Chris Hughes on How to Craft a Thriving Market | Odd Lots

Well, hello. Hello. I'm happy to be here and before I answer exactly what Marketcraft is and we spend the next hour talking about it, I just have to say that it is such a huge honor to be both here at the library, an institution that I care immensely about, and to be a guest on this live taping of my number one favorite podcast.

So, market craft, what is it? The basic idea is that policy makers are often harnessing and shaping private markets and pointing them towards public goals like making Americans richer, safer, and more economically secure. And that there's actually a very long history of doing that in the United States. It's done by Republicans. It's done by Democrats. It's done to ensure energy stability, financial stability, or make semiconductors here at home. There are a ton of successes in the past, plenty of failures. And the whole point of writing the book was to try to tease out what are the lessons for our contemporary policy environment today because we're going to have to rebuild on the other side of the chaos that exists in the world right now.

Yeah. I mean, I think listen, we all exist with this idea in our heads that markets exist and are almost forces of nature. And then on the other side of the balance sheet, there's government. I mean, I'm the first to say that the language that I've used for years has been around verbs like to intervene as if markets come first and then government is just like the emergency room that happens when things go awry and you've got to bail out a bank. And the whole point of my book is to say actually something bigger is happening. Like if you look at the American economy between healthcare, pharmaceuticals, aviation, semiconductor and high-tech, clean energy, and add up the size of these industries, you are well over half of American GDP in industries where the state not just has a heavy hand, but is actually crafting it from the beginning. And so it is about industrial policy. There's a lot in there about industrial policy, but it's actually about something bigger. Market craft is something that encompasses what the Fed does in financial markets, what the strategic petroleum reserve does in energy markets. There's a whole set of strategies that I think we have to be wrestling with.

Well, I mean, it's hard not to have that image of Bezos and Zuckerberg and the whole crew behind Trump at the inauguration and just see that and say, 'What are those guys hoping for?' You know, certainly it's to make more money somewhat, but I think it's about something bigger. I think they want to have more power. They want to have more respect. And they feel like in the Biden years there was too much focus on things like competition and fair markets. But if you fast forward, I mean it's not even been 100 days, you know the trial against Facebook is ongoing, Mark Zuckerberg was on the stand for much of last week if you're not following it closely, the FTC filed suit against Uber two days ago and Google just last week lost its second antitrust case with a federal prosecuted by the justice department making clear that it's a monopoly. So, we're only a few months in and you squint and you look and you're like, what are these guys getting out of this? It doesn't seem like very much.

No, I don't think so. No. But you know, anti-monopoly is a bit how I got into market craft in the first place. So about 6 years ago I wrote an article in the New York Times saying that I thought Facebook should undergo structural separation or breakup, that its corporate power had become too concentrated and it become a monopoly and that started me on a journey of really wrestling with the history of anti-monopoly in the United States. And you can't think about that set of topics without seeing public actors saying, 'Hey, we want markets to work a certain way.' We don't think that they should be concentrated with a lot of power. We think they should be competitive. We think it should be easy for new entrants to come in and innovate. We think markets should keep prices low, wages up, and innovation going. And so we are going to use the tools of public policy to craft those markets to ensure that's the case. If whether it's the free market going to lead to it or not, it really doesn't matter because we have this goal as a common good. And so once you sort of once I began to see that in the anti-monopoly world, you quickly saw it at the Fed as an institution that you know most free market Bible thumping folks would say that they appreciate. But you know the Fed sets the price of short-term credit and is actively in markets buffering that price through open market operations. And then if things really go awry, you bet it's going to be there to step in to stabilize. So that market is crafted and managed every single day for stability. And so I began to see all these kind of cross-pollinations and similar trends. And then, you know, a couple years later, here's the fruit of that.

