A choice between the rich and the free market:
----------------------------------------------
Some Rich Fear Free Market Competition.
Status quo wealthy prefer subsidies, tax goodies;
small businessmen want real competition;
dilemma for the Republican Party
----------------------------------------------
By Raghuram Rajan and Luigi Zingales
Published: March 2 2003 19:35
news.ft.com
The world used to be divided starkly into right and left. On the right were people who believed in the protection of property rights, in the virtues of free markets and in the dangers of government interference. On the left were those who believed markets did not work and that governments had to step in to substitute for them, as well as to redress the wrongs of the past by redistributing wealth.
The rich, fearing expropriation, mostly sided with the right. The poor, hoping to gain some of the crumbs from redistribution, mostly sided with the left. Hence, throughout the world, pro-market parties became the parties of the rich and anti-market parties the parties of the poor.
The fall of communism has allowed us to make finer distinctions. People are recognising that there is a difference between being for free markets and being for the elite that has benefited from them. This distinction seems to escape today's US administration.
Truly free markets create competition, which undermines the position of established companies, forcing them to prove their competence again and again. While this competition is an opportunity for the have-nots and a stimulus for the constant improvement of the economy as a whole, it is a threat for today's elites. The elite that derives its positions from its abilities is spurred by competition to try harder, to the benefit of all. But those whose positions derive only from past accomplishments or inheritance have a reason to oppose truly competitive markets, the single most important tool of capitalism.
In other words, a large share of the incumbent super-rich can be against free markets because it sees them only as competition and not as opportunity. By contrast, the free market's strongest supporters are typically self-made small and medium-size business owners and professionals, who do not have the political power to lobby for special protections and who need the level playing field of a free market.
Once these distinctions are recognised, old mantras of the right need to be questioned. For instance, is all regulation bad? While excessive regulation suffocates markets, lack of regulation can be equally effective in killing them. Rigid airline safety standards, for instance, help attract new entrants to the airline industry. Without them, customers would be too scared to fly in any but the most established airlines, granting them a de facto monopoly. There is a distinction between market-supporting and market-suppressing regulation, one we did not make in the past when the alternative was to have no markets at all.
Similarly, attitudes towards taxation have to be revised. Nobody likes to be taxed but the forms of taxation that benefit markets are not necessarily those that benefit the rich. Estate taxes, for instance, reduce the concentration of wealth in the hands of incompetent heirs, reducing their ability to exert political pressure for protection. Similarly, shifting some of the tax burden from income to wealth would penalise inefficient owners and force them to give up control of poorly managed assets. But these are precisely the kind of taxes that penalise the super-rich the most.
Being pro-market and being pro-rich are not the same. During the fight against the overweening regulation of the postwar welfare state, that used not to matter. Now parties on the right all over the world are being forced to choose. In Italy, the right has not only chosen to side with the rich, it has also been acquired by a rich man - Silvio Berlusconi - and turned into his personal lobbying organisation.
Fortunately, we are not quite there in the US. But the signs are not comforting. The administration's recent policies have tended to side with the incumbents, against the interests of free markets. The imposition of tariffs to protect the steel industry has suggested that the interests of an in- efficient few (but politically powerful) companies can dominate those of the nation as a whole.
Many small and medium-sized companies whose access to financial markets has been cut off would benefit if confidence in those markets could be restored quickly after the recent accounting scandals. But there is a strong temptation to find a few scapegoats rather than undertake a deep-rooted investigation of the potential conflicts of interest in accounting firms and banks. Those whose interests are threatened are also lobbying hard. One example is the watering down of a sensible proposal to require rotation of a company's auditors every few years. Now the reform would only require that the partner in charge of an audit be replaced with another partner from the same firm every few years. But which accounting partner is likely to reveal the misdeeds of his predecessor, no matter how egregious? Recent tax proposals also leave much to be desired. The abolition of the inheritance tax and the proposed reform of the tax on dividends run the risk of further concentrating wealth and jeopardising the political support for free markets.
The Republican party should make up its mind. Does it want to defend the few against the larger interests of capitalism, or does it embrace not just the rhetoric but also the substance of a pro-market agenda?
The writers are professors at the University of Chicago Graduate School of Business and authors of Saving Capitalism from the Capitalists |
