Thursday, September 11, 2008

Big Business, Government, and Coercion - Peas in a Pod

Blogging at AOTP, beloved lefty-blogger Libby Spencer writes that her disagreement with libertarians often boils down to - in her estimation - beliefs in whether a free market exists, rather than whether a free market should exist. Many/most libertarians, of course, would probably point out that their major beef with liberals/Progressives is over the liberal/Progressive assertion that the last 25 years have demonstrated the failure of free markets because free markets have not, in fact, existed. So in this sense, Libby seems to be different from other liberals/Progressives, and in fact in agreement with libertarians.

Where she differs from libertarians, however, is in her belief that the biggest impediment to a free market is corporate monopoly AND that therefore trust-busting (and regulatory control) is a legitimate function of government:

Today many major multinational corporations have an annual revenue that exceeds the GDP of at least 30% of the third world nations. Free market principles can’t exist under these conditions. I hear a lot of talk from libertarians about the coercion of big government when regulatory controls and monopoly busting comes up but I believe corporate coercion is of much greater concern and is the one area of the market that does require government intervention, assuming we can break the stranglehold the corporations already have on our government that has allowed these monopolies to form in the first place. In fact, I see it as an essential first step in breaking the excessive governmental interference in our private lives.

In the comments section, Libby adds:

"[I]sn’t the reason government regulation right now favors corporate interests because the corporations and their lobbyists are the ones writing the regs in order to subvert the free market. It’s a catch-22 and I’m thinking if we break up the conglomerates, they won’t have the economic power to control government policy."

This of course begs for a response from someone with an unnatural fixation on lobbying, corruption, and interest group politics. Someone like, uhh, me.

The first point of disagreement is that I think the latter assertion, which most Americans accept as a truism, does not match up with existing political science, which overwhelmingly shows that economic clout (such as that thrown around in campaign donations) doesn't so much buy control as it buys access. This is a less important point, though, because it's not as relevant and requires an awfully long explanation. Also - regulators are more often than not career bureaucrats who have no need for campaign donations (and there is little evidence to support the idea that they are frequently bribed).

The more important point of disagreement, though, is that I think the evidence shows that as long as you have government regulators, you will have interested parties seeking to influence those regulators. The problem is that the parties interested in a particular set of regulations will almost entirely come from the regulated industry itself (with some exceptions, of course). This fact holds true whether those parties are a handful of large conglomerates or a group of relatively small businesses.

Except in relatively rare circumstances, these parties will be the only group that is both interested enough and organized enough to effectively push for or against a given regulation. Even when a group of particularly interested businesses is not well organized, the prospect of regulatory authority will almost always lead them, or at least a large sub-group of them, to quickly become well organized. This is not difficult, since you are usually talking about only a tiny subset of the population that shares some form of common network, whether it be a trade magazine, distribution network, or whatever. Because regulations typically pertain to a significant portion of the group's livelihood, they will be willing to expend tremendous amounts of time and money to influence the outcome of the regulations.

Meanwhile, to the extent others are interested in the regulations, they are likely to be not only relatively small in number, but also extremely disorganized, as only rarely will they share common lines of communication. Additionally, the regulations will almost never affect them in a way that will have an impact on a substantial portion of their lives. Which means they will be less willing and able to expend time and money on the issue even if they are able to organize.

Importantly, this holds true whether or not the regulated industry is dominated by a handful of large conglomerates. Indeed, the existence of regulatory powers alone can - and I think frequently does - have the effect of encouraging consolidation, collusion, and monopoly rather than competition. The existence of regulatory powers creates a unity of interest amongst potentially regulated businesses - whether that unity is centered on fighting against regulation or, frequently, fighting for regulation that will in some way increase the costs of entry into the industry (which is obviously a deterrent to competition). This unity of interest results in a situation where group members work together against outsiders even as they nominally compete against each other. There are some clear examples of this sort of behavior, perhaps the most infamous being the Realtors' Association. There is even one example I can think of that is far more powerful within its field, and far more relevant to this topic, because there are no constituent businesses within the organization that have more than a few thousand employees - and all but a handful have far less than that.

Meanwhile the group most negatively affected by regulations almost never has the incentive and ability to work for or against a regulation. This group of course consists of those who may in the future wish to become involved in the now-regulated industry. Few, if any, members of this group will get involved in the regulatory process because they, by definition, are not yet involved in the industry, and only rarely will they already have an interest in becoming involved in the industry. Even those who do already have this interest will lack any kind of a network that would allow for the requisite organization and activism.

The result? The regulatory authority (which, I might add, usually consists of people closely linked to the regulated industry) only hears one side of the story. To the extent it hears other sides, those other sides are drowned out by the hue and cry coming from the well-organized industry members, as well as the politicians they have persuaded to intervene on their behalf.

Trust-busting will not solve this problem, though. Instead, it will result in an informal, de facto monopoly that cannot be destroyed without violating the freedom to associate and to petition the government since you would have to prohibit industry members from joining what are essentially trade groups. This de facto monopoly will be worse than a naturally occuring monopoly, which is still usually subject to market forces and can (and often is) still be brought down through normal competition. In many instances, the de facto monopoly will even have more control over government regulation than an actual monopoly because the former example will have the weight of thousands of theoretically independent businesses behind it whereas the the latter will have the weight of only one (admittedly massive) business.

Ultimately, I suspect that monopolies are both created and sustained by government's regulatory authority. To the extent a monopoly could exist in a free market, it would not be nearly so insidious as it is in a regulatory environment where it can use its clout to raise the entry costs of prospective competitors and thereby behave like a true monopoly.