Business vs. the Market

The confrontation between state governments and public sector unions presently occurring throughout America is about many things. At the surface are disputes over collective bargaining rights and the levels of debt run up by state and federal governments over the past twenty years. At a deeper level, however, the struggle reflects an unfolding political and economic dynamic that is slowly corroding America’s market economy. From this standpoint, it’s not only public sector unions who have enlisted government power to advance their self-interest: a considerable portion of the business community is equally culpable.

More than one commentator has observed that the intensity of the struggle in Wisconsin and other states is partly fueled by a subtext of public sector unions’ being able to influence who their employers are (i.e., the executive and legislative wings of government) via political donations. Those union-supported politicians in turn accede to these unions’ salary and benefits demands. The same politicians also help unions to fund themselves by mandating that union dues simply be extracted from government employees’ paychecks, and by creating impediments that obstruct those public sector workers who might choose to exercise their freedom of association by declining to join a given union.

The situation is further complicated by the fact that neither public sector unions nor governments have to consider an omnipresent reality for private sector businesses: the need to make a profit if they are to survive. Instead, governments are able to fund the salary and benefit packages demanded by many public sector unions through increased taxes, deficit spending, and ever-increasing amounts of debt.

Fewer observers, however, have noted the growth of an unhealthy collusion between government and many American companies that is equally damaging to the common good, not least in that it allows many businesses to escape the disciplines of market competition.

The most visible examples of this are obviously bailouts and subsidies for businesses and industries that have established close relationships with federal and state politicians. In recent months, the Washington Examiner’s Timothy Carney has illustrated in pointed article after pointed article the disturbing links between government subventions and those businesses that enjoy political connections on both sides of the aisle.

There are, however, less visible ways in which many American businesses seek to avoid the rigors of competition and pass on the costs of doing so to taxpayers and consumers. A good example is America’s tariff regime.

In his book Mad About Trade (2009), the trade-analyst Daniel Griswold points out that “The official Harmonized Tariff Schedule of the United States rivals the U.S. income tax code for random complexity.” Its 2,959 pages encompass 99 chapters and feature 10,253 tariff lines. Each tariff line consists in turn of three different tariff rates.

When we look at the details, we find Byzantine provisions for different products that defy rational explanation. Why, for example, is the tariff on men’s overcoats 15.9 percent if made of cotton, but only 5.6 percent if the coat is primarily of manmade fibers, but contains 25 percent or more by weight of leather?

Page after page of America’s Tariff Schedule reveals a mishmash of similarly arbitrary, discriminatory, and distortionary customs duties. The only way to explain this situation, Griswold concludes, is the ability of different businesses to persuade legislators that their particular industry (such as those who manufacture coats made of cotton) somehow requires more protection from foreign competition than others (such as those manufacturing coats made of man-made fibers with a substantial leather content).

No doubt many of these provisions are publicly justified as somehow being in the national interest. But as Adam Smith once sagely commented, “I have never known much good done by those who affected to trade for the public good.” In other words, businesses (such as Detroit-based car companies) in financial distress will often claim they merit special government assistance because their continued existence is somehow essential for the common good, whereas the real reason they want legislators to privilege them with taxpayers’ money is their failure to compete in the marketplace (such as with Japanese car manufacturers who have created profitable factories – and thousands of well-paying jobs – in America’s UAW-free South).

Then there are the ways in which some American businesses use government power to try to shut down their domestic competitors. Anti-trust laws are a prominent instance of this.

As Judge Robert Bork illustrated in his book, The Antitrust Paradox (1978), the original purpose of anti-trust laws was to promote consumer welfare and competition. Today, however, anti-trust laws are often used by businesses seeking to undermine the competitive advantages that their rivals have developed in perfectly legal and entrepreneurial ways. The Justice Department is thus used to weaken one’s competitors, not least by forcing them to incur considerable legal expenses.

The attractions of business-government collusion are enhanced when the state’s involvement in the economy grows. This is partly a question of incentives. The larger the scope of government economic intervention, the more businesses are incentivized to cultivate politicians in much the same way that public sector unions have.

As a result, consumers become displaced as the focus of business activity. Nor do the incentives for people of an entrepreneurial bent lie with creating something that the entrepreneur thinks consumers will value.

Instead the incentives become increasingly aligned with successful political entrepreneurship. Competition becomes less about a company’s ability to offer new and better products for consumers at lower prices. Instead, it become a struggle among businesses to secure state subsidies, to lobby legislators to establish tariffs that stack the deck against foreign competition, or to persuade governments to provide one company with exemptions from regulations that apply to every other company in the same industry.

It’s a form of soft corruption that produces higher prices for consumers, undermines value creation in the marketplace, and facilitates unwholesome relationships between politicians and businesses. It also represents the gradual subversion of the market economy by mercantilist arrangements. Smith identified the core of the problem in his Wealth of Nations (1776): “in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and consumption.”

In the end, however, everyone loses. Economies dominated by the struggle for government favors and largesse become less competitive in the global marketplace. Governments actually begin to believe the dirigiste illusion that they, rather than private enterprise, are the real drivers of economic growth. Technological and business innovation begins to falter. The commercial world slowly becomes dominated by “insiders” (those close to legislators and governments), while “outsiders”—such as entrepreneurs with creative ideas and capital but few political contacts—begin to consider moving to more hospitable economic climates. The work of wealth creation subsequently begins to decline in intensity.

Circumventing this situation is not simple. The more companies invest themselves and their assets in the business of political entrepreneurship, the less likely they are to favor the type of market liberalization that might shift the incentives back towards meeting consumer demand. Nor do those politicians who derive their own benefits from the patronage system implicit to corporate welfare arrangements have any strong interest in winding back these neo-mercantilist trends.

There is, of course, something fundamentally wrong about businesses and governments behaving in this manner. In market economies, companies are rewarded for their ability to innovate and produce more and often higher quality goods at comparatively lower prices by the choice of consumers to buy their product rather than the merchandise offered by others.

By contrast, corporate welfare and regulations that shield companies from competition amount to granting legal privileges to businesses primarily on the basis of their ability to court the favor of politicians. How many people can honestly describe this as just?

One byproduct of the 2008 financial crisis has been a revival of discussion about the need to restore a modicum of moral coherence to those parts of the business world that went astray in the 2000s. Unfortunately in our relativistic ethical environment, this rarely goes beyond platitudes and appeals for greater social responsibility on the part of business. This often translates into businesses being cajoled into supporting any number of politically correct causes—something increasingly described in business circles as just another cost of doing business.

Given the degree of business-government collusion that increasingly disfigures American economic life, perhaps one step forward for a morally healthier commercial culture would be for businesses to voluntarily swear off the addictive practices of political entrepreneurship and corporate welfare.

By all means, businesses should defend themselves against competitors who cynically employ political influence in an effort to drive them out of the market place. It takes, however, another type of moral courage to tell your family, shareholders, and employees that the days of cuddling up to Senator Leveraged and Congressman Influential are over.

Certainly, extracting themselves from the sticky web of government patronage or refusing to contemplate seeking corporate welfare might well prove economically costly—at least in the short-term—for many businesses. They would, however, no longer be open to the charge of behaving in ways not dissimilar to public sector unions. They would also have the satisfaction of knowing they are back in the business of creating wealth, instead of the less dignified endeavor of perpetually trying to live at everyone else’s expense.