Towards a Political Theory of the Firm

Summary

"Towards a Political Theory of the Firm" (2017) is an essay by Luigi Zingales, the Robert C. McCormack Professor of Finance at the University of Chicago Booth School of Business and a longtime NBER affiliate. It was circulated as NBER Working Paper No. 23593 and published in the Journal of Economic Perspectives 31(3) [VERIFY: JEP volume/issue per task metadata; the NBER WP itself does not state the JEP citation]. Zingales is a mainstream financial economist — not a Georgist — best known for his work on corporate governance, the theory of the firm (with Raghuram Rajan), and the political economy of finance. The essay argues that standard economic theory of the firm, which treats firms as having "no power of fiat… different in the slightest degree from ordinary market contracting" (quoting Alchian and Demsetz 1972), is inadequate for understanding large modern corporations that possess both the means and the motive to shape the political rules under which they operate. The paper's central contribution is the concept of a "Medici vicious circle": a self-reinforcing cycle in which market power is converted into political power, which is then used to protect and enhance market power.

The Core Argument

Zingales's argument proceeds in several steps:

1. Firms have political power. Neoclassical theory assumes firms cannot influence the rules of the game. In reality, large corporations have revenues rivaling national governments, private security forces, public relations operations larger than presidential campaign headquarters, and the financial capacity to capture elected representatives through donations, lobbying, and implicit promises of future employment.
2. Market power creates both the ability and the need for political power. The more market power a firm has, the more credible its implicit promises to politicians and regulators (e.g., future career opportunities), and the more it fears political expropriation of its rents. As Zingales writes: "the more firms have market power, the more they have both the ability and the need to gain political power. Thus, market concentration can easily lead to a 'Medici vicious circle,' where money is used to get political power and political power is used to make money."
3. The incomplete-contracts framework extends to politics. Drawing on Grossman and Hart (1986) and his own work with Rajan (1998, 2001), Zingales argues that incomplete contracts create scope for lobbying, rent-seeking, and power-grabbing. If rents are not perfectly allocated ex ante by contracts and rules, economic actors have incentive to pressure the regulatory, judicial, and political systems to capture a larger share.
4. The problem is worsening. Zingales identifies three trends increasing corporate political power: rising firm size and market share (reducing competition among conflicting interests within a sector), increasing size and complexity of regulation (making it easier for vested interests to tilt the playing field), and the demise of anti-business ideology among Democrats (reducing the political cost of being seen as friendly to big business).

Empirical Evidence Cited

Zingales surveys several strands of evidence for rising market power, drawing on work available by 2017:

• Concentration. More than 75 percent of US industries experienced increased concentration over the prior two decades, with the Herfindahl index rising by more than 50 percent on average. The average publicly listed company tripled in market capitalization, from $1.2 billion to $3.7 billion (2016 dollars), citing Grullon, Larkin and Michaely (2017).
• Markups. Mergers raised markups from 15 percent to over 50 percent of the average markup, citing Blonigen and Pierce (2016).
• The profit share. Zingales highlights Barkai (2016): the profit share (the residual after labor and required-return capital shares) rose from 2 percent of GDP in 1984 to 16 percent in 2014. He emphasizes this is "not just a relabeling" — by separating the return to capital from profits, one can identify when profits come from barriers to entry rather than capital accumulation.
• Declining entry. The rate of new firm birth fell from 14 percent in the late 1980s to less than 10 percent in 2014, citing Haltiwanger (2017).
• Weakened antitrust. Section 2 Sherman Act cases brought by DOJ and FTC fell from an average of 15.7 per year (1970–1999) to 2.8 per year (2000–2014), citing Grullon et al. (2017).

The Medici Vicious Circle

The paper's signature concept is the Medici vicious circle, named after the medieval Italian signorias — city-states taken over by rich families who ran them with their own commercial interests as the main objective. Zingales defines it as a cycle in which "money is used to gain political power and political power is then used to make more money." He identifies six non-market factors that determine the feasibility and extent of this circle:

1. The main source of political power (military force vs. democratic consensus)
2. The conditions of the media market
3. The independence of the prosecutorial and judiciary power
4. Campaign financing laws
5. The dominant ideology
6. [VERIFY: Zingales lists five factors in the body text — the sixth is implied by the institutional taxonomy section but not explicitly enumerated as a separate factor; the abstract mentions "several non-market factors" and the text says "I identify six of them" but only five are clearly listed]

Zingales places the contemporary United States at risk of drifting toward a "vertical politically integrated" regime — where rich businessmen control the political system, directly (as with Berlusconi in Italy) or indirectly (as with Russian oligarchs under Putin) — citing the decline of competitive conditions (large country size no longer guarantees competition) and the disappearance of the Cold War efficiency imperative.

Historical Context

The essay traces concern about corporate political power from Adam Smith's skepticism toward joint stock companies (granted monopoly rights by the Crown, prone to "negligence and profusion"), through the East India Company's 233-year monopoly maintained through lobbying and bribes, the Gilded Age robber barons, the Progressive Era and New Deal reforms that tamed corporate power (Tillman Act 1907, Clayton Act 1914, Glass-Steagall 1933, aggressive antitrust under Thurman Arnold), and the mid-century competitive equilibrium that made the neoclassical "firm without power" a reasonable approximation — an equilibrium Zingales argues is now eroding.

