American Capitalism at High Noon

So powerful is this class—so powerful was it in the US in the closing decades of the 19th century—that it is quite impossible to believe that large political interferences in the economic system could have taken place without the permission of the industries that were regulated. Imagine the railroad industry under the unwilling control of the Interstate Commerce Commission in 1890. The industry had 700,000 employees, $10 billion in capital, and dozens upon dozens of powerful, able entrepreneurs. The ICC had five commissioners, a staff of 61, a budget of $150,000, and infinite respect for the members of Congress—who in turn were not lacking in respect for the great industry of railroading. If told that the ICC controlled the railroads, the Duke of Wellington would have repeated himself: anyone who believed that would believe anything.

Thus, the larger part of the regulations to which businessmen are subjected must be of their own contriving and acceptance. It is they who persuaded the federal and state governments to initiate the controls over financial institutions, transportation systems, communication systems, extractive industries, and so on. The railroad industry is a suitable example: it was scarcely born before it began requesting loans from local governments and land from the federal government, and it has now advanced to such eleemosynary forms as Amtrak and Conrail.

A golden age for business

If the lamented Joseph Schumpeter, that alternately profoundly wise and infinitely clever economist, were here, he would tell you that I am quite wrong in my explanation for the luxuriant growth of public regulation. He would tell you that despite the immense contributions of the private enterprise system to the economic prosperity of the Western world, the system is being undermined by its critics. Some are intellectuals; some are activists, meaning that their mouths, not their minds, are active; some are simply people who will gain power by increasing governmental controls. All view the unregulated private enterprise system as their primary enemy.

I am not prepared to deny that there are more than enough of such critics of private enterprise and that they have achieved a good deal of public attention for many years. However, I do deny that they would be remotely a match for the American business community if that community were united in its opposition to public intervention in economic life. The American business community has ample financial resources, even in these days of onerous taxation. What the American business community lacks is the will to eliminate most business regulation. The fact that the intellectuals were the chief pleaders for regulation and the business community was verbally opposed to regulation in general may well underlie the illusion that the intellectuals have been responsible for the regulatory policies that were adopted. If mine is a correct reading of history, the intellectuals, miserable souls, were basically serving the business community they profess to dislike by creating a facade of public interest for the regulatory regime.

The recent actions of the new [Reagan] administration, dedicated as it is to deregulation, are instructive with respect to the desires of the business community. The financial community does not wish to see a serious curtailment of the Securities and Exchange Commission’s powers, and an informed and responsible figure in that industry is named the new chairman of the SEC. The opening demand that the Federal Trade Commission withdraw from antitrust enforcement is hastily modified in response to small-business pressures. The Interstate Commerce Commission is apparently moving back from an antiregulatory to a proregulatory stance and so, too, the FCC. I am even in genuine doubt that the attack on environmental protection laws will gain the widespread support of the business community.

I must hasten to add that it is not only the business community, as we commonly understand that phrase, that has urged and obtained those bountiful regulatory favors. The agricultural industries have secured many regulatory boons, especially in the past 50 years. The labor unions, and particularly groups such as the employees of railroads and coal mines, have done very well in Washington. It would be more precise if I said that most regulatory policies have been sought by producer groups, of whom the business community is the most important and the academic community, by no means the least important.

Thus I have argued for two propositions: (1) consumers are opposed to most regulations and (2) businessmen are selectively in favor of most regulations. If I add to these propositions the commonplace that regulations are both pervasive and perhaps increasing, should I conclude that we are in the golden age of business? Should we tell people who write of the twilight of American capitalism that they are mistaken and in fact it is really the high noon of capitalism?

At this point, some of you will say that I have achieved a misreading of the American scene with my perverse arguments: American business wishes to be freed of its regulations. I hope that you will reexamine my arguments at your leisure and consider whether our ocean of regulations could possibly have been achieved under high capitalism except by the consent of the capitalists. American business likes what it is getting and complains publicly only because so many intellectuals take affront at the sight of a happy businessman. Since I promised not to tell you how to run your business, I am compelled to applaud this state of affairs.

Indeed, I am not at all tempted to reproach the business community for accepting and even seizing the opportunities that the political system offers to business to improve its profitability or to ward off the attacks of other groups. It is the duty of a businessman to conduct his enterprise efficiently, devoting efforts and resources in every direction which is legally permissible and economically rewarding. To ask a company to oppose a protective tariff that would increase the value of its stock by 10 percent is to make a most arbitrary assignment of the costs, and the benefits, of achieving a public policy that Chicago economists have traditionally sought. If you tell me that you are successfully repelling an offer of government assistance, I will write you a most sincerely admiring letter—and sell your stock short.

