Tuesday, 15 December 2015

Pro-business or pro-market?

When evaluating public policies there is a widespread confusion in the identification of pro-business with pro-market policies. This is a dangerous confusion, because not all business interests are pro-market. In this regard the phenomenon observed long ago by Adam Smith about businessmen reunions where (“the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”) is as alive today as it has always been.

Therefore, it is crucial to assess if any policies classified as pro-business are not really for specific-interest groups and anti-competitive practices. In general, it is important to realize that both insufficient and excessive regulation work for the benefit of incumbents with market power. This said, it is equally true that there is no way of fixing theoretically the right balance for regulation.

So, in the end, the judgement on pro-market policies must be based on economic theory and on how such policies eradicate well known distortionary practices. Sometimes, this requires playing on the opposite interests of specific-interest groups.

For instance, in the energy industry regulators often play some players against the others, either industry segments or corporations. This is so because the players are often sophisticated and ruthless.

For example, oil companies like BP or Repsol are not choir boys and yet they were recently taken for a ride by local companies and their political allies in Russia and Argentina. It is often said that under crony capitalism one needs a crony to deal with another. This may be so, but taking sides on the infighting between oligarchs does not guarantee that one is not replacing a special interest by another one. Thus fighting for competitive markets should not be confused with business infighting.

Business ethics is another field where pro-business should not be confused with pro-market. There are often two opposing camps on this debate, some wanting to transform businesses into social or philanthropic institutions while others think that the end (profit maximization) justifies the use of any means, including testing the limits of the law. Both are wrong, because capitalism cannot flourish without simultaneously upholding the profit motive and the rule of law.

Another concern regards the tolerance or even support for distortionary price policies through price controls or subsidies. Although such policies are usually promoted by claiming that they are temporary special measures, they invariably end up creating special interest groups which are difficult to dislodge.

Finally, the generalized idea that firms need to grow to be able to compete is equally misleading. When pursued to the limit winners would inevitably transform into oligopolies and turn to the pursuit of rent-seeking opportunities. However, fixing firm size limits or forcing company breakups it is neither easy nor a guarantee of success as more than 100-years of enforcing antitrust legislation suggests (see Bork, 1993 ).

To conclude, since business people are neither more evil or saintly than the rest of the humans, regulatory measures too much focused on preventing their potential evil or trying to transform them into saints will be inefficient and messy. Regulation should focus more on the playing than on the players and should only be pro-business whenever this does not collide with being pro-market.

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