Wednesday, February 23, 2011

Some Thoughts on Big Business and Big Government

Greg posed the question the other day, and I'll paraphrase, that asked why libertarians appear to worry so much about the problems of big government, and not so much about the problems of big business. Fair question. The answer is that we do, but to a great extent we believe the solution to big business is to shrink the government. What we're talking about here, really, is crony capitalism. This is a similar concept to mercantilism and fascism (as an economic system, not a political one).

Quickly, the reason one worries about big government is twofold: public choice issues, and knowledge problems. The public choice problems are that agents of the government can use their office to pursue their own agendas, rather than the agenda that is in the public interest. The knowledge problem is that the government agents do not (cannot) know all the relevant facts of a particular problem, so that their solutions in fact make things worse rather than better. There's boatloads of research on this, I just wanted to get into place for the next step.

The reasons we worry about big business are: monopoly/monopsony power; externalities that cost the public something but the company doesn't have to answer for (think poisoning water ways through pollution); and the ability to 'capture' regulators. I believe these are legitimate concerns, except for concerns over "natural" monopolies since these are unlikely to exist.

Where I'm from, certain utilities used to be monopolists. Some still are. The reason they were monopolists was because the government would only allow one company (in fact the state-owned company) to provide the utility in question. The reason was because it was a critical utility (telephony) and the government didn't want the people to be at the mercy of greedy capitalist pigs (my words). Eventually, the monopoly was ceased and competition opened up. The price of telephone service subsequently dropped precipitously. This trend is ubiquitous when a monopoly is ended. Therefore, this was not a natural monopoly, but one created by the government. Thus we should oppose governments giving monopolies to any business (yes, this included the Federal Reserve being the currency monopolist).

The other concern is that "business" can act as a monopsonist in the labor market and dictate terms to those who want to work for them. I think there are times that has been true - West Virgina coal mines come to mind. But to me it seems the solution is to have more business, not government control. Why? Because with government control comes the opportunity for political entrepreneurship - the big business has the resources to influence politics. I think we can all agree this is not desirable from a people point of view. It benefits a few at the expense of the many. The financial sector is a very good example of this behavior, by the way. The connections between Wall Street and the federal government are deep.

Finally, pollution. Here's another area where big business captured government power. But, I think this pollution issue is going to make for a different direction, so I will carry on later - need to get my thoughts together first.

I hope I have shown that, in fact, libertarians want to reduce government not just because government is bad but because big business feeds off big government.


  1. I remember when civil servants were sometimes referred to as public servants - those whose integrity was beyond reproach.

    I know this is a sweeping generality, but my gut tells me that folks (bureaucrats) today enter into government service because (1) path of least resistance and (2) they are driven by ideology and government gives them a venue to feed their activism.

    I simply cannot relate to those who fear big business over big government. Who wields the coercive power here?

  2. I don't worry about big business personally. My main concern with political entrepreneurship is that it limits the playing field so other good businesses get shut out.

  3. A good post Jeff, and I actually agree with the gist of it entirely. Corporations are a product of a state. They do not occur "naturally" so to speak and the only way they get the massive influence is to capture the state. The only times we've had some corporate control BY the govt was during the golden years of the American middle class, 1940s to 1970s. Since the Reagan revolution its been a steady DEvolutuon to corporate control OF the govt.

    Its quite interesting to me that the loudest cries about govts influence have been during the time when the govt has been totally bought and paid for BY private interests. Of course the govt is doing less for the average guy the last 30 years, the govt is now USA inc.. It is being run (very poorly mind you) as if it is a private business.

    What should the govt do for the average guy? Protect their rights to collectively bargain. All workers should be able to speak as one and act together to change their workplace conditions. If they are denied that right by their employer they are being denied a basic human right to have some control over their economic welfare. Only an outside entity can enforce this relationship between corporation and worker, there is NO incentive for this to happen in the actual working of a private marketplace, the owners incentive will ALWAYS be to get their employee for as close to free as possible.

    The public choice and knowledge problems apply equally to corporate entities as well. Private entities use their position to pursue their own interests as well (this is supposed to be good) the question is how are actions found to be harmful actually addressed? Without something "bigger" than corporations or any private interest that can make them "pay" for their actions, where does redress come from?

    Living in a society is tricky, we all want to pursue our agendas and inhibit others' agendas that might interfere with ours. How to balance?

  4. Greg,

    I appreciate the thoughtful comments. Can you be a little more explicit when you say corporations are the product of the state? Do you mean specifically the corporate form as it currently exists (which is granted by state government charter)? Or do you mean the concepts behind incorporation, which is basically the idea of limited liability and agency?

    I disagree with you, though, about the middle class "golden years." I am specifically thinking about work by Terry Fitzgerald here:

    I do not deny that recently the top income earnings have gained more than others. I think a lot of this has to do with playing the political game, though. Many of the richest have recently become so not by inventing wonderful new products and services (a la Apple) but by being in politically favored industries (e.g. financial services). This is deplorable and not consistent with free market principles.

    I disagree also with collective bargaining to the extent that a few may speak for the many. If all workers want the same thing, then fine. But to the extent collective bargaining treats workers as a homogeneous mass, I think it violates freedom.

    The labor market economics shows that unionization such harms workers. Capital is mobile - people are basically not. If you want workers to be well off, the you have to have high productivity. I believe we will continue to disagree here, so I guess we can pick it up later.

    Note that I do agree it is against free market principles to limit the ability of people to peacefully gather into groups for any peaceful purpose.

    Public choice doesn't apply precisely to corporations. It is similar, but it is called agency theory because, absent political entrepreneurship, they can only misuse shareholder funds. Public choice theory grew out of that idea to encompass bureaucrats as agents of taxpayers.

    The knowledge problem definitely plagues corporations and the bigger they are the worse it is.

    But businesses exist to find profit. I only see problems if they start violating others' property rights. And they do so with impunity, and compete unfairly, by using political power.

    Balance is achieved by respecting property rights. I believe this is the chief role of any government - to enforce property rights. Right now, as you point out, the government mostly violates property rights because they are, in fact, bought and paid for by a few moneyed interests.