The Future of Free Enterprise

By Donald M. Morrison

THE U.S. is universally recognized as the capital of capitalism, the land of free markets and the home of resourceful entrepreneurs. More than any other country, it has been known for leaving an entrepreneur free to decide prices for his products and set wages for his workers, free to grow and prosper--and free to go bankrupt if he failed. Historically, the U.S. Government has often done much to strengthen those twin pillars of free enterprise, private ownership and unfettered competition. Americans have grown so accustomed to living under free enterprise that they rarely even think in terms of class struggles, expropriation, the proletariat or other concepts that mark national debate elsewhere.

Only in the U.S. are airlines, radio and television networks, telephone systems, power companies and all other major industries owned primarily by private individuals. By contrast, Japan is a corporate state in which government and industry are so closely interrelated that it is difficult to tell which segment is in control. Half of France's auto industry is owned by the state; 35% of Italy's industrial production is state controlled.

Recently, however, free enterprise in the U.S. has been under heavy pressure--not so much from the New Left or consumerist critics as from some of the system's primary defenders, namely the Republican Party and private businessmen. By ordering the first controls in the nation's history (outside of a military emergency) clamped on wages, prices and rents, President Nixon made one of the boldest encroachments so far on the free-enterprise system. Nixon's New Economic Policy is, in fact, only the latest and most dramatic in a series of events that seem to challenge the principle of free enterprise. In business, the role of Government is fast growing larger--as savior, subsidizer, owner, regulator, decision maker.

It is business leaders themselves who often urge the Government to step in. When the aerospace industry tumbled into trouble last year, its generally conservative captains importuned Washington for subsidies to bail out Lockheed (successful) and save the SST (unsuccessful). When the housing industry slumped in the late 1960s, home builders pressured the Government to increase subsidies greatly; under the present Administration, the number of federally assisted housing starts has jumped 150%, to almost 400,000. After passenger rail service had become a hopeless drain on profit, Congress last year relieved the railroads of that burden by creating Amtrak, the Government-sponsored rail corporation.

The Government's recent actions raise troubling questions. Does free enterprise have much of a future? If so, what should be done to preserve and strengthen the system? If not, what will replace it?

Actually, the system has never been as free as its folklore suggests. Business and Government have often been partners in a common-law marriage. What is happening now is largely an intensification of a long process of Government involvement.

Many early American capitalists built their fortunes by prying favors and subsidies out of the Government, including publicly financed roads and canals that were tailored to their needs, direct land grants and protective tariffs. The first steps toward Government regulation of industry were prompted not primarily by bureaucrats or muckrakers but by businessmen themselves. Around the turn of the century they persuaded the Government to referee ruinous competition, stabilize markets and guarantee a steady line of credit by creating the Interstate Commerce Commission, the Federal Trade Commission, the Federal Reserve System and other agencies of the Progressive era. Some businessmen urged the Government to go even further. As Judge Elbert Gary, first chairman of U.S. Steel Corp., told a somewhat startled congressional committee in 1911: "I believe we must come to enforced publicity and Government control, even as to prices."

As conservatives have never ceased grumbling. Franklin Roosevelt's New Deal pushed the Government even deeper into free-market restraints by creating the Securities and Exchange Commission (which regulates the securities business), expanding the Reconstruction Finance Corporation (which started the Government rescuing companies from bankruptcy), and introducing the minimum wage law (which set a precedent for some wage controls). During World War II and the Korean War, the Government imposed temporary wage and price controls.

The most important incursion of all came when Congress passed the Employment Act of 1946, which once and for all committed the Government to take all necessary steps "to promote maximum employment, production and purchasing power." Using that broad political charter and the economic principles of John Maynard Keynes, every President since 1946 has wielded the powers of Government in attempts to keep the level of jobs high and prices low. Richard Nixon's controls are by far the most drastic moves toward that goal in the past quarter-century. Yet in the Government's arsenal, controls are merely one form of economic weaponry, along with fiscal and monetary policy.

The Government's influence on the private economy will become even greater in the future. But the nation is not creeping toward a corporate state or outright socialism. Aside from the special case of railroads, for example, there is little popular support for having Washington take control of basic industries. Still, the Government will increasingly exert its great power in three ways:

First, Washington will involve itself more and more as a goal setter and rules maker for business--largely because many business leaders want it to do so. Banker David Rockefeller, General Motors' ex-Chairman James Roche and A.T. & T. Chairman H.I. Romnes are among the prominent nonrevolutionaries who have endorsed the National Urban Coalition's proposed "counter-budget." which calls for the Government by the mid-1970s to establish a guaranteed annual income, start a national health-insurance program, and double federal outlays for education. Only the Federal Government is in a position to direct an attack on a wide array of national problems--environmental pollution, urban deterioration, auto and job safety. The business community is too fragmented, and individual managers are too preoccupied with their own companies' affairs, to undertake the task alone.

