Capitalisn’t: Capitalism Transcended?

Yanis Varoufakis: My critique of capitalism is not that it is unjust. My critique of capitalism is that it is inefficient, which I know sounds a bit strange.

Bethany: 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: First of all, happy New Year. This is the first episode of 2022. And, as we promised in the last one of 2021, we decided that we want to adopt an enemy—not adopt an enemy, but talk to somebody you disagree with in a civilized way to learn the differences.

And so, we decided to start the episodes of this year with one of the most flamboyant Marxists I know, whose name is Yanis Varoufakis. He might not be so well known in the United States, but he’s incredibly well known in Europe.

He was the minister of finance of Greece for a short period of time as Greece was renegotiating its debt with the European Union. He’s now a member of the Greek parliament. He’s a leader of the European left-leaning movement called DiEM25, and he’s also a professor of economics. So, I think he has all the characteristics to make an interesting episode.

Bethany: And I also think Yanis is an interesting guest because he disagrees with our entire premise that we can have a Capital-is and a Capitalisn’t, given that, in his view, we’ve actually already moved beyond capitalism entirely. So, in a sense, by having him on, we’re choosing a guest who doesn’t agree with the premise of our show, right?

Luigi: Yeah. So, we’re going to make our lives difficult.

Bethany: Who wants an easy life, Luigi?

Luigi: One of the aspects that I find a bit disappointing is that the intellectual opposition to capitalism is pretty empty, at least from my perspective. I might be wrong. That’s why we’re interviewing people like you to figure out what is the most valid intellectual alternative to capitalism. So, I heard you repeat many times that you feel that you are a socialist. Can you define for us what it means to be a socialist today?

Yanis Varoufakis: Well, to begin with, I’m a socialist who can’t stand socialists, because we have been so intellectually vacuous. At the same time, the vast majority of socialists have managed to change themselves and to adapt themselves to capitalism much more efficiently than they have managed to adapt capitalism to their own ideas. Having said that, my understanding of capitalism from a very young age was that of a system which is the definition of contradiction.

Capitalism is imbued with the capacity to produce simultaneously immense advantages, wealth, gadgets, technologies, and at the same time, unspeakable depravity and deprivation. If you understand as I do capitalism in those terms, as a contradictory system that produces crisis with the same panache that it produces the internet or iPhones, it is inevitable that a critique of capitalism emerges, in the sense that it is a system that needs to be transcended before these contradictions can be eradicated. Transcended by what? A system that takes the best things and which discards the inherent tendency, as I see it, to produce evils.

And what do we call that alternative system? Well, a long time ago, people who shared my critique of capitalism, my perspective on capitalism, called it socialism. But the essence concerns diagnosis of why it is—if I’m correct, of course—that capitalism is such a contradictory system and that the crises are not accidents, but they are design features of it. What needs to be taken out of capitalism for the inherent malignancies to be removed?

Bethany: I want to come back to this idea and whether or not you can actually have . . . I love your description of the panache with which capitalism creates both crisis and innovation, but can you have one? Can you have the innovation without the crisis? But before we go there, I’d like to just back up to where we are now and talk about your definition of techno-feudalism and what that encompasses.

Yanis Varoufakis: The two main pillars of capitalism, the two main characteristics of capitalism, are a system that is propagated, motivated, fueled by private profits and a system in which value is extracted through markets. These two pillars are on the way out since 2008 and the great bailout of the financial sector, which then zombified much of the corporate sector. Instead of private profits, the system we live in is driven and fueled by central-bank money.

That explains, to a very large extent, why the Fed, for instance, today, even though they are desperate to reduce asset purchases, to taper, they’re too scared to do it. They know they have to push interest rates up to at least 3, 4 percent. They’re scared to do it because they have zombified the corporate sector, because the central-bank money is the driving force. It’s no longer private profits.

And at the same time with digital platforms, Amazon, Facebook, and so on, which are not markets . . . Amazon.com is not a marketplace. It’s a digital fiefdom belonging to one man, or maybe a small number of people, who control both sides of buying and selling. They control what you can see as a customer. It’s a bit like the whole town belongs to one person, and that one person also can determine what your eyes can see and your ears can hear as you’re walking through it. That is not a capitalist market town. That is a feudal fiefdom that is, of course, digital.

And with Mark Zuckerberg’s recent announcement that he really wants to turn the world into his own digital fiefdom, I think the term techno-feudalism is quite apt. Imagine Zuckerberg gets his metaverse. That’s it, end of democracy. It isn’t even as a concept. If I can build and control the world in which you live, the space in which you live, whom you meet, whom you don’t meet, whom you never see because the algorithm doesn’t let you see them, if I have a machine in your house, which effectively, while supposedly serving your commands or responding to your commands, like Alexa or Echo, effectively what happens is you are training it to train you to desire the things that I want you to buy off my platform.

