February 15, 2004

Pro-Market Vs. Pro-Business

Via the Flemish Beerdrinker

Bruce Bartlett over at Townhall.com has written an excellent article that points out that the normal conservative reflex of pro-business is not always pro-market. As similar as the two terms sound, they are not the same. In fact, many times they end up opposed to each other.

Now Ivan over at the Flemish Beerdrinker does a pretty good job of looking at the relationship between pro-business and pro-market over the last decade (I don't appear to be able to link directly to the article so look for the one datestamped 14/02/2004 - 14:42:13 and titled: Is being pro-market conservative?).

I believe that the lessons of pro-market vs. pro-business can be best illustrated by one of my favorite industries - the airline industry.

From it's earlier beginnings the airline industry was largely unregulated. The barriers to entry were simply buying an airplane, getting a pilot's license, and finding some passenger that wanted to fly from point A to point B. Some folks managed to do well and were buying bigger, faster airplanes and were building mini-aeronautical empires, but by and large, the industry was very much pro-market.

Right on up until 1934 and the Spoils Conference of Postmaster Walter Folger Brown. Brown was a man who hated disorder and inefficiency, so he organized a meeting between the airline chiefteins in which they swapped mail routes, with the Big Four: American, United, TWA, and Eastern organizing with the first three being east/west airlines and Eastern flying north/south.

Brown was happy, as were the heads of the Big Four, but the public was outraged. Pro-business was the watchword of the day. Overnight the airlines had gone from one extreme to the other.

Now, as a reaction to the Spoils Conference, the airmail contracts were reawarded, with the Big Four maintaining most of the contracts, although a few other smaller airlines: Delta, Continental, Braniff and Northwest notably, picking up a few of the routes. But the die had already been cast. Brown had effectively set up significant governmental barriers to entry as mail was the most significant profit cargo for the early airlines.

Another pro-business, anti-market institution that was formed around the same time, at the behest as the airlines, was the Civil Aeronautics Board or CAB. The CAB became quite literally the biggest barrier to entry in the airline industry as it approved new routes and new pricing. The only way for an airline to form without the explicit approval of the CAB was to become an intrastate carrier. Since there were few states (California, Texas and Florida were the real exceptions) that could support an intrastate carrier, there was no real way to enter the market.

The CAB was the ultimate pro-business, anti-market entity. It maintained the competitive positions of the Big Four. It set pricing so that the weakest airline in a market made money. The CAB wasn't interested in allowing the market to work. It was interested in maintaining the status quo.

Now the CAB was sunsetted out of existence, one of the few governmental organizations to have actually disappeared. And once it went away, along with its barriers to entry, competition exploded in the industry. It became even safer to fly, more passengers fly and at lower prices than under government regulation. In short we have gone back to a more pro-market environment in the industry, and while everything is not perfect, it is certainly better than it was in the 1970s.

So what's the lesson to take away from the experience of the airline industry? A pro-market economic environment responds better to the needs of the marketplace than does a regulated pro-business one. Pro-market is best for the consumer and the nascent business; pro-business is the desire and wish of the existing businesses. The two are not the same.

Generally, the convential wisdom is backwards. The Democrats, preferring regulation to market pressure, tend to take more true pro-business positions. Republicans tend to be more pro-market. The Bush Administration, though, tends to take a more true pro-business stance than most Republican administrations (although it can also be argued that what they are doing is simply a continuation of the path started down by the previous administration), which is a bit disappointing, but still much better than the alternatives being proposed by the Democratic candidates.

We really need to start swinging the pendulum back towards the pro-market side of the spectrum. When the market is relatively unfettered is when our economy performs best. We have the most innovation and the best profitability (along with generally the highest employment) during periods of laissez-faire policy by the government.

All in all, I thought the article by Bartlett was pretty interesting. Definitely well worth the read.

Posted by Chris at February 15, 2004 05:28 PM | TrackBack | Linked by:
Pennywit linked with Guest posting and recommended reading on economic policy
Pennywit linked with Keeping Boobs Afloat: When Market Regulation is Misdirected
Comments

But isn't this pro-market vs. pro-business paradigm a false dichotomy? It seems to me that this sort of thinking ignores certain externalities.

The airline hypothetical, for example, doesn't take into interest the account of third parties, including individuals who live near an airport and must deal with the noise and traffic congestion associated with having an airport in the neighborhood.

Why shouldn't the government implement regulations that require businesses to account for these external cost?

Posted by: pennywit at February 16, 2004 01:26 PM

But there is one point that the noise abatement argument misses - the CAB had nothing to do with noise or traffic regulations. It was after deregulation that those two issues really became issues.

