Capitalism’s Survival Depends on Politics

I would like to thank those who have commented on my Cato Unbound lead essay. Although I touched upon some of the mechanistic explanations for “what keeps money out of politics,” my primary intent was to focus on the related question of why business leaders so rarely seek economic liberalization via political engagement. In this response, I address points that respondents have raised to date.

To reprise: My initial piece suggested that public choice economists had focused unduly on crony capitalism while largely ignoring the potential for wealth-enhancing entrepreneurial activity in the political sphere. I also noted that economists generally—and intellectuals on both the right and left—have tended to focus on negative functions of business, namely market failures in the private sphere and rent seeking in the political sphere.

This focus has influenced the narratives that frame public policy issues for most people, thus helping to propagate a distrust of business engagement in politics. Since, as I argued, the path to economic liberalization leads through politics, this has discouraged business from challenging the growth of the regulatory state. Absent that resistance, we have seen a steady shift of the economy toward statism.

My perspective, as noted, is based on the work of Joseph Schumpeter—his essay “Can Capitalism Survive” and his reasons for answering “No.” Businessmen, he believed, would be inarticulate in the political sphere, while intellectuals, seeing the growth of the state as advancing their interests, would have strong incentive to master engagement in the political process. And, fulfilling their role as “second-hand dealers in ideas,” which Hayek so ably described, intellectuals—conceptual thinkers and narrative crafters—would disseminate these negative stories to the citizenry, leading to capitalism steadily losing its legitimacy. In a democratic market economy, loss of legitimacy attracts “entrepreneurial” politicians who champion new interventionist policies. The market shrinks as Leviathan expands.

On the initial question of why more money isn’t spent in politics—a point discussed in the literature as the “Tullock Paradox”—there was, I think, much agreement among us.

However, my posting did not elicit comments on my observation that public choice analysts placed undue emphasis on crony capitalism—that is, the negative role of business in the political world—and the corollary suggestion that public choice economists might give a closer look at the conditions in which business might find it advantageous to seek greater economic freedom in the political sphere.

I also noted that while public choice economists understand well that interest group politics determines much in Washington and that interest groups are both economic and ideological, they seem to view ideological groups as minor players in the Washington power game.

The major point I wished to make was that intellectuals have focused on the social negatives of business (and these certainly exist) but have neglected the social positives, and that this has encouraged a state-broken business community (another Schumpeter term), has discouraged business from engaging in economic liberalization efforts, and threatens to make Schumpeter’s gloomy (to me) assessment a reality. I think it is worthwhile to respond to some particulars from my fellow authors.

Is business the dominant force in Washington? I have been in the public policy arena for over 40 years and have been engaged in many policy fights. Business is almost always present and often dominates, especially when the issue is technical and involves some backroom dealings. But when issues move into the public arena, when the media covers the debate and public opinion becomes an important factor, I find that Schumpeter’s description of business’s role in politics to provide a far more accurate picture: “A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose—both in the drawing room and on the platform.” Anecdotes are not evidence, but they do provide a window into ways of thinking. In my experience, businesses tend to adopt preemptive surrender strategies, accepting the validity of almost every criticism, in order to get the latest crisis behind them.

The results are sometimes amusing. At one meeting I attended, a lobbyist for a major firm proudly stated: “We never oppose anything, we like to get along!” That partly explains why some of the most important policy changes in Washington over the last few decades—the environmental laws—were pushed not by business but rather by powerful ideological environmental lobbies. True, some firms have tweaked the resulting environmental rules in their favor, gaining a larger share of a smaller pie, but these remain minor ameliorations of the regulatory costs of well over $1 trillion that now hinder economic growth.

Should we view business efforts to resist the growth of government, to regain economic freedom as negative? The freight railroad sector, facing bankruptcy in the 1970s, sought and won economic liberalization. The result was that an industry barely surviving moved into the mainstream. Shippers enjoyed massively improved services, and in the decades since hundreds of billions of private capital have been expended to upgrade and expand private rail infrastructure. Had such economic liberalization efforts been mounted and succeeded in other areas, America’s current economic plight would be much less serious. As we like to say at CEI: One doesn’t need to teach the grass to grow; simply move rocks off the lawn.

There is a path dependency element in politics. For at least the last century, intellectuals have viewed the role of business in the political sphere negatively, focusing on its rent-seeking crony capitalism aspects. Yet what is truly surprising is that we have seen so little of those. As some of the commenters seem to agree, many (I would argue most) businessmen have tended to see Washington as not only inimical, but irrelevant to their wealth-creation skills and thus have stayed away. But today, with government’s share of the nation’s economic terrain approaching 50 percent, can they remain neutral? Will they be forced to engage the political process to survive? Is it therefore possible that at this stage in the game, an aggressive positive effort toward entrepreneurial liberalization is not only a morally correct option, but also an economically profitable one?

