The Siren of Partnership

JULY 01, 1983 by ERNEST ROSS

Mr. Ross is an Oregon commentator and writer especially concerned with new developments in human freedom.

An ancient sound echoes across the troubled waters of American politics—a haunting, alluring chant. Free economy advocates must recognize that this is not a call which would lead America forward to a safe harbor of economic rejuvenation, but one which beckons ominously back onto the reefs of economic stagnation and decay.

This deceptive sound is none other than the plea for formation of a partnership between government and business. Several outspoken politicians have been pounding podiums about business and government “pulling together” to spark the economy. The essentials always come out the same: We must have a conscious, national decision to unify the major purposes of government and business.

The idea can be superficially attractive. After all, if both partners decided to move in the same direction, wouldn’t much otherwise wasted energy be saved? In business, cooperative partners tend to do better than feuding ones. So why not seek the same kind of cooperation between government and business?

There is a fundamental reason why not. In a government partnership with business, it is always the government which becomes the more powerful, or “senior” partner. It is ultimately government which ends up setting the direction. And when that happens, the efficiency and morality of the free market are sacrificed.

The entire idea of free markets is that they be able to function without government intervention. Bringing government into the markets “merely” as a partner guarantees intervention. To see why this is so, let us review some of the major ways in which government might act as a partner with business: (1) by setting economic development goals, (2) by protecting preferred industries, (3) by subsidizing research and development, (4) by establishing favorable tax policies.

Setting Economic Development Goals

The argument for having the government set priorities in development is usually a variant of arguing for economic stability. If we had a national policy for development, goes the rhetoric, everyone would be able to plan better, to make business decisions without having to worry about conflicting viewpoints and antagonism between government and business. We’d all be setting our sails in a way that would best catch the wind and speed our jointly-run yes- sel ahead.

It sounds so easy—yet it is an impossible idea, one that has never worked. It is merely the old controlled-economy tenet put into slightly new language. And the central refutation of this tenet is still that no government, no national consensus, is capable of predetermining the market. The market is too vast, too complex, outside the scope of even the greatest minds to direct. Setting aside the fact that our economic planning bureaus are not suffused with the greatest of minds to begin with (as fifty years of government-managed economic boondoggles demonstrate), it is patently absurd to believe that deciding on economic development goals will make economic rejuvenation possible.

Will is not enough; that which is willed must also be consonant with reality; reality in this case is that the market cannot be accurately predetermined—only a god could do that, and men are not gods, nor can they become so by passing laws which assign themselves godlike duties. And since it is the senior partner of the government-business partnership which retains the power to make and enforce laws through coercion, it is to the senior partner, proven the less efficient of the two, that these godlike duties would accrue. Not only would we assign our partnership an impossible task; we would choose the less competent partner to make and enforce our economic decisions!

Even if economic development goals of this type could work, there still would be a serious moral barrier in the way: mandating certain goals automatically requires government to thwart other goals, the goals of individual producers (and consumers) who may not agree with the government. Their individual rights would be violated, they would be left with the dregs, with whatever tidbits of freedom of enterprise the government allowed them after its own major priorities and customers were served.

This situation cannot be avoided under a government-business partnership. For when government swings its massive legislative and taxing powers behind certain favorite areas of economic development, other areas must suffer. This should become clear as we consider our next three major ways in which government might act as a partner with business.

Protecting Preferred Industries

The main form of industrial protection in our modern age is not the tariff, the tax break, or the subsidy. It is favoritism through government contracts. Establishing national development goals presumes that specific types of industries are necessary for the goals’ achievement. A national goal of putting a base on the moon is unlikely to require much help from the lumber industry; a national goal of increasing employment by building thousands of new timber mills is unlikely to require the skills of those capable of building a moon base.

We’ve had a real example very similar to this. When Congress agreed with President Kennedy in the early 1960s that America should land a man on the moon, the redistributed tax dollars went to favored electronics, aerospace, chemical, and other related high-tech firms—economically, at the expense of other industries. And while the actual achievement of the moon landing was wonderful, a tribute to man’s ingenuity, very few people thought to ask: What other companies might have grown up, what other firms might have survived—but did not—had all that tax money spent on the moon project been left to circulate freely in the economy? Would the same industries have thrived? Possibly—but good arguments can be made otherwise. The same questions can be asked about hundreds of government projects ranging from freeway construction, to public housing, to dam building, to economic consulting, to banking, to defense programs.

