Epstein: Handouts no boon to business

Richard A. Epstein

July 18, 2005

One of the most famous quips about the relationship between a company and a state is the remark some 50 years ago by Charles E. Wilson ("Engine Charlie" of General Motors).

He said that, "for years I thought what was good for our country was good for General Motors and vice versa".

One obvious virtue of his proposition is that it recognises that sound social policies start with the nation and then reverberate to the benefit of the firm. The obvious criticism of the remark zeroes in on the words "vice versa", which clearly overstates the case: corporate subsidies or tax breaks could easily hurt the nation, for example.

Make no mistake about it: a country is not a company, nor even a collection of companies.

A company is a centrally planned institution, in which decentralised decisions are made only with the blessing of those at the top of the pyramid: ultimately the chief executive, subject to the supervision of the board of directors. A firm could not survive with unco-ordinated decisions made by decentralised agents in spot markets.

A sound economy functions quite differently. Central planning does not work. Decision-makers at the centre lack the information and incentives to put society's resources to best use.

We need markets and prices to first collect and then utilise dispersed information, which in turn permits the easy co-ordination of the behaviour of producers and consumers. A good institutional and legal framework is required to facilitate voluntary exchange. Running a market economy is a matter of getting the road rules right, not directing all the economic traffic.

Business people accustomed to hands-on direction of their enterprises have to master a quite different set of skills if they want to contribute usefully to debates about the management of an economy.

They need to grasp the abstract principles that should guide public policy in the national interest.

They should not seek to dominate by the sheer force of their personalities.

Those who lack the necessary application and ability to learn are a liability, not an asset in policy debates, no matter how good they have been at running a business.

What then should we fear about business executives who venture into the public realm? Most critically, it is their belief that the worth of their own private missions means that all other social objectives should be subordinate to it.

Instead, they should recognise that in modern states the interactions between the Government and business take place at many levels.

Some of them benefit firms and society at large, such as the definition and enforcement of property rights, and some of them are oppressive.

The latter category includes heavy taxes, onerous regulations, and various forms of expropriation.

It also covers subsidies and other privileges. Too often, businesses will support new regulations that burden their competitors, and subsidies that work to their private advantage.

So there are two tasks: the first is to protect business from government, and the second is to protect government from business. But how?

One possibility is systematic structural reform. In my view, the best approach would involve either an informal fiscal constitution or a formal US-style constitution with the aim of getting the Government out of both the taxation-as-punishment and the tax-concession-as-privilege business.

Ideally, the tax system should be neutral between rival business forms (for example, corporates and co-operatives) and rival business projects (for example, farming and forestry investments).

I have no doubt that the US constitutional prohibitions against takings, together with mandated flat taxes, would take us a long way in that direction if they were correctly understood and consistently enforced.

There is another principled approach.

When confronted by an oppressive Government regulation, a company should attempt to make a case to the public that the policy is not only bad because it harms a specific business or industry, but that it is also unjust or inefficient with respect to the community as a whole.

Admittedly, it is a daunting task for a business to show that it has adopted an enlightened approach to public policy. In day-to-day operations, playing and prospering within the rules is critical to company success.

The short-range challenge, indeed fiduciary obligation, is to optimise under a series of external constraints when there is no immediate prospect of changing them.

With business subsidies, a serious problem is that every firm in a competitive market faces a genuine prisoner's dilemma.

If one company accepts a handout from the Government it will be at a systematic advantage over every competitor that spurns it. How can firms exercise self-restraint when acting virtuously simply benefits rival firms with fewer scruples?

This is a big ask. There have been attempts to call together corporate leaders to get them to agree, at the very least, not to be the first mover when faced with an offer of Government largess, for instance a tax break to build a new plant.

If every company were to comply with that injunction the wall would hold, but a single deviation would bring it down.

At root, therefore, what is needed once again is public education and debate to increase pressure on Governments to abandon subsidy policies.

Ideally, even companies that took advantage of subsidies in the past will join the campaign. This was the case in New Zealand in the 1980s when many business leaders supported moves to cut subsidies and tariffs and deregulate markets, even though their firms suffered short-term losses.

Anyone like myself, who has had as a mission to defend the principles of autonomy, property, contract, and limited government, has no interest in defending privileged groups in society.

I believe talented and successful corporate leaders have a special duty to help promote economic policies that are in the interests of society at large and business as a whole in the long run. Only then can Engine Charlie be proved right.

Richard Epstein is the James Parker Hall Distinguished Professor of Law at the University of Chicago. He visited New Zealand in 2004 as a guest of the Business Roundtable.