Capitalism has a bad reputation. Many people see it as corrupt, uncaring, and in bed with politicians. And popular wisdom isn’t always wrong. For example, take the Export-Import Bank’s pending renewal. How dare large, healthy businesses such as Boeing and General Electric receive billions of dollars-worth of special privileges?
Has Big Business thought through the political and social costs of such self-aggrandizement? Is sacrificing long-term moral standing for short-term dollars really wise?
Most businesses, after all, rarely lobby. Lobbying at the national level is largely a phenomena of the largest corporations. Why don’t more business leaders recognize the strategic value of asserting their superiority in creating wealth rather than having funds transferred to them via politics?
Fortunately, it turns out, most businesses do at least implicitly recognize these tradeoffs. As the late, great academic Gordon Tullock noted, lobbying’s apparent payoff is far lower than generally believed. Measuring the full extent of lobbying “investments” is difficult, but a simple analysis find less than $10 billion being spent annually on lobbying to gain perhaps $100 billion of government largess. Tullock outlined four factors which suggest that the costs of lobbying are greater than generally presumed, while its benefits are less.
First, when multiple companies are competing for a single government grant, a “lottery” situation emerges in which one company might win big, but the losing companies still incur lobbying expenses which bring down the overall corporate returns.
Second, if a company purchases the support of one politician, the firm and the politicians must generally still negotiate with a requisite number of others and that requires additional political investment.
Third, since most people view special political favors as unseemly, companies and politicians have to spend time and money building cover stories. GM’s bailout was purchased in part with a multi-million dollar national advertising campaign in which the company draped itself in patriotic nostalgia. GM also gave up significant decision authority to the government, even allowing President Obama to fire the CEO.
Finally, as markets adjust over time and eat away at the returns on government privilege, the beneficiaries must still invest to retain their eroding benefits. Think of the struggle between New York City’s taxi medallion owners and upstart ridesharing services such as Uber and Lyft.
Even with these considerations, the level of lobbying seems lower than one would expect. This suggests that many businessmen also have some sense of propriety, believing that earned income is morally superior to granted income. This does much to inoculate them against Washington’s temptations. As the economist Joseph Schumpeter noted of the average businessman long ago: “…he wants to be left alone and to leave politics alone.”
The “Adam Smith” problem sheds further light on why lobbying efforts may be low. Scholars have long noted a tension between the Wealth of Nations’ focus on self-interest and the “other-regarding empathetic” message of his earlier book, Theory of Moral Sentiments. As Smith observed, most people simultaneously hold both values – “other regarding” values encourage people to get along with each other peacefully and escape the Hobbesian war of each against all, and self-interest encourages people to seek the win/win arrangements that make trade, the free market, and wealth creation so viable.
To the populace and perhaps many business leaders, cronyism seems a form of political “sharp dealing” that threatens voluntary win/win arrangements and capitalism itself. This may well dissuade many business leaders to focus on the world they know best – a world characterized by a creative mix of cooperation and market, rather than political, competition – to produce a close approximation of moral (rather than crony) capitalism.
Nonetheless, cronyism remains a serious challenge to capitalism. It must be condemned and corrected. This will require creative alliance-building by both free market intellectuals and true capitalists who reject rent-seeking. Capitalism, after all, is unlikely to be defended adequately if capitalists fail to engage. Such a coalition of moral, intellectual, and economic forces could be a powerful force for economic liberalization, ensuring a positive future for capitalism – and for America.
Originally posted at Forbes.