The media are among society’s greatest safeguards against crony capitalism.
Last year, a series of emails came to light that got the American Egg Board—an industry group whose members are appointed by the US secretary of agriculture, and whose mission is to increase demand for eggs—into a bit of hot water. The emails appeared to show the board strategizing not how to promote eggs, but rather how to attack a new kind of vegan (and therefore eggless) mayonnaise being produced by a California-based company. The emails came to the attention of a US senator, and the US Department of Agriculture launched an investigation. In the midst of the controversy, the CEO of the egg board went into early retirement.
It’s entirely possible that the saga of the egg board will pass into history largely forgotten, but I take it up because of one important detail about the affair, which is that the emails were brought to public attention by the Guardian. It may be an obscure example of the “watchdog” role of the press, but its very obscurity shows how effective the press can be at policing the people and institutions that the general public doesn’t itself have time or access to monitor.
“Getting informed on all issues would be prohibitively expensive if we all had to collect information by ourselves.”
As traditional media, particularly print media, continue to adapt to changing technology and its disruptive effects, it’s worth remembering that everyone has an interest in the press maintaining that watchdog role. And it’s not just to keep an eye on egg boards; a strong press is, among other things, an important defense against anticompetitive behavior. After all, who steps out to defend a competitive market infrastructure in a world in which people are busy and don’t follow many of the debates on specific regulations? The only people who pay attention to a given regulatory topic have a big, compelling interest in that topic and are trying to push the agenda in the direction of their interest, not necessarily in the direction of the common good. Provision of public welfare has always been in some sense challenged by so-called rational ignorance: it is rational for me not to get informed because it’s costly to get informed.
Hence it’s important to reduce this cost of information, and that is ultimately what newspapers do. Getting informed on all issues would be prohibitively expensive if we all had to collect information by ourselves. The media summarize and explain issues, and because they try to maximize their subscribers, they write for a wide audience, making more people interested, and as a result, promoting public welfare.
The general public isn’t the newspapers’ only constituent. I’ve been on the board of two large companies in the past, and I learned well the importance of newspapers to corporate boards. Companies are complex, and board members obtain only a small set of information, which is generally precooked by the corporate apparatus that brings information to the board. When newspapers write about a company, it gives board members an opportunity to go in front of the board and say, “Look, there was this stuff; I read it in the newspaper. Can you please explain that to me?” This is a rare opportunity in which you actually get to ask them informed questions, and they find it a bit more difficult to precook all the material.
The important role that the media play is as relevant to civic governance as it is to corporate governance. By informing the public, the press creates a political demand for action that political entrepreneurs can try to exploit by running a campaign on certain issues. The stereotypical example, the sort of golden era that everybody refers to, is the period of muckraking in the United States. A lot of the Progressive-Era legislation was passed by a Republican president, Theodore Roosevelt, under the pressure of magazines such as McClure’s that were exposing stuff so horrendous that you had to take action, and a smart and proactive president like Roosevelt seized the opportunity. There was clearly a symbiosis between the magazines that were creating the agenda and the politicians who were exploiting it.
For journalists, there are clear rewards in investing time and energy into investigative work: there’s recognition, the prestige of getting the scoop, and accolades like the Pulitzer Prize or the Wincott Awards. But investigative work isn’t always as rewarding for newspapers in the same way. The reason is that information has many of the characteristics of what we economists call a public good. An example of a public good is national defense, and it has two characteristics. For one, there are no rivalries, which means my consumption of defense does not reduce your consumption of defense. The second is it’s not possible to exclude somebody from consumption of that good. So if I consume defense, I cannot exclude another person from consuming the same amount of defense. Information clearly has the first component: my reading a piece of news does not reduce the relevance of the news, and it does not reduce your ability to read the same piece of news. However, when it comes to the second element, the possibility of exclusion, that’s very much a function of technology.
