All Commentary
Friday, January 20, 2017

What Turns Big Business into an Economic Mafia

When businesses are not subject to the crueler dictates of market forces, they thrive on connections and unearned privileges.

The state should never own or control major industries or enterprises. Additionally, it should not hand out favors to some companies at the expense of others. When it does, the result is almost always corruption, kleptocracy and a political culture that benefits the most privileged and criminal elements of society.

Take Ukraine for example. There are many historical and geopolitical reasons for its current predicament, but let’s focus on the economic forces at play. Andrew Roth, who writes for The Washington Post at its Moscow bureau, wrote an article last year that details the political crisis in Ukraine, fueled by corruption between those in power and the financial elites:

The Ministry of Infrastructure’s bloated portfolio of almost 300 state-owned enterprises, including a railroad, seaports and roads, funnel cash to corrupt businessmen with connections to Ukraine’s parliament, he says. For months, they have blocked his attempts to privatize them.

“If the state-owned companies suddenly disappear, if they’re privately owned, then what’s in it for them? They cannot skim from those companies anymore.”

There you have it. This is one major reason why post-Soviet Ukraine (and Russia for that matter) has had such a horrible time trying to build a stable, viable nation state. So long as its members have a personal stake in state-owned companies, the Rada, the unicameral parliament of Ukraine, will be unable to make common-sense economic reforms.

The state cannot eradicate corruption. Sure, the law has a role to play, but too much involvement makes the problem worse. People like to help out their friends at the expense of other people, no matter how awful those friends may be. The only way to end corruption would be to end friendships. Let’s do a little thought experiment to illustrate this.

The Problem of Human Frailty

Let’s say you and I live in a fictional post-Soviet country. I run a government ministry charged with prosecuting fraud and abuse. You run a state-owned freight company that ships goods by rail.

When the state runs major enterprises, it holds the population hostage to all the faults of the people in those businesses.

Your business is failing, your workers have connections to drug dealers and gangs, and your equipment is old and often breaks down. The worst part is, you have a competitor who can do business 1,000 times better, and may soon run you out of business.

But you don’t have to worry. Since we’re such good friends and we go way back, I’ll help you out.

I’ll have my employees bypass your company when we run an audit. Since you’re already owned by the government, we have the same boss! You’re insulated from the law, because you and I are the law. Plus, I’m friends with the transportation minister, who can give you priority access to the railroad tracks. In fact, if you give me a cut of your profits for a few months, I can slip some of that money to the head of the secret police and have your competitor framed for bribery and locked away for the next 10 years. We could even torture him if you like.

If anyone protests, we’ll have our media cronies call them “traitors” who are secretly working for “the decadent West” (with some homophobia or antisemitism thrown in for good measure).

Oh, they have a “ petition?” Adorable. We have tanks.

If you give me access to your mansion on the water, I’ll even have the treasury seize all of his business assets and give them to you! You’ll never have to worry about competition, innovation or investment ever again!

But maybe I won’t do this.

Maybe I have principles. Maybe I care more about right and wrong than about my screwball buddy who’s really bad at running his business. Those thugs you hired back in the bad, old days of the 90s? You’re going to have to let them go. The audit will go as scheduled, and you’re going to have to lower prices to compete with the new guy. Eventually, we may have to privatize you. We can’t just keep using taxpayer money to pay for a terrible service, especially when they can voluntarily purchase a good one (sorry, bro).

Just kidding; you should have seen your face!

A Sign of What’s to Come?

Calling for the nationalization of major industries is naive. When the state owns or runs major enterprises, it holds the population hostage to all the faults and imperfections of the people in those businesses.

This should serve as a cautionary tale to those Americans now cheering the incoming administration for the Carrier deal and proposed infrastructure projects. 

When businesses are state-owned, bad actors get away with terrible things, because they’re insulated by those in power.

There’s nothing wrong with saving people’s jobs, but one issue with the Carrier deal is that negotiations were with a single organization.

No changes were made to Indiana’s laws and tax structure that would incentivize more businesses to stay. It was an explicitly populist move, meant to increase the President-elect’s political capital, not a broad economic reform that allows for meaningful employment for all Americans. It doesn’t help that the deal may have something to do with United Technologies, Carrier’s parent company, wanting to hold on to federal contract money.

The real danger of a Donald Trump presidency is not diplomatic rapprochement with Russia, but that he threatens to curse the United States with a similar economic mafia culture.

Consider a future where we waste spending on nationalistic vanity projects, consolidate power among the regime’s friends and loyalists, and apply endless red tape to shut out emerging competitors. The state has always had an uneasy relationship with the cultural foundations of markets, fair play and competition. But Trump’s worst impulses threaten to deal these traditions, built over centuries through common law and revolutions, a nearly fatal blow.

Maybe we’ll get lucky, and this is all just populist bravado. But we can’t base our social and economic order on luck. People don’t always do the right thing. Many people often enjoy doing the wrong thing. When businesses are state-owned or handed favors to the detriment of others, it’s easier for bad actors to get away with terrible things, because they’re connected with and insulated by those in power. It creates a culture where businesses thrive according to their connections and unearned privileges, not the crueler dictates of market forces.