Political Capitalism: Risky Business

The collapse of renewable-energy highflier Solyndra has increased media attention to government “green” bets elsewhere. And what has come to light is other renewable energy projects in trouble, as well as government (taxpayer) bets on energy efficiency projects.

“While Solyndra LLC’s flameout has fueled criticism of federal initiatives to encourage alternative power sources,” the Wall Street Journal reported this week, “the solar-panel maker is hardly the only disappointment among U.S.-backed energy programs.” The article, “Red Flags for Green Energy,” goes on to describe how programs for home weatherization and green-job training in California and other states have been beset by a lack of consumer interest and overcapacity, respectively.

Welcome to the world of lemon socialism and crony capitalism where virtually everyone loses (taxpayers, consumers, the economy) so that a (politically) privileged few can make a quick buck.

Fair Warning

It is not that we haven’t been warned. American political economist William Graham Sumner more than a century ago cautioned against what today would be called the politicization of economic relations. Regulation to “control … interests” did not level the playing field but resulted in “more crafty and secret modes of action” by private enterprise. The “lamentable contest” between government officials and business lawyers to shape regulation and operate under it was one reason that the effects of regulation could be “far other than those which were expected and intended.” His answer was to “minimize to the utmost the relations of the state to industry.”[1]

Special interests winning at the expense of the common good—not even Al Gore likes that, if he is on the wrong side, that is. “The influence of special interests is now at an extremely unhealthy level,” Gore told the New Yorker last year. “And it’s to the point where it’s virtually impossible for participants in the current political system to enact any significant change without first seeking and gaining permission from the largest commercial interests who are most affected by the proposed change.”[2]

The Public Choice school of political economy explains in common-sense terms the age-old phenomenon of private interests compromising the general good despite the notions of Good Government and We the People. “Benevolent despots do not exist,” Nobel Laureate James Buchanan wrote in 1978. “Government policy emerges from a highly complex and intricate institutional structure peopled by ordinary men and women, very little different from the rest of us.”[3]

In public-choice terms, Abraham Lincoln’s “government of the people, by the people, and for the people” is recast as government of, by, and for some people. “It is government ‘of the Busy (political activists), by the Bossy (government managers), for the Bully (lobbying activists),’” said one public-choice economist.[4]

Risky Business

Political capitalism is risky business. For rent-seeking companies, the costs of lobbying and public relations are large, and temporary political majorities can remove hard-won gains. Sumner saw this clearly:

Although you may be in possession of the power of the state to-day, and it might suit you very well … to triumph over your business rivals and competitors … you would far better content to forego your satisfaction, lest presently your rivals … should beat you in a political struggle; and then you must suffer wrong and in the end be forced to … devote your whole energy to the political struggle, as that on which all the rest depends.[5]

Enron, for example, an infamous practitioner of political business, was burdened by high administrative costs (corporate overhead, etc.) to support its rent-seeking activities. Low profit margins (there were other reasons too, of course) panicked the company into chasing more political rainbows until, finally, the U.S. Treasury said “no” to Ken Lay’s bailout request in 2001.

Conclusion

Three points can be made in conclusion.

One, the free market is a democratic process that is run by the “other 99 percent” (think current anti-Wall Street protesters). “It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference,” noted economist Ludwig von Mises in his 1949 classic, Human Action.[6]

Two, the societal goal of elevating consumer-driven markets over politically engineered ones needs business reform, not only political reform. As Milton Friedman reminds us: “With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.”

Three, bypassing the democracy of the free market to prop up bad business is risky business all around. For the business, there are the higher costs of lobbying and public relations and very real prospect of ultimate failure at other people’s expense. For the politician, there is voter backlash at business favoritism gone bad. And for taxpayers and voters, it is democracy in deficit.

Welcome to today’s America.