Capitalisn’t: The Economics of Student Protests

Luigi: This morning, I woke up to the sound of helicopters hovering over my house, which is on the University of Chicago campus. I reached quickly for my iPad because I knew what that meant. It meant that police were moving on the campus encampment in the main quadrangle of the university.

Speaker 2: The pro-Palestinian encampment at the University of Chicago has been taken down. The school sending in campus police to dismantle the tents just before dawn today.

Bethany: The good news is that the helicopter was not the police, it was TV, and most importantly, nobody got hurt. In fact, nobody got arrested. The University of Chicago police simply removed the encampment.

Luigi: The outcome at the University of Chicago should not make us ignore the massive amount of arrests throughout the country and the historical importance of the student protests.

Speaker 4: These latest flashpoints following weeks of clashes at roughly 75 campuses nationwide, according to a count by NBC News. Arrests now topping 2,400 as demonstrators demand schools divest from Israel.

Bethany: Since this is an economic podcast and not a political one, we’re going to focus on the economic side of students’ protests, not on the political side, but this economic question is a really important one. A guy named Adam Tooze just wrote today, “Indeed, to a surprising degree, questions of political economy are at the heart of the protests.”

I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: Let’s start with an economics issue, which is divestment. The student requests are slightly different across different campuses. We’re going to go mostly with the ones from Columbia because they’re the ones that are better publicized, and they’re the ones who started, more or less, the entire trend.

They say, and I quote: “It’s a moral imperative, urgent, viable, and most importantly, widely agreed upon in the university community that Columbia University must divest from and refrain from investing in the following companies and all subsidiaries: Microsoft, Amazon, Airbnb, and Alphabet.

“For the same reasons, we urge the university to immediately withdraw assets from BlackRock’s iShares ETF, which exposes Columbia to Hyundai, Caterpillar, Lockheed, Boeing, and Barclays Bank. And once again, for the same reason as above, we also call on Columbia to refrain from investing directly or indirectly in Elbit Systems Sweden, China-based Volvo, UK-based JC Bamford Excavators, CAF, Hikvision, and TKH Security.”

Bethany: Let’s start with a pretty straightforward question. Even if Columbia were to acquiesce to the students’ demands, is it feasible? Is it feasible to do what they’re asking in this manifesto? And is it feasible, more broadly, to divest completely from Israel?

Luigi: I think that the operative word, and the secret, is whether you’re saying direct holdings or indirect holdings. Most of the endowments of top universities like Columbia, Chicago, Yale, et cetera, are invested in what are called alternative assets, which are—your favorite—private equity, venture capital, and hedge funds.

As far as these are concerned, I think in the short term, divesting is impossible because they have committed to give the money to these organizations, and they’ve committed not to interfere with the day-to-day operation of these companies. The cost of interfering is that they might lose their limited liability status as limited partners.

There is no way they can interfere and say to Kleiner Perkins, “Oh, by the way, I gave you $100 million, but I don’t want to invest in startups in Israel.” Because it’s not possible. And if they were to try, it would be extremely costly.

So, this is not in the feasible set, but honestly, I don’t think that’s what the students are asking. What the students are asking is to divest from direct holdings. And these direct holdings are teeny tiny. The most complicated thing, in my view, is to say you should divest from BlackRock’s iShares ETF. For most universities, the fraction of public equity they own is owned through some indices, and indices own a lot of stuff. In fact, if they’re indexed to the S&P 500, they own exactly 500 stocks.

If they want to exclude, for example, Caterpillar, they would need to do two things. One is to divest completely from the S&P 500 index, which would start to be a little bit costly. The alternative—and I don’t know whether this would qualify under the students’ request—is to keep owning the S&P but short Caterpillar. That’s tantamount to divesting from Caterpillar but retaining the index. Technically, it would be a cheaper way to handle the problem. I’m not so sure that the students would be so satisfied.

Bethany: That is an interesting theory, indeed. I wonder, if profiting from Caterpillar making money is bad, is profiting from Caterpillar declining in value worse? I don’t know. I’m going to have to think about that. It poses an interesting moral conundrum to me.

