Monday, January 19, 2015

Fighting the Wrong Fight, Part II

After writing "Fighting the Wrong Fight", I was almost immediately aware that there would be many who would take exception to my arguments, pointing out that numerous businesses, even successful ones, which have lobbied for such laws, and that many businesses, even whole industries, expend tremendous amounts of time and money seeking favorable government actions. Nor can I deny such things, as they are plainly visible. The American sugar and steel industries are heavily dependent on tariffs for their existence1. The auto industry has played games with import laws2. And countless others have sight government favors of one sort or another3.

Despite that, I still believe that, rather than blame business, we are still better off blaming government, for a few reasons. It is my contention that, under a true free market, big business would have no incentive to seek such favors, in fact, the more successful, the less likely. It is only because our economy has already been distorted by tremendous government intervention that we see businesses engaged in activities that would, in a free market, be self-defeating. In addition, the activities themselves, trade regulation, easy money policies, mandatory health insurance, and so on, are in the first place either the ideas of interventionist politicians, or, at the very least, simply extensions of existing ideas previously proposed by the same. In short, these bad ideas are not the creation of businessmen, especially not of "big business", but rather are the creations of our political theorists and politicians, and the support they gain from business are the result of either businessmen trying to defend their interests in a regulated environment, or of opportunists who exist  -- or at least are able to flourish -- solely because of such an environment4.

First, let us start with the most obvious fact, that government intervention will always produce results that are below optimal. I established this clearly in my essay "The Basics", but to put it simply, the government cannot impose any but the broadest rules, which will inevitably fail to fit the desires of the vast majority of individuals. It may create some gradations within the rules, allowing for a slightly better fit, but, even if it could introduce individual solutions, the best it could do would be to imitate the results of an individual making his own choice -- that is, produce results no better than normal. However, in most cases, the result will be nowhere near that nice a fit, and most individuals will be less than satisfied with the solutions imposed, meaning a government solution will, inevitably, leave everyone less happy than before. Which, in terms of both subjective satisfaction, and monetary/economic performance means that any form of government intervention represents a net loss, a decrease in overall results when compared to the free market solution.

I mention this because, in a free market, those firms with the influence and wealth to shape government policy are inevitably those that best serve consumer desires, and are thus most successful. In a free market, such firms would also enjoy the greatest share of the market for their specific good or service. For such a firm, introducing government would not produce any benefit but, by reducing the overall market, as well as imposing restrictions and costs not previously present, and forcing the firms to change their behaviors, would most likely result in the most successful firms suffering a net loss, not a gain. Or, to put it more plainly, in a free market, the most successful firms have little or nothing to gain from government favors. Government favors would benefit only the marginal and failing firms, but in general those firms lack the wealth or influence to purchase such government favors.

Some may argue that this model is too simplistic, that perhaps some smaller interventions might not produce enough benefit to offset the costs incurred, but what about monopolies? If a given firm is granted the sole right to control a given market, is that not sufficient benefit to offset any costs? Even for a firm which was successful in a free market?

And yes, in isolation, such a benefit may be great enough to offset the costs imposed by government intervention, however, such decisions never occur in isolation. If we are starting from a free market, and imposing a monopoly on, say, steel, it would look tempting for the beneficiary, but only until he considered the other factors. Foremost among them being the fact that such actions tends not to occur just once. Once a single monopoly is created, it is impossible to believe no more would ever be granted. And thus, the beneficiary of this monopoly must consider that both his costs as a producer, and his purchases as a private consumer, will now be burdened with the inefficiencies of other monopolies. Of course, he can try raising his prices to offset these expenses, but as he does so, he raises the costs of other monopolies who will then do the same, not to mention reducing his own customer base, as even monopolies cannot keep a consistent level of sales when raising prices. In other words, while he might find some small financial benefit in becoming a monopolist, viewed objectively, considering the other changes to the market, he would be much better off in the long run being one of many in a competitive market than a monopolist in a market full of monopolies.

Nor is that the sole problem. A successful competitor in a free market knows how he can remain competitive, and understands well what he must do to succeed. The market may be harsh and unfeeling in the eyes of some, as it will happily eliminate yesterday's victor if a cheaper competitor arises, but it is much less unpredictable and capricious than a market based on government favor5. Granted, some would find the world of political infighting preferable to honest price competition, as they are more glib than efficient, but if we are postulating an initially free market, they would not be the businesses who are supposedly seeking government favor, and thus, the few who would see patronage as better than competition would not be among those who would have the influence to seek such a change.

So, if business, at least free market firms, or firms which are successful competitors, would have no interest in seeking government patronage, then why do we have so-called "corporate welfare"? Why are these protectionist tariffs and bailouts and regulations clearly created to benefits specific firms or industries?

