I have always thought of American capitalism as dominantly rule and law based…. Even though we know of instances of corruption, abuse of power, favoritism and selective enforcement, we take this rules-based system for granted. But looking around the world today or back through American history, this model is hardly a norm. Many market economies operate what might be called ad hoc or deals-based capitalism …. This is the world of New York City under Tammany Hall, of Suharto’s Indonesia, and of Putin’s Russia.
Reliance on rules and law has enormous advantages. It greatly increases predictability and reduces uncertainty. It reduces expenditures on both guarding property and seeking to appropriate property. It promotes freedom because most of the people most of the time do not take political positions with a view to gaining commercial advantage. The advantages of the rule of law are so great that I would claim that there is no country more than 2/3 as rich as the United States that does not have a strong tradition of the rule of law-based capitalism. And I know of no country where the people are free where the rule of law does not largely govern market interactions.
What about Carrier? The president-elect of the United States decided in a purely ad hoc basis that he wanted Carrier to remain in Indiana. He deployed some combination of carrots and sticks at his disposal to lever Carrier into doing what he wanted. Implicitly or explicitly, there must have been sticks, as press accounts suggest that the tax benefits provided offset only a small part of the savings forgone by staying in Indiana. It is not hard to see from the point of view of United Technologies, the parent of Carrier, that for a company with more than $50 billion in revenue it’s surely worth $60 million to not be on the wrong side of a possibly vindictive president of the United States.
It seems to me what we have just witnessed is an act of ad hoc deal capitalism and, worse yet, its celebration as a model…. [O]nly a negligible sliver of the economy is involved, but there is huge symbolic value. A principle is being established: It is good for the president to try to figure out what people want and lean on companies to give it to them. Predictability and procedure are less important than getting the right result at the right time. Like Hong Kong, as mainland China increasingly imposes its will, we may have taken a first step toward a kind of reverse transition from rule of law capitalism to ad hoc deal-based capitalism.