Democracy is not even an interesting question. Liberalism has ended. The idea of the liberal individual, the autonomous individual, who is sovereign has gone. So, techno-feudalism is feudalism. It is the end of the liberal individual. Those who railed against the Soviet Union must rail against techno-feudalism.

Luigi: But, Yanis, I have criticized bailouts I think as much as you do. And, in this podcast, we’ve often spoken very critically about digital platforms. But I think that there is a fundamental distinction between you and me, at least the way I understand it. It really has to do with what kind of system you want and how you would like to change it. I heard you saying that the real turning point of the world was 1599. Since in the United States we mention 1619 very often, I think it’s useful to use other dates. So, tell us your story of 1599, and what is your solution or response to the revolution that started in 1599?

Yanis Varoufakis: 1599 was the moment when, in London, we had the invention of the most significant institution that came out of Tudor England. And that is the joint-stock company. The idea that the company, its assets, its ownership, can be split up in tiny little pieces called shares, which can then be traded anonymously through the marketplace, which, of course, then becomes the stock exchange. Up until then, there were large corporations trading globally, but they were guilds. They were partnerships.

What came out of this 1599 moment, of course, was the previous East Indies Company grew to a size that was greater than that of England. It had an army which was stronger than that of England. It did a lot of damage to India and to Southeast Asia, but at the same time accumulated huge quantities of wealth for the shareholders.

Adam Smith, who today features as the patron saint of competitive markets and those who believe in capitalism, was absolutely adamant that the 1599 moment was a bad moment for the world. He believed in family businesses, businesses that belong to the entrepreneurs and are run by the entrepreneurs.

And he was adamant that the moment you introduce a stock exchange, the moment you introduce anonymous buying and selling of shares, you’re going to end up with a market that will be usurped and which will not be competitive. I agree with him. At the same time, you have private ownership. It is very difficult to argue against the right of those who own those companies to break up the ownership and then sell it off in shares. So, there is a contradiction in Adam Smith as well.

From there, I make a leap of my socialist imagination to suggest that maybe the only way that we can have the kind of competitive markets, which Adam Smith associated with the invisible hand, is by having corporations which are run on the basis of one person, one share, one vote. In other words, to turn shares into privileges a little bit like in universities. In our great and good universities, we have library cards. You enter a university, you enroll in a college, you get a library card.

A library card cannot be traded, cannot be lent, cannot be borrowed. It’s for you to use. It allows you to take books out, connect to the Internet, read articles, to vote in student selections, or employee, or staff selection committees, and so on. And then, when you leave the university, you simply hand it over. The way to liberate markets, to free markets up so that markets can perform the kind of miracle that Adam Smith was talking about, you need to do away with private ownership of corporations.

Luigi: The question is, is this by government fiat or by choice?

Yanis Varoufakis: It’s by collective decision-making called legislation. As we speak, there is corporate law which determines the rules of the game for corporations. It is fantasy that we have something called the state and something called the market. And the two are separate but somehow mate. There’s nothing more than that. It is a fantasy. Why can’t we do it when it comes to shares of corporations?

Bethany: Can we back up? I don’t understand how you get rid of private ownership of corporations and still have a market. How does that work in practice? How does the market function when the means of production is collectively owned?

Yanis Varoufakis: Exactly as it works now, only better. Because, you see, now the problem is this: when you’ve got oligopoly or monopoly capitalism, you have the Googles and the Facebooks of the world. They have concentrated huge amounts of power. The central bank money turbocharges them. They can gobble up startups. This concentrated power is inimical to competition.

Suppose, for instance, that, let’s say, Tesla were to move from the current ownership structure. It belongs mostly to Elon Musk and a few other people and funds. But you press the button, you have a new corporate law that every Tesla employee, including Elon Musk, has one vote and one share. And they can’t sell it as long as they work for Tesla.

What changes tomorrow morning? Nothing. They continue to work, each one of them in their own department. They make cars, they make batteries. What changes is that Elon Musk no longer calls the shots. He could call the shots if the rest think that Elon Musk is so clever that he has the best ideas.

In the intranet of Tesla, maybe his opinion counts for more than anybody else. Maybe he receives a much, much, much larger share of the pie if bonuses are distributed on the basis of what I call the Eurovision Song Contest grading system, where everybody gets 100 brownie points, let’s say, and distributes it to everybody else except themselves, in proportion to their best estimate of the contribution of everybody else’s work to the value, to the interest, to the corporate culture of the company. So, Tesla continues to sell cars in the open market. There’s no state involved.

Markets are there, no difference. The only thing that is now missing is the labor market, because now all the employees share in the profits. Nobody receives a wage, and nobody receives a share of the profits. Everybody shares the net revenues of the firm. In my understanding, the effect of that would be smaller companies without regulation, without the state coming in. Because if we are the employees and we have to run this thing, we don’t want to make it a 500,000-employee company because it’s harder for us to regulate it.

