Market economies can operate anywhere along a continuum between two poles.
I have always thought of American capitalism as dominantly rule and law based. Courts enforce contracts and property rights in ways that are largely independent of just who it is who is before them. Taxes are calculable on the basis of an arithmetic algorithm. Companies and governments buy from the cheapest bidder. Regulation follows previously promulgated rules. In the economic arena, the state’s monopoly on the use of force is used to enforce contract and property rights and to enforce previously promulgated laws.
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: Economic actors assume that they have to protect their property and do their own contract enforcement. Tax collectors use discretion in assessing taxes. Companies and governments buy from their friends rather than seek low-cost bids. Regulators abuse their power. The state’s monopoly on the use of force is used to enrich and satisfy the desires of those who control the apparatus of the state.
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. As with the air traffic controllers, only 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.
The commentary on the president-elect’s actions has emphasized its novelty, has emphasized the difficulties of scaling, and in the case of Sen. Bernie Sanders (I-Vt.), has argued that the actions taken were insufficiently forceful because some workers will still be relocated to Mexico. All of this misses the point. Presidents have enormous latent power, and it is the custom of restraint in its use that is one of the important differences between us and banana republics. If its ad hoc use is licensed, the possibilities are endless. Most companies will prefer the good to the bad will of the U.S. president and his leadership team. Should that reality be levered to get them to locate where the president wants, to make contributions to the president’s reelection campaign, to hire people the president wants to see hired, to do the kinds of research the president wants carried out, or to lend money to those that the president wants to see assisted?
Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders. I fear in a way that is more fundamental than a bad tax policy or tariff we have started down the road of changing the operating assumptions of our capitalism. I hope I am wrong, but I expect that as a consequence we are going to be not only poorer but less free.
Lawrence H. Summers, the Charles W. Eliot university professor at Harvard, is a former treasury secretary and director of the National Economic Council in the White House. He writes occasional posts on Wonkblog about issues of national and international economics and policymaking.