The Paradox of the Statist Businessman

March/​April 1995 • Policy Report
By Theodore J. Forstmann

Possibly because I was never properlytrained at a business school, I have always found entrepreneurialcapitalism appealing, easy to understand, and as natural aswalking or breathing. It is an economic model that focuses ongrowth and allows the individual the opportunity to employ hisGod‐​given talents. Success can be pursued and failuretolerated — in short, that is the way the world should work.

So when Ed Crane asked me to talk about the statist businessman,two things immediately struck me. The first was the theoreticalcontradiction in terms as, of course, most ordinary citizenswould equate the word businessman with capitalist, not statist.The second was that it would be difficult to find anything toonice to say about that particular breed. But since I don’t wantto end up sounding like one of the retirees in southern Floridawho went to a restaurant one night and complained so much thatthe waiter finally asked, “Is anything all right?” Iwant to preface my remarks with something that is right. It’s aquote by Domingo Cavallo, finance minister of Argentina.“Each peso,” he stated — and you could substitute“dollar” or any other currency — is a contract betweenthe government and the peso holder. That contract guarantees thateach peso — as a unit of value that the holder has worked hard toget — will be worth as much tomorrow as today. If the governmentbreaks the contract, it’s breaking the law. The only role ofgovernment in the economy should be to guarantee the integrity ofmarket transactions.

That’s a simple statement, but somewhatrevolutionary — revolutionary because its premise of a passive,limited government is radically different from the activist rolegovernment assumes today. But these are revolutionary times, andthe real revolution is one that reaches beyond politics andpartisanship to challenge some very basic assumptions about theway the world works. Our new Speaker of the House, Newt Gingrich,has warned that “American businesses can’t win in themarketplace for products and services if they concede defeat inthe war of ideas.” The battle lines of that war are notdrawn so much between Republican and Democrat, or evenconservative and liberal, as they are between two diametricallydifferent worldviews.

The Statist Worldview

One view begins and ends with government. It is of a statistsociety in which the government regulates and mediates most humanrelationships — economic and otherwise. The other view begins andends with the individual. It is of a civil society in whichpeople organize themselves through voluntary association andexchange. Statist society promises you happiness in exchange forthe better part of your freedom. Civil society merely guaranteesyour freedom. Happiness is up to you.

Perhaps we can understand the statist impulse on behalf of theunskilled and unschooled, the disabled and the disenfranchised, theinfantile and the infirm. But why would the businessman choose tobargain with his most precious capital — freedom?

It would be easy to dismiss the statist businessman as either aknave or a fool. The sad truth is that he’s neither. Remember whatVoltaire once said: “It is dangerous to be right when thegovernment is wrong.” The statist businessman is simplydoing his job. He’s probably just part of a big corporation. Hedidn’t make the rules; he just follows them. He doesn’t ask whythe government holds all the cards; he simply accepts the handhe’s dealt. To play it safe, the bureaucratic businessman plays along.

But by joining rather than fighting the forces of an activist biggovernment, he becomes part of the problem. Indeed, he becomes asignificant part of the problem to which he contributes in threeways. Number one, he is a conservator — not a creator. Number two,he is a lobbyist. And number three, he is used as an argumentagainst capitalism even though he is not a capitalist at all.

My first point is that the statist businessman is a conservativein the most literal sense of the word. He is a caretaker, not arisk taker. Rarely the owner of his own enterprise, he places apremium on permanence over growth. In his mission to preserve andprotect, he seeks state shelter against what Schumpeter called“the perennial gale of creative destruction.” Putsimply, he wants government to guarantee him security withoutrisks, the opportunity to succeed without the possibility offailure.

The taxicab driver, the dry cleaner, and the barber can’t operatethat way. They don’t have accounting departments; they can’t affordto hire lawyers and lobbyists. The small businessman is close tothe ground while the big businessman is flying at 50,000 feetabove it — and at that altitude you don’t see individuals, you seeaggregates. The barber doesn’t deal with aggregates; he dealswith electricity bills and supplies and customers. As GeorgeBurns once said, “It’s too bad that the only people who knowhow to run the country are too busy driving cabs and cuttinghair.”

