When Competition Goes Bad

Interesting article in the National Post today (that alone is noteworthy!) about corporate welfare.

The article is primarily about a recent court victory by Ralph Nader which argued that state subsidies to lure businesses to set up there were a form of illegal discrimination against other states.

It's a pretty good article and it almost gets right to the heart of the matter when the author (Peter Foster) argues that,

"As Nobel economist James Buchanan noted several years ago, politicians are every bit as self-interested as market actors. The difference is that private actors in free markets do, as Adam Smith pointed out, a "good that is no part of their intention." Political actors invariably do unintentional damage."

Unfortunately, in his haste Foster oversimplifies matters in saying that the private sector always achieves good by following its self-interest while the public sector does the opposite. When private actors dump toxins into our environment for their own benefit, no unintentional good is done. When public actors ensure that police forces are properly trained, staffed and free from corruption this is both in their own self-interest and good for the public as well.

I would argue that private actors achieve an unintentional good not through all their actions, but when they are in competition with each other while public actors do harm when they compete with one another.

Let's look at an example. Suppose Ford wants to open a new auto plant somewhere in North America. Suppose further that whatever state/province the plant moves to will get a total financial benefit (lower unemployment, higher tax revenue etc.) of $100 million. Ford wants to keep its costs as low as possible (which is good for the public) because of its competition with other auto-makers.

Now suppose that Ontario offers Ford $10 million to put the plant there. This is perfectly reasonable since there will be a net benefit to Ontario of $90 million. Seeing this, Alabama offers $50 million, and Ohio then offers $80 million, and so on. In the end, because it can play one jurisdiction against one another, Ford can capture and keep pretty much all of the social benefits of it's new plant.

I am reminded of Jane Jacobs brilliant book, Systems of Survival, in which she builds on Plato's Republic, to argue that humans have two ways of making a living: our traditional one based on control of territory and a somewhat newer one based on trading. Each of these ways of making a living has it's own set of ethics, with ethical trading relying on shunning the use of force, competing, honesty, openness to novelty, invention, collaboration with strangers and a bunch more.

In contrast, ethical territorial activities (such as government) rely on a different set of values including shunning trading, respect for hierarchy and tradition, loyalty and a bunch more.

In Jacobs' view, unethical behavior arises when values which are ethical in one way of making a living are used in the other way. As an example of what happens when governmental organizations adopt commercial tactics she documents a case where a consultant to a police organization recommended introducing market incentives to the force by financially rewarding officers based on how many arrests they made (basically, putting them on commission). As you might expect, the whole thing unravelled amid numerous false and marginal arrests being made. Jacobs could just as well have used governments competing over the location of a new factory as an example of what goes wrong when a commercial value like competition is introduced into a territorial (governmental) system.

In the end, the Post hopes that Nader's actions will end the corporate welfare by appealing directly to the courts to tie the government's hands. Still, I think if they want to provide the subsidies, state and provincial government will find a way to skirt the law (and I'm sure the corporate law troops will only be too happy to help.) The true solution would be to move jurisdiction over subsidies to multinational companies under federal jurisdiction instead of state/provincial. Of course as a global problem (Many companies can build new plants pretty much any where on the globe) it really needs to be dealt with by a global government. A global government wouldn't be in competition with any other jurisdictions and would therefore be able to protect the global public interest, but that may still be a few years off (we're doomed without it, but alas, that's no guarantee it will happen).