Making Ad Hoc Deals

By making ad hoc deals, governments are imposing extra costs on companies and are increasing business uncertainty.

After Donald Trump had won the 2016 presidential election, but before he had taken office, he used his influence to ‘persuade’ the Carrier company not to move jobs out of America.  This was popular, but Larry Summers pointed out, in an article entitled Trump’s Carrier Deal – Ad Hoc Deal Capitalism, that it undermined the framework of rules which has helped American business to operate efficiently:

“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.”

Summers argued that “deals-based capitalism” can lead to a situation where 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”, which is an abuse of power that could make people “not only poorer but less free”.  He cited Putin’s Russia as an example of a government making ad hoc deals.

Another way of looking at this intervention is that the company has incurred extra costs, making it less efficient.  In economic terms, it is the same as having to pay a bribe to a corrupt official or organisation.  Its customers will presumably have to bear the burden of higher prices, instead of being able to spend the money on potentially more economically beneficial products and services.


Next Section

This page is intended to form part of Edition 4 of the Patterns of Power series of books.  An archived copy of it is held at https://www.patternsofpower.org/edition04/3374.htm.