Free markets vs. business

Bruce Yandle has a wonderfully insightful theory of regulation he calls the Bootleggers and Baptists theory. Both groups want to ban Sunday liquor sales. One out of concern for others. One out of self-interest. Politicians who support such a ban always invoke the altruistic motive. The altruists give cover to the self-interested advocates for a particular policy.

The altruists often inspire the general public to encourage politicians to "do something." But they lose interest in the details of the legislation. The bootleggers, the self-interested folk, spend a lot of time on those details making sure that the legislation is structured to line their pockets. So the tobacco settlement gets a lot of public support—everyone’s in favor of good health and protecting the children. But the legislation is structured to enrich tobacco companies and lawyers. Very few are paying attention when the details are hammered out. The noble Clean Air Act’s benefits are mitigated because it encourages the use of dirtier  West Virginia coal and enriches politically connected coal producers at the expense of clean air for the rest of us.

I have heard Bruce lecture on the B&B theory and he particularly delights in situations where the bootleggers testify in favor of some legislation pleading how much it will serve the public interest. It turns out Adam Smith understood the different incentives facing the bootleggers and the general public. Here is Smith talking about merchants and master manufacturers:

As during their whole lives they are engaged in plans and projects,
they have frequently more acuteness of understanding than the greater
part of country gentlemen. As their thoughts, however, are commonly
exercised rather about the interest of their own particular branch of
business, than about that of the society, their judgment, even when
given with the greatest candour (which it has not been upon every
occasion) is much more to be depended upon with regard to the former of
those two objects, than with regard to the latter. Their superiority
over the country gentleman is, not so much in their knowledge of the
public interest, as in their having a better knowledge of their own
interest than he has of his. It is by this superior knowledge of their
own interest that they have frequently imposed upon his generosity, and
persuaded him to give up both his own interest and that of the public,
from a very simple but honest conviction, that their interest, and not
his, was the interest of the public. The interest of the dealers,
however, in any particular branch of trade or manufactures, is always
in some respects different from, and even opposite to, that of the
public. To widen the market and to narrow the competition, is always
the interest of the dealers. To widen the market may frequently be
agreeable enough to the interest of the public; but to narrow the
competition must always be against it, and can serve only to enable the
dealers, by raising their profits above what they naturally would be,
to levy, for their own benefit, an absurd tax upon the rest of their
fellow-citizens. The proposal of any new law or regulation of commerce
which comes from this order, ought always to be listened to with great
precaution, and ought never to be adopted till after having been long
and carefully examined, not only with the most scrupulous, but with the
most suspicious attention. It comes from an order of men, whose
interest is never exactly the same with that of the public, who have
generally an interest to deceive and even to oppress the public, and
who accordingly have, upon many occasions, both deceived and oppressed
it.

I am reminded of Milton Friedman’s observation in this podcast that business is not generally supportive of economic freedom. When someone presumes that because I am in favor of economic liberty I must also be pro-business, I always remind them that business interest and economic liberty are at odds with one another. Let me repeat the relevant part of the Smith quotation:

The interest of the dealers,
however, in any particular branch of trade or manufactures, is always
in some respects different from, and even opposite to, that of the
public. To widen the market and to narrow the competition, is always
the interest of the dealers. To widen the market may frequently be
agreeable enough to the interest of the public; but to narrow the
competition must always be against it, and can serve only to enable the
dealers, by raising their profits above what they naturally would be,
to levy, for their own benefit, an absurd tax upon the rest of their
fellow-citizens. The proposal of any new law or regulation of commerce
which comes from this order, ought always to be listened to with great
precaution, and ought never to be adopted till after having been long
and carefully examined, not only with the most scrupulous, but with the
most suspicious attention. It comes from an order of men, whose
interest is never exactly the same with that of the public, who have
generally an interest to deceive and even to oppress the public, and
who accordingly have, upon many occasions, both deceived and oppressed
it.

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