Socialists Are Scary, but Capitalists Are Their Own Worst Enemies

New research shows that business leaders who benefit from government favoritism are more comfortable with government intervention into markets.

According to a recent Gallup poll, four in 10 Americans now think favorably about socialism.

This reminds me of the economist Joseph Schumpeter, who in 1942 wondered, "Can capitalism survive?" His conclusion? "No. I do not think it can." Schumpeter didn't like this conclusion. But his fear, to borrow a Marxist saying, was that capitalists would sell the rope with which they would be hung. Schumpeter and many other free marketeers from Adam Smith to Milton Friedman observed that individual capitalists can profit by destroying capitalism, by lobbying governments for special privileges that undermine competition and tilt the economic playing field in their favor.

If this depressing hypothesis is right, we should find evidence of it in the way business leaders think and talk about markets. Sadly, it turns out we can.

Working with a national research firm, my colleagues Scott Eastman, Tamara Winter, and I surveyed 500 American business leaders. What we found was that capitalists who benefit from government favoritism are more likely to accept interventions into markets. Being a favorite is correlated with approving of favoritism.

To qualify for the survey, respondents had to work full time, be at management level or higher, and be knowledgeable of their firm's characteristics, like the number of employees and financial details. They also had to be either decision makers or have influence over their firm's decisions. Our sample drew from every major industry defined by the Census Bureau, and included leaders of small and large firms alike.

We began by asking these leaders whether they thought their firms benefited from any number of government privileges, including: direct loans, loan guarantees, subsidies, bailouts (or the expectation thereof), regulatory barriers to competition, targeted tax breaks, tariffs or quotas on foreign competition, or government-created monopoly. About 61 percent told us that their firms benefit from at least one of these government-granted privileges.

Next, we set out to see whether those who think they work for firms that benefited from such favors have systematically different beliefs when compared to those who don't work for privileged firms. We focused on their beliefs about markets, about government, and about favoritism itself.

This group was about 10 percent more likely to say that markets should be generally free and that free markets serve the broader public. Yet these same business leaders were also about 10 percent more likely to say that the U.S. market is currently too free.

This isn't necessarily a contradiction. One can believe that free markets are generally a force for good and believe that, on the margin, markets in a particular country are too free. Yet leaders of favored firms were also more likely to say that competition is unfair to business, which is more difficult to square with their belief that markets should be free. Leaders of favored firms were 12 percent more likely to approve of government involvement in the economy, 9 percent more likely to think that regulations benefit consumers, and 16 percent more likely to say that regulations benefit the economy.

Now, seven out of ten business leaders we surveyed said that government shouldn't favor specific businesses or industries. Even among those who think they work for favored firms, a majority—61 percent—disapproved of favoritism. Predictably, however, among leaders of non-favored firms, disapproval of favoritism ran much higher at 84 percent.

Notably, the leaders of firms who received government favoritism had different ideas about what it takes to succeed in business. They were about 10 percent less likely to say that either customer focus or a unique business model are the most important factors for success and about 7 percent more likely to say that either knowledge of influential people or government assistance are the most important.

They were also more likely to hold contradictory beliefs about free enterprise—believing both that markets should be free and also that government should favor particular firms. Compared with other business leaders, those who work for favored firms were more than three times as likely to hold these contradictory ideas, 28 percent versus 8 percent.

Like any study, ours has some limitations. We're relying on business leaders to report whether they work for favored firms or not. Their own statements may not always be reliable. And we should also be cautious in drawing causal conclusions. When we find that business leaders who think they work at favored firms have different beliefs compared to other leaders, we can't be certain that employment at the firm caused this belief. It is plausible that a business leader's attitudes about markets, government, and favoritism change once he comes to work for a favored firm. But it's also possible that one who is comfortable with an active government that favors particular firms or industries will naturally self-select into (and be comfortable working for) a favored firm. 

Whatever the causal relationship, our study offers some reasons for optimism as well as some reasons for pessimism about the fate of capitalism. Optimists can take heart that most business leaders disapprove of favoritism, have mildly favorable views of competition, and think that customer focus is the key to business success. On the other hand, the pessimists may be disturbed to learn that experience with or awareness of favoritism seems to correlate with greater approval of favoritism, greater disapproval of competition, and a stronger belief that government relationships are the key to success.

Were they alive today, I suspect that free marketeers like Smith, Schumpeter, and Friedman would say that our findings are consistent with their conclusion that capitalists are their own worst enemies. At the same time, I can't help but note that the study is consistent with Marxist notions of class interest and false consciousness. According to Marxist theory, different classes—capitalists, workers—have different and often opposing interests. The idea of false consciousness is that many of us are deluded into thinking and acting in ways that do not serve our class interests.

Maybe some capitalists support the "free market" because they believe it is consistent with favoritism and that this favoritism will permit mass flourishing? In this, I fear they are deluded. And their delusions may be an even greater threat to capitalism than the four in 10 Americans who favor socialism.