But noise abatement regulation is nowhere near the barrier to entry that the CAB was. Noise abatement affects all competitors or potential competitors equally. It does not unfairly affect the competitive position of one company over another. As such it would be neither pro-market or pro-business.

The CAB on the other hand did affect the competitive postion of existing companies vs. startups. The CAB did distort the market in favor of the existing businesses. Hence it was pro-business, anti-market.

You are correct in that there are other factors that need to be taken into account when analyzing an industry. I was merely trying to look at one aspect of the airline industry through one filter out of many that could be applied.

But I also don't think that pro-market vs. pro-business is a false dichotomy. They are merely two extremes on a continuum in which everything falls somewhere in the middle.

Posted by: Chris at February 16, 2004 02:57 PM

You know, my specialty in law class is dodging the questions posed in hypos. You are right in that CAB is an excellent example of a regulatory agency being captured by the very industry it's supposed to be regulating.

However, I maintain that your pro-business/pro-market dichotomy is off-target because it defines regulation in a simple bipolar fashion, when industry regulation is actually a multipolar affair.

You start by defining the market and the business as the two entities that can be protected by regulation. I would argue that there are two more.

First, you have consumers, who are often in a bargaining position inferior to that of the sellers, especially in an industry whose suppliers are dominated by large companies. Regulation can be used to make sure that consumers aren't cheated or imposed upon because of their inferior bargaining position.

Second, you have externals, individuals who are not participants in a transaction, but are inevitably affected by it. Part of the goal of regulation is to force a market to internalize the interests of these externals -- aka externalities -- so that the transaction is forced to reflect its true cost.

The classic example of this sort of thing, of course, is pollution. If a factory sets up shop near a lake and its emissions pollute the lake, those who fish in the lake will see a measurable decrease in their incomes although they are not party to the factory's dealings with its customers.

Effective regulation forces the factory to take this externality into account in its operations, perhaps by compensating the fishermen who have lsot income or by installing equipment that reduces its emissions.

While Coase would no doubt want us to find the lowest cost avoider and assign property rights that way, I prefer a system in which the government steps in and forces internalization of the externality.

This sort of approach forces the individuals involved in the transaction to act in such a way that they try to have as little negative effect on those external to their transaction as possible.

--|PW|--

P.S. See what you made me do? I had to go look up friggin' Coase again! Didn't have much taste for him in torts class, don't like his work now.

Posted by: pennywit at February 17, 2004 11:51 AM

I didn't think that I was presenting pro-business vs pro-market as a dichotomy, but more as a continuum, sort of like good and evil (most everything falls into a grey area somewhere in the middle). If that wasn't clear, I apologize.

I think I also see the root of our difference - and that our difference isn't all that great. I was using (very) broad generalizations, whereas you are being more specific. I assumed that the interests of the consumer and externalities fell into the pro-market side of the continuum.

That being said, I don't think that regulation was a positive for the airline passenger in any way. Real prices have fallen substantially since deregulation. Choice has improved. The customer can - and does - now use the power of the pocketbook to influence airline decisions in pricing and route structure. Under the CAB, the consumer was the forgotten element.

Now if we want to get more specific and to further breakout certain elements of the industry, we certainly could. We could look at how anything might impact labor, or suppliers, or security personnel, or just about anything else.

But unfortunately, this medium (and my patience with my two balky computers) doesn't really allow me to go into the depth to do justice to the issue. So I use broad generalizations to make broad, general points. Even when I use specific examples, I still look at the big picture, rather than the finer details.

Does it leave some room for clarification and explaination? Most certainly. But my goal is not to be the end all source of education on a topic, but rather to get people to think about an issue enough to learn more about it. At least that's how I am when I write pieces like this. Political posts are a different animal althogether.

Posted by: Chris at February 17, 2004 09:32 PM

Ah, sorry, Chris. Just engaging. Random Fate's Jack pointed me at this, so I thought I'd take a look. It's interesting.

--|PW|--

Posted by: pennywit at February 18, 2004 09:43 AM

No, no, no, please don't misunderstand. I actually enjoy the engagement. Most of my lack of posting yesterday was because I was trying to research Coase, as I must admit I am not familiar with his works.

I've had people in the past complain about my use of generalizations, so I'm maybe a touch sensitive about it. I just feel that in a 1000 word essay, using specifics to try to make a general point isn't very effective.

By all means, please keep engaging. It helps to keep me on my toes! If we both walk away with a better understanding, so much the better.

Posted by: Chris at February 18, 2004 06:52 PM


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