What this covers
Luigi Zingales sits with Tyler Cowen to diagnose why Italy—and by extension much of Europe—has stalled economically while competitors scaled upward. The conversation moves across economics, history, politics, and institutional analysis, treating Italy as a readable case study of dynamics that also operate in the United States. Zingales argues that institutional weakness and [principal-agent problems](concept:Principal-Agent Problem) become disabling only as economies approach the [technological frontier](jargon:technological frontier), where firms must grow large and coordinate tightly. Family-firm structures and pervasive agency problems, visible in a small café where employees can pilfer freely, block the scaling that modern productivity demands. He draws parallels between Silvio Berlusconi's transparent integration of politics, business, and personal interest and the more diffuse crony capitalism embedded in the U.S. Congress—suggesting that Italy simply made visible what America keeps obscured.
The discussion ranges widely. Zingales invokes Antonio Gramsci's concept of the Historical Bloc to explain how Northern and Southern Italian elites compromised at unification, condemning the South to underdevelopment—a dynamic he then sees repeating as Northern Europe manages rather than fixes Greece. He unpacks the European Central Bank's institutional bias toward deflation, the paradox that Europe has competitive sports while America's closed franchises contradict American ideology, and behavioral economics findings among MBA students that undermine the dismissal of such deviations as mere artifacts. He also argues that America's chief barrier to small-business creation is not finance but patent policy and entry barriers, whereas other countries struggle primarily with their financial systems. The conversation touches Luchino Visconti, Marx, and the Laffer curve, moving between the historical, the theoretical, and the distinctly contemporary.
Zingales argues that Italy's (and Europe's) economic stagnation stems from weak institutions, agency problems, and demographic decline that prevent firms from scaling at the technological frontier, and that the same crony-capitalist dynamics he diagnoses in Italy mirror and illuminate corruption in the United States.
- Institutional deficits matter most as economies approach the technological frontier where scaling is required
- Italy's family-firm structure and pervasive agency problems block the scaling that drives modern productivity
- Berlusconi is a transparent, integrated version of the diffuse crony capitalism present in the US Congress
Italy's productivity collapsed after 1995 when it stopped catching up and moved toward the technological frontier.
- Italy grew at least as fast as Europe and the US in productivity from 1945 to 1995, but since 1995 it stopped growing in productivity, and because income per capita cannot grow without productivity growth, the country has stagnated for 20 years.
“In fact, in the period 1945 to 1995, Italy grew at a rate that was at least as good, if not better, than Europe and the United States, especially in terms of productivity. Since 1995, Italy stopped growing in terms of productivity.”
- Italy's 1980s boom was the boom of a developing country in a protected currency area playing catch-up: as the rest of Europe moved into advanced production and services, they left market space in less technological production for Italy to capture, so the boom was real but in the wrong, low-tech direction.
“the boom of Italy in the 1980s was a boom of a developing country that had a protected currency area. We were playing the catch‑up nation within Europe.”
- Although there is a strong temporal correlation between Italy joining the euro and its productivity stop, Zingales finds no evidence the euro caused the stagnation; the real cause is that Italy's institutional deficits become particularly severe as the country approaches the technological frontier.
“I don’t think there is any evidence that’s the case, in spite of the fact that it’s a very strong correlation, temporally. I think that the sad reality is that the institutional deficits present in Italy are particularly severe as you approach the technological frontier.”
- The global economy over the last 20 years has put far greater emphasis on scaling up firms than the 1980s did, so where small- and medium-sized enterprises could thrive in the 1980s, today value accrues to mega-scale firms like Apple and Google; because Italy stayed still while China scaled, Italy was left behind, which is the fundamental productivity reason even the Italian North has underperformed.
“The global economy, over the last 20 years, has put greater emphasis on scaling up. The 1980s were much less about scaling up.”
- Corrupt or dysfunctional institutions are survivable when a country only needs to improve agriculture or produce t-shirts (as in Cambodia), but they become fatal when a country tries to compete at the technological frontier, which requires a relatively non-corrupt government and a tax system with moderate rates and low evasion.
“If you have institutions that don’t work and are corrupt, et cetera, you can get by if the only thing you have to do is improve agriculture and produce t‑shirts. We’ve seen in Cambodia, not great institutions, but they produce great t‑shirts, and it works.”
Political elites maintain appearance of change while preserving existing power through crony capitalism and lack of genuine competition.
