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Rival business interests

- The Washington Times - Monday, July 11, 2005

THE COMPETITION SOLUTION: THE BIPARTISAN SECRET BEHIND AMERICAN PROSPERITY

By Paul A. London, AEI Press, $25, 227 pages

"Simplify, simplify." Had the author more closely followed Thoreau's advice, he would have written an even better book. When he strays from description to policy prescription, his footing is less secure. Still, Paul London, a deputy undersecretary of commerce in the Clinton administration, has a good story to tell and tells it well.

His perfect storm is competition, Joseph Schumpeter's "perennial gale of creative destruction." For sector after sector -- automobiles, steel, telecommunications, transportation, finance and retailing -- he recounts how competition shook up the status quo, stimulated growth and created wealth by lowering costs and prices, and improving and introducing new goods and services. "The three decades at the end of the twentieth century were," Mr. London observes, "a period of change that ousted old elites, brought in new competitors, transformed whole sectors, and broadened and democratized the American economy."

A case in point is General Motors. Not so long ago it was a blue chip company with a triple A credit rating, "Generous Motors" to its employees. Now it is bleeding red ink, issuing junk-rated debt, cutting jobs, closing factories and striving to renegotiate with the United Auto Workers the health care and pension costs that help to hold it down. While it "controlled" almost half of the U.S. car market a quarter-century ago, its market share has been sliced in half by overseas competitors.

But what is bad for GM is not necessarily bad for the country. Car prices have fallen in real-dollar terms even as quality has improved and foreign carmakers have created 55,000 factory jobs through their American "transplants" over the past two years alone. Competition is, as the author illustrates, "contagious." Carmakers and their parts suppliers demanded price cuts for steel and machine tools; mutual funds' money-marketaccounts spawned commercial banks' interest-bearing checking accounts; trucking deregulation meant that railroads too needed flexibility to compete.

In each sector, the arguments against competition have a familiar ring: claims that each industry merits "special" protection, appeals for "fair" versus "predatory" or "cutthroat" competition; and dire predictions of (among other things) the destruction of small, local businesses and degradation of the environment. It wouldn't do, after all, for a special interest to concede that it is simply feathering its own nest.

Even though Mr. London never defines competition, he does, by example after example, reveal it as a dynamic, step-by-step -- or even leap-by-leap -- process through which markets produce more and better output at lower cost. He shows, significantly, that competition flourishes when import restrictions and regulatory barriers to entry are removed.

Surprisingly, this book that focuses on competition and public policy pays only passing attention to antitrust. What little discussion there is of antitrust is one-sided. In the author's view, we need strong antitrust enforcement to curb the power of "well-established companies...to limit competition from challengers." He does not take note of the Chicago School's insight that "bigness in business is not necessarily badness" or acknowledge that antitrust is frequently misused to protect competitors and not consumers and competition.

Mr. London stresses that competition has "to be defended by governments against attacks by powerful interests... [G]overnment has an indispensable role to play in making sure that private interests check and balance each other." He cites Federalist Paper 51 (1788), which explains how "opposite and rival interests" compensate for the lack of "better motives" in both the private and the public sphere.

Mr. London might more fully have considered the difficulties in constraining government power that this same Federalist Paper sets forth: "In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself." As NobelLaureateJames Buchanan, Gordon Tullock and others in the public choice school point out, government officials often pursue self-serving policies that expand the scope of their authority and cater to special interests.

In the increasingly partisan debates over globalization, outsourcing, the Central American Free Trade Agreement and the emergence of China and India as major economic powers, we hear renewed calls for regulation and protectionism. "The Competition Solution" teaches valuable lessons about the benefits of unimpeded market forces -- even if these lessons are not always the ones its author intends.

Laura Bennett Peterson, a Washington lawyer, served as an amicus curiae on an appeal of United States v. Microsoft.