Again, let’s just assume that this is where we’re going—divestment. What are the costs of it? And you had mentioned that you’ve been talking and writing a lot about this, which I think is fascinating. But you had mentioned that the students don’t seem to totally understand what the costs are.

In other words, that it’s not their tuition dollars that are getting invested in things that they don’t like, but it’s the discount they get on their tuition that is being funded by investments. Talk a little bit about that. What are the actual costs? Assuming these are money-making investments that the university is then going to lose money because it’s not doing them.

Luigi: First of all, you are absolutely right. This idea that the tuition dollars of the college students are invested in these companies is completely wrong. It is the other way around. A lot of students receive discounts on their tuition thanks to the investment in the endowment.

If I were the president of the university, I would say: “You really want to not be profiting from tainted companies? Fine, there is a special tuition rate for you at the full price, and you’re not going to get any discounts, and we’re going to give the discount only to people who want to compromise morally.” Now, this is a provocation, of course, but that’s the reality of the issue.

To be honest, what would be the cost of divesting from these companies? It’s hard to predict on an ex-ante basis, but clearly, by restricting your investment portfolio, it’s hard to do better. By accident, you can do better, but not in expectation. And so, you’re going to have a slightly lower return on the endowment.

Depending on how long the list is, the cost might differ. Honestly, I don’t think that this is going to be a dramatic cost. Remember, the important fact is that Columbia has already agreed to divest from oil and to divest from private prisons. The University of Chicago never took a position on divestment. But Columbia, Harvard, I think Yale, and other universities already decided to divest from some sectors. So, they proved that this is feasible, and it’s not too costly.

Bethany: It’s feasible, and it’s not too costly. Has it mattered? I mean, can you make an argument that because Columbia is not investing in oil and gas, that has somehow affected the future of oil and gas in a meaningful way?

Maybe a comparison to invoke should be apartheid, where there were calls for divestment as well. Does it matter if people do this? Is this the right place for the students to be focusing their efforts? Or could they focus their efforts differently? Even if they get what they want, does it matter?

Luigi: This is the most important question, and I will try to break it down in two steps. The first is, does it really impact Israel so much? I think that even if all the universities together would divest, the impact would be, I think, relatively small because Israel is a very strong economy. There are a lot of other people willing to invest in Israel.

Remember, the way you have an impact by divesting is that you have to push down the stock price. That’s the only way in which divestment is really painful to you. But as is the nature of the beast, when you push down the stock price, you make it very attractive for an investor who doesn’t care to step in.

Imagine that I am able to cut the price of Microsoft by 10 percent because Microsoft is doing business with Israel. I can see a lot of endowments and investors that would say: “Wait a minute, Microsoft is underpriced. We should massively buy Microsoft because we don’t care about the Israeli issue."

You might be on the other side of the Israeli issue, but imagine you’re not even on the other side. You might not care, and you invest in Microsoft just because it’s very profitable. As a result, not only would the effect be destroyed, but you are also, actually, transferring money from the people who care about the issue to the people who don’t care. You’re subsidizing people who are really completely selfish. From a purely economic point of view, that’s the story.

But this is not purely economic. This is an activist campaign, and the thing that matters the most is the impact on media, the impact on public opinion. And if you do that strategically, you go after people that don’t have a lot of cost of complying. They’re going to comply because the cost of complying is less than the cost of resisting.

Historically, this is why Columbia and a lot of other places have given up on the issue of oil or the issue of private prisons. Let’s take private prisons. You don’t want to have Columbia’s name associated with profiting from private prisons. You’re profiting from the incarceration-industrial complex, and so on and so forth. At the end of the day, it doesn’t really make a difference for you because there are two publicly traded companies that are private prisons. You exclude them, you’re not losing much, and the issue disappears.

The beauty of a boycotting campaign is that you target people who don’t care a lot, and they’re forced to give up. First of all, this gets in the news. That raises awareness and automatically raises the cost for other institutional groups not to comply. If you have Columbia, who divests from private prisons, then you go to Yale and say: “Wait a minute, Columbia divested. Why not you, Yale? How are they different?"