Most people are probably too young to remember, but in the 1950s and ’60s, credit rating agencies were based on subscription. They were not what we now call an issuer-paying model; rather, they were paid by investors that wanted to understand the quality of bonds and therefore subscribed to Moody’s or Standard and Poor’s or Fitch. What destroyed that model was the photocopying machine. Why? Because you don’t pay several hundred dollars for a few pieces of paper that can be quickly reproduced and given away to everybody at a fraction of the cost. During the ’70s, credit agencies, in order to survive, moved from a subscription-based model to an issuer-paying model. There is a beautiful paper exploring the fact that Moody’s moved first and Standard and Poor’s moved later, and it showed that during the time in which the two agencies were using different revenue models, Standard and Poor’s ratings of companies were lower than those in Moody’s. When Standard and Poor’s adopted the same issuer-paying model Moody’s was using, the ratings aligned perfectly between the two agencies. Who pays for information affects what information you get.
This is relevant today because the Information Age has made it easy to transmit information quickly around the world. Access to information has become superior to what it used to be. However, this increased access can also be a curse in that it’s more difficult to exclude somebody from accessing the information. In the old days, when a newspaper landed a scoop, everybody was rushing to the street to buy a copy and figure out what this marvelous information was. Today, when you hear there is news, you Google it. Somebody has replicated most of the content in a perfectly legal way so you don’t need to go to the original source. The institution that did the hard work doesn’t even get a boost in revenue as a result of their effort. As information becomes more easily distributed, the incentives to collect it go down, and the quality goes down as well.
If the Information Age has made this problem more severe, the problem has nonetheless always existed. Information has always had the first characteristic of a public good, and investigative journalists have always been a sort of add-on that was not particularly profitable. An analogy can be made here with haute couture for the fashion houses, which, if you look at that segment of the fashion business, is incredibly unprofitable. Very few people buy the extravagant dresses on display during fashion shows. They’re too extravagant and too expensive.
But fashion houses pursue haute couture for two reasons. One is prestige: you see this new beautiful Valentino dress, and then you go and buy a more mundane Valentino dress in a store. Why? Because the first dress represents an aspiration. The second reason is that haute couture functions to attract talent. You want to have the most-creative designers, so you let these designers go wild at the fashion shows, and then they also produce some more-mundane lines of clothes that normal human beings can actually wear. It would be difficult for Valentino or Gucci to retain the most-talented people if they couldn’t do the most-extravagant things.
But one fundamental condition of all this is that the fashion house has to be profitable. You can afford to do haute couture if you have a lot of cash flow. If you are struggling to survive, the first thing that goes is the haute couture line. After all, there’s no point in investing in long-term prestige if you’re not sure you’ll make it to the end of the month.
Investigative journalism follows a similar model. McClure’s did not make money with investigative journalism. McClure’s was the most profitable and prestigious publication in the US during Roosevelt’s time, and because of this they could afford to use investigative journalists. And that added to the magazine’s prestige. It added to its mystique and attracted the best talent, but it was not the bread-and-butter business model.
Now, you might say, “Wait a minute. Shouldn’t a well-run company be run in the interest of shareholders, who don’t really care about all these extravagances?” The answer is yes, but if you are in an oligopolistic business and you earn some rents, it makes sense to spend some of those rents to make sure nobody can get into your business. You build barriers to entry by building prestige. If you are one of two business papers in a large town and you are very profitable, it makes sense to spend some of those profits in creating credibility so that it’s harder for competitors to enter the field. Plus, you attract the best talent, who will also write more-mundane articles, exactly like the haute couture model. And finally, we know that in every industry where there are some rents, these rents tend to be shared by investors and workers—in the case of the newspaper industry, that would be the owners of newspapers and the journalists, whose rents come not necessarily in the form of high salaries but in having the opportunity to do the work they actually want to do.
