they're pursuing, what works and what doesn't work, not like a proper like being lobbied by them to, you know, privatize public gains or things of this nature. The devil is very much in the details. And the Noyce example, you know, the national security infrastructure in the United States in the 1980s was quite concerned about losing American advantage for semiconductor production and manufacturing. And they had an interest in seeing that industry be supported. And it was the Department of Defense that I think really leaned on the Reagan White House to pursue this industrial policy to support domestic construction. Now, it also was clear that Noyce and others were lobbying on Capitol Hill very effectively to tell people that they needed to do this and in the White House and it lined their pockets, you know, that made their private companies like Intel, which Noyce had founded, bounce back from some of the challenges and it accomplished the public goal from the national security perspective of producing these chips here at home. And so I think that kind of dialogue you do need it to accomplish public goals a lot of the time but you know the market crafters it's their responsibility to ensure that giveaways to the private sector are minimized and I will say in doing a lot of the research for this book you see what we call like you know classic capture some but it tends to be more rare than I expected but that's maybe a result of the long-term historical arc of the book and not just the past few years.
So the last time I wrote about healthcare, I remember being really struck by a statement that a doctor made to me and he said or healthcare economist doctor and he said what often goes unnoticed is how we've society constructed who gets to make money and who doesn't and therefore that defines a lot of our health care system. And you write about health care as an example for the most part of market crafting gone wrong. So how do you take away any broad rules from the book about when market crafting is good and when it's bad or what makes it go wrong and what makes it go right and create the kind of markets that we want.
Well, market crafting isn't good or bad in any more than tax policy is good or bad or competition policy is good or bad. I mean these policies can be pointed in the direction of different sort of normative political goals. From where I sit, I think having a healthy citizenry that can live long and ideally fulfilling lives, that's a pretty important political goal. And I think most Americans feel that the current health care system is I'm trying to use a vanilla term to not get the expletive warning on the podcast things that healthcare markets are extremely challenged and troubled. And so I think we have to ask why is that? And if you zoom out and take the long historical view in all the research that I did, I think there was a pretty clear enduring answer. It is our fear of consolidating power in the federal government to deliver on equitable health outcomes for everyone. And what many people see as the big victory was in the mid 1960s, the creation of Medicare and Medicaid. And I have to say like that when I started doing the research, that's sort of what I thought was the big victory as well. And you know, these are important programs that have been massively helpful to millions, tens of millions of Americans. And they were part of a grand compromise where we said, we're going to rely on this vulcanized patchwork solution for healthcare in the United States. We're not going to provide it through a federal authority. We are going to provide some of it for the elderly through Medicare, some of it for the at the time indigent through Medicaid. Of course, that's changed a little bit now. And then everybody else is going to rely on private markets to provide them what they need. That kind of compromise set us up on this trajectory now where we have this patchwork system which gets us to a point where we end up paying roughly double of what other industrialized countries do for healthcare with health outcomes that are you know on par with others. So that's I do think a failed kind of market craft where our hesitancy to really invest state power with the ability to deliver on that promise set us up on this trajectory. And the one last thing I'll say on this is you know it's no coincidence that this happened in the 1960s and the debates were very much tied up in the questions around race. Wilbur Mills was the congressman from Arkansas who was incredibly influential and he and southern Democrats feared most a federal government that would force white doctors to see black patients or other kind or hospitals to be desegregated in the south. And these other things were what created a bright line for them to avoid creating any kind of institution that would have this kind of authority. And so for decades, it's who are you going to hold accountable when no one is responsible for delivering quality healthcare at reasonable prices to Americans?
We all agree that good market crafting is good. The question is how do you prevent the bad one and you allow the good one? And so it feels to me that the American system is a system where in general it's difficult to have the power to collect all the power to do what a good market crafter can do except in extraordinary circumstances. So my reading of the book is the time where market crafting is most successful is when there is really a crisis. Think about of course the great depression, the great financial crisis, even the oil crisis. When it fails, think about Medicare. There's not really any imminent crisis and so it's very difficult for Congress to find the strength to give so much power to one individual to craft a market and it's also maybe more difficult to have an overarching mission. And say one thing that I got from your book which I think is interesting and right the successful market crafters are people with a very strong sense of mission but it's easier to have a sense of mission when you are entering World War II and you need to build enough tanks to win the war. Then when you are in the middle of the peace and there are so many different interests that makes it difficult to have a single mission.
