In an extensive interview with the Swiss news website, Luigi Zingales discusses ways to deal with Big Tech and the impact of the antitrust debate on the 2020 presidential election and on consumer welfare. “The digital economy is substantially different from a traditional textbook economy.”


Editor’s note: The following interview was originally published on the Swiss website TheMarket


So far, most investors don’t perceive the US presidential elections as a risk to financial markets. That could change soon, when the race for the White House will heat up.


From the point of view of Luigi Zingales, especially large tech companies are exposed to political uncertainty. “Facebook and Google are most troublesome because they’re not only an economic problem. They’re also an immense political problem since they control access to information,” says the professor of entrepreneurship and finance at the University of Chicago.


The renowned expert on competition also argues for a comprehensive health care reform. He explains what’s wrong with the US healthcare system and why he advocates for a market-oriented approach to curb skyrocketing costs.


Q: Professor Zingales, it’s been more than three years since Donald Trump won the US election with the promise to “drain the swamp” in Washington. How’s that working out so far?


The swamp is alive and well, with more crocodiles in charge. Donald Trump was very clever by waving the flag against lobbyism and corruption because this is a very popular topic. But he doesn’t seem to have followed up on his promise very much. It will be interesting to see whether the voters realize it and punish him in 2020 for this or not.


Q: What do you think will happen on election day?


Clearly, there is some dissatisfaction with what Trump has done. But when I look at the Democratic presidential candidates, I’m not so sure there is such a great alternative, or at least a clear alternative in anybody’s mind. Joe Biden, for instance, does not seem to be such a strong candidate. Of course, what Trump has done with respect to the Ukraine scandal is bad. But it seems that there are some questions about Biden’s son Hunter as well. So that’s not really portraying a picture of a real alternative.


Q: Around the globe, populism is on the rise. Why are so many voters attracted to populist leaders like President Trump?


Shortly after Trump won the election, the Stigler Center and Harvard Law School organized a conference called Populist Plutocrats: Lessons from Around the World. What’s stunning is how similar they all are. From Silvio Berlusconi in Italy to Thaksin Shinawatra in Thailand, to Alberto Fujimori in Peru and Joseph Estrada in the Philippines: They all arise when there is a sense that the current leaders fail. Also, they’re all kind of outsiders and kind of flawed because the only way you can be successful as an outsider is when you have a problem. Otherwise, you would be on the inside. So the more they get attacked by the elites, the more they are loved. Everybody says Russia influenced the US election. But I think the New York Times influenced the election as well, just in the opposite direction they intended: The Times going so aggressive against Trump made his fortune.


Q: Political polarization is also evident in the Democratic Party. With Elizabeth Warren and Bernie Sanders, there are two far-left candidates among the top five contenders for 2020. What does this say about today’s state of capitalism in America?


To me, Elizabeth Warren is very different from Bernie Sanders. Sanders is kind of an unrepentant socialist. Warren, on the other hand, used to be a Republican. She’s a capitalist who has been dissatisfied with the system and wants to readdress it. However, the United States is incredibly stable because nothing gets done in Congress. Even if Warren won the election and had the House and the Senate under her control, there would still be a filibustering rule making it very hard for her to implement major changes. But I think major changes are needed.


“Bernie Sanders is kind of an unrepentant socialist. Elizabeth Warren, on the other hand, used to be a Republican: she’s a capitalist who has been dissatisfied with the system and wants to readdress it.”


Elizabeth Warren, Photo by Gage Skidmore via Flickr [CC BY-SA 2.0]


Q: Where do you see a need for change in particular?


The health care situation is a disaster. The costs are outrageous and the quality is not that good, unless you get really sick. The current system is very corrupt, and that makes it very hard to defend it from a market perspective.


Q: What goes through your mind as an economist when a pharmaceutical company like Novartis sells a new gene therapy for more than $2 million per patient?


It’s tricky because if you rely on private incentives for research you have to reward that. Patents reward that effort to some extent. However, the system is designed in a very distorted way. It rewards stupid or marginal innovation and not good innovation. Let’s say there is a medicine that cures acid reflux for $1 a pill. Then, a new medicine gets approved that’s a little better but costs $100 a pill. In this case, the system is designed to prescribe everybody the new drug. That’s completely crazy because if you were to give a patient the $1 pill plus $100 in cash, I assure you she would be much better off in life. So that’s where I would intervene: In the drug approval process and how to associate it to the marginal contribution and the cost.


Q: What else is wrong with the US health care system?


