Thursday, June 7, 2012

Crony Capitalism

Luigi Zingales has a nice Wall Street Journal oped today, decrying how crony capitalism has ruined Italy and is on its way to doing so in the US. A tidbit:
In Italy today, even emergency-room doctors gain promotions on the basis of political affiliation. Instead of being told to study, young people are urged to "carry the bag" for powerful people in the hope of winning favors.
Related, the University of Chicago Magazine had a very nice article by Dario Maestripieri explaining just how Italian academia works. Another tidbit:

The year I applied to the biology doctorate program at the University of Rome, there were eight open slots, and the eight winners had already been agreed upon. I wasn’t one of them. A couple of weeks before the concorso, however, the National Research Council offered funding to support two additional fellowships. The baroni did not have time to negotiate these positions, so two outsiders with good résumés and exam scores—a friend and I—were admitted. We squeezed in through a crack in the system. Yet despite the fact that we were straight-A students and had published scientific articles, we couldn’t find a professor willing to serve as our adviser.

The truth was that by filling a slot with an outsider without raccomandazioni or appropriate pedigree, the advisers might lose an opportunity to admit a family member or the child of the prime minister the following year. Admitting two outsiders had been a big mistake—someone would have to pay the price. Eventually, after some arm-twisting, my friend and I found an adviser. Three years later, however, after I finished my PhD, it was made abundantly clear that someone who had entered academia through a crack in the system could not expect to go very far. After doors were shut in my face one too many times, I moved to the United States.
Short version, translated to Chicagoan: "We don't want nobody nobody sent."


Economists tend not to pay enough attention to this sort of thing, in part because it's hard to measure. We argue about taxes and government spending because we can at least try to measure them. We acknowledge that government mandates are the same as taxing and spending, but tend to leave them out because it's hard to get numbers. Intrusive regulation, just as damaging, is even harder to quantify. And pervasive corruption harder still. Yet it's just as much, maybe more, sand in the gears as are headline taxing and spending.

It just looks like mysterious "low productivity." Keynesians see low output and employment and ask for more stimulus.  That's not the problem.

A lot of Luigi's work has been to try to seriously study and measure crony capitalism, which is the only way to address it.  (At some point soon I'll review his book)

Second thought. It is a wonder that US academic institutions, for all their many faults, are so much better than most around the world, and that the best faculty and students gravitate to the US. US universities  are still by and large a pretty severe meritocracy. Now you know why Dario isn't teaching in Rome. And why so much of Italy's great economics talent like Luigi is also working here.

The rot in Europe is concentrated in state systems, with new private universities and research institutes really the bright spots. The US meritocracy is driven by competition among private universities. I don't need to bash you over the head with the obvious conclusions and dangers.

Our advantage is not permanent or innate. Lots of the US system is protected from competition, and there is plenty of mediocrity here too. It also depends on an immigration policy that lets smart people come in, and lets smart students come learn from them.


  1. "The rot in Europe is concentrated in state systems, with new private universities and research institutes really the bright spots. The US meritocracy is driven by competition among private universities."

    This is simply false for most of the West European countries. For example, almost all universities in Germany are public (with the advantage, that students pay only negligible fees) and are far from cronyism. I'd argue, that the whole thing is more of a culturural issue. There is a reason why the Mafia originated in Italy.

    1. That the isn't cronyism in German universities is an arguable affirmation. Not just because I am an Italian doing a PhD in Germany (which for obvious reasons I didn't get through a "raccomandazione") but because I witnessed a couple of twists in the system. Getting a position as doctoral student just because you are good at assisting the professor (i.e. carrying his "bag"), no matters if you suck at doing research, is quite common in Germany (PhD-like programs where merit is proved by preliminary exams are different stories but still exceptions): now you might call it differently but to me this is a clear form of corruption. On top professors cannot be fired (literally!), are not responsible for awful performance of their own and of their phd students' and of course the bill often goes to Berlin...

  2. The tidbit on how Italian academia works is a wonderful slice of hypocrisy. As if American academia wasn't rife with cronyism and politics that are largely unrelated to the "value of the intellectual contribution" being made. Anyone who has any real experience with US academia knows how it is run. A small group of tyrants run the show. Always have and always will. In a discipline in which the value of output is inherently hard/impossible to measure it is inevitable that it devolves into a largely political enterprise.

  3. John, have you ever heard of ETH ?

    I doubt they have much cronyism there and it is public. in fact I doubt they have much cronyism in any of the public universities in Switzerland. We also have a lot of cronyism at UofI for example, yet it's still one of the best computer science and accounting programs in the world

    However, CK, I agree with you up to a point: I think it's one of those feedback loops: consistently bad institutions change the culture which makes the institutions worse, etc. But once the loop is there, it's really hard to break out of it, if not impossible

  4. It also depends on an immigration policy that lets smart people come in, and lets smart students come learn from them.

    Hear, hear.

  5. yep american's are a true breed of bible belters without wasp mafias
    only italo-american's are all capo's di tutti capo in garbish universities and ties

    you are a republican?

    well if you are a democrat, i s'pose that moronic politeia about italy and italians have a fast return in green Lincoln's und Benjamin's

    1. Σε αυτό αναφέρομαι: "Ο Σύριζα είναι αδύνατον εκ φύσεως να αποτελέσει το νέο κομματο-κλεπτο-κρατικό όχημα για την περαιτέρω επιβίωση της λεηλατικής φύσης του πολιτικου μας συστήματος."

      Ό,τι να'ναι κι εδώ…

    2. Σε αυτό αναφέρομαι: "Ο Σύριζα είναι αδύνατον εκ φύσεως να αποτελέσει το νέο κομματο-κλεπτο-κρατικό όχημα για την περαιτέρω επιβίωση της λεηλατικής φύσης του πολιτικου μας συστήματος."