So, maybe we will decide to split it up, to have one company, Tesla 1, dealing with batteries and Tesla 2, dealing with cars. Because there is this big question now, in the United States in particular, how do we break up the big monopolies, especially big tech? I don’t believe the state can do it. I think it would need a state that is hugely powerful to do it, and I don’t want to live under such an authoritarian state.

But if you don’t have that state, then you have huge, authoritarian Facebooks and Googles and Teslas. But if you have a situation where corporate law redefines property rights in such a way that, organically, companies are smaller and power is not as concentrated, then markets get a chance, an opportunity, to breathe more deeply, more efficiently, and to work in performing the miracle of Adam Smith and even Hayek described.

Luigi: Let me try to challenge this notion a bit, because, number one, when there are monopolies, the fact that they are run by workers doesn’t necessarily make them better. Imagine that Facebook was run by a bunch of employees and all the employees, just to make it a case, are all rabid Trumpians. Would you be happy to live in that world? No, it would be kind of a dystopian world. And then the Trumpian employees would prevent others from becoming employees, because they have all the power, and they don’t want anybody with different ideas to come into the system. So, that would be kind of a dystopian world, certainly not a utopian world.

Yanis Varoufakis: You’re right that Facebook differs from Tesla in the sense that if Tesla is run by Trumpians, I don’t care. If they produce good cars, Trumpians have the right to exist. The problem with Facebook, of course, is that the product is us. This is why, for Facebook, I think, our corporate law should have additional restrictions as well as provisions. For instance, our data should belong to us. I don’t believe in free services.

In my book, I’m introducing the idea of a system of micropayments, a penny for your thoughts kind of thing, which combines, on the one hand, private ownership of data. So, you remain the owner of your data, and at the same time, when you want to buy a service from Facebook, then you have to make tiny micropayments. So, you pay for the services, and they pay for your data, but the data continues to belong to you.

My thing is all about property, because you see, I’m not a social democrat in the sense that I reject social democracy. Because I don’t believe that it is the role of the state to intervene and to regulate. It would be good if the state could do it. I don’t believe the state can do it. Either the state overreaches or the state doesn’t protect us.

Capitalism is way beyond anything that the state can do. If the state tries to civilize capitalism, it will make things worse. This is why I keep bringing up Adam Smith, because Adam Smith always made the point that well-defined, clearly defined property rights are everything. And I agree with that as a left-winger, except that I don’t think that private ownership, having the 1 percent of the 1 percent owning everything, is conducive even to a market system, let alone to a just and free society.

Bethany: Let me be a little bit provocative and push on that. Isn’t the core of your idea, in a sense, the state civilizing capitalism? You say that you’re a skeptic of regulation, and yet what’s the difference between regulation and the state coming up with different forms of corporate law for different types of companies, different forms of law for a Tesla and for a Facebook?

Yanis Varoufakis: Oh, it’s a huge difference. See, the idea of regulation is exactly the opposite of the idea of creating good rules of the game. Social democrats, I mean, you call them liberals in the United States. We call them social democrats here in Europe.

They say capitalism is a fantastic system for producing wealth. It’s a rational system and an efficient system, but it is an unjust system. So, what do we need to do? The mixed-economy argument: we need to let capitalism rip, do its thing, and then the state comes in and civilizes it by taking some of the money that has been earned by the very rich and redistributing it or stopping the rich from doing some things to the poor.

The system is assumed to be efficient and freedom-producing, but it is not equity- and justice-producing, and the state comes in and does the justice thing. For me, this is absolutely rubbish. My critique of capitalism is that it is inefficient, which I know sounds a bit strange. Not only is it inefficient, but it is freedom-impeding. It is creating new forms of unfreedom.

Then the alternative to regulating is to say, OK, listen, guys, girls, the structure of property is what generated a process that led to inferior efficiency, inferior freedom, and therefore, as a byproduct of that injustice, change the rules of engagement and then let the markets do their thing without regulation. So, it’s exactly the opposite.

Luigi: But I understand when you’re saying that capitalism or some degeneration can be freedom-impeding. But if you’re saying it’s inefficient, and you’re saying your system of cooperatives is more efficient, why don’t we see the system of cooperatives supplanting capitalism and succeeding?

Yanis Varoufakis: I love this question. It reminds me of the standard joke. Two economists are walking down the street. One of them says, “Oh, look, a $100 bill on the floor.” And the other one says, “No, I’m not even looking, because if it was there, somebody would have picked it up.” It’s a good one.

I’ll give you the example from Britain in the 19th century. Working-class communities that were cut off from the financial system, they had no access to insurance companies. They had no access to banks, mortgages, to credit. They created their own: the famous, almost infamous, building societies. They created cooperative banks. They created cooperative insurance companies.