The difficult time newspapers have had turning a profit, combined with the diminishing returns to uncovering great information due to the ease with which that information is shared, has made things hard for investigative journalism. And maybe I wouldn’t particularly care, if not for the fact that it has serious consequences for economic issues. A lot of the distortions we’ve seen in capitalism in the last 20 years are directly associated with this decline of the role of newspapers, and media in general, in keeping capitalism in check. Let me mention a few.
The first one is an extreme consolidation of industry. In the US there’s much evidence of a massive consolidation in many industries. The banking industry is probably among the worst offenders, but the trend is broader than that. This consolidation comes with higher prices and little resistance from antitrust authorities or public opinion. Why? Because there’s not enough sensitivity to it among the press. It took a European commissioner to go after Google, in part because of inadequate support among the American public to do so there. After all, how many articles against Google have you seen in the US?
The second issue is widespread financial fraud. In a paper, some colleagues and I estimate that one out of seven large financial companies in the US is involved in financial fraud. Every financial fraud tends to cost roughly one-fifth the value of the company. So if you add up the annual cost of financial fraud in the US, you get $380 billion. But how many executives in the US went to jail as a result of the financial crisis? Zero.
Not long ago I was at a meeting of the New York Fed, and they brought in some people from the US Department of Justice who were touting all they’ve done to fight financial crime, including showing us a list of all the people they’ve convicted. I looked at the list and noticed that there were a lot of top executives of small companies, and a lot of low-level executives of big companies. So either big companies have more honest people at the top, or we’re not going after the most-powerful people. I’m open to being convinced that the large companies are more honest, but I want people to keep a straight face and argue on that line, because there’s no third possibility.
Last but not least, we’ve had two major bubbles in less than 10 years in the US, and I argue it’s the result of a less investigative press. In 2000, Robert J. Shiller wrote his famous book Irrational Exuberance, in which he makes an acute observation: the birth of bubbles and the birth of newspapers coincide. The first financial bubble, as we know, was the tulip bubble, and it occurred at the time when the first financial leaflets were being created. It’s only logical, since the fundamental characteristic of a bubble is that there is a collective state of euphoria. And how do you create a collective state of euphoria if you don’t have a means of infecting people?
Newspapers can be the cheering crowd encouraging the inflation of financial bubbles, or they can be in the difficult position of trying to warn that a Trojan horse is actually a Trojan horse. The latter is a tough task to take on; being part of the cheering crowd is a more profitable role. You can afford to be more vocally skeptical only if you have a solid financial base.
What can we do? Some people will look at this analysis and say, “It’s a public good. We should support it with taxation and financial subsidization.” But I’ve seen what subsidization of newspapers creates, and it’s not pretty. After all, in Italy they subsidize newspapers, and if there is a bad press, it’s Italy’s.
But you can subsidize in a variety of ways. As many scholars have suggested, a lot of news is already subsidized by virtue of the fact that journalists read stuff produced by the government, by companies, and by NGOs, and produce news out of it. This is an indirect form of subsidization. And there is a segment of society that can and should do more of this kind of subsidizing of the press: academia.
Academia today looks much like the newspaper trade of 20 or 30 years ago: it is a business where there are a lot of rents because there’s not a great deal of competition at the top, and where people consume those rents in research. Some of this research is completely irrelevant, or some of it is likely to be relevant only 200 years from now. Maybe academics don’t need to spend time doing investigative journalism exactly, but they should be using big data to expose what doesn’t work in the capitalist system.
The advantage academia has today is strong separation between the fundraising department and the academic department. It’s a separation that I think used to be there in newspapers but is less so—not because of anything nefarious, but simply because they’re less profitable. It’s time for academia to use that separation to its advantage—and the advantage of the public at large—by picking up some of the slack left by the falling fortunes of many newspapers.
Luigi Zingales is Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance and Charles M. Harper Faculty Fellow at Chicago Booth.
This essay is an edited version of remarks delivered as part of the Wincott Foundation’s 2015 Harold Wincott Memorial Lecture, which took place October 29, 2015, in London.
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