Each of us seeks economic progress, both individually and for society. Economic progress is different than economic growth, even though that’s what the government peddles. Economic growth is a quantitative concept, captured in government accounting as increased consumption. Economic progress is qualitative: a subjective feeling about the quality of life we lead and our anticipation for its future improvement.
America’s new democratic socialists promise more social justice and a higher level of consumption for all. They think that more government intervention, more taxation, more redistribution and more control over business can achieve their goals. The opposite is the case. In order to provide both better living standards and economic progress, entrepreneurial innovation is required.
Among other errors, the democratic socialists make the mistake of believing in a simplified productivity theory of capital: that accumulating savings and investment and a higher capital stock raises future investment yields, no matter whose hands they are in.
But without entrepreneurs, capital is dead. It takes entrepreneurs to bring capital to life and keep it alive. Capital needs to be constantly renewed, to be put to innovative uses that improve lives and achieve the progress we all seek. Our pension savings will not ensure future wealth unless they get into the hands of the entrepreneur who – motivated by profits – can find new productive applications for them. Investing in stocks does not create more real capital. Most stock trades represent merely a rotation of ownership. It is true profit-generating entrepreneurial activity that creates future wealth and income. The future environment for entrepreneurial activity will determine whether savings are put to productive use, and the democratic socialists prefer to suppress, if not destroy, economic activity.
Can we count on our large corporations to deliver the innovation that is needed for economic progress? There is certainly a case to be made that they are constantly testing and marketing new ideas, new devices, new services and new service extensions. Amazon, Google, Uber and Apple and Microsoft and the rest of them are lowering our transaction costs which is an improvement to our lives and represents economic progress.
But there are many curses of bigness, and one of them is an inevitable slowing down of innovation. Bigness tends to lead to defensiveness in the protection of high market shares; corporations become reluctant to innovate with the risk-taking bravado that took them to prominence in the first place, because they begin to fear the destabilization of their own marketplace.
M&A is one way to protect high-share and quasi-monopolistic market positions, and is often defensive in style: bring the innovators in house and control them rather than let them disrupt from outside. And if a company’s large scale was built partially or completely with debt borrowed to make acquisitions (as if often the case with private equity funded firms), then innovation will tend to be even more suppressed, because free cash is diverted from investment in R&D to debt service.
Worse, it is often the case that our large corporations get closer and closer to government, making a deal to accept greater supervision (it keeps bureaucrats in long term jobs) in return for regulation that makes it harder for upstart innovators to enter protected markets.
Tim Wu, a Columbia law professor who wrote a book called The Curse of Bigness, explains one way in which this sidling up to governments works for big corporations. Let’s say a large corporation wants to make a defensive acquisition to acquire a competitor. They submit the proposal for merger review by the government. The government, in turn, issues a consent decree, which means that permission to make the acquisition is given, with conditions. It is the administration of the conditions of the consent decree that keeps bureaucrats in a job for years, perhaps decades to come. The acquiring company meets the goal of its merger, and the government gets to write more administrative law and to load up the pubic payroll with more bureaucrats. Here’s what Wu said in an interview with ProMarket.
Overall, I think consent decrees appeal to academic economists, but they have a bad track record. One problem with consent decrees is that you have the most talented attorneys and economists negotiating these on the government side, but once they’re done, they’re given to an enforcement bureau which is typically not heavily staffed. And sometimes it can be forgotten, and certainly not enforced with any kind of vigor.
Structural separation is self-executing. The blocking of mergers is self-executing. You don’t have to have the government constantly trying to make sure the thing is working. I think Europe has really gone down the wrong path in that direction.
Capitalism is a dynamic system, alway changing, always adapting, always innovating. That’s because consumers are always changing, always demanding better lives, and insisting on economic progress. Socialism certainly can’t deliver what consumers want, and big companies have a tendency to become defensive in the face of consumers’ unrelenting insistence on improvement. It is the entrepreneur who imagines the better future that consumers wish for, and, in the pursuit of profit, finds a way to deliver it by refreshing capital and putting it to new uses. No other system has this capability.
For more like this, see Why Capital Needs Entrepreneurs at mises.org, which was a source for some of this article.
