The International Monetary Fund made an important appointment last week, naming Raghuram G. Rajan of the University of Chicago as its new chief economist. In this position, he will oversee all of the IMF’s economic research and have a great deal to say about its policies and programs.
What interests me about Rajan is that he is co-author (with Luigi Zingales) of a very interesting new book, Saving Capitalism from the Capitalists. It is one of the most powerful defenses of the free market ever written. Not only does he defend the market from anti-globalists and socialists, but against capitalists who manipulate markets and government policies for their own benefit.
In this respect, Rajan writes very much in the tradition of Adam Smith, who was very sophisticated about the ways of businessmen. Smith well understood that businessmen could often be the worst enemies of a free market, because they will sacrifice it in a minute for the sake of profits. Often they enlist government as a co-conspirator, getting it to enact laws that restrain competition and raise prices, which benefits them but hurts everyone else.
In The Wealth of Nations, Smith wrote that the interests of businessmen and the public were almost always in conflict. The former wants to limit competition, while the latter benefits from an increase in it. “To narrow competition,” Smith said, “can only serve 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.”
Sometimes businessmen will try to limit competition by conspiring among themselves. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices,” Smith observed.
However, such conspiracies were far less dangerous to the free market than government-sanctioned restraints on competition. Without government enforcement, private cartels naturally fall apart after a time. But when government imposes trade protection and other limitations on competition, it can go on indefinitely. For this reason, governments should be extremely wary of enacting such policies, especially when urged by businesses to do so.
Said Smith, “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 generally have an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
A good example of how businesses manipulate government for their own benefit is the prescription-drug subsidy bill now before Congress. Although marketed as a benefit for seniors, the true beneficiaries are big businesses that would be able to greatly reduce the cost of their retiree health programs. According to a July 2 report in the New York Times, Ford Motor Company alone would save $50 million per year.
The Times notes that the biggest companies are mainly those that still offer drug benefits to their retired workers and would save the most. In the aggregate, they would save billions of dollars per year if the federal government takes over a big chunk of their retiree health expenses by paying for prescription drugs. That is why they are lobbying very heavily for passage of the legislation.
By contrast, seniors are unenthusiastic about the new benefit that is to be showered on them. According to a Zogby poll for the Galen Institute, a significant majority of seniors are satisfied with the drug coverage they have now and many fear that they would actually be worse off under a mandatory government plan. They are right. Many will be worse off.
In short, to increase their profits, many of our nation’s largest corporations are pushing a budget-busting government-spending program that eventually will lead to higher taxes on all Americans. Sadly, the Bush administration often supports policies that benefit big businesses at the expense of average people, as it did with steel tariffs and agriculture subsidies.
Raghuram Rajan understands that this is not the free market, but crony capitalism and an abomination to everything Adam Smith stood for. True believers in the free market must therefore fight it as strenuously as they fight socialism and other misguided government interventions. In fact, they should fight them more strenuously, because capitalism itself often ends up getting the blame for the inevitable consequences: high prices, high taxes, high unemployment, and slow growth.