According to Jeff Miron, a member of Harvard’s economics faculty, one of the most persistent myths about capitalism is being pro-capitalism means being pro-business.
Miron explains how being pro-capitalism actually means being pro-consumer. If you sincerely believe in capitalism, you believe in the virtues of free and unregulated competition among providers of goods and services. As competition increases for the consumer’s business, price falls and quality increases; the consumer suffers when big businesses or government prevent other businesses from competing. The real problem is collusion between business and government.
A personal episode will illustrate this point. In the early 1980s, the U.S. was in a period of deregulation. Industries that were heavily regulated by the federal government were being deregulated; airlines and interstate trucking are examples. I was at a party and fell into a long conversation with another guest who happened to own an interstate trucking company. The trucking company owner spoke glowingly about the virtues of capitalism and was quite interested in what and how I was teaching students at university.
The interstate trucking deregulation bill was currently before Congress. So, I asked him if he was looking forward to the deregulation of interstate trucking. His response was immediate, emotional and almost explosive. He claimed deregulation would “destroy the trucking industry.” In other words, he clearly did not want the playing field opened to all competitors, even though the economics clearly indicated deregulation would lower trucking costs throughout the economy. Fortunately, the bill passed over vigorous industry opposition, and transportation costs fell accordingly.
My new friend was not a strong advocate of competition or, for that matter, a strong advocate of capitalism. He was, however, a strong advocate of crony capitalism: the unholy alliance between politicians and business interests. Government corruption and crony capitalism are a major obstacle to rising incomes and full employment in less developed countries. What is remarkable is how much progress has been made in global living standards during the past five decades despite the problem of crony capitalism and corrupt governments.
In other words, crony capitalism produces more general social benefit than extreme socialism/communism in Hugo Chavez’s Venezuela, Castro’s Cuba, or Kim’s North Korea. Imagine how much better off we all would be if we had real capitalism.
What this means is that “bigness” is a problem whether you are talking about government or business. With respect to business, it is a little more subtle, however. Large, established and mature big corporations are a problem because they usually face rising competition from smaller firms, and they have the wealth and influence they need to get the government to pass laws that protect their interests; they pay for protection from competition. On the other hand, younger firms that get big because they are very innovative and willing to compete create lots of jobs, new wealth and improve our international competitiveness.
Big government is a two-fold problem. Big government is a direct threat to individual liberty. As the government expands its sphere of control, it cannot help but intrude on more and more lives. The second problem with big government is the ability to protect special economic interest increases as it gets bigger, and as that power increases, the return to the economic interests who pay for that protection goes up. These economic interests can be big business or big labor. If this is unchecked, you end up with a government like Nazi Germany. On the other hand, a minimalist government does not have the power to protect special economic interests.
The irony here is that those who constantly want to expand the size of government in order to “protect the little people” are actually making the situation worse. As the government gets bigger, the political opportunities to expand the benefits going to special interest grow exponentially, making the “little people” progressively worse off. This also explains why big government advocates can be found in both political parties (big business and big labor both benefit from big government). It also is the reason why both parties signed on to “too big to fail” bailouts.
So, what do we do? First, repeal any law or regulation that prevents competition. Second, shrink the size of government. Third, vigorously pursue the antitrust laws against both big business and big labor. Finally, get rid of “too big to fail.” Capitalism creates the opportunity to succeed, but it cannot work without the opportunity to fail.
Bob Martin is emeritus Boles Professor of Economics at Centre College.