Does competitive politics restrain politicians? The argument that greater competition in the political world—such as more competitive legislative districts—would encourage greater efforts to inform voters on the pros and cons of specific policies is not persuasive to me. I think competition would do much good but communicating with a rationally ignorant electorate poses many problems that are not resolved simply by increasing the information content of those communiqués. Some political observers believe that competitive elections drive candidates toward the “center”—as the median voter theory explains—which in reality means that they encourage candidates to feign support for “consensus.”

How much does product reputation affect political legitimacy? There is much to say about this topic, but I find the linkage weak. An individual consumer can love her car, but in her role as citizen, she can still advocate more extensive regulation of automobiles. That Joan Consumer and Joan Citizen inhabit the same brain does not mean that they often meet, much less agree. Firms face two distinct challenges in achieving sustainable profitability: gaining reputation in the private world to ensure profitability (sales) and gaining legitimacy in the political sphere to fend off political predation. One appeals to the self-interest of the consumer; the other to the values of the rationally ignorant voter. In democratic market economies, it is not sufficient to be “consumer friendly”; one must also be viewed as “socially moral.” The two challenges are very different.

Why do large firms so often become crony capitalists? Large firms cannot easily avoid entanglements in politics, and absent any positive capability for defending their wealth-producing role, they often slip into cronyism or appeasement. Moreover, many of these large firms already have extensive government affairs personnel who maintain close contacts with politicians, which further exacerbates the principal/agent problems that are especially prevalent at firms’ political wings. Here, I believe that Raymond La Raja may have misconstrued part of my argument. I do not seek to posit a set of absolutist propositions regarding political advocacy that “run against some basic understandings about interest group politics in the United States.” Rather, I hope to extend interest group analysis to the inner workings of the firm, where all too often, the left hand doesn’t know what the right one is doing.

Why politics? La Raja correctly identifies one of my key arguments: As I mentioned above, the path to economic liberalization passes through politics. I raised that point to suggest that in recent years public choice economists have seemed not to consider that opportunities for entrepreneurial capitalists—that is, those who are wealth-creators, not wealth-redistributors—to invest in economic liberalization campaigns may be increasing. By focusing on the negative role of rent-seeking capitalists, I argue, they have discouraged business from engaging in politics generally—another reason why there is so little money in politics. Business must engage in politics if it is to regain any significant degree of economic liberty.

However, influence in politics is not primarily about money. The left has crafted powerful narratives promoting the expansion of government; the right has been far less successful. The important task of developing positive narratives and moral arguments that can help gain public support for economic liberalization is the task of free market intellectuals, and I believe that we have largely failed to achieve that goal.

La Raja is doubtful that the counteroffensive to expand the private sphere and regain for it terrain now under political control is viable. He thinks it more likely that we’ll see economic interests continuing to focus on the “physical” rather than the “moral,” and that rent-seeking will continue to be the dominant form of political advocacy by business. Perhaps, but with huge swathes of the economy already politically dominated, and with a federal government nearing bankruptcy, we may be approaching a tipping point. He is right that rolling back Leviathan is a difficult and risky game, but to paraphrase Damon Runyon: I long ago came to the conclusion that all life is six-to-five against.

La Raja cites two reasons why he considers a free-market counteroffensive unlikely. First, there is in a sense no such thing as “ ‘Business’ with a capital B.” Rather, we have a large number of specialized subgroups within which we can expect to find rent seekers as well as free-market entrepreneurs. Second, their competition in the private sphere makes it difficult for them to cooperate in the political world.

The first point is correct, but as the example of the successful freight rail deregulation effort shows, parts of an economy can be liberalized with limited engagement from a set of key interests. Some shippers joined with freight rail companies to push through a degree of economic liberalization. Yet it also raises the question: Must bankruptcy be the only spur that could prompt such behavior? Regarding La Raja’s last point, businesses routinely compete and cooperate. For example, competitors join the same trade associations, which sometimes achieve a degree of cooperative response.

La Raja’s skepticism that public choice theorists could become activists and that businesses could become more effective in the political world is warranted. But I’m not asking that public choice economists “renounce their analytical approach of ‘politics without romance.’” Rather, I suggest that they consider that political action can have wealth-enhancing as well as wealth-dispersal results. And, while I agree that to expect most people to display “heroic and moral behavior” would be foolish, many important changes in the world—for good and bad—have come from exactly such acts. Certainly the left has figures many of whom have been both “heroic and moral” in their cause. I believe that economic liberals are not lacking in these attributes.

Gordon Tullock rightly noted the naïveté of the “civic virtue” model of politics. His focus on how concentrated interests—rent-seeking businesses, organized interest groups—engage in politics as an investment opportunity is important. But again, as in most of the public choice literature, more emphasis could have been given to the conditions that could lead to investments in wealth creation rather than wealth redistribution.