If government programs like Medicare are prepared to pay any price, people take advantage. The most egregious example is Martin Shrkeli, a.k.a. the “Pharma Bro.” He was vilified for jacking up the price of drugs, but basically he was doing with gusto what the pharmaceutical industry has been doing all along. He even managed to squeeze the hell out of some drugs that were not protected by a patent. So something needs to be done. In my view, the first step is to liberalize imports from Canada. It doesn’t make sense: A drug produced in the United States costs a fraction in Canada. One of the greatest tragedies in this regard is what’s happening with insulin. Insulin has become so expensive that people start skipping their dose, and when you’re a diabetic that’s some serious stuff.


Q: How is this possible? Is it because of the power of the health care lobby?


When Obama was trying to pass his health care reform, there was clearly an agreement with the pharmaceutical industry prohibiting the importation of drugs. The Obama administration was very afraid that their reform would encounter a similar setback to Hillary Clinton’s reform in 1992. So they signed this side deal, and we suffer the consequences now. Because the lobbyists are preventing major changes, Obamacare was just a very partial reform.


Q: Another hot topic is the backlash against large tech companies like Google, Facebook, or Amazon. What’s your take on this debate?


Even from a conservative point of view, the concentration of power at large tech companies is scary. As a true conservative, you’re afraid of the constitutional power in the government. Not because the government is evil per se, but because you don’t trust human nature and concentration of power. So if you have the same concentration of power in the private sector it doesn’t become fine all of a sudden. If anything, it becomes more dangerous. At least, we have ways to address the concentration of power in the public sector. In contrast, we have none in the private sector, especially with regard to such large companies like Google and Facebook where the control is in the hands of only three people because of the dual stock class structure. In the case of Google, they are Larry Page and Sergey Brin, at Facebook it’s Mark Zuckerberg.


Q: How did this become such a problem?


For many years, these new digital platforms enjoyed an enormously favorable image. That’s primarily because many of their services benefit us tremendously and are perceived to be free. Think about what we get seemingly for free with Google Maps. Until a few years ago, we had to buy expensive gadgets for services like that. That clearly made these new platforms very popular. But there was also this kind of coolness and edge which gave them a fantastic aura.


Q: What changed?

I think we owe it to Trump that they suddenly have become uncool: In the presidential election of 2016, Facebook and Cambridge Analytica were basically doing the same stuff that Obama did in 2008 and 2012. But when he was doing it, it was super cool. The moment Trump started doing it, it was perceived as evil and wrong.


Q: What are the true costs of seemingly free services like Google Search, Twitter, or Instagram?

We don’t pay a monetary price for these services but we pay with our data. In economics, we think that competition should lead to a service being offered at marginal cost. If that was the case with the services being offered by Facebook and Google, it’s hard to imagine why these companies are so profitable. The answer is that we undersell our data because we don’t fully understand their value. In a world of competition, this doesn’t really matter because the competition would raise the price of our data. But so far, this has not worked because there is no real competition. That’s part of the problem and the reason why it’s so important to actually introduce some form of competition.


Luigi Zingales


Q: Why is there a lack of competition?


The digital economy is substantially different from a traditional textbook economy: Certain characteristics that might be present some times in occasional form in the traditional economy are present in a massive and concentrated way at these new digital platforms. Economies of scale and scope based on very strong network externalities. So these markets tend to end up in a natural monopoly unless we do something to prevent that.


Q: So what is the solution from a capitalistic perspective?


Since this is not a completely new phenomenon, one of the things I’m a strong advocate for is to try to mandate interoperability among various social networks. For example, the reason we have competition in the telecom sector is because every company is required to accept and transmit phone calls. It would be a disaster if I could not call Sprint customers with my Verizon phone since these networks are huge. However, many people don’t understand how regulated the telecom industry is. Today, we take basic features like number portability for granted. But number portability didn’t come from God. It was a regulation that was applied and the telecom companies fought very aggressively against it because it was not in their interest.


Q: What does this mean for tech giants like Facebook, Google, or Amazon? Should they be broken up like AT&T was split up in the 80s?


I’m not 100 percent sure. I’m not ideologically against breaking them up. In some cases, this could be the solution. But first, we need more research on how to address this problem. For example, you can’t break up Google’s search engine and allow company 1 to do only searches with the letters A to L and company 2 to do only searches from M to Z. That makes no sense. It makes much more sense with respect to social media. I don’t see the big costs of having WhatsApp separated from Facebook. Then again, if the analysis is correct that this sector naturally tends toward monopoly, breaking these companies up will only guarantee competition for a few years until they kill each other and one survives. So it’s dangerous to break them up without understanding the fundamental mechanisms. That’s why I favor interoperability as a first approach for social media, because I don’t see any downside. I think this approach is promoting true competition and is making it more likely to sustain multiple companies at the same time.


Q: A few months ago, the Justice Department announced a broad antitrust review of Big Tech. What’s your take on this approach?


