A recent New York Times Magazine article by Adam Davidson, co-founder of NPR's "Planet Money," discusses the issue of income disparity, job growth and investment incentives with Edward Conrad, a Bain Capital executive and friend and colleague of Mitt Romney. Conrad's pro-investment view of the economy provides little sympathy for the recent financial collapse and offers no support whatsoever of any government attempt to promote income equality. In Conrad's view, the 99% ought to be thankful for the increasing wealth of the 1% on the theory that if payoff (incentives) for risk-taking investment is large enough, then people will take more risks, industry will become more efficient, and every dollar earned by a risk-seeking investor will produce $20 in value for the rest of the general, and presumably risk-averse, public.
When asked about the influences of power and politics on economic growth, a.k.a., crony capitalism, and the rent-seeking behavior of firms that often defies free market mechanisms, Conrad dismisses the notion as phenomena common to third-world countries, not the United States. Of course many economists point out that gains from risk-seeking behavior can often be large and concentrated in the hands of the few even if the the costs, which are also large, are spread out among many. This especially true when powerful incentives, such as monopoly profits, encourage wealthy and powerful firms to lobby government for such things as tax rebates, deregulation (or regulation against competitors), and special franchise rights to control a market.
Too often, the result of rent-seeking behavior is that the benefits of risky investment fail to outweigh the investment's costs, including the costs of negative externalities and dead-weight losses to society. Rewarding wealth to those in power, and those who have greater resources to influence policy, comes at a greater cost to society when those who can offer more innovative ideas, products and services, are prevented from entering the market. When large gains (monopoly profits) can be attained through exclusive agreements, patent protection, protectionist policies, legislative action, deregulation, and so on, powerful and wealthy firms will spend large sums of money in order to enhance their odds of being chosen as the beneficiaries of those gains. Because the advantage to any particular beneficiary is an increasing function of the amount of money it spends lobbying for those gains, an unfortunate consequence of rent-seeking behavior is that entitlement and privilege is often granted to firms even when the benefits do not exceed the costs (economic and social) of the entitled firm's investment opportunity.
Consider how lobbying behavior in the U.S. auto industry has historically led to inefficient markets, stifled innovation and wasteful spending when the Big Three firms were able to "purchase" the privilege and entitlements to engage in monopolistic behavior. Because these firms faced intense competition from overseas competitors and rising gas prices in the 70's and 80's, the firms sought to influence government to impose import restrictions and other trade barriers on the foreign competitors, thus enabling U.S. automakers to earn substantially more expected profits than they would without such barriers, particularly in an environment where gas prices and demand for more fuel efficient automobiles would have forced the U.S. firms to invest in substantial technology. The lure of expected savings via government regulation encourages firms to engage in lobbying behavior and spend an amount of money that is no greater than the expected profits that can be attained from the firm's project or investment; and in Conrad's pro-investment view of the world, incentives to invest are only attractive if the rewards are large enough.
Yet, a firm's investment does not always lead to innovation and long-term sustainability, even if it does lead to short-term price reductions. The U.S. auto industry is a prime example of how concentrated wealth in an oligopoly--achieved through aggressive lobbying and government regulation--can actually stifle innovation and result in long term damage to the economy and the environment. In Conrad's view, it is perfectly rational for U.S. firms to incur exorbitant expenses in its lobbying efforts, so long as those costs do not exceed the firm's expected economic profits.
What Conrad fails to consider however is the social cost of such firm behavior. An efficient economy is one where firms consider the triple bottom line and one where government takes every feasible step to discourage rent-seeking by entitling private industry participants on the basis of social and environmental well-being rather than on the amount of money spent on lobbying.
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