- The social-science lesson of Visconti's film The Leopard is the Sicilian nobility's line that 'we should change to remain the same'—an ability Zingales attributes partly to the Catholic Church—to appear to change in order to leave everything unchanged, which he sees as a desperate but true description of Italy.
“the nobility there saying, “We should change to remain the same.” This ability of Italy, which by the way, I think is absorbed from the Catholic Church ... to change — not to change, to appear to change to leave everything unchanged.”
- Trump and Berlusconi are similar in every dimension: both are extremely good salesmen, flaunt their wealth, are obsessed with women and hair, and profess free-market views while making money in businesses (real estate and gambling/TV) that are the opposite of free markets, profiting through government connections; both succeed by portraying themselves as friends of the people who speak at a low level so ordinary people identify with them.
“They both profess themselves as free marketeers, but they both made their money in businesses that are the ultimate opposite of free markets. This is real estate and gambling versus real estate and TV that is basically a regulated utility in Italy. You make money by having the right connection with government.”
- Berlusconi made crony capitalism transparent: where US congressmen rotate between lobbying and office, maintaining an appearance of separation, Berlusconi integrated everything, creating a party from his own employees, ad agency staff, and personal lawyers who became MPs and ministers, even putting his own employee in charge of telecommunications rules that affected his businesses.
“Berlusconi is the integrated version of the US Congress. ... they go back to lobby. ... Berlusconi did not even care about the appearance. Everything was integrated. He ran a party with his own employees.”
- Differences in regulation across countries—such as environmental rules or the European copper-on-vineyards exemption carved out so Germans could brew beer—are driven entirely by which interest groups are most influential, so comparing regulations reveals which lobbies are winning the game.
“My bet is that the differences in regulation are driven entirely by who are the most influential groups across the board.”
- Gordon Tullock's paradox is that given the trillions of dollars in rents allocated through politics, the collective value of votes should be at least as large, yet votes 'sell cheap' because the public at large cannot coordinate to bid for them while small vested interests organize easily; the gap is partly closed by ideology and Mancur Olson's collective-action logic, and the price has risen over time as parties grow more organized.
“The point is that the public at large is not able to coordinate and beat very much for those votes. Those votes sell cheap. Why do they sell cheap? Because the parties are not well organized.”
- Google's governance resembles Italian companies more than American ones, with little floating voting stock and power concentrated in a few people; this works while those people are at the top of their game in the right sector, but as people age or change there will be a time they are no longer up to the game, when the temptation to waste money will be strong.
“the governance of Google resembles more the governance of Italian companies rather than the one of American companies. There’s not a lot of floating, voting stock. The power is concentrated in the hand of few people.”
Low fertility and emigration of young talent drain Italy's human capital and undermine business succession and firm dynamism.
- Italy's biggest problem is fertility: when families had seven kids, one was likely smart enough to take over the business with some meritocratic selection, but with only one or two kids the chance the heir is incompetent is high, so businesses can no longer be transferred within the family, and there are too few young people to keep firms dynamic.
“When you’re down to one or two kids, the chance that one is an idiot is pretty large. The result is that you can’t really transfer the business within the family. The biggest problem of Italy is actually fertility, in my view”
- Italy is in the business of exporting high-human-capital people and importing low-human-capital people, an unfavorable trade driven by increasing emigration of the younger generation that decreases the country's human capital.
“Italy is in the business of exporting high human capital people and importing low human capital people, so it’s not a good trade.”
- The combination of low fertility, lack of productivity growth, and largely unlawful immigration makes demography the number one consideration for Italy's future, an inevitability that few want to discuss.
“I think that the combination between lack of fertility, lack of productivity growth, and not particularly lawful immigration makes demography being the number one consideration.”
Italian institutional structures—family firms, agency problems, lack of computerization—make scaling impossible and trap talent in mismatched jobs.
- The Italian café operates as a single owner-monitored establishment because its cash-based, uncomputerized model lets employees steal coffee and revenue freely; Starbucks can scale because everything is computerized and centralized, so extreme agency problems in Italy force reliance on family firms and make it structurally difficult to scale firms.
“The extreme agency problems of Italy make it difficult to scale firms.”
- Italian family firms embody a 'we are a family' view of the firm so strong that bankrupt owners sometimes commit suicide, even leaving life insurance to pay employees' salaries—an orthogonal model to Netflix's 'team not family'—and which model is better depends on how important it is to transfer hard-to-teach craftsmanship knowledge within the family.
