Capitalisn't

Free trade was never actually free? That's the case Katherine Tai, Joe Biden's former U.S. Trade Representative, brings Bethany McLean and Luigi Zingales this week.

We are often told that the top 1% of earners already pay 40% of all taxes, while nearly half of Americans pay nothing at all. Legal scholar Ray Madoff argues that this statistic is a deliberate "bait-and-switch" designed to confuse the public.

There’s a word that’s gained a lot of popularity in the last year: “ensh*ttification”. It refers to a trajectory many see with digital platforms: they initially offer immense value to users, only to systematically degrade that quality over time in order to extract maximum surplus for shareholders. We invited the coiner of this term, science fiction author and activist Cory Doctorow, on the podcast to discuss whether he thinks this decline is an inevitable feature of digital markets or a consequence of specific policy failures. And, most importantly, how he thinks it could be reversed. For Doctorow, "enshittification" is not simply a result of "revealed preferences", where users tolerate worse service because they value the platform, but rather the outcome of a regulatory environment that has permitted the creation of high switching costs and the elimination of competitors. Doctorow also argues that historically, interoperability acted as an engine of dynamism, allowing new entrants to lower the barriers to entry. But current IP frameworks, such as anti-circumvention laws, have been "weaponized" to prevent this, effectively allowing firms to enforce cartels and engage in rent-seeking behavior. Finally, Doctorow offers a critical assessment of the current AI boom, arguing that the sector is creating "reverse centaurs", where human labor is conscripted to correct algorithmic errors, and warns of a potential asset bubble driven by inflated revenue attribution.

Did you know Amazon makes $37 billion a year—more than double the revenue of all the newspapers in the world combined—from its sponsored results alone? Yes, the same, spammy, sponsored results at the top of a search that bilk shoppers with fake or low-quality items and can starve legitimate businesses of traffic and revenue. This is one of the many insights shared by our guest this week, Tim Wu, in his new book, “The Age of Extraction: How Tech Platforms Conquered the Economy and Threaten Our Future Prosperity.” He argues that the defining story of the modern internet isn’t openness or democratization, but rather wealth extraction: the ability of gatekeeping Big Tech platforms, such as Amazon, Facebook, or X, to take money from everyone else without actually providing net value in return. Platforms weaponize convenience, he writes, so switching to competitors or smaller platforms is designed to be exhausting. Add in AI technologies that foster emotional relationships with users, and our dependence on them may deepen even more. An author and professor at Columbia Law School, Wu served in the Biden administration as Special Assistant to the President for Technology and Competition Policy. He discusses with Bethany and Luigi why we should care about Big Tech value extraction and posits how Big Tech power arose in the first place: from centralized power to shareholder pressure, from poorly aligned corporate structures to nefarious intentions. Together, they also chart how we can make our way out of this era of extraction. They discuss the feasibility of treating Big Tech platforms like utilities, applying frameworks for structural separation between the platforms’ various services, decentralizing digital network infrastructures through interoperability to allow users to switch more easily between different platforms, and how economic populism influences the political messaging around these issues. Ultimately, Wu makes the case for embracing a philosophy of decentralized capitalism to achieve a fairer and beneficial balance between public and private power.

Standard economic theory informs how we think about business strategy and the economy and presumes that people are selfish, have well-defined preferences, and consistently make welfare-maximizing choices. In other words, we are rational. But what if that is not the case? Nobel Prize-winning economist Richard Thaler is out with an updated edition of his bestselling 1991 book, "The Winner's Curse: Paradoxes and Anomalies of Economic Life." In the new edition, he and his co-author Alex Imas (both professors at the University of Chicago Booth School of Business) reflect on the last thirty years of behavioral economics and how it makes sense of tensions between our psychological biases and impulses that make us less than fully rational in practice. Using a wealth of empirical evidence, the authors explore the behavioral anomalies that contradict the expectations of standard economic theory and explain a wide range of real-world examples from banking crises to social media addiction. Earlier this month, Thaler joined Bethany and Luigi for a sold-out Capitalisn’t recording in front of a live audience in Chicago to walk through the anomalies of human behavior that have endured from biblical times to the age of Big Tech. Thaler reflects on how views and the adoption of behavioral economics have changed over the last thirty years, both within academia and beyond (wonder why you can’t put down your phone? Silicon Valley has read Thaler). He also shares how behavioral economics can influence public policy from canceling “junk fees” and dubious subscriptions to deciding which parts of the Affordable Care Act to keep and which are unlikely to produce their desired outcomes. Over conversation, light banter, and audience Q&A, Thaler shares his views on the state of capitalism and reveals how there is no grand unified theory of human behavior that incorporates all its irrationalities—only departures from the standard model.

The Japanese economy was once the envy of the world. By the 1980s, it looked set to surpass the United States in size. Real estate prices were high, the stock market was booming—the entire world was asking if Japan had found a superior model of economic growth and recovery after World War II, one grounded in industrial policy. However, the bubble burst in the early 1990s, and what followed was not a quick recession and rebound as we have often seen in the U.S., but decades of stagnation. Near-zero deflation became entrenched, and the banking system turned into a drug of cheap borrowing rather than an engine for recovery, with the Bank of Japan pioneering quantitative easing by pushing interest rates to zero long before the U.S. Federal Reserve considered such steps in the wake of the 2007 financial crisis. Japan has never since returned to sustainable growth, and this matters for the world at large. A significant creditor to other countries, shifts in Japan’s economic policy and fluctuations in its currency ripple across global interest rates, tightening or loosening financial conditions worldwide. Japan also remains a critical node in global supply chains (including for semiconductor chips and electronics), a major importer of energy, and not for nothing, its cultural exports continue to conquer the world. What lessons can Japan’s lost decades of economic stagnation and missed opportunities offer the U.S. and other developed economies? Bethany and Luigi are joined by Takeo Hoshi, professor of economics at the University of Tokyo and a leading expert on Japan's financial system and economic stagnation. Together, they discuss Japan’s idiosyncrasies—from demographic decline to economic policy mismanagement—and the interplay of global factors such as populism, nativism, and dissatisfaction with capitalism. If the U.S. is indeed on the cusp of its own economic bubble driven by oversized capital investments in artificial intelligence and technology rather than consumer spending and wage growth, does it have the institutions and flexibility to avoid Japan’s fate?