      Ό,τι να'ναι κι εδώ…

  6. John, excellent point. I just moved back from Italy after living over there, and it's almost cultural there to dissuade competition, in favor of "relationships". I recall meeting a real estate agent that "owned" my village, but interestingly enough, he wasn't involved in me finding my rental home when I was looking. Another real estate agent had helped me. When I met this "loser" at a party, he initially berated me for choosing to live where I did WITHOUT his assistance...that successfully finding a home in the town was impossible without him.

    Overall, as a student of geography and history, and an economist "by hobby", if you want to understand why this occurs, not just in southern Europe, but on most of the continent (the focus on "relationship building"), you will see that much of it stems from a view of scarcity. Whether it be land, resources, population, etc, Europeans tend to see things from a point of "not enough", not from a view of opportunity. I thought it might be because Europe is geographically small, and that warfare between Europeans along with foreign incursion, had deeply instilled a sense of "not enough" in them. Hence, they tend to see competition, from anyone, as yet another threat to their livelihood.

    That said, Europeans tend to hold other things to great accountability, and allow for greater levels of "competiton". The best example would be food. Local producers are protected, to the point of being a monopoly. But, after living there, I see it as similar to Trademark protections, and this is something that is missing from the "books" in the US, and tends to hurt farmers, in that their products are "comoditized". Corn is corn. Wheat is wheat. Etc. Not in Europe. And when you taste the wines, or cheese, or bread from a region, it's hard to argue that they aren't doing something better than we are in the US of A (when it comes to agricultural production with a focus on quality rather than quantity). So, they understand the benefits of competition in some realms better than America/ns, however in most aspects of business and government, they could learn a lot from us.

    Great Blog by the way. Makes me want to run off and get my PhD in Economic History in London. :)

    1. Read David Graeber's "Debt: The First 5,000 Years." Pretty thorough take on "economic history." His "politics" aside. His POV is that of scholarly social anthropologist.

    2. Thanks, BobbyG. I'll do that!

  7. If one is not careful you'll have hedge funds paying for sinecures for economics professors who turn around and use their status as professors to espouse economic policies favoring hedge funds and their wealthy clients and to provide intellectual cover for politicians who support regulatory policies favoring the wealthy.

    It is a slippery slope out there.

  8. Of course Much the same thing happens in the USA in certain industries. I have witnessed barriers to entry in the construction industry which is usually run like a combination of a mafia family and an old Medieval guild.

    You are right to sound an alarm. Although Italy's culture seems particularly rife with this mindset.

    Corruption is as you say hard to measure. It always struck me as a failure in Economics. I am reminded of the old Rodney Dangerfield movie Back to School. Dangerfield's character is arguing with his economics professor that the costs of opening a new shopping center were far greater than those the professor had stated. He had not taken account of the needed bribes and kickbacks to get the necessary permits.

    1. Corruption is as you say hard to measure,but in America they use miles of seats in congress...not easier that way

  9. is hard to measure ?

    mea sure ten inches actual size?

    well the email corruption at least is mensurable

  10. IS hard to measure chronos crony capital'ism like islam'ism have capital penalties and ties with a suit or a suite

    capital punishment and death penalties

    is easy to measure

  11. John,

    A thoughtful post. Agree that the problems are under-explored in economics.

    My (Mexican) wife and I had a very similar experience in Mexico last year. She has a very good degree and lots of international experience. So, she thought, it would be fun to work for the federal government in Mexico City.

    All bureaucratic jobs in Mexico require that you pass an entrance exam. When you apply, they show you a list of applicants (by number) and "scores" given to each applicant, based on their CV, criteria, and the exam. All this public information is meant to ensure the process is clean.

    They then advise you what the potential exam material is: for each exam, they provide perhaps 1500 pages of examinable material. This material is not the same for all bureaucratic jobs.

    The material examined, she found, was extremely specific--perhaps on only a page or two of the 1500 possible pages. Needless to say, of the test-takers, one applicant typically does extremely well (100 per cent) and the others don't (20-50 per cent).

    Later, she bumped into an old student of mine, who works for a central economic ministry. Apparently, he had been told to write an exam that his boss would have to take for a more senior job. Only his boss should be able to pass the exam.

    While Australia or the US may not be entirely free from this sort of venality (certainly not in IB or law), I have a feeling that a good reason things work well here is because in general people get jobs because they're better.

  12. Yes they are better, they don't express very well and are morons, (amerikan moronic style) but is because of the gold rush and methoxyethylmercury and arylmercury compounds in the food chain i s'pose they become megalo.... megalomania is a american hobby i s'pose they're better than most, it's normal is a
    psycho-pathological condition characterized by delusional fantasies of power, relevance, or omnipotence.
    American's can't be better is a organization characterized by an inflated sense of self-esteem and overestimation
    America release mercuric ions and they act like inorganic compounds
    methyl-morons and moronicethylmercury have a firm bond, or grasp over the whole country (U.S of A ..or us of A ...megalo you see?
    The whole American soil is a compound toxic
    Bind with indians and not mex's ...oh KKK boys

  13. I completely disagree, the system in the US based on citations is all about politics of getting your name on the paper or not sharing potentially beneficial information with other faculty members because of fear they will take it from you.

    Also citations being meritocratic is very much untrue, citations skittle over to confirmation bias and the result is that controversial papers get less attention. Not to mention that the more accessible a paper is the more citations you will get, making rigor a counterproductive attribute. Its no surprise to me that the most rigorous people professors I've met don't come from high ranking institutions.


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