“in these firms, when they go bankrupt, the owners commit suicide. ... Sometimes, they leave their life insurance to pay the salary of the employees, and then they commit suicide. That’s a completely orthogonal view of the firm like we are a family.”
- In an Italian café the productivity of an individual worker is roughly five times that of a Starbucks worker because they handle multiple orders simultaneously in a single integrated step, whereas the US model splits the order across cashier, producer, and deliverer with repeated communication.
“If you go to an Italian coffee shop, the productivity of the individual working there is five times the one of Starbucks. They do coffee, cappuccino, one after the other, no questions asked. They understand five orders contemporaneously.”
- Italy has the best secretaries and the worst managers because the market does not sort talent: when the market fails, very talented people end up in jobs that don't require talent (a literature graduate serving coffee) while non-talented people occupy jobs that require a lot of talent.
“If you don’t sort out the market, you can have some very talented people doing jobs that generally don’t require the talent, and you have, unfortunately, non‑talented people doing jobs that require a lot of talent.”
Historical North-South unification as annexation created long-term underdevelopment through elite compromise and institutional rejection in the South.
- At unification the income per capita of Sicily and of Emilia-Romagna around Bologna were equal, but today Emilia-Romagna's is almost double Sicily's, a huge gap that Zingales attributes to the post-unification compromise that left the South underdeveloped.
“when Italy got unified, the income per capita of Sicily and the one of Emilia‑Romagna around Bologna were the same. Today, it is almost double the one of Emilia‑Romagna versus Sicily.”
- Italian unification was precipitated by a small elite before a national culture existed, so it became an annexation of the South by the North in which Northern laws were imposed on a South with very different conditions, producing rejection, a repressed liberation revolt dismissed as banditry, and a compromise with Southern landowners that condemned the South to long-term underdevelopment.
“because this happened before there was a national spirit, it turned out it was basically an annexation of the South by North, in which the North imposed its laws to the South, and they were not good for the South.”
- The traditional North-South distinction in Italy is disappearing, but in the worse direction: bad practices once confined to the South, such as the Mafia, have been imported into the North (Milan, Venice), so all of Italy is coming to resemble the South.
“All Italy is looking more like the South.”
- The Northern European countries are doing to Greece what Northern Italy did to Southern Italy: not trying to fix Greece but to minimize the problem for Europe, because nobody in Brussels except the Greek representative cares about Greece, just as Turin cared only about sedating the Sicilian revolt—even aligning with the Mafia—producing huge long-term costs; reforms imposed rather than owned will not stick because the same corrupt Greek elite negotiates them.
“the Northern countries are trying to do with Greece what Northern Italy did with Southern Italy. They’re trying not to fix Greece but to minimize the problem for Europe. Nobody really in Brussels, except maybe the Greek representative, cares about Greece and the Greek people.”
European unification mirrors Italian unification: a small elite imposing unity over unwilling peoples using central authority instead of democracy.
- Europe was unified the same way as Italy: a small English-speaking elite that feels European is forcing unification over the wishes of peoples who do not feel European, and where Italy once used troops to maintain Southern order, Europe now uses the Central Bank, risking a desertification of Southern Europe analogous to Southern Italy.
“There was a small elite that felt European. Most people don’t really feel European, but a small elite feel European.”
- The pessimistic rational forecast is a breakup between Northern and Southern Europe, but the optimistic project is to inject democracy: the European Parliament has no real power to appoint a prime minister and nobody responds to the European people, so as with the US's non-linear, civil-war-marred path, what matters is moving in the right direction toward more democracy.
“There will be a breakup between the Northern Europe and the Southern Europe. ... I think that an injection of democracy is what is most needed”
- The so-called 2010 bailout of Greece was a disaster—really a bailout of French and German banks disguised as helping Greece—and Europe has not recovered from that mistake, which will weigh heavily on the future.
“I thought that the so‑called bailout of Greece in 2010 was a disaster, was really a bailout of French and German banks covered with the pretense of helping Greece.”
- The ECB was set up to fight inflation and is mentally unprepared for deflation; moreover its mandate of inflation 'below but close to 2 percent' for the European average plus the same target for every country's CPI is mathematically biased toward deflation, because if every term must be below two then the average must be below two, probably by a lot.
“If you have an average and every term has to be below two, even close to two, the average must be below two, probably by a lot. I think that the ECB has been designed, basically, to have deflation.”
Italy's financial system, not innovation itself, is the primary barrier to small-business creation and growth compared to other countries.
