Capitalism v. Corporatism: When Government & Business Collude

After reading a piece I wrote for the Freeman, a very thoughtful friend of mine asked:

"Remember that I live in Barack Obama's home district. Many people think that this current econmic problem is a result of big corporations buying the best government they could. That meant foxes guarding chicken coops, not pursuing legislation that would monitor or check the fast-changing system, and a vast pro-corporation decade ending with banks getting $$ and paying themselves bonuses and dividends instead of lending... Most libertarians think government is bad and less government is always good. But you will have a very difficult time trying to convince people that the FDIC, FTC, SEC, and others are bad. Most will say that we need more agenciies like these. And U of C professors Rajuram Rajam and Luigi Zingales, in their book, Saving Capitalism From the Capitalists, say that you must have the light but firm hand of the government to keep businesses from legislating them into monopolies and turning a level free market into a rigged game...Where should we come down on all this?"

Here is my reply:

"Well, there are a lot of questions here. Adam Smith isn't the first place I'd look either, because he had his problems and contradictions.

 

But I noticed a lot of one-way causality in the way you framed the questions below. You said, for example, that most people think the current mess is "a result of big corporations buying the best government they could." I believe libertarians should respond: "government should never be for sale." Remove opportunities for collusion. In other words, corporatism is only possible when government is able to pick winners and losers through subsidies, tax breaks, regulations, bailouts, etc., which makes an unlevel playing field, as it were. If government doesn't get involved, there is no favoritism. There is no way to game the system. There is no way to lobby a competitor out of business, or shower money on a zombie industry (like agriculture). Distortions, if they are possible in truly free markets, are short-lived and self-correcting. Why? Because government can't interfere with the distributed processes of self-correction by swooping in from the top-down and either a) changing the incentives in ad hoc fashion (usually again), or b) preventing losses that would bring about the kind of necessary failures that iterative systems require to generate true growth and solvency (by directing resources to their highest valued use).
 
"A light but firm hand of the government to keep businesses from legislating them into monopolies and turning a level free market into a rigged game." Again, it's the firm hand of government that is the creator of monopolies, zombies and rent-seekers. Can you name a monopoly that didn't collude with government for its monopoly power? And if you can find such a monopoly--can you prove that it charged a price higher than that prior to its status as a monopoly, much less predatory prices (however defined)?  "Legislating them (businesses) into monopolies" as you put it is exactly right. The causal story is two-way, not one. It's mutualism between government and business that's deadly, not corporations acting on their own in the service of customers. Now, if by "light but firm hand of government" you mean protecting actors from force, theft or fraud, then, of course, I believe government action is justified. But saving companies from failure? Subsidizing them? Giving them incentives or threats to become insolvent? No way. The libertarian story should be one that is ambivalent about the success or failure of corporations, though we're often called corporate apologists. A successful corporation is only as good as its ability to add value to its customers honestly while covering the costs of its own existence. A failed corporation is one that is unable to add value to society in this way. Again, in a truly free market, there is no game to be rigged. When government gets involved we so often cannot tell the difference. Resources get wasted on keeping zombies alive and new, prosperity-creating companies never come into existence. 

 

And that's the most troubling bit about government action. It's the wealth that is never created that is unseen and thus forgotten. Our society is a graveyard of a million companies that were never created because resources were wasted on keeping bad companies from going under. We can talk about saving jobs. But we can't talk about creating jobs in such an instance. There is a possible world in which, but for government action, we'd be much, much better off. And now, I fear, we've entered an age of government cleaning up bigger messes with dirtier mops."

 

I realize now that I didn't specifically address the regulatory alphabet-soup in his question. If they are not helping skew the incentive system in the direction of one special interest or another, they could be creating regulatory barriers, costs and unintended consequences -- that is, if they are not truly protecting people from harm.

 

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