Then, when you have Yale and Columbia, Harvard will do the same. Then, you keep going, and you basically make it more and more visible, and so on and so forth. You’re trying to raise the political issue.

Bethany: In preparation for this podcast, I was reading some pieces, and there was this op-ed in The Wall Street Journal. It talked about how, with respect to oil and gas, the most widespread divestment has involved coal companies, which many huge pension funds and endowments agreed to exclude and are almost universally banned by ESG funds.

But when the world decided it wanted more coal, after Russia’s invasion of Ukraine led to energy shortages, no amount of shunning by investors could stop the shares of coal companies soaring. And investors who want to stop the use of coal should stop using coal or push governments to ban coal use earlier, not somehow try to affect production by steering clear of coal stocks.

One of the things you’ve written about also is this idea, broader than the current investment debate, called the separation theorem. I wanted you to talk about what that was and if it’s right. Should and can investment decisions be made without ethical consideration?

Luigi: The idea of the separation principle is very simple, and while the theoretical argument is, I think, due mostly to Milton Friedman, I think the practical application is Warren Buffett. Warren Buffett is very open about this. He maximizes the return on his investments and then takes that return and donates to causes he considers very valuable.

When some people raise the issue and say: “Wait a minute, Warren Buffett, you are investing in nothing short of Coca-Cola, which basically sells sugar water to little kids and with a lot of negative consequences. How can you possibly have a conscience if you invest in that way?” And he said: “Oh, no, no problem, because I’m going to donate a lot of the money of my proceeds. And so, I feel very moral, and I don’t care how I make the money.”

Logically, this idea that goes back to Milton Friedman is that if you maximize your return, you have enough money to do everything that you want from a moral point of view. And so, you shouldn’t really be concerned.

However, this depends very much on the possibility of keeping separate the moral decision and the charitable or the social decision. Take the case of Coca-Cola. Imagine that Coca-Cola is massively advertising in Africa and making a lot of money. Then, you say: “No problem, because with that money, I can actually undo that with a campaign to reduce obesity in Africa and maybe get something extra, because I have so much money from the financial return.”

The reality is, in most situations, a profit-maximizing decision is actually much more effective in reaching a certain goal. If I want to undo the effect of a marketing campaign to sell Coca-Cola in Africa, I have to spend much more money than what I would make by doing the marketing campaign.

If I want to undo pollution . . . because the same argument is, I pollute as long as I’m permitted to pollute. And then, if you care about the environment, I’m going to donate the money and undo the pollution. The cost of undoing pollution is much, much larger than the cost of avoiding pollution to begin with.

So, this separation theorem only applies to issues like pure donation. It is not optimal to donate at the corporate level because you can distribute the money and let the shareholders make that decision. They make the decision according to their taste. They’re very different. And so, that’s superior to forcing a donation at the corporate level. But anything else that has some real synergy at the company level, actually, that separation doesn’t hold.

Bethany: So, then, how do we think about it in this case? Should the separation hold when it comes to universities and their choices of investment? If the separation shouldn’t hold, who gets to make the decision about what’s an ethical investment and what’s not an ethical investment?

I wouldn’t say this, just to be clear, but I might say that baby formula is an evil, and women should only breastfeed. Therefore, I want my university to divest from every maker of baby food. Do I get to make that call?

Luigi: Let’s divide the two things, because who makes that call is a very tricky issue. We’re going to come back to that. Let’s start with the first call. On what issue can you really make a difference?

Take your example of the baby formula, which is not so hypothetical, because Nestle was actually pushing baby formula in developing countries where water is not that safe. As a result, women were giving up breastfeeding because they were kind of bamboozled by the value of the baby formula. They were giving up breastfeeding and mixing the Nestle formula with dirty water and killing a lot of babies. So, the Nestle marketing was responsible for a lot of deaths as a result of that.

