Pissing Down Your Leg

Thoughts on Economics and Economic Policy

The Difference Between Being Pro-Market and Pro-Business

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As an economist, I’m generally pro-market. By that I mean I believe that the best way to produce most goods and services is with a free market system. Why? The profit incentive, combined with competition, generally is able to supply customers with what they want at the lowest cost. That is, the free market is generally the most efficient way to produce the stuff we want. Of course, there are times when the market fails. Sometimes there are fixed costs that are so large that competition is not possible (rail, utilities, etc.). Sometimes there are significant externalities (negative or positive) that mean the good or service is over or under produced. Sometimes there are information or bargaining asymmetries that lead to inefficient, or at least inequitable, outcomes. In those cases I believe it is the government’s job to come up with regulations that provide the correct incentives for market players, whether it is a pigovian tax (or surplus) or a cap and trade system, or whatever. On very rare occasions it makes sense for the government to supply or pay for the good itself (education and scientific research are two that come to mind. Oh, and national defense, of course).

But generally I’m pro-market. And as someone who is pro-market, I support policies that help the market function. One of the most important of these is anti-trust legislation. In order for the market to function effectively, there has to be competition. That’s why the justice department is correct in filing suit to stop the merger between AT&T and T Mobile. While mobile phone service will never be one in which there are hundreds or even dozens of firms due to the large fixed costs involved, consumers will end up paying significantly more if we go from four major carriers to three.

When most people think about economics and “the market” they think of business. After all, it’s businesses that compete in the market. And so one of the common misperceptions is that businesses are also pro-market. In fact, most businesses are not pro-market. As long as there have been “business interests” there have been businessmen (and union leaders) talking about “ruinous competition.”

Executives and managers basically have two goals: maximize profits and keep their jobs, not necessarily in that order. One way to do that is by constantly innovating, coming up with new products that customers want and new ways to make those goods more cheaply. But another (and perhaps easier) way of accomplishing those goals is to reduce competition by buying up competitors and keeping new entrants out of your market. If you can get tariffs to keep out foreign goods or legislation that limits competition, so much the better!

Pro-business policies, then, are rarely pro-market. If you limit competition you will increase profits for businesses, but you will do so by reducing choice for consumers and forcing them to pay higher prices. Politicians seem never to make this distinction, maybe because they don’t want to piss off their corporate donors. But it is not a terribly difficult distinction to make, and would be an easy way for Democrats to distinguish themselves from the “pro-business” Republicans. After all, we are all consumers, whether we are a factory worker, a school teacher, a police officer, or a farmer. Lower prices and better products are something we can all support.

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Written by Liam C Malloy

September 1, 2011 at 10:24 am

Posted in Market, Policy

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