La Raja and I agree that the sums spent on political campaigns seem reasonable compared to the amounts spent to market consumer products. Some estimates have business globally spending almost $1 trillion annually, but, as noted above, selling soap is a different challenge than legitimizing the ability to sell soap in a free market. But it is also worth noting that expenditures on political campaigns are much larger than those spent to legitimize business activities. As La Raja points out, casino mogul Sheldon Adelson spent large sums of money during the last election cycle, but did those large sums accomplish anything of substance? He is right, however, that the “money determines everything in politics” mantra has become dominant, making political marketing to gain legitimacy a difficult task—especially if business seeks to do so by itself.

Stephen Ansolabehere raises several interesting points. He notes that many Americans consider money in politics to be an invariably corrupting element, and that therefore, business should stay out of politics, leaving decisions that affect their survival to Progressive reformers. I agree that many think this way, but to resign ourselves to that reality would be a mistake. As noted above, do we really believe that society would benefit by trying to drive corporate money out of politics, leaving the intellectuals who command the media, the academy, and popular culture as the uncontested arbiters of the narratives that influence public opinion?

I do not agree with his second argument that, “[t]he more one business or another asks of government, the more distortion the government’s actions will create in the economy.” Business can approach government for wealth-creating liberalizing reforms just as easily as it can for wealth-destroying favors. That the past has seen most business engagements falling into the wealth-redistribution category does not mean that the future must be the same.

I found Ansolabehere’s division of contributors into “investors” expecting a return and “consumers” acting for other imperatives compelling. However, I think it more worthwhile to focus this discussion on policy debates rather than elections. The complexity of achieving returns certainly explains in part the paucity of political investments. Too little research has been done on the rates of return that have come, and might be expected, from investments by economic groups in politics. There are studies, but they seem often little more than anecdotal—Corporation A spent y and obtained z! How many sought but failed to achieve anything? And I agree that game theoretic approaches can be less effective in the real world.

The politics-as-market analogy is unsatisfying for another reason. There is a special kind of political “investor” that has escaped scrutiny in the course of this discussion so far: interest groups that are entirely (or overwhelmingly) dependent upon government largess. Foremost among these are government contractors and public employee unions. For these groups, politics is not “[l]ike any kind of capital or labor investment that firms may make,” but rather an all-or-nothing fight for survival.

This brings us back to one of the fundamental challenges free market advocates face. The entrepreneurial capitalists who stand the most to gain from economic liberalization rarely see the struggle for it as essential to their long-term survival. Instead, when they do engage in the political world, they are often in a reactive crisis mode. Such policy myopia is dangerous. If entrepreneurial capitalism is to survive and thrive, it will require its practitioners to have a long-term vision going forward. State intervention into the economy has gone too far for policy inertia to be a viable option.

Back when government accounted for only a small share of the economy, there were few examples of government restricting business and stifling entrepreneurship. In 1890, around the onset of the Progressive era, government was perhaps 5 percent of the economy. It was around that time that the challenge toward maintaining economic freedom shifted from protecting traditional liberties to ensure that the institutions of liberty—property rights and freedom of contract, for example—would be allowed to evolve into new areas, to enable capitalism to adapt to new circumstances and technologies. Unfortunately, much of that development was stunted.

For example, technological changes made the electromagnetic spectrum a valued resource, and property rights were slowly evolving as entrepreneurs sought to make use of it. But that evolution was derailed by Progressives’ insistence that the spectrum should be owned and managed politically. The Federal Communications Commission took over the spectrum, which then became a mismanaged and politically manipulated resource—a problem that persists to this day. Liberating enterprise will require untangling the web of regulatory interventions that to this—in effect, to reverse-engineer the Progressives policy edifice built up over the past century.

Also from this issue

Lead Essay

  • Fred L. Smith Jr. argues that while public choice economics can be a powerful tool, it has focused far too much on failure rather than success — markets fail; governments intervene; governments fail in their turn. We are told again and again that there is too much money in politics, and yet, if we quantify the returns to be had from lobbying, we discover that businessmen have actually been holding back. This suggests a previously underappreciated virtue on their part.

Response Essays

  • Stephen Ansolabehere recommends a shift in focus, away from normative claims and toward using money in politics as a tool for understanding the distribution of political power. He shares several of the more important findings from research in this direction and downplays the return on lobbying investment, characterizing it as “modest, at best.”

  • Raymond J. La Raja argues that American political institutions work against would-be buyers of special favors. The party system, the structure of our Constitution, and the difficulty of crafting a national media campaign all mitigate against rent-seeking behavior. That said, the lucky few still manage to earn outsized returns, even while many lobbyists go away with nothing. La Raja is skeptical that businessmen can work the political system toward better governance, and he doubts that the Public Choice school would make an apt partner in the effort.

  • Francesco Parisi argues that markets for political goods are highly inefficient and seldom work like traditional ones. Unexpectedly low levels of political advocacy effort do not reflect a hidden virtue on the part of would-be rent seekers. On the contrary, they indicate that simply that hidden additional costs exist in this area of effort, and that the rents to be sought are not as cheap as they may appear.