There are economists (some of them are my best friends) who will say that these governmental favors that you take today will be paid for tenfold and more by the costs that will be imposed on you by other industries’ favors. But note three things about this advice: first, it may assume a greater knowledge of politics than economists really possess; second, these economists have not shown that many industries would do better under free, unregulated competition; and third, even if you reject your favors, you will still pay for those of others.

Where we go from here

The fundamental question remains: Where is the American economy headed? Will business continue to enjoy its present high noon, or will the spread of public control become so extensive as to bring us to an essentially different type of economy?

One source of difficulty in answering these questions is that we really do not know what the pace of regulation has been in America in recent decades. If we put aside the consumer-oriented regulations such as rent control and environmental protection (and perhaps if we do not), we do not know whether the economy is regulated more in 1981 than it was in 1971. One can count up regulatory statutes and the areas of the economy to which they pertain (although no one has seriously undertaken that simple but vast task), but a statute and its regulations are hardly a measure of effective regulation. Effective regulation changes the course of events and is much more than a legal rule.

As this question about measurement implies, there are forces working for deregulation as well as for regulation. The rise of an industry that makes a good substitute for the product of a regulated industry may wreak havoc with the regulated industry and its regulations. Thus, the money-market funds have restored competition to the market for personal savings, and it may well be that the essential deregulation of the savings-and-loan industry will emerge—unless the current drive to regulate the money-market funds succeeds. The railroad industry lost control of the ICC to the trucking industry: it is a rule of life that dogs wag tails; tails do not wag dogs. The far-reaching changes in American agriculture and in synthetic fibers have demoted cotton from king to earl or count.

Some organizational changes in American businesses take on new significance in this light. One pervasive concern with the age of political regulation is that it seems calculated to accommodate the interests of established companies and industries. How can I, who would perhaps one day enter the widget industry if it is not expensively regulated into near or complete nonexistence, find the other prospective entrants and form an effective political lobby?

Clearly, those who are already on the scene have large advantages in politics: the system of regulation is hostile to industrial mavericks. Nevertheless, the answer I give for new industries holds here: the computer has become so overwhelmingly efficient as a compositor that the International Typographical Union eventually will be swept away by it.

Another response is the conglomerate corporation, which is equipped with ready access to capital and extensive experience in dealing with legislators and bureaucrats. These conglomerates are eager searchers for the new industry and the small company with an excellent idea. Are they not an efficient tool for restoring the receptivity of the economy to new industries and new methods of operating old industries?

I suspect that a full canvass of modern industrial and financial trends would reveal methods of political action to assist business that have so far escaped academic attention, but it would also reveal new methods of circumventing the obstacles that regulations put in the way of economic progress and its inseparable friend, large profits. There is no sound evidence that high noon is rapidly passing for semiprivate enterprise.

Love US capitalism, warts and all

I wish to address some concluding remarks to my fellow economists. They may well have become restive at my praise of a world so different from that which Chicago economists have customarily honored. They will even begin to suspect that I have come to recant a fundamental article of faith: that the open, competitive economy is considerably more efficient, and not obviously less fair in its distribution of income, than the heavily regulated economy that constitutes American capitalism today.

The standard case for a free, competitive economy, I freely grant, is valid: it has a solid theoretical structure, and it rests on a vast amount of empirical evidence. If I and my likes could design the American economy, it would have a national income larger by possibly 10 to 20 percent, without forfeiting any social goals that are widely desired. If I employed Milton Friedman as an independent contractor—that’s the only kind he ever is—we would also do a good job on inflation.

But notice: these good things come only because you turned dictatorial powers over to me. We have a political system that presently has only modest defenses against use of the state’s power to help politically cohesive groups.

Moreover, we cannot presently devise a set of political institutions that would prevent the uses of regulatory powers that help some groups but reduce the nation’s income. I do not despair of finding political reforms that will mitigate our problems in this respect: after all, hardly anybody has been looking for such changes. We economists in particular have been content to preach self-restraint to businessmen and tenants and farmers—when we are not writing strong letters to Washington to deplore the catastrophic effects of the reduction in the appropriations that are proposed for the National Science Foundation.

Until and unless we devise political reforms that are appealing to the nation, we have American capitalism, and we had better love it. It has warts and even an occasional boil, but for all of that, it is a magnificently productive economy, providing ample livelihoods and a variety of choices of livelihood greater than history has previously seen, as well as the armament of defense against the forces of totalitarianism. And all this with no more impropriety than this world should have become accustomed to. I for one salute American capitalism at high noon.

George J. Stigler was the Charles R. Walgreen Distinguished Service Professor Emeritus of American Institutions and director of the Center for the Study of the Economy and the State at Chicago Booth.