Yeah, I think that's directionally right. I should say I try very hard to avoid social media so I'm not on the blue app. I'm not on Instagram. I lurk on Twitter. I recently opened a Blue Sky account. It doesn't have a lot of followers. Be great if I had a couple more. But so I'm not actively using social media, so it's harder for me to weigh in on that. But I do think that there is this lurking desire to partner with government in some cases and craft markets. And so there's a very crisp example. It's not from one of the current billionaires, but there's this guy Robert Noyce, which some of you may have heard of. He was one of the co-founders of Intel. Grew up as a son of a congregationalist minister in a family in Iowa, ends up going to MIT and then invents the integrated circuit which is a fundamental part of the semiconductor, makes gobs of money and after years of that guess what happens in the mid-1980s. Japan as an industry starts really out competing the American semiconductor manufacturing market. They are moving faster. They have their own industrial policy that's pushing it. And so all of a sudden, Noyce, who had for his entire life been a libertarian who didn't want anything to do with government, thought it was not a great idea, would have liked to downsize it as we're seeing other billionaires be interested in today. All of a sudden, he shows up in Washington and he says, 'Wait a second. We need an industrial policy for semiconductors and for chips and the defense department agrees because they're concerned for national security reasons and Noyce and the government effectively partner because their interests at that moment are overlapping. We get something called Sematech which is created which is about a billion dollars that's invested to enable the semiconductor companies to begin coordinating making their supply chains vertically more integrated and more efficient and a few years later America recaptures its market share globally of semiconductors we're back on the top.' So you know I think that the lesson from that is complicated because on the one hand you do see a private sector actor with a lot to gain from private wealth maximization but working with the public sector where the public sector also has a lot to gain from semiconductors being made in the United States and in that case it worked for both it doesn't always work out like that but I think that's clear historical evidence of the fact that there is this lurking desire for market craft on the part of a lot of these folks.

No, no, no. But I mean, seriously, that's just tearing apart the federal government and the administrative state.

Exact inverse. So my book makes the case that when market craft is successful, you have administrative agencies like the CHIPS office, like the Fed, like the SPR that have a clear mission on semiconductors, keep financial markets stable, etc. And then they have the discretion to pursue that mission and the ability to get it done. And that it is critical to understand that institutions in America need that power in order to make markets work more effectively. That doesn't mean that they're always perfect, but we get much worse outcomes when we create these vulcanized sort of hybrid setups and that's what you see in something like healthcare markets today. So the importance of institutions is at the center of this book and my belief is Musk and crew are just trying to demolish all of them.

I think you show people where it works and you have to be clear about where institutions actually deliver for people. So I'll give you an example that's a little bit further back in history. So the book starts with the story of the National Investment Bank that we create in the depression in 1932. Herbert Hoover, actually a Republican, creates an institution called the Reconstruction Finance Corporation, with a clear mandate first to reinforce capitalism that was disintegrating at the time, and then a few years later, the mandate expands to actually spur development. At the head of this thing is this larger than life figure named Jesse Jones. So, this guy was born in Tennessee, but he moves to Texas at a young age. He invests in all kinds of local businesses and by the time he's 30 he's a millionaire and a few years later he's got so much money that he's building buildings in New York City and all across the eastern seaboard. Then 1929 happens and he has less to do. So he is a Democratic party activist. He's been a fundraiser for a long time. He even shares an office with Roosevelt in 1924. He convinces the Democrats to have their convention in Houston in 1928 where oh so conveniently balloons fall from the ceiling that say Jesse Jones for president. He's like a larger than life figure, but he's at the head of this bank, this institution, the National Investment Bank. And when he comes into power at the beginning, he says, you know, our first mission is going to be to reinforce all of the private commercial banks, recapitalize them, make sure that they're ready for deposit insurance. But then in the second phase on the advice of John Maynard Keynes and some other economists, Jones in consultation with Roosevelt says we got to really deploy public capital into the American economy particularly in industries that are going to encourage a lot of employment and make things cheaper for consumers. So they prioritize housing and they build a kind of institution that's named Fannie Mae which endures obviously today and they invent the 30-year mortgage which at the time mortgages had been 10 years. By expanding it to 30 years, the cost of housing comes down significantly and all of a sudden you see a boom in housing and then there's a third phase in the war years where they build the aviation industry and synthetic rubber and all kinds of other things. And so my point is you see a man who comes in skeptical of the far left in the New Deal period certainly wouldn't have identified with those folks but who ends up believing in and building an institution of American capitalism that crafts markets toward a common good. And so that example is really inspiring. It's further back in history but we've got all kinds of things that are closer.

It's not a pattern that I saw in the research of the book. And if that happens, that's what Congress is for. I mean, the Congress holds institutions accountable and monitors their activity. I mean, take the CHIPS Act. It was passed in 2022, but CHIPS was actually an idea from the first Trump era that gain was really into it.