And some of them did magnificently well. Even in the 1970s and 1980s, when I lived in England, they were still there. The Trustee Savings Bank was a very good bank, for instance. Scottish Widows was a fantastic insurance company, doing much better than capitalist ones. And those were cooperatively owned in the sense that, actually, there was no ownership. At the TSB, if you had a bank account, you were a shareholder, and you had one share, just like the one-employee, one-share, one-vote system that I’m suggesting.

The problem with these cooperative enterprises, cooperative banks, cooperative communities is when they live within a capitalist system, which seeks out and usurps any successful model, they are killed off before they get an opportunity to grow up, before they get an opportunity to infect the rest of society. This is the paradox. The more successful those companies became, the greater the pressure for them to sell out.

When the Trustee Savings Bank proved very successful, Margaret Thatcher came along. And I don’t know whether you know what she did. She did something remarkable. That’s why I really liked that woman, because she was a worthy enemy. She decided that, ideologically, it was an enemy, the very existence of the Trustee Savings Bank.

So, she said, “OK, let’s privatize it.” And her team at some point said, “Look, prime minister, we cannot privatize it, because it doesn’t belong to the state. It belongs to its account-keepers, accountholders.” So, you know what she did? She nationalized it to privatize it.

Now, in the United States, there are companies that operate along the lines of cooperatives, and they’re very successful. I have an inside experience of one such company in Washington state, a small company, video-game company, 330 employees at the time, operating on the basis of flat management, on the basis of voting. It did remarkably well. It had more than a billion dollars’ worth of revenues annually. However, the environment in which these companies live is inimical to the spreading, to the evolution, to the proliferation of this model.

Bethany: Can we come back to the question that I had asked at the beginning? Can you have the innovation of capitalism without the periodic crises? And I’ve thought of that in a slightly different framing over my work as a journalist, which is, can you have the visionary without the fraudster? Can you have the person who makes the great leap without the person who’s only pretending to make the great leap? So, how do you get the great innovation without the periodic overreach?

Yanis Varoufakis: Absolutely, you can. Think of the Internet. The first internet was an academic-military-industrial-complex enterprise. There was a common purpose. Yes, the military-industrial complex was thinking in terms of nuclear war. So, they wanted decentralized information systems. But then you had the MIT people, the Stanford people, all those people, who were fascinated by research for the sake of research. They were fascinated by the idea of information systems that they could create.

And they created them in such a way that for many years, up until the Googles and the Microsofts and the Facebooks created the second layer of the internet, which was a privatized one on top of the original . . . Or still, today, when you send an email, you send an email using the technology of a cooperative, highly innovative, remarkably beautiful piece of technical genius network, which was completely shared.

I mean, think of Linux. I mean, what is Linux? Linux is the best software for running computers today. Even Microsoft computers today, the big Microsoft computers, run on Linux. And Linux is the answer to your question. It’s the result of crowdsourcing: remarkable, brilliant technologies by people who didn’t try to profit from it, but who were motivated by innovation for the sake of innovation, the hunger to get as much cooperation without having the barriers that private property creates when it comes to patents and so on.

Isn’t it amazing how the Amazon servers, the Microsoft servers, that are oligarchic had to rely on the commons, the digital commons, in order to run their business? So, yes, I do believe that innovation can actually get a boost from the cooperative model.

Luigi: The technology area, especially the software area, is an area where I think your argument has particular appeal. But when you move, for example, to pharmaceuticals, we still, unfortunately, live in a pandemic. We’re actually quite grateful that there was some organizational capability that was able to produce in less than a year a number of very effective vaccines. I happened to be at a meeting once with Ugur, one of the founders of BioNTech, the creator of the Pfizer vaccine. He said that his goal is to offer medicines to the world. But he realized that to do it more effectively, he needs to go through a for-profit corporation, and that’s what he incorporated with.

I think that in certain sectors where you need an enormous amount of capital—because to reach those organizational capabilities, to do those vaccines, you have to spend an enormous amount of capital and R&D—you need to spread that risk among a lot of investors. And so, the idea of tradable shares is quite appealing for those actors.

Yanis Varoufakis: Well, let’s think about it, shall we? I have no doubt, you need a lot of investment in order to be able to procure a vaccine in five months, and I’m glad that they did. However, property rights again need to be reconsidered. Compare and contrast what we now have, which is these enormous risks that are spread, like CDOs, across the financial sector. And then, some companies strike gold. Others, like Sanofi, bomb out. That’s inevitable that some will succeed, some will fail.

But instead of having patents, which today are exacerbating the COVID-19 epidemic, so the result is that now we have Omicron, probably because we have failed as a species to vaccinate as many people as we could have had we not had the patent system. How can we reward the large costs of R&D differently? Well, remember how the English government procured the great technologies of navigation back in the 16th and 17th centuries? They created prizes.