If you are, for example, an educational institution that cares a lot about science, et cetera, you might have some very serious reservations about how Nestle is operating, and you certainly want Nestle to change. My preferred outcome would be that universities, when they vote at the shareholder meeting, because they have the right to vote about Nestle, they vote against managers who are proposing this, or they vote against incentive plans that favor this particular short-term value maximization, and so on and so forth.

And I think, of course, the next step is very complicated. Who is going to make the decision? But at least we should, in principle, have a serious discussion about what are the ethical considerations you bring in managing your funds. Saying that you are afraid to make a decision does not exempt you from making a decision. And not making a decision is not being neutral. It is being the most immoral possible because the only thing you care about is money. So, not choosing is choosing not to choose.

Bethany: What do you think, then, when we talk about how to make this decision? Are there any models out there? You had just shared with me this document from Columbia, where a group has set up a system for voting on it and voting on divestment.

Is that the right way to do it? And, if so, not necessarily just with divestment, but with any issue, is that the right way, that students get to vote, that faculty get to vote, that alumni get to vote, that donors get to vote? Should they each get one vote? Or should one group get more votes than the other group?

Luigi: That’s a tricky issue, but let’s start from the easier case, which is not easy, but an easier case. Let’s think about a corporation. Who gets to decide what is moral and immoral in the corporation? Think about a company producing, for example, the abortion pill, and they have to decide how to promote it and at what price. There are a lot of moral considerations on both sides of the issue.

Who gets to decide? I think that the first step should be the shareholders. All the shareholders should make a decision, because in a corporation, they are the ones paying the price. It’s very easy to be charitable with somebody else’s money. If you are saying, for example, I want to market the abortion pill at the lower price, because especially in this moment, I want to make the abortion pill more broadly available.

From an economic point of view, the fact that a lot of states restricted abortion makes the demand for the abortion pill more inelastic. And so, if I am a shrewd value maximizer, and I only care about value maximization, I should increase the price of the abortion pill because I make more money.

Who is paying the cost of the decision? If you are a consumer buying the pill, you are impacted only by the cost of the pill you buy. It’s easy for you to say, “I want the price as low as possible.” As a shareholder, you end up—because you are a residual claimant—paying the cost through lower profits.

So, I think that the moral decisions should be in the hands of the people paying for more or less profits. And so, they should be first in the hands of the shareholders. Now, you might say, “Wait a minute, but what about the workers?” The consumers are transitory. Hopefully people don’t abort a lot of times. So, you’re an occasional consumer.

But if you are an employee, you have a very strong view on that. I actually think on this moral decision, you might want to have a vote of the employees. But the vote comes with a price tag and says, “Look, if we cut the price of the abortion pill by half, we’re going to make half as much profit.”

So, let’s say that part of the profit is absorbed by the shareholders. If they want to vote for that, part of the cost should be absorbed by the workers. You feel better at working for a company that fulfills your aspirations. If you feel better, you should pay a price for it.

We know, for example, that in law firms, defense-law firms, you have two tracks. You have the tobacco track and the non-tobacco track. If you defend tobacco companies, on average, you make more money. But you have to live with the fact that, gee, you have to defend tobacco companies. And then, there is a non-tobacco track, where you make less money, but you sleep well at night.

I think, to some extent, I can see the workers coming in but coming in at a price. The principle that you shouldn’t be generous with somebody else’s money, I think, also should apply here.

Bethany: But this gets really complicated when you think about universities, because there is that other constituent that I mentioned. In the case of a university, maybe you consider the teachers and the students analogous to the employees, and the administration is maybe analogous to the management of a company.

But then, there’s also this third party sitting out there called the donors. They are critical to the financial functioning of an institution in some ways, yet they’re not in either of the positions that you just mentioned. So, what do you do there? Do they get a say? Or should the deal simply be, if you don’t like what we’re doing, then don’t donate?

Luigi: I actually would distinguish between alumni in general and donors. I think alumni, regardless of their donations, are an important constituency that needs to be protected. At the end of the day, they invested in a degree, and they suffer the consequence of their degree.

In the same way in which the alumni benefit from a university doing very well and the value of the degree being higher, they have a cost in the value of degree if the university is doing poorly because the value of the degree deteriorates. Some universities go bankrupt. Do you want to have a degree from a bankrupt university? It is pretty sad.

