Some quick thoughts about political entrepreneurship

The Wall Street Journal has a weekend interview feature with an entrepreneur who founded Airbnb, a company that has been getting rich by exploiting the so-called “sharing economy.” Overall it’s an interesting read (I think the term “sharing economy” is misleading, but it is a stroke of marketing genius; “I’m not making money: I’m helping people share stuff!”).

However, after reading Rick’s recent thoughts on entrepreneurship and re-reading my own musings on how democracy works, this passage stood out to me like a sore thumb:

By year’s end, Airbnb says it will have booked more overnight stays than the Hilton and InterContinental hotel chains.

As might be expected, hoteliers and hospitality-industry regulators are suspicious of the Airbnb model. In October, New York state sued the company for violating a law passed in 2010—just when Airbnb was picking up steam—barring private citizens from renting an entire apartment for less than 30 days.

Why on earth would New York state undertake such a ridiculous ban? Ostensibly for safety reasons, right? Or maybe to better ensure that labor regulations remain up to par?

The law that hotel chains used to sue its competition strikes me as the perfect example of how cronyism works. The hotel chains are losing some of their market share to innovative competitors, but instead of improving upon their own models they turn to the political process, which (at least in the US) provides guaranteed access to any faction who would like to use it.

Just like in the marketplace, though, guaranteed access does not mean guaranteed results. Enter the entrepreneurial spirit. Except instead of finding ways to make money, the political entrepreneur is finding ways to prevent competition. This second type of entrepreneurship is also driven by self-interest. Libertarians, I think, recognize the dual nature of self-interest (in markets: good; in government: bad), but I cannot think of any literature off the top of my head that deals with this topic.

What I can note is that many people get the nature of self-interest completely wrong. In the minds of many, if not most, people, self-interest is something that only occurs in the marketplace. From this mindset springs many of the fallacies about government regulations and taxes that we often read about in the press. Whether this mindset is a product of genuine or willful ignorance is a topic that I think deserves further scrutiny.

Why is it, for example, that many people do not see that self-interest drives the political process itself? I know that the discipline of ‘political economy’ deals with self-interest in the political process, but even here I see a tendency to treat political entrepreneurs as more noble than the entrepreneur of the marketplace (with a few exceptions, of course). Support for higher taxes on corporations, or support for more stringent government regulations, is often very prominent among the general public and among elites. The general public thinks it is supporting itself against “big corporations” when it supports these policies, as do elites, but in reality these regulations and taxes are driven by an entrepreneurial process that desires to favor one faction over all others.

Am I missing anything? I know I’m missing a bunch of stuff.

15 thoughts on “Some quick thoughts about political entrepreneurship

  1. There is a small academic literature on such things in my field of employment [strategic management]. For example a woman that I know that used to be at Texas A.&M. did some nice stuff on raising the costs of your rivals through political means.

    In sociology, the field of organization theory takes it for granted that ALL organizations pursue their own self interest not just firms. There is a large literature in sociology on ‘goal displacement’ in organizations such as bureaucracies that sheds light on your concerns. Be forewarned, exciting reading it’s not.

    • Ah thanks for the heads up Dr A.

      I forget that most social scientists recognize self-interest in when performing research within their own specialized fields.

      I guess my concern is more about what happens to people’s judgement when elections are happening or policy battles are dominating the headlines. On one hand this a wonderful thing to be able to complain about, but on the other hand it is frustrating to watch otherwise intelligent individuals stoop to arguing that “big corporations” need to be taxed more heavily in order for the cosmos to realign.

      I’ll definitely look into ‘goal displacement’ a bit more. Do you have a couple of leads (names, papers, schools, etc.) for me (and possibly other readers)? Wikipedia does not have an entry for it and although a Google search turns up some hits I just want to be sure I’m on the right track.

    • Here’s something readable. It’s old but still relevant. I like it because it sort of explains why the YMCA morphed from religious activities into being a series of health clubs and swimming pools 😉

      Click to access ZaldDenton_ASQ_1963.pdf

      BTW I still think that ‘big corporations’ need to be taxed more heavily in order for the cosmos to realign 😉

    • Thanks Dr A.

      Just to be clear: You support high taxes on corporations even though you know that such taxes raise the barriers of entry into a market, and thus shield such corporations from competition, right?

    • @Brandon
      I’m inclined to dispute your argument that higher taxes create a barrier-to-entry. But lets take it as a given. There are a large number of things that can produce barriers-to-entry, wikipedia has a list of 21 for example. Moreover if we believe industrial organization economists such as Michael Porter there are 4 other forces that determine the competiveness of markets in addition to barriers-to-entry. There is not a simple path from higher taxes to lower competiveness in a market.

      While we’re on the topic of corporate taxes let me make a proposal sure to astound those that believe there is a effective labor market for CEOs. Let’s remove executive compensation as a cost that can be deducted from pre-tax revenue.

      BTW does referring collectively to CEOs as bloated parasites exceed the bounds of civility?

    • I understand that there are other barriers to entry, but I’m having trouble understanding your logic.

