Free Markets, Anybody?

By Paolo von Schirach –

WASHINGTON – Let’s be honest. The free markets that we learn about in school do not exist. They never did and never will. What we have instead are very imperfect approximations. What we have, at least in some parts of the Western world, is a declared intention to have a level playing field in which different corporations try their best to offer products and services, without enjoying any special advantages. For this purpose, governments established, (among others), antitrust authorities tasked with the goal of preserving free markets and fair competition.

Gaming the system

But this is an effort, a goal, an aspiration. In reality, most big corporate players do their very best to game the system in their favor. The dark secret of all true blue free market capitalists is that they all aspire to have and keep an impregnable rent position, whereby they will continue to dominate their market sector, hopefully for ever.

In pursuit of this anti-free market goal, US companies and trade associations spend larger and larger amounts of money on Washington, DC-based lobbyists whose only mission is to obtain, via legislation or specially designed regulations, set-asides, tax breaks, quotas, restrictions on imports, and whatever else may make it easier for their clients to protect their market positions and fend off competitors.

A semi-market

Therefore, what we have in America is a semi-market. In many ways there is competition, access and opportunity for new comers to come in and do their best to offer their products and services. But this system is quite imperfect.

And, again, the thriving, in fact almost monstrous, lobbying industry in Washington, DC illustrates how everybody, from dairy farmers to sugar growers, from the auto industry to the film industry, is trying to get special favors from Congress, the Executive Branch and all sorts of regulators, or prevent their competitors from getting them.

Europe pushing champions

That said, it seems that in Europe they are about to take this game up one level. Afraid of losing not just a few battles but the actual war on innovation and competitiveness, the Brussels-based European Union technocratic elites are now dreaming of creating EU Champions in leading tech sectors, (batteries for electric vehicles, telephony, artificial intelligence, robotics, you name it). This will be done by creating partnerships between the private sectors, national governments and EU institutions.

Well, this is a lot more than just lobbying. This is about openly subsidized new conglomerates created for the specific purpose or carving pieces of markets now occupied by American and increasingly Chinese tech giants.

Airbus worked

There is, of course, an illustrious (and remarkably successful) precedent to all this. And this is the Airbus consortium created back in 1970 by the Europeans to compete against America in the critical sector of passenger jets, and more. At the time, US companies dominated world markets. Europe had nothing.

If the intent was to carve a space for European companies, the notion of different companies in different European countries (France, Germany, Britain and Spain), enjoying varying degrees of state aid, being capable of designing, manufacturing, and selling state of the art jetliners for the global market seemed truly preposterous.

Indeed, many skeptics predicted that this Airbus consortium would turn out to be a gigantic waste of time and money. To begin with, the business model seemed most improbable, since it rested on the willingness and ability of various corporate entities located in different countries, with distinct agendas and corporate cultures, to successfully cooperate in a major effort aimed at designing, producing, and selling state of the art jetliners.

Success

Well, surprise! it worked. In fact it worked extremely well. Nowadays, Airbus is the undisputed number one or number two (depending on the year) manufacturer of jetliners. However, Airbus, especially in its early years, managed to survive because, beyond its now undisputed ability to make good airplanes, it enjoyed various subsidies. Could Airbus have survived without them, especially in the difficult early years? May be not.

Of course, Boeing, the US aerospace conglomerate that suffered the most on account of this new, well heeled competitor, cried foul. How can a US private sector company compete against a European conglomerate that benefits from various states aid, while its customers (the airlines) could obtain extremely generous finance terms for purchasing Airbus products?

The Airbus reply was that Boeing enjoys its own subsidies. It gets a lot of business from the US Defense Department. With those profits it can finance its civilian airliners sector.

However, even though there is some truth in the argument that Boeing is not a pure private sector company fighting against many competitors, it is absolutely clear that Airbus could not have been conceived without the massive state subsidies that gave the company the staying power (especially in its early years) it needed in order to consolidate its fragile market positions.

More subsidized consortia in the EU?

So, is the EU idea now to repeat the Airbus formula, extending it to different critical industrial sectors? Can this be done? Will it work? Well, it seems that this is the only idea that might work in Europe. The European private sector, (assuming we can talk about a EU-wide private sector), is just not capable of doing important, ground-breaking things on its own. And this reality has critical implications. Europe is already falling way behind in tech innovation. If nothing happens, the competitiveness war will be lost very soon. Europe will be an industrial backwater.

China, the emerging world economic power, does not have any problems pushing its own national champions, be they state owned enterprises, or nominally private enterprises, (think Huawei), that clearly enjoy special status as favored companies. Clearly China is not a market economy.

Free markets are an abstraction

Alright. The above tells us that truly free markets, with open and unfettered competition, are an abstraction. In varying degrees, everybody is exhibiting rent-seeking behavior. Everybody is trying to game the system via carve-outs, set-asides, protectionism, ad hoc regulations, and other non-tariff barriers in order to keep the competition out, or at least in a disadvantaged position.

More lobbyists in Washington, DC

Comparatively speaking, the US seems a bit better. However, do not expect the armies of Washington, DC lobbyists to disappear any time soon. If anything, they are becoming bigger, more sophisticated, and more expensive. And this is a worrisome trend. We preach free markets. Some politicians may actually believe in them. But corporations currently enjoying a dominant position are not really committed to this idea.

Paolo von Schirach is the Editor of the Schirach Report He is also the President of the Global Policy Institute, a Washington DC think tank, and Chair of Political Science and International Relations at Bay Atlantic University, also in Washington, DC.