By Lawrence Lessig
Theorists and principled souls on the Right are free-market advocates. They are convinced by Hayek and his followers that markets aggregate the will of the public better than governments do. This doesn’t mean that governments are unnecessary. As Rajan and Zingales put it in their very strong pro-free-market book, Saving Capitalism from the Capitalists, “Markets cannot flourish without the very visible hand of the government, which is needed to set up and maintain the infrastructure that enables participants to trade freely and with confidence.” But it does mean that a society should try to protect free markets, within that essential infrastructure, and ensure that those who would achieve their wealth by corrupting free markets don’t.
Yet often the biggest danger to free markets comes not so much from antimarket advocates (the Communists and worse!) as from strong and successful market players eager to protect themselves from the next round of strong and successful market players. As Rajan and Zingales describe:
Capitalism’s biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action.
The perpetual danger is that this competition will be “distorted by incumbents,” because of an obvious fact not about markets, but about humans: “Those in power… prefer to stay in power. They feel threatened by free markets”— even if it was free markets that gave them their power!
This is not a new point. Adam Smith, founding father of the modern free-market movement (even if, like most founding fathers, his work is only indirectly and partially understood by those who follow him most vigorously), famously condemned the very heroes of free-market wealth:
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.
It was from this recognition that Smith offered his rule for interpreting any proposal by successful incumbents for regulating the market. Such proposals, Smith said, “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.”
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For such proposals “come… 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 oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
Thus, as an example, Rajan and Zingales point to Congress’s aid for the tourism industry after 9/11: “The terrorist attacks affected the entire tourism industry. But the first legislation was not relief for the hundreds of thousands of taxi drivers or restaurant and hotel workers, but for the airlines, which conducted an organized lobbying effort for taxpayer subsidies.”
Principled souls on the Right thus worry about how to protect, as Rajan and Zingales put it, capitalism from the capitalists. As Rajan writes in his own work, “The central problem of free-enterprise capitalism in a modern democracy has always been how to balance the role of the government and that of the market. While much intellectual energy has been focused on defining the appropriate activities of each, it is the interaction between the two that is a central source of fragility.”
This is a worry because there are only two things we can be certain of when talking of free markets: first, that new innovation will challenge old; and second, that old innovation will try to protect itself against the new. Again and again, across history and nations, the successful defend their success in whatever way they can. Principles— such as “I got here because of a free market; I shouldn’t interfere with others challenging me by interfering with a free market”— are good so long as they don’t actually constrain. Once they constrain, the principles disappear. And once they disappear, the previously successful use whatever means, including government, to protect against the new. This was one of the problems the Progressives fought against: “To destroy this invisible government, to dissolve the unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of the day.” This is one of the battles that should join progressives of the Left and free-market advocates on the Right.
James Bessen makes a similar point about how the way we fund campaigns affects innovation. In an essay published in Foreign Affairs, Bessen writes:
Government policies have, across the board, increasingly favored powerful interest groups at the expense of promising young start-ups, stifling technological innovation.
“The root of the problem,” Bessen writes:
is the corrosive influence of money in politics. As more intense lobbying and ever-greater campaign contributions become the norm, special interests are more able to sway public officials.
Bessen’s examples are many (followed up with even more evidence in a book published in 2015, Learning by Doing).
Defense Department procurement, for example, used to favor “a diverse group of private firms, including start-ups and university spinoffs.” Over the past few years, however, that has changed as “procurement has strayed from this successful formula. Instead of awarding contracts to start-ups and spinoffs, the Pentagon has favored traditional defense contractors.” The reason? “Large defense contractors have the money and influence to secure lucrative government contracts.”
Likewise, with patents. Start-ups have suffered, Bessen writes, because of the “proliferation of patent litigation.” That growth began after Congress (“ after persistent lobbying by patent lawyers”) created a special patent court to enforce patent claims. Since that change, patent litigation has surged: “A 2013 study by the Government Accountability Office found that the number of defendants in patent lawsuits more than doubled between 2007 and 2011; software patents accounted for 89 percent of the increase.”
Some of these suits defend appropriate rights appropriately. But many are the work of “patent trolls.” Bessen offers this extreme example:
In the early 1980s, for example, one inventor developed a kiosk for retail stores that could produce music tapes from digital downloads, filing a patent for an “information-manufacturing machine” at “a point of sale location.” A patent troll named E-Data later acquired the patent and interpreted it to cover all sorts of digital e-commerce, making millions of dollars from suits against more than 100 companies.
These lawsuits are expensive. Bessen calculates that in 2011, the roughly 5,000 “firms named as defendants… paid more than $ 29 billion out of pocket.”
