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Thursday, May 19, 2011

Guilt by Corporate Association

Anatomy of a smear.

A favorite tactic of left-leaning critics of libertarians and other defenders of the free market is to smear them with a form of guilt by association: namely, by pointing out when advocates of deregulation have links, especially financial, to corporations which presumably would benefit from that deregulation. According to the critics, since those advocates support corporate interests, they are presumed to be mere mouthpieces for business self-interest rather than disinterested truth-seekers.

The argument behind this smear is fallacious for several reasons. First, the charge is almost never made against those who accept money from or otherwise have relationships with the State. Those same leftist critics are never heard suggesting that people who accept National Science Foundation money for social science research arguing for more government are mouthpieces for political self-interest rather than disinterested truth-seekers. One could further note that the dollars given by the state and federal governments for scholarly research dwarf the amount given by the private sector. So if one wants to play this game, the question of who is really hiring shills becomes a lot more interesting.

Chicken or Egg?

Second, the argument implies that whoever accepts the funds holds his or her views because of that relationship. It’s as if the evil corporation swoops in on naïve scholars and, after dangling cash or prestige in their faces, gets them to produce studies in favor of deregulation. In reality the causality runs the other way: If corporations or their foundations wish to support academic research, they will find scholars whose work is already consistent with their positions. The scholars have come to their views independently of the support, not because of it.

But both arguments miss the much more important point. The hidden and false assumption of leftist critics is that the benefits of deregulation accrue mostly to the firms competing in the industry. Yet genuine deregulation primarily benefits not competitors, but consumers. As economists have long argued, real market competition is what drives firms to increase the quantity and quality of products and reduce prices in the process. One need only look at the highly competitive retail and technology industries, among many others, to see the empirical evidence for competition’s benefits.

Widespread Benefits

Those of us who think deregulation and increased competition are good do so not because we want to enrich the firms in those markets, but because we want to see the benefits of competition available to everyone, especially the poor for whom lower prices matter most. Specifically, I support Walmart’s right to open a store in an urban area not because I think it’s good for Walmart, but because I want its low prices and above-minimum-wage jobs to be available to the residents of those neighborhoods. Competition is a positive-sum game: If Walmart profits, it’s because they better served consumers.

The left needs to realize that corporations often support more regulation, not less. Never forget Horwitz’s First Law of Political Economy: “No one hates capitalism more than capitalists.” Real competition makes firms work hard and earn every penny; where competition is restricted, firms can frequently profit much more easily. Larger firms in particular tend to like regulation for two reasons: 1) they are likely to have a role in crafting it to their benefit, as they did in the recent Dodd-Frank banking regulations; and 2) they are better able than smaller firms to absorb the costs of those regulations, as we see from the increased centralization of the banking industry, among others. Leftist critics might consider the ways in which regulation concentrates economic power and competition disperses it.

Economists who support deregulation while having links to corporations should not be accused of being shills without clear and specific evidence of a quid pro quo. If those of us who support deregulation are serving the interests of anyone, it is consumers, not producers. Far more corporate dollars go to lobbying for additional government intervention and subsidies than to scholarship on behalf of deregulation. The corporations understand that a larger role for the State is often far more in their self-interest than is deregulation. If only their leftist critics could understand that as well.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.