At the same time, the federal role will be restricted by the fact that not even the Government is rich or powerful enough to solve all the nation's needs and problems without help from business and the public. A prime example is pollution control. Businessmen are urging the Government to set clear, firm national standards. Only in that way can entrepreneurs compete on equal terms; no one will be able to use plain self-interest or lax local laws to cut his antipollution costs. But if the Government were to attempt to spend all the billions necessary to clean up the nation's air and waters, it would break the already deficit-ridden federal budget. The cost of cleanup is so enormous that it can be met only by adding to the prices of the major products of pollution--gasoline, electric energy, steel, fertilizers and others--and thus ultimately making consumers pay the bill. Thus the Government may set the goals and standards, but the problem can be solved in the private market.

Second, the Government will become a sterner policeman of private enterprise. Responding to a surge of rising public expectations about corporate performance, Washington is stepping up its regulatory efforts. Nixon-appointed heads of federal agencies are already outdoing their Democratic predecessors in bedeviling businessmen with tougher rules on auto safety, toy safety, food and drug quality, truth in advertising, disclosure of financial information and other securities practices, as new regulations proposed last week by the SEC indicate (see BUSINESS). In 1970 Congress passed environmental protection and industrial safety acts that empower the Government to seek court orders banning certain methods of production, and even closing down some plants in basic industries--notably autos, steel, oil, electric power and coal mining--when they violate federal pollution or job-hazard standards. By 1975, federal officials will be responsible for almost as many basic decisions in auto design as the auto companies' engineers. Stiffer regulation, however, is not a constraint on free enterprise. In an increasingly large and complex economy, regulation is what prevents the pursuit of profit from leading to harmful products, destructive dis-economies like pollution, the exploitation of customers and other threats to the stability of the business system.

Third, the Government will likely continue some form of surveillance over wages and prices. In his economic report to Congress two weeks ago, President Nixon implied that controls will remain at least until the end of this year and perhaps longer. Beyond that, the U.S. will probably have some looser form of Government wage-and-price supervision more or less indefinitely. At his farewell press conference in December, Paul McCracken, the President's outgoing Chief Economic Adviser, said that the Government may have to take steps to moderate prices "for a long time to come, even after Phase II has done its thing."

Many economists and businessmen favor a system of voluntary wage-price guidelines, such as existed with varying success during the Kennedy-Johnson years. Companies and unions would probably be reluctant to transgress these guidelines, if for no other reason than that the Government, having set a precedent for peacetime controls, could always go back to them. Says Walter Heller, a member of TIME'S Board of Economists: "Things will never be the same again. Even after controls are lifted, there will be the threat of their reimposition. As Al Capone put it: 'You can get so much farther with a kind word and a gun than with a kind word alone.' "

If the Government, whether under Republican or Democratic auspices, can curtail inflation and revive the economy by using such tools as controls and guidelines, free enterprise will be greatly strengthened. When the economy is growing, entrepreneurs have a much greater opportunity to start and enlarge businesses. When costs are stable, established businessmen find it much easier to lower the prices of their own products in pursuit of competitiveness.

Free enterprise should be valued, preserved and strengthened. It is not fundamentally endangered by Government attempts to set rules or goals for business to solve social problems or by efforts to straighten out the economy by setting wage-and-price controls. The real threat comes from quite another source: the steady increase of economic power concentrated in large corporations and large unions. Today the 100 biggest industrial corporations control about half the nation's corporate manufacturing assets, an even greater percentage than the 200 largest companies controlled 20 years ago. These corporations may be beneficent and efficient, though smaller firms are often better in both categories. The sheer size of the giants, however, hampers new entrepreneurs from entering some industries and expanding in others. A handful of companies dominate auto, aerospace, steel, aluminum and computer manufacturing so thoroughly that new companies find it nearly impossible to break in. If the U.S. wants to expand free enterprise in these and other basic areas, the Government will have to be come more vigorous in pursuing antitrust policies.

Free enterprise is also restrained by giant national unions. Because they are often more powerful than their generally small employers, the building-trades unions can demand -- and get -- exorbitant wage increases, make-work practices, and restrictions on the use of new methods and materials. Similar abuses are committed by the Teamsters, the maritime unions and the civil service workers. Sooner or later, some U.S. President will have to challenge union power and put an end to such enterprise-sapping practices as the union hiring hall and featherbedding. That man may as well be Richard Nixon, since the great majority of union leaders already vehemently oppose him and he has little to lose.

The U.S. should make free enterprise even more competitive and more responsive to the nation's needs. That may require some more effective form of Government planning to coordinate the resources of businesses with the spending and taxation policies of federal, state and local governments. The capitalist economy may thus eventually take on some features of socialism, just as socialism over the years has adopted some practices of capitalism. Yet a nation that accounts annually for nearly half of the non-Com munist world's gross national product, and has more individual business enterprises than many countries have people, is surely strong and diverse enough to accommodate the best features of both systems. sb Donald M. Morrison

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