Corporations, Government, and Markets 

            Most of the dialogue about free markets in the U.S. today is not dialogue, but rhetoric. We live in a liberal democratic political system. Liberal means what it used to mean: the opposite of a monarchy, dictatorship, or oligarchy in which the ultimate legal political power resides in one or a few individuals. Instead, the governing few are checked by the will of the people in general. Our current muddled definitions of liberal and conservative operate within this old-fashioned liberal umbrella. 

            Within this context, a free market must be understood to mean an even playing field between individual companies. This necessitates regulation of markets in order for them to be free. Adam Smith, at the beginning of economic theory, understood and warned that the natural tendency of a business is to dominate its market and tend towards monopoly. This must be checked by the liberal government. 

            One of the greatest dangers to markets today, however, is the government. 

            When government and corporations collude to create cartels or monopolies, the root of liberal capitalism—the free market—is cut off. Corporations argue that protecting them protects jobs, but the government should focus on protecting individuals, not corporations. It may be that some temporary job protection in transition is allowable, but ultimately, companies that are mismanaged or obsolete must be allowed to fail. The workers, NOT their particular jobs, should be protected with relocation aid, new skill training, transitional income, etc. 

            Having started by saying that government regulation is essential to a successful capitalist society, the wrong kind of (or too much) regulation has the opposite effect. It hinders and can destroy the level playing field. Today, large corporations have gained a lot of protection simply by the proliferation and complexity of regulation and taxation. Complexity is expensive. The marginal cost of dealing with complexity goes down as company size increases: large companies can afford it, small companies can’t. 

            The American cigarette companies offer a clear example. This is probably the most regulated industry in the country, which is generally viewed as a good thing (and I agree), but it offers a laboratory of the anti-market nature of regulations. There are no new startup cigarette companies or foreign competitors. It’s not because entrepreneurs feel its immoral, it’s because the barriers to entering this market are too high. The taxes and reams of regulations, all make the risk/return ratio way too high for a new player to enter the game. Only the large established companies can compete by operating to some extent as a cartel, their interests aligned in a love/hate relationship with the regulators, who function similarly to a protection racket. Those who can pay enough and jump through the complex hoops are protected from competition from those who can’t. 

            This limits the industry itself and keeps prices artificially high, which is the intent. Note that vaping companies actually support my argument. They have started up to compete with cigarettes precisely because of the lack of regulation, demonstrating the resilience of markets in any regulatory environment. 

            The problem is that this same proliferation of regulation that favors large companies exists in many areas of our economy that we are not trying to limit. You can pick your favorite, but some options are phone service, internet service, television, energy (oil, gas, hydro, wind, solar, etc), and transportation. More competition would lower prices which has essentially the same effect as raising wages. 

            The solution exists. In our current situation most companies, finding that the battle for favorable laws tends to favor their larger competitor rather than themselves, will opt for the 2nd best alternative: a level playing field. The fact that this isn’t happening is one of the things that fuels Trumpism. Small businesses are furious at how difficult it is for them. (In my opinion they have backed the wrong horse, but that’s another discussion). 

            There are laws to encourage small business. They exist. They help. They require legal expertise to navigate and add to the complexity that adds to the barriers to entry, so have a downside also. The fact remains, small businesses cannot compete with the deep pockets of large corporations in lobbying and dealing with complexity. 

            Another confusion about capitalism is that the amorality of it must lead to greed and evil. Properly regulated, the opposite happens. Yes, individual companies – like individual people, families, communities, etc – want to succeed and will compete against others to that goal. If they can gain an advantage, they will take it. However, if they feel that stable regulatory bodies create an even playing field, they will favor that over the current situation and over the chaos of no regulation, because chaos always favors the large over the small. 

            Consider climate change. Climate change hurts everyone, personally and economically. The cost of climate change will clearly be greater than the cost of preventing it. Everyone is beginning to recognize this. The Economist magazine reckoned a few years ago that successful addressing of climate change would cost about 1% of world GDP. That cost has to be shared. Companies are made of people. People have families. People care about their families and their descendants. Given reasonable options, companies will accept the cost of controlling climate change. The essential characteristic of those reasonable options is that all competing companies share the cost fairly. 

            So companies have an incentive to support regulation that requires this cost of their industry, if the regulation is convincingly effective and fairly applied to all. There will be a lot of heated discussion over the details, but the incentive to work them out exists. If the discussions fail, everyone retreats into their corner, protects their own turf, and everyone loses in the long run—which is not so long anymore. 

            The term “business friendly” is Orwellian today. Mostly it means friendly to anti-capitalist cartels and monopolies. Big government and big business are colluding against all of us, even though they are both made up of us. (Reference Pogo on this.) This is NOT what Adam Smith, Karl Marx, J. M. Keynes, Friedrich Hayek, or any other free thinker proposed. To re-apply a phrase from 13 Bankers (by Johnson and Kwak): This is literally something nobody thinks is right. And yet it’s what we have.

Hugh Moffatt
Waltham, Massachusetts
February 5, 2019