Bethany: Not if you’re an economist. Maybe if you’re an English major, you should have a degree from a bankrupt university. Maybe that would be very poetic. But I think if you’re an economist, that would probably be a bad look.

Luigi: I think that the alumni are an important constituency that should be listened to in these decisions. So are the students, and so are the faculty. But, to some extent, the students are the ones that just arrived. If I have the choice between Columbia and Harvard and somebody else, I should look at all the factors, and then I choose.

I cannot turn around two months later and say, “Oh, I don’t like what I got.” That’s what you bought in the marketplace. The students, especially the freshmen, are the ones that are least at risk of being abused by the system.

Then there are the faculty, and a lot of tenured faculty are not very mobile, and so, they can be affected, too. If you’re mobile, you can go to a different university. If I don’t like the University of Chicago, I can move somewhere else. I’m not really suffering the consequences. The alumni are really stuck.

Then, of course, there is the issue that is very important that I can ignore the pressure from past donors. But to the extent I live on future donations, I cannot ignore future donations. And if people say, “I am not going to donate to you if you do X, Y, and Z,” then it’s a moral choice, in the sense that I have to say, “I am going to pay a cost, but am I willing to pay the cost?”

Then, the question is how you distribute the cost. The cost generally is not borne by alumni unless they donate more. The cost is borne by the faculty, and it is borne by the current students. Those are the ones that really get affected by a reduction in the budget.

Bethany: Picking up on something you said about students being able to make a decision, can you make a decision? One of the things our wonderful team sent around was this piece noting how difficult it can be to identify what it is, exactly, that universities are invested in. There aren’t a lot of requirements to share all of this publicly.

There was this great quote that Columbia University spokesman Robert Hornsby said to NBC News: “We don’t share direct holdings beyond what is filed publicly, nor do we disclose investment manager information.” How would you, as a student, even know? Is that part of the issue, that you as a student wouldn’t be able to know necessarily where the university you’re thinking about attending has its money invested?

And should you be able to know? Clearly, that’s a pretty easy step, to force universities to do really, really explicit disclosure. Then, everybody can see, and everybody can make a decision based on transparent information.

Luigi: Absolutely. I think this is a no-brainer. We owe to the students the fact that they raised a very, very important issue, the lack of transparency about what universities do. At the end of the day, the university of today is a completely different animal from the university of 1968. At that time, most of the money was coming either from the government or from tuition.

Today, there is a big chunk of the money that comes from the return on the endowment, and there is a big chunk that comes from donations. And so, this stuff should be particularly transparent, as it should be transparent who gives you the donations.

I think, personally, I am more upset that maybe the money that comes from certain centers comes from Qatar, who is funding a lot of dubious groups in the Middle East. Or it’s coming from MBS in Saudi Arabia, or so on and so forth. The transparency on donations is really, really important.

As we remember the story of Jeffrey Epstein, we found out that Jeffrey Epstein had donated to MIT and Harvard, mostly to MIT. He donated to MIT after he was convicted in the first degree of sex offenses. If you donate, and then, you commit a crime, universities are not able to tell in advance. But if you have been a convicted criminal, and your behavior is very questionable, I think universities should have a standard of what they accept and what they don’t accept. I think that’s one important issue. And, as a student, I don’t want to go to a university that depends heavily on donations from X, Y, and Z.

Bethany: I thought about this a lot with respect to the Sackler family and the opioid crisis, because obviously, a lot of cultural institutions got their money from the Sackler family. A friend of mine who’s worked in the arts for years said the source of funds for a lot of our great art institutions has always been what we would view as tainted funds.

If you start saying you can’t take money from anybody who might have a question mark over their head, suddenly, the budget for a lot of not-for-profits gets dismantled. I mean, think about Pittsburgh’s beautiful Carnegie Museum. Can you imagine? That is a corollary, maybe, to this ethical debate we’re having.

