There exists a myth that government only serves to get in the way of business. Government action impedes the formation of free markets, thereby inhibiting economic growth. Certainly, an abundance of central planning is dangerous for an economy. Even though state-owned enterprises in China impressed many economists for a few years, they are now suffering losses that the Chinese government subsidizes. There is a legitimate argument that SOEs are unable to innovate.
However, it is important to recognize an important reality that many private interests lobby hard to bury: government regulation breeds a safe environment for free markets to form. At the very base lies the rule of law established and protected by government action. Without rule of law, capital markets struggle to form and free markets resemble a bloody free for all ripe with corruption. Government regulation breeds the dynamic necessary for entrepreneurs, investors, lenders, consumers, and producers to come together to form markets. Government regulation can encourage and protect. Specifically, government grants patents, ensures that contracts are honored, decides who can file for bankruptcy, provides credit incentives to promising industries, opens markets for American business, and provides the critical infrastructure necessary for business to operate.
Free markets are important. But fair markets are essential. Ideally, the role of government is to ensure free and fair markets. Unfortunately, that is not the case. We have a political system in which our elected representatives are owned by big corporate interests that specialize in rent-seeking, the practice of manipulating public policy or economic conditions as a strategy to bolster profits. Just like the concentration of wealth and economic power among people in society, the American private sector also suffers from a concentration of market power among a few very powerful corporations in each industry.
According to Larry Summers and The Economist, there appears to be growing monopoly power stemming from market concentration, focus on mergers and acquisitions, pure profit driven strategies, and declining business formation. Competition becomes even harder for smaller business when big businesses exploit their market share as a way to avoid taxation. They have fought like hell to make sure they pay the least in taxes to fund the federal government. In fact, corporate taxes in 2015 composed only 11 percent of federal revenues compared to anywhere from 25 to 33 percent in the 1950s. Let’s not forget the $2 trillion companies and individuals hiding overseas.
This would be acceptable to many Americans if the right-wing notion that unfettered business activity stimulates economic growth for all was true. Unfortunately, this is not the case because more and more businesses do not invest profits into the American economy. The Roosevelt Institute found that 40 percent of corporate earnings and borrowing in the 1980s was allocated to investment. The rate has been falling ever since with borrowing closely correlated with shareholder payouts. The same pattern is corroborated by FiveThirtyEight which finds that about 52 percent of business investments are shareholder payouts.
This shareholder-centric perspective harms the American economy and common Americans with a short-term business strategy that prioritizes quick profits over sustainable growth and competitive market share. The infatuation with shareholder profits creates a market in which returns to capital rapidly and absurdly exceed returns to labor, acting as a core contributor to the widening gap between rich and poor.
Challenges to the further entrenchment of shareholder perspective into American corporate culture can only be challenged from the private sector with a focus on stakeholders: producers, consumers, advocacy groups, government, the environment, communities, etc.
Meanwhile, the United States government and state representatives can make an effort to utilize pro-growth and pro-competition policies that prioritize consumers in an economy that works for common Americans.