- The major problem for innovation and small-business creation differs by country: in Italy and most other countries it is the financial system, but in the United States it is not finance but patent policy and other barriers to entry, illustrated by students whose first item in their business plan was a lobbying plan.
“In the United States, it’s not. It’s more of a pattern policy and other form of barriers to entry.”
- If innovation were just throwing money at it, Greece would be the most innovative country in the world; money is a necessary condition but not sufficient and sometimes counterproductive, since too much capital early distracts entrepreneurs and reduces focus, which is why markets are valuable for allocating capital to the right people.
“If innovation were just throwing money at it, Greece would be the most innovative country in the world. I think money is a necessary condition, but all the time it’s not sufficient and sometimes it’s also counterproductive.”
Wealth taxation cannot solve Italy's debt because high tax mobility and housing illiquidity make the wealth tax unworkable.
- Italy's optimistic wealth-to-income picture (high home ownership, low private debt) does not solve the debt problem because of deadweight costs of taxation in a mobile world: labor and financial capital flee, houses cannot run away but are politically untaxable since 70 percent own them, and a wealth tax on illiquid houses would itself drive house values down.
“if you were to do a wealth tax on houses, then the value of houses would go down, because people are very illiquid, and so it would go down.”
- Tax bases are highly elastic at the sub-national level (people move from Illinois to Indiana or Wisconsin to avoid taxes), and the European Union has eliminated the former home-bias that kept Italians in Italy, so high taxation now drives mobile people to nearby countries like Austria and Slovenia, making aggressive taxation a losing game.
“what the European Union has done is to basically eliminate this bias. ... People moved to Austria and Slovenia anytime. Why do you want to stay in Italy where you’re taxed more, things work less well, et cetera? The elasticity is very large.”
Italy will eventually default on its sovereign debt because the window to prevent internal redistribution has closed with Italian ownership rising to seventy percent.
- Zingales confidently predicts Italy will not pay its sovereign debt in some form, because the right moment was missed: when 50 percent of debt was held by foreigners the Germans ensured Italy bought it back, and now roughly 70 percent is Italian-owned, making the debt mostly internal redistribution that cannot be sustained at this level.
“One thing I can predict fairly confidently is that we are not going to pay the debt.”
Family meal culture and sitting together for lunch and dinner transfer human capital across generations in ways America lacks.
- The Italian tradition of sitting down together at lunch and dinner is an undervalued mechanism for socializing and transferring human capital from older to younger generations, something lacking in the US where many people do not eat together, that America could learn from Italy.
“There is a tradition of spending some time around the dinner table. That’s a place where you socialize, you learn, you transfer human capital from the older generation to the younger generation.”
- American coffee before 27 years ago was a dark thing that tasted bad and a sit-down café culture did not exist in the US.
“when I arrived in this country 27 years ago, you were not really drinking coffee. ... The culture of coffee did not exist here.”
Behavioral economics deviations found in MBA students undermine dismissals that the effects are artifacts of undergraduate subjects.
- Behavioral-economics deviations are often dismissed as artifacts of poor undergrad art-major subjects, but studying an entire cohort of 550 Chicago MBA students—people who statistically run big corporations—Zingales and a Northwestern colleague find many of the same deviations present, undermining the dismissal.
“We started with a sample that, hopefully, will run big corporations and statistically has run big corporations. What we find in many of the deviations that behavioral economics find are present in our sample.”
- In an experiment, Chicago MBAs gave up a 10 percent (about $30) two-week return to receive a check immediately even though 90 percent were not maxed out on credit cards, yet on average took two weeks to cash it and 10 percent never cashed it at all; Zingales attributes this combination of impatience and procrastination to salience—the eagerness to receive the gift, then relaxation once it is in hand.
“These guys really give up receiving $30 over two weeks to get the check in the mail that day. ... we follow when they cash that check. On average it was two weeks, but 10 percent never cash it. They lost it.”
Immigration of talented people provides economic gain, though assimilation speed depends on cultural similarity to host populations.
- Merkel is underrated partly for her handling of the immigrant crisis: refugees are the best people—the most talented, entrepreneurial, and dynamic—so accepting them is not only a moral obligation to save people escaping extermination but also an economic gain.
“We want refugees, because refugees are the best people. Not only is there a moral obligation to save people that escape extermination, it’s also an economic consideration. These are the most talented, the most entrepreneurial, the most dynamic people in the world.”