Given the essential conservatism of corporate culture — theaversion to risk, the resistance to change — you’d think that the statistbusinessman would quickly become a casualty in our ever‐ changingeconomy. If we were operating in a truly free market, he would.But he has bought himself insurance against that eventuality,which brings me to his second contribution.

Businessman as Lobbyist

The statist businessman is, by definition, a lobbyist. Havingmade his peace with 20th‐​century collectivism, he isfundamentally concerned with “who gets what” fromgovernment’s redistributive powers. He seeks subsidies forhimself and penalties and regulations for his competitors. He isthe miserable figure Ronald Reagan described as the fellow whohoped the crocodile would eat him last.

After the election I read an article that reported thatcorporations and business PACs that had supported Democratsduring the campaign were now tripping all over themselves to payoff the campaign debts of the Republican winners. It’s called “catchingthe late train” in politics, and its destination isWashington. Those corporate contributors did not have some sortof epiphany or conversion; they merely reshuffled their politicalportfolios. In the words of one donor, “We don’t really lookat it as an eraser on the pencil, but as a way of letting thewinner know we’d like to be the same friend to him as we were tothe guy he defeated.”

It’s that kind of “friendship” that Secretary of LaborRobert Reich called into question when he challenged Congress tocut “corporate welfare.” Using a list drawn up by theProgressive Policy Institute, Reich estimates that the federalgovernment could save $225 billion over five years by cuttingwhat he calls “Aid to Dependent Corporations” — welfarefor the wealthy in the form of special subsidies and tax breaks.The list includes such things as tax breaks for pharmaceuticalfirms operating in Puerto Rico, credits for producers of ethanol,subsidies to farmers whose food sells at below government‐​setprices, and subsidies to utilities serving rural areas long afterelectrification — the program’s original purpose — has beenachieved.

The statist businessman would tell you that Reich is completelywrong. I don’t agree. Amazingly, I believe he is completely right.Subsidies granted to particular corporations by the governmentare quintessentially anti‐​capitalist. But predictably, of course,Reich is right for all the wrong reasons. He wants to cutcorporate welfare so that he can expand social welfare. He’s infavor of limiting business’s claim on government — he’s not infavor of limiting government’s control of business. He’s eager to abolishsubsidies — not penalties. Because of that, statist Republicanswill complain that Reich is hostile to capitalism. They are right.But remember, in this Alice in Wonderland debate, the programs heseeks to cut have nothing to do with capitalism to begin with.

Trashing Capitalism

The bureaucratic businessman is no better than any otherspecial‐​interest group that feeds off of Washington. But in one importantsense he is much worse, which brings me to the third part of theproblem he creates. Lobbyists give a bad name to the things theylobby for. The NEA gives a bad name to education. The AMA gives abad name to medicine. But the statist businessman does not give abad name to statism; he gives a bad name to capitalism!

The quote that’s always trotted out to indict capitalism is fromThomas Murphy, former chairman of GM. “General Motors is notin the business of making cars. General Motors is in the businessof making money.” In a truly free market, you wouldn’t beable to make money without making a quality product. But thebureaucratic businessman is constantly finding ways around thatdifficulty. For instance, he can lobby the government for tradesanctions against Japan. He can lobby the government for subsidies.He can lobby the government for a taxpayer‐​paid publicitycampaign. There are all sorts of ways that one can subvert thefree market and still make a buck — all in the name of capitalism!

By committing statist sins under capitalist cover, thebureaucratic businessman bears false witness against the freemarket. And that’s why I’m here today simply attempting toclarify the terminology of this debate. Think of it: we live in aworld today where the liberals are really the conservatives; theconservatives are really the liberals; and half the businessmenaren’t even capitalists. That’s why I suggest that we anchor ourdebate to Cavallo’s very simple definition of the role ofgovernment: “to guarantee the integrity of markettransactions.”

What does it mean, for example, when the president tells us, ashe did in the State of the Union address, that the federal governmentstill wants to be “partners” working “hand inhand” to help the middle class? Given the monumentalevidence of government failure over the past 25 years, I’m notsure whether we should interpret that as a promise or a threat.Clinton is promising, once again, to “reinventgovernment.” But what he doesn’t understand is that thepeople don’t want government reinvented; they want it reduced.They don’t want bureaucracy modernized; they want it minimized.

