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In the three decades since I founded the Competitive Enterprise Institute , I have seen the pro–free market intellectual movement grow by leaps and bounds. Many libertarian ideas and policies once considered on the fringe have entered the mainstream of public debate. This is all to the good. In the battle of ideas, we have won some significant victories. Yet, despite these victories, Leviathan’s onward march has continued unabated—as the stagnant economies and crushing debt burdens in the United States, Europe, and around the world show. Why?
My explanation is that the strategies proposed by F.A. Hayek to promote classical liberal ideas through traditional academic means, while compelling as a way to develop the ideas of liberty, are inadequate to the real-world task of ensuring that these ideas result in policy reforms in the political world. Hayek’s view that ideas are powerful things does not address the challenge of ensuring that the ideas that prevail are good ones.
One necessary element for “good” ideas to prevail is that they must be viewed positively, as making the world more virtuous or less sinful. Yet, as I argue in this essay, free market scholars have focused more on “sin” than “virtue”—on how business does “bad” rather than “good” things in both the private and political worlds. In this essay, I will both explore some examples of this trend and suggest some correctives.
Traditional economists have done much to publicize the “failures” of private markets, like pollution, inadequate provision of public goods, or collective action difficulties. While in the political world, many public choice economists present an equally pessimistic view of business practices. Essentially, public choice theory seems to imply that it is futile to try to effect change through ossified government institutions mainly concerned about their own self-preservation. Efforts to liberalize the economy never get off the ground. The tendency of public choice scholars to focus on the bad behavior of business in the political world, combined with traditional economists’ focus on “market failures,” leaves business little to respect about itself in either world.
My framework for examining this question stems from Joseph Schumpeter’s classic essay, “Can Capitalism Survive? ” and his gloomy answer, “No, I do not think it can.” Like Hayek and others, Schumpeter saw capitalism succeeding materially, creating the world’s first significant middle class, which in turn created two forces of change in society: entrepreneurs and intellectuals.
Entrepreneurs, Schumpeter noted, would explore ways of meeting new needs or ways of meeting older needs more creatively. Entrepreneurial activities would further growth and thus help create a larger middle class. Intellectuals, he argued, would find statism in their self-interest. (The term “intellectuals” as used here is that defined by Hayek: those who view the world in conceptual terms. The members of this group are not the “original thinkers” but the “second hand dealers in ideas” who craft and disseminate the narratives that frame issues for most of us. )
Intellectuals, Schumpter argued, would favor the growth of government over an entrepreneurial society for both psychological and economic reasons. First, their championing of collective solutions grants them a feeling of moral superiority (Businessmen care about money—we care about people!) Second, as government expands, large numbers of powerful and influential jobs are created, not only in the government bureaucracy but also in the myriad positions—such as vice presidents for external affairs—within firms that businesses creates in order to negotiate with Leviathan. The net result is that intellectuals will see statism as their class interest. Anecdotally, the vote tallies in university towns, ideological surveys of journalists or even Hollywood types provides evidence that Schumpeter was on to something.
The intellectuals’ statist bias is critical, because they craft the narratives that inform most people about public policy. Entrepreneurs and businesses rarely compete in this communications realm. The result is a world where large swaths of the population view the world through pink-colored glasses. In such a world, political trends veer continually toward the expansion of state power.
This is clearly a problem, but public choice economists—whether wittingly or not—have helped foster a sense of despondent resignation in the face of an array of incentives that inexorably favor the political realm over the private one. Moreover, by focusing on the negative role of economic groups in the political process, they have failed to adequately consider the power of ideological interest groups, usually elite-driven, that play a major role in crafting, disseminating and legitimizing the narratives that inform how both business and the rationally ignorant citizenry view the economic world. By broadening its analytical scope, the public choice school could play a more positive role in the effort to liberate our economy.
James Buchanan defined public choice economics as “politics without romance .” Public choice scholars wisely noted that self-interest does not vanish when one enters the political arena. It may seem obvious today, but when that proposal was first announced, it was paradigm-shattering. Note that the public choice school has evolved in a world dominated by Pigovian economics. Pigouvians had argued for significant political intervention in the economy, based in part on their elaborated theories of market failure. Government intervention, they believed, would often be an effective way of resolving these problems.
It should be noted that Pigou himself was not altogether naïve. He was well aware that the history of political intervention in the economy has generally been prone to failure. However, he believed that the evolution of “independent” regulatory agencies, the improvements made possible by “scientific management,” the cultural shifts within in the English-speaking world that made reliance on civic virtue more viable, and the knowledge developed by economists of the ideal outcome of a perfectly competitive economy—all made government intervention far more credible than in years past. Thus, he argued, the path to expanding the power of government to “do good” was now open.
Given that context, the response of classical liberal economists should not be surprising. Progressives had focused on ways in which markets failed; classical liberals would focus on ways in which government failed. Thus, public choice scholars focused on the naiveté of the Progressives’ view that expanding the role of government would solve problems. The result was a theory of government failure to offset the then-dominant theory of market failure. Henceforth, policymakers would face a more realistic world in which all institutions and government policies were subject to failure. There could be no magic bullets!
But, while this focus brought some degree of balance to the policy debate, the overall picture of business painted by economists was negative: Progressives focused on ways in which private action in the private sphere led to social losses; public choice economists looked at ways in which private action in the political sphere led to the same. This focus on failure is all too typical of social policy research. Why was there little focus on the history of private efforts to resolve “market failure” challenges? Why hasn’t there been more followup on the work of Steven Cheung  on bees and orchards or Ronald Coase  on lighthouse provision? Why hasn’t there been more economic history research broadening the work of Burton Folsom demonstrating often heroic efforts by business to fend off political predation? Or, even more exciting, where business has actually fought to promote economic freedom—the success of the freight rail association in gaining the right to operate in the free market or the success of the Anti-Corn Law League?