Relation to the Georgist Case

Zingales's essay does not address land or land value taxation. Its relevance to the Georgist framework is structural and analogical: it provides a political-economy mechanism for how market-power rents become entrenched — the same pattern of rent-seeking that Georgist analysis identifies in land, extended to corporate political capture. The paper directly cites Barkai's decomposition showing the profit share rising at the expense of both labor and capital shares — the same evidence assembled on the wiki's corporate profits increasingly reflect economic rents outcome page. Zingales's Medici vicious circle supplies a causal story for why those rents persist rather than being competed away: political power blocks the competitive correction.

This complements Philippon's The Great Reversal, which documents the same concentration-and-lobbying pattern with more detailed industry case studies and US-Europe comparisons. Where Philippon focuses on the product-market and regulatory mechanisms, Zingales focuses on the political-economy feedback loop and the theoretical inadequacy of the neoclassical firm model for describing it. Both contribute to the Rentier Economy narrative as non-land instances of rising rent capture.

Nuances and Limits

• Not a land-rent paper. Zingales does not connect his argument to land value, location rent, or Georgist policy. The link to the Georgist framework is interpretive, not made by the author.
• Working paper / essay format. The NBER version is a circulated working paper, not peer-reviewed at time of circulation (the NBER disclaimer states this explicitly). The JEP publication [VERIFY: confirm JEP 31(3) publication details] would constitute peer review, but this page draws on the NBER WP text.
• Prescriptive modesty. Zingales does not propose a single-tax or land-based remedy. His proposed tools are transparency, corporate democracy, revolving-door restrictions, antitrust enforcement, and media independence — mainstream institutional reforms, not Georgist instruments.
• Concentration as proxy. Like Philippon, Zingales relies partly on concentration measures (HHI) as evidence of market power. The same critique Eeckhout raises against Philippon — that concentration is not a reliable proxy for market power in all theoretical settings — applies here as well.
• US-centric. The empirical evidence and institutional analysis focus on the United States, with comparative references to autocratic regimes, Scandinavian countries, and specific cases (Italy under Berlusconi, Russia under Putin, Indonesia under Suharto). The generalizability to other developed economies is asserted but not systematically demonstrated.

Bears On

• Outcome: Corporate profits increasingly reflect economic rents — Zingales's citation of Barkai's profit-share decomposition and his argument that market power entrenches rents through political capture directly support this outcome's claim that rising profits reflect economic rents rather than competitive returns.
• Concept: Rent-Seeking — the Medici vicious circle is a political-economy model of rent-seeking behavior, extending the concept from land to corporate political capture.
• Concept: Economic Rent — the paper's distinction between profits from barriers to entry and profits from capital accumulation is an application of the rent concept to corporate income.
• Narrative: The Rentier Economy — the Medici vicious circle provides a mechanism for how rentier income becomes self-reinforcing.
• Research: Philippon, The Great Reversal — a closely related book-length treatment of the same concentration-lobbying-regulatory-capture nexus, with more industry detail and US-Europe comparison.
• Research: Barkai, Declining Labor and Capital Shares — the empirical decomposition Zingales cites as his most convincing evidence for rising market-power rents.

See Also

• Corporate Profits Increasingly Reflect Economic Rents
• Rent-Seeking
• The Great Reversal
• Barkai — Declining Labor and Capital Shares
• The Rentier Economy
• Economic Rent

Sources

1. Luigi Zingales (2017), "Towards a Political Theory of the Firm," NBER Working Paper No. 23593. NBER — used for the Medici vicious circle concept, the six-factor institutional framework, the empirical evidence survey (concentration, markups, profit share, entry decline, antitrust enforcement), the historical analysis (Smith, East India Company, Gilded Age, Progressive Era, New Deal), and all direct quotations.
2. Simcha Barkai (2016), "Declining Labor and Capital Shares," Working Paper, University of Chicago — as cited by Zingales for the profit-share rise from 2% to 16% of GDP (1984–2014) and the labor/capital decomposition. Wiki page.
3. Bruce A. Blonigen and Justin R. Pierce (2016), "Evidence for the Effects of Mergers on Market Power and Efficiency," Federal Reserve Finance and Economics Discussion Series 2016-082 — as cited by Zingales for the markup increase from 15% to over 50%.
4. Gustavo Grullon, Yelena Larkin and Roni Michaely (2017), "Are US Industries Becoming More Concentrated?" Cornell working paper — as cited by Zingales for the concentration increase (75% of industries, HHI up 50%+) and the antitrust enforcement decline.
5. John Haltiwanger (2017), as cited by Zingales for the decline in new firm birth rate from 14% to less than 10%.

[VERIFY: JEP publication details — the task metadata states this was published in JEP 31(3), but the NBER working paper text does not include the JEP citation; a future editor should confirm the JEP volume, issue, page numbers, and any differences between the WP and published versions.]

[VERIFY: Zingales states "I identify six of them" regarding non-market factors but the body text appears to list five clearly (source of political power, media market, prosecutorial/judiciary independence, campaign financing laws, dominant ideology); the sixth factor may be implied in the institutional taxonomy section or may be an editorial oversight — a future editor with access to the JEP published version should clarify.]