What should we think when the president proposes a budget thatwould spend $1.6 trillion and then tells us how much money that’sgoing to save? When we’re told that our government will spend$1.6 trillion next year, our eyes glaze over. That’s becausetrying to imagine $1.6 trillion is like trying to imagineeternity or infinity. Finally, what does it mean when Republicans andDemocrats alike warn us about all the “pain” involvedin cutting government spending? Where’s the pain in theirspending less of our money? Maybe it’s painful for thepoliticians, but for the average citizen, what pain is there inkeeping more of his own money to invest the way he wants?

I also wonder what Mr. Cavallo would say about the whole debateover how much different plans to cut taxes would “cost” gov​ern​ment​.No government in the history of the world has borne the cost ofanything. Taxes cost people. Tax cuts do not cost government.

Those simple principles are as true for Arizona as they were forArgentina. And it was a senator from Arizona who perhaps articulatedthem best. “I have little interest in streamlininggovernment or in making it more efficient,” said BarryGoldwater, for I mean to reduce its size. I do not undertake topromote welfare, for I propose to extend freedom. My aim is notto pass laws, but to repeal them. It is not to inaugurate newprograms, but to cancel old ones that do violence to theConstitution, or that have failed in their purpose, or thatimpose on the people an unwanted financial burden.… And if Ishould later be attacked for neglecting my constituents’ ”interests,” I shall reply that I was informed thattheir main interest is liberty and in that cause I am doing thevery best I can.

We should be thankful that we’re not in the situation we foundourselves in only 20 or 30 years ago, when many feared — or hoped — thatwe were on the verge of becoming a socialist America. No onetalks, as George McGovern or John Kenneth Galbraith once did, ofnationalizing industries. By and large, the question of whethergovernment can improve on the free market has been settled, andthe answer is “no, it can’t.” It can’t because that’snot its role.

Extending the Capitalist Revolution

The question for the 21st century will be whether the free marketcan improve on the government; and I believe the answer is “yes,it can.” As we look ahead to the challenges of tomorrow’sglobalized economy, the answer is not just that it can but that itmust.

Even if the Republicans pass every item in their Contract withAmerica, they will have succeeded only in liberating the economy,the top half of our society. The bottom half will still be miredin socialist bureaucracy. In that sense, the contract leavesintact our current social contract, one which Jack Kemp describesas “capitalism for the rich and socialism for the poor.”

We may be winning the battle of ideas, but we could still losethe war. True revolutions sweep across 100 percent of a society,not 50 percent. By all means let’s liberate the economy. But wewill not have a true revolution, and we will not be able to keepup with the coming challenges of the new economy, if we do notfree those now quarantined in the decaying confines of thecollapsing welfare state.

I am talking not just about the direct costs of exorbitantlyexpensive socialist policies; I am talking not just about the opportunitycosts of all those who will not be joining us in creating the neweconomy; I am talking about the price of the continued humandegradation of those whom statism has failed to help andcapitalism has failed to reach. That situation is not justmorally unconscionable, it is politically untenable. Remember,the statist businessman does not discredit statism, he discreditscapitalism. And believe me, any increases in joblessness, orhomelessness, or child poverty since the day the 104th Congressconvened will be seen not as statist failures but as capitalistfailures. If we were either a statist country or a libertarian,free-market economy, we’d know what to do. But we’re neither. Andwe’re both.

The hardest thing for a country to do is to cross the bridge ofrevolution. That’s because no matter how bad things get on this sideof the bridge, there’s always the fear that things on the otherside could be even worse. I believe that as we approach the 21stcentury, we need leaders who can tell us stories of thefuture — leaders with a vision of what life looks like onhistory’s other side. Because in the final analysis, revolutionsare fueled not just by frustration, not just by theories, notjust by outrage, but by a vision of a better future and the willto cross the bridge.

About the Author

Theodore J. Forstmann is a founding general partner of Forstmann Little & Co., a private investment firm, and a member of the Cato Institute’s Board of Directors. He delivered these remarks at Cato’s 1995 Benefactor Summit, held at the Loews Ventana Canyon Resort outside Tucson, Arizona.