Mhm. Yeah, I think that's right. I mean crises are particularly galvanizing because people of different political outlooks often temporarily suspend their disagreements and are willing to lock arms to fight it. And so you see that in a lot of cases. One example though of where that crisis then creates a new institutional reality is in the energy crisis in the 1970s which are often scrambled in the collective memory because we think oh in the '70s oil and gas prices went crazy and there were long lines which is true in the second oil crisis in 1979 but the story at the beginning of the decade during the Nixon administration in 1973 was actually very different. So, I honed in on the story of this guy, Bill Simon, who is another avowed libertarian, a bond trader from Wall Street, who becomes deputy treasury secretary in the Nixon administration and has no experience in energy markets and is given that portfolio because he doesn't have all these different political interests pulling him in a lot of directions. And then in the fall of 1973, the Yom Kippur War begins and the oil embargo occurs. American oil prices had already been going up because domestic production had been going down. But this is talk about a crisis. This is a real crisis moment. People worry that, you know, home heating oil was still primary method of heating homes in New England. If you could not get enough for the winter, people could freeze to death in their homes. Gas lines might be an quote unquote easy problem to solve. So that kind of crisis brought disparate political parties together and ironically the libertarian becomes incredibly successful at using state power to allocate resources to stockpile oil and gas imports to use price controls so that the prices only go up bit by bit over time rather than skyrocketing as they did in a lot of Western Europe. He's very successful. But out of that effort comes the strategic petroleum reserve. So what I'm trying to say is we have this institution that comes out of a crisis now well over 50 years ago which endures and is one of the key reasons that energy stability has been so important. So crises are galvanizing moments but out of them can come this kind of institution building.
So it's interesting Luigi sees the conundrum of the book as this crisis versus normalcy where times of crisis versus times of normalcy whereas I was thinking of the conundrum of the book is individuals versus institutions. So the irony to me is that you tell this story through individuals and often very complicated individuals who might be more about their own personal power and self aggrandizement like Jesse Jones in some ways. So if market crafting is a path that we want to take or embrace, how much do we want to have invested in individuals and how much do we want to have invested in institutions and what are the limits on individual power?
Yeah, I think this is I like taking a historical perspective a lot of time and this is one of the big lurking questions of history. How much does the person leading the institution matter and how much does the institution itself matter and then what how do we make sense of the ideas that are circulating in the midst? My take is that entrepreneurs whether they're in the private sector or the public sector can make a lot of change. When you have a strong leader who has a clear vision and has the mandate to get it done, a lot can happen very quickly. And so that's why I call the book Market Crafters rather than market crafting or market craft is because the people are ultimately the individuals who are driving the change. They need the institutions to have the power and the expertise and the networks to get it done. But the individuals are critically important. And so Jesse Jones is one that you mentioned, you know, with the National Investment Bank that was called the Reconstruction Finance Corporation, which lasted for about 20 years between 1932 and the early 1950s. And he is just this larger than life character. That institution, what we call the RFC, would not have existed with anywhere near the same kind of power as it did without Jesse Jones. And it begins by reinforcing finance and banking, saving those industries in a way where the Fed is not. And then in a middle period is working to spur housing construction and do direct industry loans. And then in the war is responsible for so much of the armament, planes, synthetic rubber, pipelines carrying oil and gas from Texas to the Northeast because all of our tankers were being hit by German submarines. A kind of very empowered institution with a lot of resources and a lot of success because he was at its head. And so you need the institution and in that case you need the man. In fact once he was gone the institution frayed because it had not been set up for longevity. And I think there are important lessons in that that you know that an entrepreneur can sometimes go too far if the institution becomes synonymous with them. They have to think about legacy building and succession planning if they really care about the thing that they've built.
I'm struggling to try to find some generalizable lessons. Maybe it's unfair. But the first one as I said is you need the crisis. The second I'm not so sure I agree with the institution is more that you need a powerful but a smart but independent person. So Jesse Jones and no basically acts to grind. He was rich. He was not necessarily of one agenda in the housing market or in the war market. He wasn't representing General Dynamics or Martin Marietta. He was kind of a good American interested in American winning the war. Bill Simon again is a rich dude that as you said has nothing to do with the oil industry and to some extent that's the saving grace when you have people who are more interested in one side or the other. They are too biased. So take to some extent Hank Paulson. Nice human being, but not particularly successful in market crafting. He was too much of a world view in one direction to be a market crafter. Is that a fair characterization of your story or am I reading too much into it?
Well, I want to make sure that I'm understanding what you said. You cut out a little bit, but I think what you were saying is that a lot of the most successful market crafters either come from business or have a lot of wealth or privilege or something when they come in.