And they said anybody who develops the technology for navigating across the Atlantic, finding ways of establishing one’s location on the map, is going to get a million pounds back then, or £10,000, whatever it was. So, Donald Trump gave $10 billion to Pfizer and to other companies or offered them.

Well, what if we were to say, “OK, here’s some seed money for everyone, and anyone who manages to strike the target is going to get a billion dollars or $20 billion.” You take it. You repay your loans, you repay your R&D, but you do not own the patent. The patent is owned by humanity.

Now, I’m trying to relate to you why and how I always put property rights at the heart of a discussion. I don’t believe that Pfizer has the right to be charging remarkably large price-cost margins in Asia, in Africa, in the poorer parts of Eastern Europe today, jeopardizing world health. Pfizer, if they did strike the target, which they did, should be rewarded. But they should be rewarded with a lump sum, not with a perpetual right.

Bethany: But where does the money to pay the lump sum come from, if it doesn’t come from the perpetual right?

Yanis Varoufakis: From the governments, of course.

Bethany: But where does the government get it?

Yanis Varoufakis: From the governments, of course, from us, from society. Isn’t that how it works, anyway? Where did Donald Trump find the money to give them $10 billion? The government. But that’s OK. NASA is paying Elon Musk to take stuff to space. We don’t question that, do we? Why do we question it when it comes to vaccines?

The question is, who has the right to be replicating those vaccines and to be distributing them in a way which is efficient? Because the way we’re doing it now is not efficient. To have a vaccination rate in Africa which is less than 7 percent today is monumentally stupid from humanity’s perspective, speaking of proficiency.

Luigi: Yeah. But you’re back to a very powerful state. Now, in the case of the COVID vaccine, we knew what we wanted, but in reality, the world is more complex. So, what are you incentivizing with government money, and what are you not? If the only system to have innovation is that the government sets prices, basically, the government determines what kind of innovation we’re going to have. Because only the innovation that is priced by the government is going to take place. So, you’re back to a more, if you want, incentive-compatible version of the Soviet Union.

Yanis Varoufakis: Well, there were good things about the Soviet Union. Let’s not reject everything the Soviet Union did. Let’s not forget that fission was discovered in the Soviet Union. Now you have American companies using it. SpaceX used Soviet missiles to begin with.

But, look, it is a war. When it comes to pandemics, when it comes to viruses, the viruses are staging the war against humanity. We have to answer by warlike means. And when it comes to war, the government is not choosing what kind of innovation you’re going to do. The government says, “If you develop a vaccine, here is $10 billion.” It doesn’t tell you how to do it. What’s wrong with that? Then you can choose your means of producing the vaccine.

Luigi: I cannot let you go without mentioning one fact that might not be so well-known to the American listeners, but it is to the European listeners, not only were you minister of finance in Greece in a very difficult time, but you were subject to a media campaign—I would say character assassination—that I rarely have seen in the world. Because at least Donald Trump had some newspapers supporting him and one channel supporting him. I don’t think you had any newspaper or any TV in Europe defending you. What have you learned from that tragic experience?

Yanis Varoufakis: When you say no to an unsustainable loan, which is very large, and which can never be repaid, and you say that no on behalf of the people that are refusing to be enslaved by means of predatory lending, then you have it coming.

Luigi: If I have an extra minute. Because one thing that is missing, in my view, is what is your message to the American left? I know you’re European. You think about Europe. But if you were to send a message and send an ideal to fix the American problems, how would you articulate it? How would you relate to the American left?

Yanis Varoufakis: I would say two things to my friends, and I do say them to many friends amongst the Democratic Socialists of America, the Bernie Sanders crowd, AOC, and so on, two things: look at the world outside the frontiers of the United States. There is much to learn from that. Because Americans, whether they are on the left or the right, tend to think that the world ends where the United States ends. The second point, if I may say, is you’ve got to reconsider the tragedy of blue-collar, white, disenfranchised men.

I’m a feminist. I support the Black Lives Matter movement. But I see a very clear and present danger in the left losing any kind of capacity to communicate with those people who are suffering, who are Hillary Clinton’s deplorables. We have no right to surrender white, blue-collar men—and women, but primarily men—to Trump.

Bethany: Well, thank you so much for your time. I think this has been fantastic. And we’re grateful you took all this time to talk to us. It’s been really interesting.

Luigi: Yes, Yanis, this has been fantastic. Thanks a lot for all your thoughts. And to keep sort of variety alive. I think that while I don’t agree with everything you say, you do play a key role in keeping democracy alive. I think that is really a challenge.

Yanis Varoufakis: Luigi, I don’t agree entirely with what I’m saying. The reason why I wrote a novel . . . You know why I wrote a novel? Because I disagree with myself on all those things. So, I had to put Eva in there to mouth my disagreements that I have with myself.

