Break up big government: The case against monopolies

The United States is careening toward another crisis, a series of crises, in fact.

All of these ineluctable future events are, in one way or another, crises of centralization, generated by the problems inherent in the centralization of political and decision-making power.

Such centralization slows the processes through which errors and misallocations are discovered, foreclosing the institutional diversity that allows local actors to govern themselves and cultivate the practices that suit their needs.

We can think of institutional diversity, encapsulated in the idea of polycentricity, as fulfilling some of the same risk management function as one’s diversification of her investment portfolio.

In most contexts, the prudence of spreading risk — of not putting all of your eggs in one basket — is generally understood and fairly uncontroversial. The reasoning is apparent even to those untrained in investment strategy. 

The general problems with centralization and monopoly are similarly intuitive. Without choices, access to competing goods or services, the consumer is at the mercy of the monopoly provider, trapped in a relationship (or set of relationships) he regards as suboptimal. 

{mosads}What is less commonly understood, however, is the application of such basic truths to the world of institutional analysis, in which there is a largely unexamined assumption that law, regulatory bodies, and governments themselves must necessarily be monopolies — that the special tasks with which they are charged require this.

Simple lessons from economics (in particular, the subfields of public choice theory and new institutional economics) suggest that not only are monopolies unnecessary in these spheres, they are extremely harmful. 

Decision-making in the United States must be radically divided and decentralized, wrested from the baleful clutches of what legal scholar Randy Barnett calls the “Single Power Principle.” This is the idea that there must be a single monopoly charged with creating and enforcing society’s rules, exempt from competition and uniquely empowered to use force and threats of force. 

The theory is that if people are generally bad (or at least capable of acting badly when no one is looking) — driven by self-interest and often lacking in moral scruples — then a Single Power is necessary to monitor behavior and enforce the law. 

Yet there is a paradox at the heart of the Single Power Principle: If people are self-seeking and prone to abuse their power, then arguably we should want to avoid concentrating power at all costs, preferring instead institutional designs that balance centers of power against one another.

Rather than chasing the fool’s errand of reshaping human nature, public policy ought to leverage the institutional designs that can protect against its worst impulses. 

This conclusion entails the core ideas of political, legal and economic polycentricity. 

In their short book “Applied Mainline Economics,” economists Matthew D. Mitchell and Peter J. Boettke observe: “Many problems that were once thought to require top-down government intervention are actually better resolved through bottom-up polycentric orders.”

Just as advocates of the Single Power Principle believe that the goals of law and order are served by compulsory monopoly, so does the progressive left believe that government monopolies are necessary to remedy market failure.

The progressive argument seems to run as follows: to solve the perceived problem of market failure, all that is necessary is to make the corporate monopoly sufficiently large and powerful, admitting no competitors whatever, and to call that corporate monopoly “government.” 

Here, again, is the paradox observed above — that of taking it for granted that government actors somehow exist outside the world of incentives, interests, and imperfect knowledge.

They don’t, of course, and more often than not government’s rulemaking power is captured by the richest, most well-organized corporate interests.

Through this power, they are able to coercively exclude their competitors and obtain special privileges unavailable to smaller companies and newer market entrants.

Risk is thus socialized and dispersed, benefits privatized and concentrated. Mitchell and Boettke note that rent-seeking costs Americans between 7 and 23 percent of gross national output, equivalent to 1 to 3.5 trillion dollars every year.

The pioneering work of Nobel laureate economist Elinor Ostrom suggests a way out of the current failed political economy of centralization, unaccountability, and corporatist rent-seeking.

As she explained in her Nobel lecture, Ostrom’s innovative project rejected the mid-twentieth century’s dominant scholarly trend of “try[ing] to fit the world into simple models.”

Her work demonstrates that the crude dichotomy traditionally applied to questions of resource government, the market or the state, overlooks a much more diverse and varied range of alternatives.

As it happens, many of the most successful efforts at addressing complex resource use and distribution problems have applied spontaneously emerging, cooperative models that are not accurately described as either the market or the state (as least not as they are traditionally understood).

Ostrom found that the individuals with a concrete stake in finding solutions to resource-governance problems craft solutions and organizational forms that transcend standard categories, shaped to account for the needs and perspectives of the players involved.

Such polycentric systems of governance contemplate a more adaptive, even improvisational, approach to problem-solving, with a dispersed but connected network of nodes — points at which actors possess decision-making authority.

Thus freed from a rigid structure of rules, imposed from afar and from the top down, stakeholders can extemporize, acting on local knowledge, shaping solutions that actually fit their unique needs.

Parallel governing bodies and systems both compete and cooperate, engaged in a recursive process of communication that drives them to respond to one another and improve. This process fortifies the entire network. Each node, with its unique capabilities and stores of knowledge, is a hedge against crisis taking the form of system-wide misallocations and wastes.

Considered carefully, the assumption that practical rules and stable governance require centralization and centrally prescribed uniformity succumbs to analysis. Better outcomes require the replacement of wishful thinking with better institutions, which in turn are based on a more refined understanding of the ways in which individuals act and respond to incentives.

Bulky and slow to adapt to changing circumstances, public governance and rule-making monopolies — as well as the mammoth nominally private firms they beget — will always be vulnerable, lacking both the information and the incentives necessary to avoid disaster.

The truth is counterintuitive: great accumulations of power are inherently predisposed to oversight and miscalculation, “whereas,” as Wilhelm Röpke remarked, “the smaller concern is distinguished for its greater pliability and resistance to crises.”

Real reform must zero in on decentralization, guided by the revolutionary institutional insights of economists like Elinor Ostrom.

David D’Amato, an adjunct law professor at DePaul University, is a policy advisor at the Heartland Institute.

The views expressed by contributors are their own and are not the views of The Hill.