But I think what you’re saying, and what I really like as an answer, is that both for the incoming money from donors as well as the outgoing money, in the sense of how that money is being invested, it should all just be completely transparent. That way, everybody has the opportunity to make their choices based on very clear information.

Luigi: But also, I think, taking a page from the Catholic book, you want to encourage donations from your estate. If you have done a lot of bad things, but you’re dead, and after you’re dead, the university will receive the money, I don’t feel particularly bad.

What I do feel more conflicted or problematic about is a relationship. When MIT had a relationship with Epstein, it was not that he donated money and was gone. It was a continuous relationship that might influence a lot of things, and that’s much more complicated and much more problematic, in my view.

Bethany: To wrap up, if you ran the world, Luigi, how would you like to see a university run? If there were a university czar who could decide how all universities approach this issue, what would you do? Where would you start? And what would be most important?

Luigi: I would start by being more transparent. That’s an easy one. So that many people make their choice consciously knowing what they’re getting into. The second is trying to get from my constituencies, which are the alumni and the faculty, and, of course, the current students, at least some form of trade-off on what they want to do.

I’m now passionate about this idea of a citizen assembly. I would get some citizen assembly of students or alumni to help me walk through this problem because those are tricky issues. But the president of the university does not really represent the morality of the majority of its constituencies. And so, you want to be informed by the morality of its constituencies, but with the understanding that you pay a price for it.

I would like the faculty to say: “Yes, you want to divest from oil. What are the fellowships we cut as a result of that? Are you happy to do it?” If they say yes, then you go to the students and say: “We are doing the same. Are you happy?” If they vote yes, then you go to the alumni, and maybe the alumni say, “Look, we love this so much that we’ll give you more donations if you divest from oil,” at which point it is a great thing.

What I want to avoid, in my view, is the situation of small groups that have disproportionate power, because they get the university in the moment they are the weakest. While I think it’s completely legitimate for the student body joined with the alumni, et cetera, to make decisions to divest from oil, from Israel, from China, whatever they want, we don’t necessarily want to make decisions based on a few students who threaten to disrupt graduation. I think that would be a mistake.

This said, I think that the students have raised a very, very important issue that needs to be discussed. To be fair, I don’t want the students to have all this disproportionate power. I also don’t want donors to have this disproportionate power. To some extent, what is interesting is that this battle is a political battle fought over the university body.

If the issue was¬—and sometimes, maybe in the case of Columbia, is—that there are some special programs or some special research that Columbia really is doing, and it helps Israel, I understand that’s more of a contentious issue.

But at the end of the day, if Columbia or Chicago divests from Israel, it is not really a dramatic cost for Israel, nor is it a dramatic cost for the university. And so, this is really a political battle on the side of the students and on the side of the donors that gets the university administration in the middle.

So, if I were the czar or the king of the university for a day, what I would say is, “Let’s scale down and limit the decision to issues that where the university has a major impact.” In those cases, we want to make some moral choices. Speaking from the University of Chicago, are we making the atomic bomb, or are we not making the atomic bomb? That seems pretty important.

Now, to be fair, the University of Chicago only did the first controlled experiments of atomic energy, not the atomic bomb. But, OK, we get the point. Those are really, really important issues in which the university actually has a gigantic role because they have some unique resources, the talented faculty that can make the difference in that dimension.

What we should do moving forward is have an episode on the governance of universities, because I think that this is becoming really, really an important issue, and it is not studied very much, but it’s super, super important. And universities differ tremendously in their governance, and there is no visibility on that.

For example, Harvard does not have a senate, while Chicago or Yale or Columbia do have a senate. The way faculty are promoted to full professor differs in procedures. The way deans are elected or appointed differ dramatically. The roles of donors and students differ dramatically. So, I think we need to bring much more visibility into governance, so that people recognize that not all universities are created equal.

Bethany: Yeah. Or, I think, maybe, once again, transparency is the answer. Every university should be required to have a document somewhere where it explains exactly how its governance works. And then, it doesn’t have to be governed in a particular way, but everybody should know how it’s governed and who gets to make the decisions. Transparency: it’s the age-old answer.