That burden, in turn, led many to press for reform to the patent system. The culmination of that push was the America Invents Act of 2011. But despite high hopes, as Bessen describes, “The new law did little to deter patent trolls or to discourage the vague software patents that allow trolls to abuse the system. In fact, the law granted relief to only one industry: finance.” It’s no surprise that of the “more than 1,000 lobbyists [who] worked on the bill, including ten former members of Congress, 280 former congressional staffers, and more than 50 former government officials,” Wall Street had enough to get the one special favor of the law: relief!
“Politics,” Bessen concludes, “is about balancing competing interests. Opposing factions battle one another but ultimately compromise, each getting something it wants.” But in the lobbyist-driven battle that defines DC now, quoting Jim Cooper (D-Tenn.; 1983– 1995; 2003–), Bessen writes, “The future has no lobbyists.” And so the future will have less innovation.
One of the most striking examples— because so blatant— of this protectionism is the story of “Internet Radio.” If you’ve spent any time on the Net, you’ve experienced the magic of Internet Radio. Almost every terrestrial radio station has a mirror on the Internet. From your computer or iPhone you can “tune” into literally thousands of stations around the world.
But in the beginning of Internet Radio, it wasn’t just existing radio stations that had mirrors on the Net. It was literally hundreds of thousands of music enthusiasts who had launched their own “radio station.” These were wanna-be DJs, or experts in some remote domain of music— jazz from 1910 to 1915; the best baroque in Italy. You think of a theme, there was likely to be an Internet Radio station, and hobbyists and amateurs competed with the professional radio stations to serve a growing audience an amazing diversity of creative work.
Until the lawyers showed up. Because of course, broadcasting music triggers copyright law. And copyright law is a favorite tool of protectionists. So in 1995, Congress enacted a special copyright levy on Internet Radio that didn’t apply to ordinary radio. And then the government launched a royalty proceeding to determine how much money Internet Radio stations would have to pay.
No one should oppose fair rates for creative work. But the striking part of the Internet Radio story is that, at least for some, the whole purpose of the setting the rates was not to get a “fair” royalty for copyright owners. It was instead to shrink the competition in radio. As I described in my book Free Culture (2004), recounting an interview with Alex Alben, vice president for Public Policy at Real Networks:
The RIAA, which was representing the record labels, presented some testimony about what they thought a willing buyer would pay to a willing seller, and it was much higher. It was ten times higher than what radio stations pay to perform the same songs for the same period of time. And so the attorneys representing the webcasters asked the RIAA,…“ How do you come up with a rate that’s so much higher? Why is it worth more than radio? Because here we have hundreds of thousands of webcasters who want to pay, and that should establish the market rate, and if you set the rate so high, you’re going to drive the small webcasters out of business.…”
And the RIAA experts said, “Well, we don’t really model this as an industry with thousands of webcasters, we think it should be an industry with, you know, five or seven big players who can pay a high rate and it’s a stable, predictable market.
Translation: We want to use the law to knife the baby, so the future of radio (and hence music) is much like the past.
This is the dynamic that Zingales and Rajan were writing about: the incumbents protecting themselves against the challenger. Recognizing the threat of this dynamic is nothing new. Neither is it partisan. As Dean Post writes:
As early as 1894, the irreproachable Elihu Root, a “conservative of conservatives” [and Republican], had proposed amending the New York State Constitution to prohibit corporate campaign contributions and expenditures. “The idea,” Root said, “is to prevent the great moneyed corporations from furnishing the money with which to elect members of the legislature of this state, in order that those members of the legislature 5may vote to protect the corporations. It is to prevent the great railroad companies, the great insurance companies, the great telephone companies, the great aggregations of wealth, from using their corporate funds, directly or indirectly to send members of the legislature to these halls, in order to vote for their protection and the advancement of their interests as against those of the public.”
Rajan and Zingales offer a range of remedies to secure a free society from this type of market protection. The most interesting I’ve described: the notion of a political antitrust doctrine, a doctrine that aims at blocking not only inefficient economic behavior, but also concentrations in economic power that could too easily translate into political power. In this, their work echoes Louis Brandeis, who opposed “bigness” not just for (mistaken) economic reasons, but more important, because of the view that “in a democratic society the existence of large centers of private power is dangerous to the continuing vitality of a free people.” It also echoes the battles by Presidents Jefferson and Jackson centuries ago, who both fought the first Bank of the United States, because both “saw a powerful bank as a corrupting influence that could undermine the proper functioning of a democratic government.”
But the one point that Rajan and Zingales strangely leave aside is the role of money in politics on the capacity for capitalists to corrupt capitalism. So long as wealth can be used to leverage political power, wealth will be used to leverage political power to protect itself. This was Teddy Roosevelt’s view: “Corporate expenditures for political purposes… have supplied one of the principal sources of corruption in our political affairs.”
But however clever political antitrust might be, a more fundamental response would be to weaken the ability of wealth to leverage political power. Never completely. That would not be possible. But at least enough to weaken the return from rent seeking, perhaps enough to make ordinary innovation seem more profitable.