Luigi: I think that what intrigues me is most people stop at the criticism, and he’s willing to design something alternative. I’m not so sure I really see the paths getting together. He basically has a very idealistic view of cooperatives. I’m not so sure that, number one, he has any evidence in this direction. He said, “I worked once for a cooperative, and that worked fine.” And, sure, there are a lot of cases, but even some firms in the Soviet Union were working fine. One example is not proving a theory.

And, two, I think he made his life particularly difficult by saying not that cooperatives are more egalitarian, which I think is easy to argue, and then we can argue between efficiency and the egalitarian component, but he said they are more efficient. And then, when challenged about why they don’t thrive, it is because the entire ecosystem is against them. So, it’s a bit like the theory that you cannot have socialism in one country alone. You cannot have one cooperative if not everybody is a cooperative, which is a clever way to defend your position. It makes it untestable to some extent.

Bethany: Right. One of the things I wanted to ask him about, but we ran out of time, and you correct me if I’m wrong, but isn’t one of the great innovations of the modern system economies of scale? And so, if you do have these cooperatives, and he admitted, he acknowledged, they can’t get very big, because if every worker has one vote, then you can’t have a very big company, or it becomes completely unmanageable. So, if you can’t have a big company, then you can’t have economies of scale.

And doesn’t that radically change the means of production, in a way? It doesn’t just change the ownership of the production, which has been his point. It changes the entire structure. If you have thousands of small companies with no economies of scale versus one big one with economies of scale, and then I wasn’t sure how to think through whether that was a good or a bad thing.

If you don’t have economies of scale and goods are more expensive, and we all have to think a little bit more about what we create and what we spend money on, maybe that’s not so bad. If the ultimate example of economies of scale is fast fashion, which is destroying the environment, maybe economies of scale aren’t all they’re cracked up to be.

Luigi: I think economies of scale are very important. It’s one definition of being more efficient. So, when he’s saying that cooperatives are more efficient, he needs to explain how they can survive without exploiting economies of scale, especially in sectors that require a lot of invested capital. So, not surprisingly, he uses a software company as an example of a cooperative. And software companies tend to be run basically by software engineers, and they generally don’t require a lot of capital to get started. And if they’re successful, they can make a lot of money.

So, I think in that dimension, it is the ideal cooperative. When you have to invest an enormous amount of money, so think about the case of the vaccines and BioNTech that produced the vaccine that Pfizer sold, or Moderna. Now, at the end, they were helped by the government, but even before, they had to invest billions of dollars. Who is going to provide the money for that? The aspect I find fascinating and very strange of all this construction is that it is really against a corporate structure and the stock market.

Bethany: In a weird way, for as cynical as he is about capitalism, he is actually more idealistic than I am, and perhaps than you are, in the ways in which he believes that cooperatives of workers with one vote each, without any one person standing to make a great deal of money from driving a particular vision or process forward, that human nature will still be motivated to work together and to produce. And perhaps I’m cynical or perhaps I’m limited, because I’ve grown up under the system that we have today. But I somehow don’t quite believe that.

When you look at corporations or companies where great innovations are made, they often are due to the drive of one or two people. Efforts like that are rarely cooperative. They are one person or people driving forward and marshaling a bunch of other people because they are leaders. And I don’t know how that works with a one-vote, everybody’s-equal point of view. I’d like the world more if that were true, but I’m just not sure it’s true.

Luigi: He refers to the cooperative movement that was very popular in Europe, especially at the beginning of the 20th century. As you probably know, a big chunk of the bank system in Germany is still a cooperative system. It used to be in Italy until 2015, ’16, with the latest financial crisis. In some situations, the cooperative system can work really well. What I like to think about capitalism is more of freedom of enterprise rather than necessarily a system based on corporations.

Because, to me, what is important is that people try different ways. They might succeed in different ways, depending on the circumstances. I was recently at a conference that was celebrating the 25th anniversary of publication of an important book by a Yale law professor, Henry Hansmann. It’s called The Ownership of Enterprise. And Hansmann actually started his career studying cooperatives.

And he arrives at a very insightful point, which is, cooperatives do relatively well as long as the workforce is very homogeneous. Why? Because they all want the same thing. Farmers’ cooperatives, for example, work relatively well because all the farmers are very similar. They have similar objectives. And, actually, they do achieve some of the economies of scale of large farming without having large farming. So, I think that that’s an example in his favor.

But once you start to have different categories of workers, so think about airlines. The airlines, at some point, there was the ESOP of the retirement fund of the pilots that took over, I think it was United or American. I think there are a lot of categories. There are the pilots, there are the flight attendants, there are the mechanics, there are all the other employees. And then there are large capital investments that need to be made, and that is much more difficult to do.