Hard to say. I’m not very optimistic that any of these investigations will end up in a case. When it comes to antitrust, nowadays the mentality is that you don’t go to court unless you’re almost sure to win. That’s a mistake because in some cases the trial is the remedy. Think about the Microsoft case twenty years ago: The judicial remedy was a joke and did not work. However, this trial is the reason why the internet is not completely monopolized by Microsoft today. Microsoft even had plans to charge for every transaction on the internet. Can you imagine what that would mean? The reason these plans did not materialize is mostly because of that trial. Google and Facebook are beneficiaries of it, as Microsoft was a beneficiary of the trial against IBM: When IBM launched the PC in the early 80s, they did not create a closed system because they spent the previous twenty years fighting against antitrust.


Q: Where do you see the strongest case for regulatory measures when it comes to Big Tech?


We have to distinguish: Facebook and Google are the most troublesome because they’re not only an economic problem. They’re also an immense political problem since they control access to information. And, by controlling access to information, they’re influencing the political system. In that sense, their monopolies are much scarier than others. Amazon, for example, has not reached that level of monopoly yet, but it’s becoming incredibly influential and important. That’s why the US should go in the same direction as other countries are going and adopt rules that if you are the referee, you cannot be a player. When it comes to online sales, Amazon is both: a referee and a player, and that’s not a good situation.


Q: Then again, regulations also have unintended consequences and, in some cases, can lead to even worse outcomes. What’s your answer to that as an outspoken defender of capitalism and free markets?


Often times, there is a big misunderstanding when we talk about free markets: Markets only exist under certain rules. These rules can be mandated by the government, or they can evolve naturally like it was in the case of the old stock exchanges, which had their own rules. But a market does not exist without rules. So when we talk about free markets, we really mean that there is free entry and people can create new markets. In contrast, if we interpret free as absent of any rules, that’s a crazy utopia.


A Juventus supporter, Photo by Enki22 via Flickr [CC BY-ND 2.0]


Q: Most Americans are distrustful of Big Tech and large companies in general. However, there’s also a growing distrust against regulators. What’s the reason for this negative sentiment against the referees tasked with overseeing corporate America?


Being Italian, I can tell that the referees are all paid for by Juventus Turin, one of our leading soccer teams. But seriously: There’s an element of truth to that. First, the referees have lost their sense of impartiality. Banking regulators, for instance, clearly have a preference for large companies. Also, according to fair disclosure, public companies are supposed to talk to all their shareholders at the same time. Yet, if you’re a large investor like Fidelity and ask a company for specific information, you’re getting treated much more favorably compared to a small hedge fund. So the enforcement does not exist. If you’re a big player, you go by a different set of rules than if you’re a small player. This was also on display in the case of Jeffrey Epstein: If you have influence and money, you can be a pedophile and get away with one year of prison “lite,” spending your jail time in a resort-like facility. Or look at the college admissions scandal. I thought such things could only take place in Italy. Now, it’s getting sort of standard even here in the US.


Q: Another problematic development regarding large companies is rising market concentration. After decades of M&A, the market structure in more and more industries looks like the bracket of a tennis grand slam, with only a few players left in the final rounds.


That’s true, but I would also take into account international competition. Take the auto industry: There are only three American producers left, but you have a lot of foreign competitors. Other industries are different: In the pharmacy business, there are basically only three companies in the entire United States, and in every single market there are generally two. Earlier, we were talking about diabetes. There are similar problems with companies that provide dialysis. This industry is highly concentrated and prices have gone through the roof. You can keep going. When it comes to eyeglasses, for instance, Luxottica did a fantastic job in monopolizing the market. Now, they can charge a fortune for stuff that costs almost nothing to produce.


Q: What should be done to make capitalism competitive again?


The problem of market concentration must be tackled at the government level. It cannot be tackled at the investor level, because as an investor I love high margins and it’s hard to ask a company to restrain itself. It’s like putting a tiger on a diet. It’s not going to work. You can put a tiger in a cage but you cannot transform a tiger into a vegan.


Q: Yet, industry self-regulation is becoming more popular. Automakers, for example, agree to impose emissions standards upon themselves that are stricter than the emissions standards proposed by the federal government. What does this mean for investors?


An increasing number of investors are starting to avoid certain companiesnot because they really care about environmental, social, or governance issues, but because they are afraid of regulatory risk. In my interpretation, that’s the reason why the car industry is trying to go with higher emission standards on their own behalf. These kinds of risks are in many sectors, whether it’s because of impacts on the environment or because of governance practices applied in other countries where companies source their materials. Take electronics: Inside our smartphones, we have a bunch of rare-earth materials and we don’t know really where they are coming from, how they are sourced, and how many people get killed to get these materials on the cheap. So all this is becoming important.



The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.