Any reform that would seek to weaken the ability of wealth to rent-seek would itself be resisted by wealth. So long as private money drives public elections, public officials will work hard to protect that private money. And if you doubt this, look to Wall Street: Never has an industry been filled with more rabid libertarians; but never has an industry more successfully engineered government handouts when the gambling of those libertarians went south. When threatened with our existence, none of us— including principled libertarians— will stand on principle. The Right needs to recognize this as well as the Left.
All three examples point to a step in arguments from the Right that too many too often overlook. I’ve been in the middle of hundreds of arguments in which someone on the Right (and I was that person for many years) invoked a common meme: something like, “This problem, too, would be solved if we simply didn’t have such a big/ invasive/ expensive government.”
Maybe. But the point these three examples emphasize is that you can’t simply assume the problem away. If you believe big or expensive government is the problem, then what are you going to do to change it? How are you going to shrink it? What political steps will you take toward the end that you seek?
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My sense is that too many on the Right make the same mistake as too many on the Left. They assume that change happens when you win enough votes in Congress. Elect a strong Republican majority, many in the Tea Party believe, and you will elect a government that will deliver the promise of smaller government and simpler taxes— just as activists on the Left thought that they could elect a strong Democratic majority and deliver on the promise of meaningful health care reform, or global warming legislation, or whatever other reform the Left thought it would get.
What both sides miss is that the machine we’ve evolved systematically thwarts the objectives of each side. The reason for the thwart is different on each side. Change on the Left gets stopped because a strong, powerful private interest uses its leverage to block changes in the status quo. Change on the Right gets stopped because strong, powerful public interests, Congress, work to block any change that would weaken their fund-raising machine.
The point is not that the Right agrees with the Left. They don’t. The ends that both sides aim for are different. But even if the Left and the Right don’t share common ends, they do share a common enemy. The current system of campaign funding radically benefits the status quo— the status quo for private interests and the status quo of the Fund-raising Congress.
The same dynamic will thus work against both types of reform. Private interests will flood DC with dollars to block change that affects them. And government interests, as in congressmen, will keep the grip tight on large, intrusive, complicated government, in part because it makes it easier to suck campaign dollars from the targets of regulation.
The existing system will always block the changes that both sides campaign for. Both sides should, therefore, have the same interest in changing this system.
This is not a new point, though it is strange how completely it gets forgotten. In 1999, Charles Kolb, a Republican and former George H. W. Bush administration official, led the Committee for Economic Development (CED) to take a major role in pushing for campaign finance reform. The CED describes itself as “a non-profit, non-partisan business led public policy organization.” Since 1942, the CED has pushed for “sustained economic growth.” It has been well known for pushing for that growth from a relatively conservative position.
Central to its mission since 1999 has been the argument that the existing system of campaign funding is broken. As it wrote in its first campaign financing report:
The vast majority of citizens feel that money threatens the basic fairness and integrity of our political system. Two out of three Americans think that money has an “excessive influence” on elections and government policy. Substantial majorities in poll after poll agree that “Congress is largely owned by the special interest groups,” or that special interests have “too much influence over elected officials.” Fully two-thirds of the public think that “their own representative in Congress would listen to the views of outsiders who made large political contributions before a constituent’s views.”
These findings, typical of the results of public opinion surveys conducted in recent years, indicate a deep cynicism regarding the role of money in politics. Many citizens have lost faith in the political process and doubt their ability as individuals to make a difference in our nation’s political life. Americans see rising campaign expenditures, highly publicized scandals and allegations regarding fundraising practices, and a dramatic growth in unregulated money flowing into elections.
The CED was “deeply concerned about these negative public attitudes toward government and the role of money in the political process.” It was “also concerned about the effects of the campaign finance system on the economy and business.” For “if public policy decisions are made— or appear to be made— on the basis of political contributions, not only will policy be suspect, but its uncertain and arbitrary character will make business planning less effective and the economy less productive.”
The solution, the CED argues, is for business to be less tied to campaign fund-raising. “We wish,” as the report states, “to compete in the marketplace, not in the political arena.” Because, again, that competition doesn’t create wealth or produce new jobs. It just fuels the very rent seeking that all good conservatives should oppose.
The CED has continued its work in this field since the first edition of my book. The organization runs a “Money in Politics Project.” In 2013, it commissioned a bipartisan-run nationwide survey of 302 business leaders on money in politics. Here are its key findings— none surprising in light of everything we’ve seen so far:
- 85 percent say that the campaign finance system is in poor shape or broken;
- 87 percent say that the campaign finance system needs major reforms or a complete overhaul;
- 71 percent believe that major contributors have too much influence on politicians;
- 75 percent say that the U.S. campaign finance system is pay-to-play.
These are business leaders— the people most familiar with what Peter Schweizer calls the “extortion” of the system. Why is there any debate about the need for reform here at all?
This essay was adapted from Republic, Lost: Version 2.0 , with permission from the publisher Twelve Books.
2016 January 16
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