The other thing that he completely ignores is that if everybody has a vote in a cooperative and gets a share of the proceeds of the cooperative, then there would be more-desirable cooperatives and less-desirable cooperatives. So, now, if I am a member of a desirable cooperative, I might want to restrict entry because I don’t want to dilute it. Everybody wants to come to the Google cooperative, and nobody wants to go to the Sears cooperative, right?

Bethany: I was going to pick the Sears cooperative, too. That’s so funny. I don’t know why that popped into my brain, too.

Luigi: We are from Chicago, after all, so we know the disaster of Sears. And so, how do you prevent them? How do you discriminate against them? And you need a bigger system of governance, or you leave that either to a rationing system, which will be extremely unfair, or to a political system that will create a lot of rent-seeking. So, I’m not so sure how you fix that.

Bethany: It’s interesting. I was thinking when you were talking about our conversation with Vivek Ramaswamy and how he argues that capitalism is what fixed the caste system in India. And, under this cooperative model, the only way it could work that I can see, is that you would get assigned to a certain cooperative at birth, which would just be another form of a caste system, right? And then, in order to keep society stable, you would have to be assigned to that cooperative system, and that would be your lot in life.

So, if you got Sears, sucks for you. If you got Google, good for you. But it made me think again about Vivek’s argument that the parts of his argument that really resonated with me, which is this idea that capitalism can become like an uninvited guest if you let it spread too far into a society. But that as a way of breathing air into otherwise closed systems, it’s actually done a lot of good in the world. And it’s interesting to think about reversing that and going back to what would essentially be a caste system.

Luigi: Now, I don’t know how much you know about his history, but the thing that to me was more surprising is the way he was vilified in Europe during the financial crisis. He was vilified because he was considered responsible for holding out in the process of renegotiating the Greek debt, and so, basically making it impossible to go along. And he was portrayed as not understanding the importance of the European Union, what the Europeans were fighting about, and all the stuff that comes with it.

In that particular case, he was absolutely right, in the sense that he was saying, “Why are we, the Greek people, being forced to pay the debt when, in fact, who has made a mistake were the banks lending the money to us, and they should take a cut?” And one of the most famous stories is that he basically accused another member of the European Council of lying. He said, “Oh, actually, I taped the conversation.” At which point, they accused him of taping the conversation.

So, he could not do it right. No matter what he was doing, it was wrong because he was doing it. And the fact that the other leader, and I don’t remember who it was, but the other leader’s lie was completely passed over as a nonissue. Because in this big European Council meeting, they all lie, they all pretend, they all have this esprit de corps that when you are in, you have to basically protect your image via the outside world.

And he has this, if you want, more-populist view, but populist in the good sense of the word, that you want to bring a little bit of the people inside the tower of power. And that is really what the entire European system could not afford. It’s an organization based on technocrats who are very much afraid of anybody who actually tried to bring the people in.

Bethany: It’s a version of C.S. Lewis’s “The Inner Ring.” Once you’re allowed into the inner ring, most people never want to leave, because they’ve gone from being the person outside in the cold, having their nose pressed against the glass, looking at those who are included in the center of things. And once they get into the center of things, they’ll do anything to stay there. But I think his experience also speaks that once you are part of that inner sanctum, you’re supposed to go along with what everybody else thinks is right.

Luigi: Absolutely. They wanted to destroy him to prove that nobody should dare to do that ever in the future.

Bethany: That would shake you.

Luigi: But I was a little bit disappointed by his answer to my question on the media, because given this experience, I thought he would be much more critical about the media system in Europe.

Bethany: I actually thought it was something different, although I could be completely wrong, which is that he sees the media as a reflection of those in power, no more and no less than that. And so, his ire is reserved for those in power, not for the media, as a reflective organ of what those voices are. And so, instead of being angry at the media, he just shrugs his shoulders in the same way that you probably wouldn’t be mad at your tape recorder for recording someone saying nasty things. You’d be mad at the person saying the nasty things.

And so, I think he views the media as akin to the tape recorder. Does that make sense?

Luigi: Wow, Bethany, you’re going hard. The media is just the tape recorder of the people in power, is that your characterization of the media?

Bethany: I don’t think across the board. I think at certain times, in certain countries’ history, yes.

Luigi: I think that you might well be right and even more so now than in the past, because media are not that profitable, so they cannot afford to fight the people who give the money at the end of the day.

Bethany: I think it’s less about profits. I don’t know why I’m in a C.S. Lewis mood today, but I’m going to come back to the inner ring, which is as alluring to the media as it is to anybody else. And once you’re admitted into that inner sanctum of power, and you have presidents, or advisers to presidents, and prime ministers and finance ministers talking to you like you’re an equal, that’s as addictive for a member of the media as it is for anybody else. And so, then the view that gets reflected tends to be that consensus view.

The sense of being part of the in-crowd, the sense of being where the cool people are, and having people say, “Oh, you’re so smart,” having people who the world thinks of as smart saying, “Oh, you’re so smart,” very, very alluring.