- An underdiscussed aspect of immigration is the process of assimilation: it is important to get immigrants who are more similar so they assimilate faster, precisely to avoid the social fractures seen in the French banlieue and the suburbs of Paris.
“I think that it’s important to try to get immigrants that are more similar so that they assimilate faster, precisely to avoid those fractures that we have seen in the French banlieue, in the suburbs of Paris”
Firms face unavoidable trade-offs between incentive-harsh and family-like cultures depending on whether craftsmanship transfer matters.
- The most successful organizations, like universities, spend a huge amount of time selecting the right people up front—because firing is very costly—after which organizations almost run themselves; get hiring wrong and you spend all your time fixing mistakes.
“the best, most successful organizations are the ones that spend a huge amount of time selecting the good people. ... Once you get the right people in place, organizations, I wouldn’t say run themselves, but almost.”
- There is always a trade-off between incentives and insurance in firms: harsh cultures like Netflix's 'we are a team, not a family' eliminate insurance to maximize incentives, which motivates people very effectively but makes work hard and people less happy, so the right balance must be found.
“There is always the trade‑off between incentives and some form of insurance. If you eliminate every insurance, you have all incentives, then incentives are great but people are not particularly happy.”
Zero-interest-rate policy redistributes unfairly from savers to speculators, though deflation spirals justify it as the lesser evil.
- Zero-interest-rate policy is a redistribution in the wrong direction, taking from people with bank deposits and giving to those who can easily engage in speculation, which Zingales finds morally objectionable; yet given that the eurozone fell into deflation he concedes Irving Fisher's debt-deflation spiral is the worst outcome when debt is high, leaving him conflicted.
“the zero‑interest rate policy is a redistribution in the wrong direction. This is taking away from the people with the bank deposits and giving it to the guys who can easily engage in speculation”
Regulatory capture and the Chicago school's 'right-wing Marxism' concept explain how elites extract rents through political allocation.
- The Chicago intellectual tradition, exemplified by Stigler's invention of regulatory capture, was borrowing from Marx—Zingales calls it 'right-wing Marxism'—and the North-South historical bloc that ruled Italy through an alliance of Northern and Southern elites is itself a Gramscian concept.
“I think that intellectual tradition of Chicago, Stigler, when he invented regulatory capture was borrowing from Marx. It’s right‑wing Marxism.”
Religion's role in development is overstated; Catholic countries caught up well despite Weber's pessimism.
- While Muslim religion as practiced and diffused in mostly-Muslim countries is generally not associated with good attitudes for capitalism, Zingales argues Weber was wrong that Catholicism is a disaster, since Catholic countries caught up fairly well, and although some Protestant ethic is useful, religion is something to consider but not the major cause of underdevelopment around the world.
“I think Weber was wrong on saying that Catholicism is such a disaster. I think that Catholic countries caught up fairly well. ... I don’t think it’s the major cause of underdevelopment around the world.”
Pope Francis's reform of Vatican corruption was overdue and his risk of assassination is non-negligible.
- Pope Francis was elected largely by North and South American cardinals tired of the 'Italian Mafia in the Church,' which had cost the Vatican lawsuits and money in the US while the Vatican contributed nothing and ran the IOR as a money-laundering organization; Francis is reforming this, and Zingales rates the risk of his being killed as not zero.
“Pope Francis was elected, basically, by Northern and Southern American cardinals who were sick and tired of the Italian Mafia in the Church.”
American sports leagues are uniquely uncompetitive with closed franchises despite American ideology, while Europe's promotion-relegation model is truly competitive.
- In the United States the only thing that is truly non-competitive is sports—you buy a franchise and remain in the league regardless of incompetence—whereas in Europe sports is the one truly competitive arena with promotion and relegation by performance, which Zingales calls a paradox since closed franchises are 'completely un-American.'
“In the United States the only thing that is really noncompetitive is sports. In Europe, the only thing that is really competitive is sports. ... Here, you buy the franchise, and once you’re in, no matter how incompetent you are, you stay there, which is completely un‑American.”
Separation of divisions by accounting, as Google did with Alphabet, reveals actual profit flows and prevents overinvestment in money-losing ventures.
- Google's reorganization into Alphabet, separating the moneymaking machine from the rest, is a good idea because when you cannot see how much transfer takes place between divisions you tend to overdo it, so the accounting separation reveals who is making money versus wasting it.
“Because when you don’t see how much transfer takes place, you tend to overdo it. I think it’s a first step to do this separation so that you see, from an accounting point of view, who’s making money and who is investing money or wasting money”