Perhaps the bailouts mentioned above will help clarify that. Recall when both Bush and Obama were seeking to "fix" the economy by providing bailout money. One thing that surprised many regulators was the fact that both banks and automakers were, initially, reluctant to take this money. In fact, some had to be effectively bullied into accepting government funds. Why? Because they saw the strings attached, and thought it better to do without than accept that burden. And who forced them to forget these misgivings? The government.

And that is, in the earliest stages, where these policies arise. Though some want to blame insurers for ObamaCare, the truth is the name says it all. Certain insurers may benefit from it, some may have even argued for it (as we shall discuss shortly), but in the end, it originated where the name says, with Obama and like minded politicians. Every supposedly pro-business policy, from tariffs to restraints on competition, all started with some regulator or politician or political theorist who proposed just such a solution in order to "fix" the problems of the free market6.

This is not to say there were no profiteers, or not firms which role on such policies to make their own fortunes. As soon as the state began to introduce such policies, many who saw how they could profit from such laws jumped aboard. And even reputable firms which had opposed the state intervention earlier, forced to change to adjust to the new environment, likely played along so they could survive in the new world. But, in the long run, those were all the result of government changes, and the perversions of self-interest such laws introduced7. Had the government never become a means of earning money, a source of favors, a weapon to use against competitors, then businessmen would never have used it as such.

In short, it is not business which creates corrupt government, it is granting the government unlimited power to intervene, viewing it as a Swiss Army Knife capable of solving every problem that opens the door, allowing those so inclined to abuse that unlimited grant of power to gain advantages. Had we left government limited to the protection of rights, and left business free and private, then such corruption would be impossible.


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1.  Steel is an odd duck, as before strong unions, it could have easily been quite profitable, yet it was one of the earliest subjects for protectionist policies, and as a result inherited all the expected inefficiencies. On the other hand, sugar is such an inefficient crop in most of the US it is hard to see the sugar industry as anything but a creation of protectionist measures.

2. The auto industry provides many interesting examples of paradoxical outcomes. To name just one, the way the quota on imports forced many foreign makers to focus on luxury imports, essentially destroying the American luxury car market for a very long time. (Even today there are few domestic cars one thinks of as top of the line.)

3. On the other hand, we can also point to many situations where industries, rightly wary of more government involvement, tried to turn down nominal aid, such as the banks which tried to refuse Bush and Obama bailout offers, despite serious financial difficulties. This alone should show that such plans are often not brought about by the machinations of "big business". (See "Those Greedy Bankers")

4. See "Perverting Self Interest" and "Mergers and Acquisitions".

5. See "Patronage", "Government by Emotion", "The Problem of Antitrust", "Imperfect Competition, Abstraction and Anti-Trust" ,"Moral For Me, But Not For Thee", "My Censorship Is Your Discretion", "Selfishness as Reason - "Wants", "Needs", "Fairness" and Other Guises for Arbitrary Decisions", "The Other 99%", "Bureaucracy and Arbitrary Power", "A Question for Artists of the Left", "Misunderstanding the Market", "An On Demand World", "The Secret of Success, or, Why Government Fails", "An Examination of the Economics and Sociology of Government Spending", "Adaptability and Government", "Arbitrary Choices", "Two Sided Processes and Claims of "Unfair" Outcomes" and "Competition" .

6. See "Greed Versus Evil", "How to Blame the Free Market", "How to Blame the Free Market Part II", "The "Lucky" Rich", "The Devil is in the Definitions (And Assumptions)", "Government Efficiency", "High Cost of Medical Care", "Medical Reform, An Overview", "Of Wheat and Doctors", "Bad Economics Part 10", "Bad Economics Part 19", "You Gotta Have Faith", "Why Do They Earn So Much For Playing a Game?", "Misunderstanding Profits", "Clarification of my Argument for a Free Market in Medicine", "Two Examples of "Inefficiency" in Capitalism", "The Threat of Perfection", "Utopianism and Disaster", "Misunderstanding the Market", "Big Box Stores and the "Climate of Greed"", "Put Your Money Where Your Mouth Is, Or The Logical Implications of Price Gouging Laws", "The Inevitability of Bureaucratic Management in Government Enterprises", "Government Quackery", "A New Look At Intervention", "Contract and Freedom", "In Praise of Contracts", "Misunderstanding Economics", "Placebo Economics", "Nonsensical Beliefs", "You've Come a Long Way, Baby!", "Simplicity and Freedom" and "Why Freedom is Essential".

7. See "Perverting Self Interest", "Subsidizing Irresponsibility and Poor Planning", "Racketeering Through Legislation", "Power and Disorder" and "Transparency, Corruption and Reform".


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