Wednesday, August 29, 2012

Things I wish liberals knew, or would acknowledge, about American business and business people 

American liberals, particularly of the academic left variety that walk unsupervised on the streets of our college towns, seem to my ear not to understand American business people. Not the often caretaker executives of big multinationals, but the owners and other decision-makers of the hundreds of thousands of still significant American companies that often compete against the behemoths and struggle to manage the thicket of regulation that politicians at every level of government -- federal, state and local, not to mention interstate "authorities" and special regulatory boards -- throw at them. So, in the interest of mutual understanding, here a few of the things that I wish liberals understood about American business.

People in business are just like other people, no more or less honest, kind, cruel, giving or grasping than people in general.

Business is a creative act, an expression of the human spirit no less noble than art, letters, philosophy and other inquiry, the learned professions, or philanthropy. When you insult or inhibit a person's business, you are invalidating his creative act.

Business acknowledges that it extracts value from labor in excess of its cost. However, it also confers value to its customers in excess of the price it charges. Left liberals worry a great deal about the surplus value conferred by labor, but often give no credit to the surplus value businesses confer on their customers.

Without the prosperity that comes from the surplus value recovered by customers, many of the things left liberals value -- a clean environment, widespread health care, food, clothes and shelter for virtually everybody, and a robust cultural and intellectual life -- would not be affordable or even possible.

For this discussion, an "owner" of a business is not a stockholder trading a liquid security in seconds and at the dropping of a hat. Rather, an "owner" is any person who bears the burden of decision in a business to such a degree that his or her reputation and material well-being are substantially tied to the quality of his or her decision, or who puts his or her own capital at stake backing the people who make those decisions.

The foundation of business is the willingness of owners to take risk that others will not or cannot take. These other people are known as lenders, employees, or customers.

Because owners take risks, they demand rewards commensurate to the risks. They expect the fruits of success only after the risk-avoiders -- employees, lenders, and customers -- all get their due. These rewards consist of money, satisfaction, and prestige, each in a different priority depending on the person. On average, they are greater than the rewards to non-risk takers. It is possible, but highly unlikely, that the owner's rewards will be very great.

Without the taking of risk in return for the prospect of perhaps great rewards, there is no new business. Therefore, there is no new opportunity for risk averse employees, lenders, and customers.

Business owners are as emotional as anybody else. They are more likely to take risk when they are optimistic and excited, and less likely when they are angry, worried or depressed. Conditions that demotivate business owners, such as sharp rhetorical attacks from the president of the United States and his proxies, discourage risk-taking and therefore economic growth.

Business owners are also rational, just like anybody else. If they see federal agencies capriciously changing their interpretation of longstanding laws and the Congress writing sweeping, vague statutes that confer essentially unchecked power to the unelected permanent regulatory bureaucracy, they will worry that the rules will change in some way that destroys their investment even if it would have succeeded under the old rules. That deters them from taking the risks necessary to start and grow businesses.

Virtually all business owners understand and agree that there must be some regulation.

Regulation usually imposes a fixed cost on each affected business regardless of size. Therefore, complex and costly regulation favors large companies (for which the proportionate cost of compliance is relatively small) over small and mid-sized companies. Left liberals almost never recognize that more regulation almost always drives consolidation in the affected industry, forcing smaller companies to sell out to larger ones. In general, you cannot have both heavy regulation and small, diffuse businesses. The first drives out the second in favor of the behemoths for whom large overhead is a small proportion of the total.

Business owners have the right and proclivity to petition government for the redress of grievances just like anybody else. Regulation, whether or not "necessary," begets lobbying. The more regulation you have, or propose to have, the more lobbying you will have.

In order to regulate business effectively, regulators have to understand the object of their regulation. As often as not, the only source of sufficient expertise is the industry itself. The converse is also true; industry hires former regulators to help it contend with regulation. All current regulators know that industry may hire them one day. This revolving door makes it easier for the largest competitors in regulated industries to blunt the effects of regulation or shape it to their own competitive advantage. This phenomenon is known as "regulatory capture."

As often as not, regulatory capture diminishes the value of regulation compared to the cost of it.

So, regulation favors the big over the small by increasing fixed costs (which inherently benefits larger competitors) and creating opportunities for regulatory capture.

There are all sorts of things that left liberals do not or ought not like about big companies. They create far fewer jobs and opportunities than small companies. They innovate less. They have the capacity to influence politics and other civil discourse, both to protect their interests against government and to gain advantage over smaller competitors. They must operate in a global market, so they are much more likely to move opportunities for workers to countries outside the United States. They pay their CEOs a lot of money (I have heard that liberals hate that). Yet, they also like heavy regulation of business. It would help, at least, if they understood that the price of the latter is more of the former.

Release the hounds.

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