U.S. Government Expands Equity Stakes in Multiple Companies, Raising Concerns Over Market Impact
When the Referee Buys a Team
By taking direct ownership stakes in dozens of companies, the state ceases to be an impartial umpire of the market and becomes a partial player, to the quiet detriment of competition, innovation, and the labouring poor.
We are told that the government now holds a share worth more than two billion dollars in one company, and that this is but one of roughly three dozen in which it has “acquired a piece of the action.” The phrase is revealing. When the magistrate, who frames the rules and calls the fouls, also joins the game as a proprietor, he does not merely watch the action, he alters it. Some modern analysts already fear “conflicts between the role of the government as an investor … and its role as a regulator,” and they are right to do so. No man can serve two masters; still less can a government serve all masters once it has chosen to be one.
In my Inquiry into the Nature and Causes of the Wealth of Nations, I observed that people of the same trade seldom meet without ending in some contrivance to raise prices or restrain competition. I meant private merchants and manufacturers; I now see that the same temptation attends the public when it becomes a trader. A ministry that holds equity in certain firms has a standing interest that those firms prosper, not by pleasing the public, but by pleasing their owner. It will be strongly tempted to shape export controls, standards, subsidies, and even the timing of regulation so that its own portfolio is safe, while less-favoured rivals bear the risk. The conspiracy against the public is only more dangerous when the conspirator writes the law.
Some will answer that the sums, though large to individual citizens, are small to a great nation; that strategic sectors must be defended; that without such stakes, important enterprises might fail or fall into foreign hands. In my own time I allowed that the sovereign may rightly erect certain public works and institutions which, though profitable to society, could never repay a private undertaker. But a road or a bridge serves all who travel; a share in a trading company serves, first, the fortunes of that company. The burden of proof lies on those who would turn an impartial magistrate into a silent partner and call it mere prudence. They ask us to trust their virtue where we should examine their incentives.
The danger is not only partiality but the choking of the market itself. In Wealth of Nations I remarked that the division of labour is limited by the extent of the market; whatever widens that market, widens also the scope for ingenuity and industry. When the state openly prefers those firms in which it holds a stake, it narrows the effective market for all others. New entrants hesitate to challenge a favourite of the treasury. Capital, seeing that the rules may bend toward the state’s darlings, shuns the unfavoured fields. Over time, innovation withers not by prohibition, but by a discouragement so gentle it can be plausibly denied.
The impartial spectator, whose judgment I sought to describe in The Theory of Moral Sentiments, would ask not what is loudly promised, but what is quietly encouraged. He would see that officials, as investors, are rewarded when their particular firms thrive, and, as regulators, are supposed to care only for the general interest. He would note that the applause of the moment goes to the minister who “saves” this or that enterprise, while the cost is spread thinly over millions of consumers in higher prices, stifled innovation, and lost alternatives they never see. He would suspect that praise is being purchased at the expense of praise-worthiness, which is a poor bargain in public life as in private morals.
There is also the familiar mischief of other people’s money. When a merchant hazards his own fortune in a speculation, the loss corrects his folly; when a minister hazards the public’s fortune in equity adventures, the loss corrects nothing, for it is borne by those who never consented to the wager. Such a system invites what I once called the vile maxim of the masters of mankind: all for ourselves, and nothing for other people. Only now the master is a strange compound of office-holder and shareholder, voting with one hand in the legislature and with the other at the shareholders’ meeting, always assured that the bill, in the end, will reach someone else’s door.
The surest test of any such scheme is its effect on the labouring poor, whose wages and cheap consumption are the true measure of a nation’s opulence. If state ownership distorts competition, shelters incumbents, and dulls the spur of improvement, the result will be dearer goods, slower progress, and fewer opportunities for those who live by their work. Once government crosses the line into equity, as a modern writer has observed, the game indeed changes. It becomes less the open contest of many striving under known rules, and more a match in which the referee quietly backs a side and then wonders why the crowd has lost its trust.
From the works cited
- An Inquiry into the Nature and Causes of the Wealth of Nations — The critique of mercantilism: wealth is not money; policies rigged by merchants and manufacturers sacrifice the consumer to the producer.
- An Inquiry into the Nature and Causes of the Wealth of Nations — The division of labour is limited by the extent of the market: whatever widens the market — roads, ports, peace, cheap carriage, open trade — deepens specialization and enriches; whatever fragments it impoverishes.
- The Theory of Moral Sentiments — Judge conduct by the impartial spectator: what would a well-informed, disinterested observer feel about this action?