Further, because political pull is always a powerful factor in determining which firms receive bids for government contracts (despite assurances by the government of its own objectivity!), the case can be made that favored companies are not necessarily the best, not necessarily the ones most “deserving” to survive—not if we measure survival by the standards of the free market. Broadly applied, government protection of preferred industries tends to populate the market with the less able, the less efficient, the weaker. This in turn encourages malinvestment, lowers productivity, and depletes the overall health of the economy which the partnership was originally intended to strengthen!

As has been well documented elsewhere, other forms of protectionism have similar effects. But considering the enormous amount of government spending today, protectionism through government contract favoritism is by far and away the biggest form of it, if not the worst form.

Subsidizing Research and Development

We are often told that one of the ways the United States can regain its technological lead is by accelerating government subsidies of research and development. This is a central premise of the new “Atari” liberals, that group which wants a new government-business partnership to favor the high-tech industries.

But again, it is the main partner, government, which would be dealing the cards, deciding which areas of research and development are “most” worthy. We’ve all heard of the Golden Fleece Award type R&D projects receiving often quite substantial government funding—projects which, if R&D funding were left to the free market, would very likely stand a much tougher time getting the needed dollars. Perhaps to most of us, such projects seem the epitome of waste. Yet, they are precisely the result of our existing, implicit partnership between government and the scientific community. Worse than the questionable nature of such obscure projects is the economics involved: When government redistributes wealth to fund these pursuits, there is that much less money available in the market for perhaps much more productive endeavors.

What would those endeavors be? Neither you nor I can say, and that is precisely the point. It is the free market in scientific research which is distorted when the government is a priority-setting partner. How many new consumer products would we have seen, how many as yet unmade scientific discoveries might have occurred, how many new technologies would have been born had the market determined where R&D should go?

All we can say is that undoubtedly free markets make many different decisions about what is important to human beings—different from the decisions of governments. While we cannot predict the differences, we can confidently assert that the decisions would have more closely matched the preferences of the American public because that is what free markets are most adept at doing.

(As a counter to the contention that government R&D funding necessarily spawns government interference in research and development, it is often argued that much of the money goes to universities or other institutions which are free to determine for themselves how to spend the money. However, this misses the central point that a free market may not have given any funding to those universities and institutions—or, perhaps, many times more! Governments are no more proficient at determining “worthy” institutions or schools than they are at determining “worthy” individual scientific projects.)

Establishing Tax Policies

Setting the tax structure has always been a major function—and weapon—of government. Tax breaks or deductions would be a key tool of any new government-business partnership.

The power to selectively lower taxes is an effective way for the state to encourage the growth and development of industries which its goals require. When one industry is allowed to keep more of its wealth than another, it will stand a much better chance of survival. In a sense, it is a bizarre sort of favoritism.

One cannot morally begrudge a policy which allows an industry to keep more of what it has rightfully earned. But one can begrudge the fact that other industries are allowed to keep less. This is the way the situation should be viewed. Both morally and economically, the em phasis should not be on the “unfair” tax breaks some companies get; it should be on the higher tax rates which remain imposed on other industries. The tax money is not the government’s first; it is the producers’. The chief inequity is not in the selectively lowered taxes, but in the majority of selectively higher ones.

Higher taxation discrimination against some industries is a method for keeping those industries from becoming dominant in a way the government might consider inappropriate (or less appropriate) to national goals. This is the other side of the goal-setting coin: The “senior partner” must not only actively aid the industries it favors; it must keep penalties on those it disfavors. If it did not, the latter would rise in the marketplace, impudently reflecting the priorities of those whose choices the government has ultimately usurped: the buying public.

It should be clear that the call for a “new” partnership between government and business is not only a bad idea, but an old one. It is merely another cry from the haggard Siren of central planning.

In order to attain economic rejuvenation of the American economy, it is not a partnership we need. Rather, it is a dissolution of a de facto partnership. Government has already muscled in too heavily as a participant in business planning. The more we can push government back out of the market place, the faster we’ll free Adam Smith’s invisible hand to help bring a lasting recovery to America.


July 1983

comments powered by Disqus


* indicates required


November 2014

It's been 40 years since F. A. Hayek received his Nobel Prize. His insights, particularly on the distribution of knowledge and the impossibility of economic planning, remain hugely important today. In this issue, we look back on the influence of his work. Max Borders and Craig Biddle debate whether liberty must be defended from one absolute foundation, further reflections on Scottish secession, and how technology is already changing our world for the better--including how robots, despite the unease they cause, will only accelerate this process.
Download Free PDF