Being pro-free enterprise is not the same as being pro-big business

When you advocate for free enterprise you are often accused of being for businesses, sometimes ‘big businesses’ specifically. But the two things are not the same. They may even be mutually exclusive. The bailout of General Motors by the Obama administration in 2008 was certainly pro-big business, but there was nothing ‘free enterprise’ about it.

The economist Milton Friedman wrote about the contrast between these two positions in Newsweek in June, 1981.

The contrast is clearest in foreign trade. Tariffs are anti-free enterprise, yet pro-existing business. “Voluntary” restrictions on auto exports by Japan are anti-free enterprise yet pro-Chrysler, Ford and General Motors.

The contrast is less clear for regulation. Some regulations are both anti-free enterprise and anti-existing business. For example, oil price control restricted competition and the free market and also harmed many oil-producing and oil-refining businesses. Yet even in this case, “tin can” refineries set up to take advantage of subsidized foreign oil were harmed by the end of price control.

The regulations that have multiplied fastest in the past decade have been directed toward the environment, health, safety and consumer protection. These have all tended to substitute the judgment of bureaucrats for the judgment of the market, and hence have been both anti-free enterprise and anti-existing business. They have all imposed heavy costs on industry, generally for questionable benefits. With respect to these regulations, no confusion arises.

The situation is very different for the more traditional areas of regulation, such as ICC regulation of railroads and trucking. Though such regulations were adopted in the name of promoting competition, in practice the agencies administering them have become captives of the industries they were supposed to regulate. As a result, their effect has been to suppress competition, preserve monopoly and harm both consumers and potential competitors.

Trucking is a particularly egregious case. An ICC permit to operate is a valuable piece of property–to the person who has it. It is valuable because it restricts entry and thereby enables truckers to charge higher prices than they otherwise could. Private wealth, public nuisance.

The great virtue of free enterprise is that it forces existing businesses to meet the test of the market continuously, to produce products that meet consumer demands at lowest cost, or else be driven from the market. It is a profit-and-loss system. Naturally, existing businesses generally prefer to keep out competitors in other ways. That is why the business community, despite its rhetoric, has so often been a major enemy of truly free enterprise.

We cannot expect existing businesses to promote legislation that would harm them. It is up to the rest of us to promote the public interest by fostering competition across the board and to recognized that being pro-free enterprise may sometimes require that we be anti-existing business.

The failure to distinguish between being pro-free enterprise and pro-business is by no means special to the Reagan Administration. It has been endemic. It has led persons opposed to particular existing businesses to oppose free enterprise. It has led them to regard proponents of free enterprise as simply paid apologists for existing businesses. It has led them to support government measures that have achieved the very opposite of their intended purpose.

There is no problem with big businesses per se. If they have grown and stayed big by producing goods and services that consumers want to purchase, they are to be applauded. This is a good thing. But where they have gained and maintained their size by sucking up to the government, that is to be opposed. This is the contrast Friedman so wisely noted, but which is all too often missed.

John Phelan is an economist at the Center of the American Experiment.