September 30, 2020 3:13PM

Big Government, Big Business, Big Protectionism

It is commonly assumed on the left and (increasingly) the right that free markets boost—and that government regulation checks—the growth and market power of large corporations. Liberalized international trade and investment policies, in particular, are often criticized by market skeptics as a tool that Big Business uses to entrench its dominant position to the detriment of workers and potential competitors. Libertarians and other free market advocates, of course, believe much the opposite: that free market competition fuels “creative destruction”—i.e., the economically‐​valuable displacement of old, large companies by new competitors, as first described by economist Joseph Schumpeter—and thus serves as a powerful check on Big Business, which often lobbies for and benefits from trade restrictions and other government regulations that discourage new market entrants.

A new paper from economists Mara Faccio and John McConnell of Purdue University provides strong new support for the “libertarian” view. Examining data for 75 countries (including the United States) since 1910, they find—

  • Consistent with Schumpeter’s proposition, the displacement of old, large firms is the norm in each of the time periods considered, but exceptions to the creative destruction rule do exist. In fact, 13.6 percent of the 20 largest firms in each country remained in the top 20 a hundred years later; 25 percent of the largest firms in 1980 remained dominant in 2018; and 43.8 percent of the top 20 remained from 2000 to 2018.
  • The most important predictor of a firm being an exception to the creative destruction norm is political connections (as measured by the presence of government officials, or people connected to officials, in senior management). In particular, the authors find that “[h]aving a political connection increases the probability that one of the 20 largest firms in 1910 remains among the 20 largest firms in 2018 by 11.5 percentage points” – a “very sizable” effect that is “both economically and statistically significant.” This relationship remains strong in the other, more recent period examined (2000–2018).
  • Regulatory barriers to market entry enable politically‐​connected firms to remain dominant over the long term. In particular, the authors find a strong and statistically significant relationship between restrictions on cross‐​border trade and investment and the likelihood that politically‐​connected large firms are just as powerful decades later. By contrast, trade and investment openness checks Big Business: “[P]olitical connections facilitate the ability of big companies to remain or become big only when their home country is closed to both trade and capital flows. The presence of regulatory barriers to entry appear to be a necessary condition for politically connected firms to remain or become dominant.”

Based on these findings, the authors conclude (emphasis mine)—

[P]olitical connections enable big businesses to remain large, particularly when regulatory barriers to cross‐​border entry and cross‐​border capital flows are in place. The implication is that in an unimpeded market the Schumpeterian process of creative destruction of large firms is likely to prevail. To the extent that it does not, the data suggest that it is because the political process impedes entry.

When skeptics criticize “free markets,” the markets at issue are usually not very free at all. Indeed, the conclusions above are utterly unsurprising to free traders who have for years watched large, well‐​connected corporations capture the administrative state and use regulation to restrict foreign competition and maintain power. If the markets were free (or, at least, freer), and large companies were forced to compete without the government’s thumb on the scale, Big Business’ market power could be significantly checked. You’d think such a result would be welcomed by the populist right and left, but progress (especially these days) is often thwarted by emotional antipathy to markets and “globalism” more broadly. As a result, un-free markets proliferate, and corporate power increases—ironically fueling populist calls for the very government action that increased it in the first place.