RALEIGH — My old friend — check that, my longtime friend — Virginia Postrel was in North Carolina this week to speak to JLF audiences in Charlotte and Raleigh about her new book The Substance of Style, a fascinating look at the rise of the aesthetic imperative and how it is transforming the workplace, the marketplace, and the public space. (You can read much more about the book and Virginia’s thesis on her website).
As it happens, one of Virginia’s other regular writing outlets caught my eye today: her most recent “Economic Scene” column for The New York Times. In it, she writes about new research suggesting that one of the barriers to growth and productivity gains in the past has been “relationship capitalism,” the practice of doing business with friends and regular partners without going through a more rigorous process of determining who can best do one’s work at the best possible price.
This is not to say that such relationships lack any economic value. In many developing countries without well-established legal systems for enforcing contracts and resolving disputes, doing business with family and friends reduces risk and allows social sanctions and pressures to substitute for more formal structures. Furthermore, the family business is a venerable and often successful business institution which economizes on information and allows for the valuable formation of human and social capital.
But the tradeoff is obvious. By necessity, a rule that limits potential business partners to people you know or with whom you share ancestral lineage inevitably limits the pool of talent available to you. Limiting choices means limiting opportunities for new and innovative solutions to problems. There are fewer surprises, fewer discoveries, fewer opportunities to economize and to “click.”
A good example of the pros and cons of relationship transactions, though not strictly of a capitalist sort, can be found in the fictional town of Mayberry, North Carolina. Sheriff Andy Taylor hires Barney Fife, his cousin (did you know that?), to be his deputy. Obviously, Barney is not the crunchiest pickle in the jar, as Aunt Bee might put it. He fumbles. He stumbles. He gets into jams that only Andy can get him out of. Some of the best episodes of the show involve Andy manipulating Barney into thinking that he is catching a crook or solving a problem, thus boosting his self-esteem. While heart-warming, these stories don’t necessarily reflect well on Andy’s job performnce. Doesn’t he have anything better to do, even in Mayberry? And don’t his constant efforts to prop up Barney’s ego simply result in his deputy repeatedly getting in over his head and having to be rescued?
Of course, the relationship made for funny and sometimes even poignant television. But it was not exactly the prototype of a workable model for law enforcement.
Virginia’s column cites the example of banking as a sector where close relationship capitalism, enabled by strict laws in many states forbidding consumers to do business with banks outside of a county or region, served to limit economic growth. There’s a good North Carolina connection to this aspect of her thesis, too. As I discovered some years ago while doing research on my first book, The Heroic Enterprise, North Carolina avoided most of the problems experienced by other states with cloistered banking markets. For more than a century, our state maintained some of the most liberal banking laws in the country. Banks chartered in North Carolina essentially enjoyed complete freedom to open branches across the state, and even to get into other related businesses such as insurance. As a result, when a more competitive model for financial services began to develop in the 1970s, first across county lines and then across state lines, North Carolina banks were primed and ready to capitalize on the trend, both literally and figuratively. Bred to competition, such institutions as North Carolina National Bank and First Union thrived in the new market, and now constitute two of the largest and most dynamic banks in the United States (NCNB first becoming NationsBank and then swallowing Bank of America).
The good news about banking, and about relationship capitalism in general, is that technology and deregulation are offering alternatives and improving prospects for rapid growth — not only in the United States but also in many other countries. The next time someone tells you about the evils of deregulation and how we’d all be much better off if our economy resembled “the way it used to be,” you might remind them that the chumminess and leisure they recall had the effect of raising prices and limiting the quality of services delivered. You don’t make people wealthier and happier that way.
Virginia Postrel’s New York Times column is well worth reading in full. And it serves as a good example of her valuable contribution to the world of ideas. She’s always thinking, always taking readers somewhere they haven’t been before.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.