That more balanced approach would yield a much wider and richer array of narratives that might better guide businessmen in our mixed economy. That work would also help business schools provide positive advice to their students about entrepreneurial opportunities by resolving “market failure” or by seeking economic liberalization. Moreover, both types of positive narratives help establish better norms for business behavior. Today, after all, the negative narratives encourage firms to avoid politics or to seek favor. The norms that would encourage positive moral behavior in the political world are weak. Norms that discourage bad behavior are valuable, but norms that encourage heroic and moral behavior are even more valuable.
The major point of this exercise is to suggest that the negative moral tales of public choice may mislead businessmen. The focus on the risks of political involvement may encourage them to drop out of the policy formulation process. This is tragic. The path to economic liberalization passes through politics! If the narratives portray only the wickedness of business in politics, they’re less likely to engage in the struggle for economic liberalization. Their withdrawal, their neutrality, will only means that Leviathan will expand even faster. Business needs to overcome the pessimistic fatalism that sees pro-economic freedom political action as futile.
The emphasis of public choice has led many to believe that crony capitalism is rampant. In reality, of the hundreds of thousands of businesses in America, relatively few seek special favors in Washington. Most small firms have no lobbyists at all and wish only to be left alone. Gordon Tullock noted a paradox: If, as public choice theory suggests, the economic benefits (rents) to be gained from government are so high, why is so little actually spent in pursuit? Estimates of lobbying expenditures by corporate watchdog groups and academics, while varied, all seem to indicate that although rent seeking is highly profitable, spending on lobbying is relatively modest, with estimates ranging from $3.5 billion to $30 billion . In a $15 trillion economy and with a $3.8 trillion federal budget (including regulatory costs would add another $2 trillion to that budget), those seem like extraordinarily low levels of “investment” for very high potential payoffs. Those sums seem even more modest when one considers that much of the expenditure is defensive—seeking merely to fend off or modify costly and poorly designed wealth-reducing regulatory initiatives. Yet, one study found a return of $220 for each lobbying dollar spent. So why do businessmen hire engineers or marketers rather than lobbyists? Other factors must be present.
One factor is the nature of politics—an environment where nothing like an enforceable contract is possible. (As Rick Stroup has noted: At best, you rent politicians, you don’t buy them!) In many ways, politics is like a game of chance. One may have done everything “right” to promote an issue, but some external event can intervene—war, financial crisis, natural disaster, political scandal—and the momentum one has built vanishes overnight. Lobbying is akin to liability litigation, a lottery, with high returns but high risks. Lobbyists in political negotiations do not know whether “promises” will be kept, whether the politicians are negotiating with others on an opposing policy. Higher risk means that lobbying is both more expensive and less productive—thus, reducing its extent.
Other factors that might explain the low level of lobbying activity include the dilution effect, the crowding-out effect, and maintenance cost considerations. Dilution means that if one achieves an attractive rent-seeking opportunity offering high profits, one can expect other firms to do so also, reducing the value of that privilege. Crowding out refers to the fact that if too many lobbyists seek the same favor, their voices may be less persuasive. Even politicians have some concept of the need to limit rents. Maintenance cost is the Danegeld issue—one may gain a special privilege but then have to invest year after year in retaining it as changes in the economy, negative publicity, and efforts by other claimants to gain priority come into play. Moreover, while citizen scrutiny of politicians is weak, politicians are in fact worried about being seen as the “Senator from Enron.” And in today’s fishbowl media world, deals may become public and create significant drops in voter confidence. Taking bribes remains for most Americans a contemptible act, and no politician wishes to face that charge. This chills the politicians’ enthusiasm to entertain lobbying that cannot readily be defended in a sound bite.
Gaining that cloak of legitimacy also explains the role of “Baptist and Bootlegger” alliances, coalitions of ideological/moral/intellectual forces with economic groups. Renewable energy is a good example. The environmentalists provide the moral and intellectual case for subsides and mandates, the firms make the economic case for whatever profitable government-favored activity they pursue. In a democratic market economy, one needs both an economic and a moral case. The number of rent-seeking opportunities that meet this test may be much smaller than commonly believed.
Public choice has emphasized the economic partner in Baptist and Bootlegger coalitions, but often the dominant partner is ideological. Consider environmental regulations. While the design and specifics of environmental rules have clearly been influenced by economic interests, the overall thrust to push residual emissions down to zero came from environmentalists.
Perhaps the most neglected consideration is that businessmen, like Americans generally, find little pride in gains achieved through special dealing. For most business leaders, as for most Americans, earned achievements with their concomitant sense of virtue are the only path to happiness. There is something shameful, immoral even, about being “given” success. Has morality been too quickly discounted by economists?
My point is that public choice economists focus on a problem that is smaller than they and the popular media suggest. The dominant, negative stories of crony capitalism—told by both left- and right-leaning academics—have led many businessmen to avoid politics altogether, and in some cases even to join the ranks of the crony capitalists. With intellectuals of all stripes emphasizing only the negatives of business involvement in politics, should we be surprised that business has largely remained passive and defensive as government has grown massively over the last century? And should we be surprised that calls for “driving money out of politics” would have become so powerful? A more balanced view clarifying the positive role of business in that world would be helpful. After all, if money (that is, economic interests) were driven out of politics, we’d be left with nothing but ideological groups. History does not suggest that this would lead to better policies.