A strong press is best defence against crony capitalism

Luigi Zingales a professor at the University of Chicago Booth School of Business

In the past decade economists have shown a growing interest in the media. Most of their attention has focused on the role the media play in limiting government corruption or in shaping electoral outcomes. Little attention has been dedicated to its influence on the type of capitalism prevailing in a country.

While nowadays almost all the world professes itself to be capitalist, not everybody experiences the same type of capitalism. In fact, the form of capitalism prevailing in most of the world is very distant from the ideal competitive and meritocratic system we economists theorise in our analyses and most of us aspire to. It is a corrupt form, in which incumbents and special-interest groups shape the rules of the game to their advantage, at the expense of everybody else: it is crony capitalism.

The reason why a competitive capitalism is so difficult to achieve is that it requires an impartial arbiter to set the rules and enforce them. Markets work well only when the rules of the game are specified beforehand and are designed to level the playing field. But who has the incentives to design the rules in such an impartial way?

While everybody benefits from a competitive market system, nobody benefits enough to spend resources to lobby for it. Business has very powerful lobbies; competitive markets do not. The diffused constituency that is in favour of competitive markets has few incentives to mobilise in its defence.

This is where the media can play a crucial role. By gathering information on the nature and cost of cronyism and distributing it among the public at large, media outlets can reduce the power of vested interests. By exposing the distortions created by powerful incumbents, they can create the political demand for a competitive capitalism.

This is the role that “muckraking” publications such as McClure’s magazine played in the US in the early 20th century, where the investigative reporting of Ida Tarbell created the political environment to break up Rockefeller’s Standard Oil monopoly. And it is the role that the business newspaper The Marker has played in Israel in exposing the effect on the national economy of the concentration of power and wealth in the hands of a few billionaires.

Unfortunately, this is not the most profitable sort of media activity. It can be very expensive, not so much from the costs of the resources dedicated to investigative journalists, but because of the economic repercussions from annoyed advertisers that these investigations can generate.

The value of the advertising that is withheld from muckraking media will generally exceed the additional revenues generated from new subscriptions.

Even if they do not lose money, muckraking newspapers at best break even. As a result, the important social role they play becomes the preserve of profitable media companies, which can afford investigative journalism as a sideline rather than a business model that can make profits.

Before the internet revolution, newspapers were very profitable and some of them were willing to fund costly investigative reporting and weather any possible retaliation by advertisers. Not any more. Plummeting advertising revenues, disappearing classified ads and dwindling subscriptions have all but hollowed out newsrooms and their investigative reporting teams.

So how can one restore this essential role of the media? Most countries have a group of readers who are interested in investigative journalism and are willing to pay for it. In France, for example, Mediapart, an online newspaper dedicated to investigative journalism, has 110,000 paid subscribers.

For most readers, however, it is difficult to ascertain whether investigative journalism is professional, independent and unbiased; or whether it only preys on easy targets, sparing the powerful players in the economy. Without any quality certification, the risk is that competition will drive the price of all news to zero, destroying any incentives to invest in quality.

If we want the media to play a key role in capitalist societies, we need to find a way to certify the quality of its investigative work. At stake here is not just good journalism, but capitalism itself and, eventually, even democracy.

Inquisitive, daring and influential media outlets willing to take a strong stand against economic power are essential in a competitive capitalist society. They are our defence against crony capitalism. When the media outlets in any country fail to challenge power, not only are they not part of the solution, they become part of the problem.