Obama’s Self‐Immolating Capitalism
This article appeared in The Week on March 19, 2009.
There are two capitalisms. There is mundane market capitalism and there is political capitalism. Markets regulated by the rule of law and governed by a freely functioning price system are post and beam in the architecture of prosperity. You step into a grocery and there in the freezer are your coveted waffles waiting as if someone knew you were coming for them. But no one is looking after your need for breakfast treats. Each looks after her own needs by looking to the free play of prices and there emerges a rough‐but‐remarkable convergence of the waffles wanted and the waffles supplied. As the great Adam Smith noted, it seems like magic, but it’s not. It’s just amazing — in the way the evolution of the eye is amazing.
Government helps make markets work, and work better. Effective mundane markets exist within the institutions of property, contract, and law — institutions well‐ordered governments support. Prudent regulation helps contain the harmful spillovers of productive activity. But there is little danger the waffle market will go haywire in the absence of intense scrutiny by government authorities. The lightly regulated markets of mundane capitalism deserve our continued trust because their quiet efficiency so rarely betrays it.
Political markets — less enabled by government than made by it — operate according to fundamentally different, and less trustworthy, principles. Propped‐up by subsidy, structured by central diktat and created ex nihilo by edict, political markets may arise from noble aspirations but in the end are instruments always of the privileged and powerful.
Take contemporary financial markets. (Please!) These are not so much regulated by government oversight as they are constituted by the convoluted web of regulation that dictates who may sell what to whom and on what terms. The shape of our financial markets has emerged from the gradual accretion and rare subtraction of political intervention. But it is now brutally clear that financial markets are not stable simply because they are framed by law and watched by bureaucrats. It is not so hard to see why.
In political markets, the battle for competitive advantage is in part a battle over the rules of the game. That, in turn, is a battle for the hearts of minds of regulators, who generally know less, and are far less motivated, than the industry insiders they regulate. It is no surprise when regulators come to confuse the interests of the powerful (for whom they might someday wish to work, after all) with the interests of the public. As we have recently witnessed, the heavily regulated nature of our financial markets did not keep them from going haywire and taking the entire economy down with them. Appointing a better breed of bureaucrat fixes nothing. Even now, in the morning of the Obama era, Washington remains convinced that the country is best served by “rescuing” its self‐immolating Wall Street wards.
It is the failure of this capitalism that accounts for the suffering of millions and explains our bitter decline. Yet President Obama asks for more. The controversial cap and trade scheme for limiting CO2 emissions is perhaps the most striking example. A cap and trade system would introduce a new market fabricated by government to regulate the entire economy of mundane markets. Cap and trade is based on the political invention of scarcity. But the problem of determining the ideal supply of emission permits is much like the Federal Reserve’s problem of determining the ideal quantity of government money. In both cases, bureaucrats must appeal to dubious mathematical models and pronounce on questions that remain the subject of raging scientific controversy. When the Fed produced the wrong answers, it helped inflate the housing bubble, which led to the ruin of our economy. Do we trust the government climate bureaucrats to do better?
Each element of a political market invites political wrangling. Obama’s budget assumes the government will rake in over $600 billion from auctioning the initial round of emissions permits. But carbon‐heavy businesses, already suffering from the recession, are lobbying hard to be given permits for free. Industries that fear they will be hurt by the increased cost of emissions will push for an oversupply of permits, to keep permit prices low. Companies that reckon a high emissions cost will give them an advantage over their competitors will favor a low cap that keeps permit prices high. But the higher the price, the more those harmed by them will clamor for exemptions and rebates, and many will get them. The reality of cap and trade will be a typical political market: an expensive ramshackle compromise of competing forces.
But this can look pretty good if you think your team can win the political game. Jeff Immelt, the CEO of GE, is certainly excited about the opportunities Obama’s innovations in political capitalism offer his well‐positioned corporate behemoth, which wields considerable influence in Washington. “The interaction between government and business will change forever,” Immelt recently wrote in a letter to shareholders. “In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.” And GE, Immelt is sure, will profit nicely.
That’s political capitalism, that’s corporatism, in a nutshell. And that’s the kind of disreputable market system that got us into this mess.