      Are you arguing that because higher taxes are only one barrier, there is no need to worry about raising corporate taxes?

    • @Brandon
      “Are you arguing that because higher taxes are only one barrier, there is no need to worry about raising corporate taxes?”

      In short, yes. I’m sceptical about ‘socio-economic’ engineering but as one action in a collection of actions, taxes could be raised and the NET result would not be lower competition.

      At the risk of derailing the thread even more….The ‘big corporations’ I’m whining about come from a variety of markets but how many of those markets are even close to competitive markets now? Before you answer consider the excellent post Dr. Foldvary recently made here.

    • Thanks Dr A.

      Taxes could indeed be raised, and lower competition may not be the NET result, but would you bet on this?

      Your point about competitive markets and big corporations is an excellent one. But I am confused: The US has one of the highest corporate tax rates in the world. Many of its markets are dominated by big corporations. Therefore, your solution to this problem (admittedly, not a bad problem to have) is to raise the corporate tax rate?

    • @Brandon
      “The US has one of the highest corporate tax rates in the world.”
      Lol. It has one of the highest fictional corporate tax rates in the world. What sort of taxes do these companies actually pay? Nominal tax rates could be lower if they actually had to pay it.

    • Dr A,

      Glad I could elicit a hearty belly laugh out of you. Once you are done laughing at me, perhaps you could be so kind as to explain to me a couple of things.

      1) Does the US have one of the highest corporate tax rates in the world or not? This seems like an easy question to answer (“yes”).

      2) Do corporations in the US pay those high tax rates? Probably not, and why is this?

      3) Because they simply relocate to places in the world where corporate tax rates are lower.

      4) Therefore, according to you (correct me if I’m wrong), the US should raise its corporate tax rate. Is this the position that American Progressives hold?

      4a) Because of the high corporate tax rate, corporations in the US simply relocate their headquarters elsewhere. Therefore CEOs should have their pay docked. Is this also the logic underlying the American Progressive argument for higher taxes and more government regulations?

      4b) Do you not see how absurd positions 4 and 4a are?

      5) Would you support an overhaul of the tax and welfare system in the US, and one that included a radically smaller federal government, extremely low taxes, and welfare services that went directly to welfare recipients instead of trickling down through the bureaucracy? If not, why?

    • @Brandon
      Looks like you’ve picked up bad habits from Dr. P…
      1. yes
      2. no
      3. no. They don’t relocate overseas. Check for yourself; take the Fortune 500 for the most recent year and see where they are headquartered. They hide income overseas which is entirely different.
      4. Look at the wording I used….I said nothing about ‘rates’ I want their taxes raised. I want them to PAY more. I’d be happy if the code were simplified, rates were lowered and all the b.s. subsidies went away.
      btw I’m not a spokesperson for American Progressives although I would do so for proper remuneration.
      4a. Your predicate is wrong, they don’t relocate overseas. see 3 above.
      4b. No, see above about your predicate.
      5. Yes, yes, yes, and yes.

    • I can’t resist a follow on. Drastic simplification of the tax code would be a good thing even if were completely ‘revenue neutral’.

    • Terry:

      Thank you for the corrections (I think).

      Here is the crux of our disagreement: You want corporations to pay their taxes. Corporations invest lots of time and effort into avoiding paying taxes.

      The money you would like corporations to pay to the US often funds needless or, in some cases, terrible government programs. In addition, these taxes often create barriers to entry. There are other barriers to entry, but taxes are one of them.

      Do you think that a lower tax rate would eliminate the behavior that you find atrocious in many firms (I think that corporations are doing us all a favor by not paying taxes, but I’m sure I’m in the minority here)?

      Also, given the US’s current economic problems (all good problems to have, by the way), don’t you think that forcing corporations (which are largely protected by the regulatory apparatuses drawn up by Washington in order to ensure that corporations pay their “fair share”) to pay more into a system that obviously does not work well is a bad idea.

      I can see that more money would be good for the US government, but what I fail to see is how more money, from corporations, into the US government’s coffers is good for anyone else.

  2. Reducing competition *is* a way to reduce competition. A company can invest effort in increasing value or reducing availability of substitutes (both shifting demand) or in reducing costs or shifting costs onto others (supply shifts).

    (Okay, now I’m going to go into some philosophical stuff purely for my own benefit…)

    That’s the high level story, but it rests on a foundation of property rights; by which I mean the de facto property rights that actually matter, not some rights assigned by Santa, or rights that are just and proper as defined by very sensible arguments by libertarians. “Society” generally accepts that the government holds particular property rights that touch on a number of possible exchanges in order to promote–we can tell that that’s the case because people aren’t willing to undergo the cost of stripping those rights away. The hotel lobby has recognized that to be the case and so has asked the state to exercise those rights in a way that benefits the hotel lobby and they have offered some sort of exchange (which may be as vague as “social capital”/reasonable expectation of future political support, or as explicit as bribes, but probably something in between). This exchange has altered the shape of the socio-political-economic environment in which similar exchanges may occur in the future.

Please keep it civil

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s