And the under secretary of state for economic affairs and a whole set of folks were very invested in it. It gained steam in his past in 2022 and then you know quite quickly money begins to move. Congress actually a year later says, 'You know what? We're going to exempt semiconductor construction from NEPA requirements, making the environmental requirements that in some cases could have made it harder to build.' So, Congress stepped in to make sure that something that they did actually happen more effectively or similarly with the Fed. I mean, Congress is constantly tweaking the Fed, who gets to decide who's going to be a reserve bank president, even in some cases the methodologies for monetary policy implementation. So I think accountability is very important but accountability rests in the legislative branch not with an impulsive billionaire just running through town with a hammer.

So, I have a special place in my heart for Fed history. I've been working on a dissertation at Wharton for a few years, which is more properly narrow and focused on that topic. And I thought that's what this book was going to be initially. But then when the conversation around industrial policy exploded and the IRA, the climate bill happened, the CHIPS bill happened, the infrastructure bill happened, a new conversation around tariffs in the Biden administration was happening, it felt like there was a bigger story to tell. And the challenge that I the thing I wanted to do was to explain how did we get from the era that I grew up in the you know the Clinton and George W. Bush era where most people thought markets self-regulate and work on their own to a moment where both parties both Democrats and Republicans put the state at the center of the economic story. And I wanted to track that history in the past 15 years and see it through the great recession and then the challenge of climate and then the rise of China and the pandemic and understand how you got these bizarre agreements like you know almost a dozen Republicans voting for Lina Khan in the Senate to run the FTC. How did that happen? Where did that come from? And how enduring might that be? And that set of questions then took me way back into history and then back into the present day. And well, how did we get 12 Senate Republicans to vote for Lina Khan? I think the confluence of those four events made Americans, let alone policy makers, realize that markets don't just take care of themselves and that that whole idea, that whole story wasn't working. That capitalism needs to be cultivated and that markets need to be cared for. In the introduction of the book, I talk about this metaphor of a vegetable garden, which might seem a little hokey, but at least for me, it's personal because when I grew up, I grew up in North Carolina in a small town. And my dad tilled up a third of the backyard to make a vegetable garden and constantly forced me in the summers to go like weed and pick green beans and stake tomatoes and do all these things that I did not want to do.

Yeah, a lot of people enjoy this. It turns out, not me. So but nonetheless, I spent an inordinate amount of time in that garden. And so when I started to think about like, well, what are markets like if they're not these self-regulating systems, the best metaphor that I landed upon is a garden because it recognizes there are organic forces that can sometimes be unruly that won't necessarily cooperate and just do exactly what you want to do. But it also recognizes that you need care and cultivation to steer those plants. You need to plant some things in the sun and some things in the shade. You need fertilizer for some things. You need to get the weeds out for others. You need to shape these markets. You need to point them in a direction to ensure they're actually working, that they're producing a harvest that you want to eat and that is going to be nutritious. And so I kept coming back to that metaphor. And I think it is the right one to think about how markets actually work.

No, but it helps and it always matters how you define the crisis. You know, there are several examples of market crafters who are very successful in the book who are not responding to crisis. So I have an extended passage on Alan Greenspan who is normally not thought of as like a market crafting kind of guy. He's supposed to be the deregulator in chief and he did do plenty of that when he was the chair of the Fed. But he also had a vision. And so I'm going to use him as an example to make it clear that market craft is neither good nor bad in of itself. It matters. It's a tool and it's pointed towards a certain end and it can be a good one or it can be a bad one. For Greenspan, it was financial innovation. He so intensely believed that the more efficient markets would be, the more prosperity and stability would come out of that. I mean, the guy is writing papers when he's a young analyst in the 50s along these lines and eventually knits them together in his PhD dissertation. And then when he becomes chair of the Fed, yeah, he does deregulate and take a lot of rules out of the way. But he also makes really important policy actions to encourage the development of financially innovative tools, things that we now know of as credit default swaps and special purpose vehicles. And the kinds of things that did indeed significantly increase leverage in the financial sector did in some cases mean markets moved faster and more efficiently. And he believed would ultimately create that kind of market discipline that would keep the whole system stable. So he had a goal. It was financial innovation and he was using the power of his institution to deliver on it. It's just it had disastrous consequences and he was wrong.

Well, we're still working on it.

Still working on it.