Luigi: Indeed.

Bethany: A lot more fun than having one of those people say, “You just don’t get it.” Right?

Luigi: Yeah. Or hating you in a different way, yeah.

Bethany: I would rather have somebody treat me with hatred than have somebody treat me with disdain. In other words, if some corporate leader with whom I disagree decides to hate me, that’s one thing. If they simply say, “Dismiss. You’re so stupid. You just don’t get it.” That’s what’s hard to deal with. That’s what I mean by the power of the sense of belonging.

Luigi: You’re absolutely right. And that’s basically the way the entire newspaper elite, media elite treated him during the financial crisis. They treated him like an idiot. You can disagree with him on a lot of things, but the last thing you can say is that the guy is an idiot. Especially, and this is true in absolute terms, but if you adjust for the average level of the finance ministers in Europe, he’s two standard deviations above that average. So, I think that that is particularly ironic that they really went after him on that ground, when the average is not that great.

Bethany: So, for this week’s issue of Capital-is or Capitalisn’t, we decided to focus on what else: the Theranos verdict.

Speaker 8: Elizabeth Holmes, who was celebrated as the youngest self-made female billionaire in the world, left court a convicted felon, clutching the hands of her parents and husband. Late Monday, a jury found her guilty of four fraud-related counts for conning some of her investors into believing her blood-testing startup, Theranos, could perform hundreds of diagnostic tests for everything from cancer to HIV to pregnancy with just the prick of a finger.

Luigi: Bethany just wrote a very interesting op-ed for The New York Times. And so, I want to ask Bethany, what is Capital-is and Capitalisn’t in the judicial decision on Elizabeth Holmes?

Bethany: Actually, despite the fact that it was not the verdict I wanted, because we all bring our own moral inclinations to these trials . . . It was not the decision I wanted. She was found not guilty on charges of defrauding patients and doctors. And she was found guilty on several charges of defrauding investors, and the jury hung on a couple of other counts of defrauding investors, because each count is very specific to which investor it was that was defrauded.

My moral framework would have hoped that she would have been found guilty of defrauding patients and not guilty of defrauding investors. I think anybody who put money into Theranos without getting audited financial statements, which she wouldn’t provide, just simply didn’t do their homework.

But I didn’t get what I wanted. And, ultimately, I came to the conclusion, it’s a Capital-is, because the jury did what the jury is supposed to do, which is look at each specific case, each specific charge, and determine if they believed the government had met its burden of proof on that specific charge. And I think that’s precisely how a case should work. The verdict isn’t necessarily supposed to be satisfying to us on a moral level. It’s not supposed to send a larger message to society. It’s supposed to be based on the specific charges, and then the specific evidence presented that bolsters those charges.

I actually came to believe it was a Capital-is. I would certainly not want . . . As I concluded the op-ed by noting, if I were on trial for something, I would not want the jury to be trying to send a larger message to anybody about my behavior. I would want them to be looking at what the charges against me were and deciding if the government had met its burden of proof.

Luigi: Actually, I like your reasoning, but I arrived at the opposite conclusion, in the sense that, first of all, I don’t see a moral argument here. I see an economic argument, especially when there are no real victims. If there are people that have been raped, or they’ve been beaten, or they’ve been killed, that’s a different story. But here, it’s mostly about money, right?

And if it’s mostly about money, you do want to look at long-term incentives. And you’re absolutely right that the long-term incentives should be that you should protect patients and you should not protect investors. And so, I don’t make it a moral argument. I make an economic argument, a capitalism argument, that you should do that.

And I think that the jury has not done that. And I even go so far as to say it has not done that, why? Because they’re Silicon Valley people, and so they don’t care about patients, but they do care about investors.

Bethany: I think you would have to be in the jury room. You would have to have been in the deliberations to know that. I see it differently. And the juror was on Good Morning America talking about it. And the reason, at least according to this juror, that they didn’t convict on the patient counts was essentially that they thought that Holmes had a right to rely on the reassurances given to her by her underlings about the technology.

I may not like that. I want her to be guilty on those charges for the same reason you do. I think you, as an investor, especially as a big investor, supposedly sophisticated investor, have the duty to do your homework, to do your due diligence, to get those audited financial statements. You as a patient going in for a blood test are not supposed to have to do due diligence on whether or not your blood-test provider is actually providing a test that works.

But the jury wasn’t asked to rule about that large moral piece of it. They were asked to rule: “Did Elizabeth Holmes specifically understand that her tests weren’t working?” And based on the evidence presented to them, they said, no. In fact, the juror on Good Morning America said she believed. She believed in her technology.

I don’t like that answer. I’m not sure we really disagree on this. I don’t like that answer. But I think the jury did its job, because in the end, it’s not about getting to the answer that you like. It’s about very specifically deciding, did the government meet its burden of proof? And they decided that the government didn’t.