Political Entrepreneurs

The Economic Engine of Political Change

Bill McGowan, MCI’s Political Entrepreneur

October 27th, 2017 by Arthur Diamond

AT&T was one of the most powerful and long-lived monopolies in U.S. history. Tim Wu has documented in The Master Switch how AT&T suppressed innovations, big and small, even some that were generated within AT&T’s own Bell Labs. The advocates of AT&T were articulate and well-connected politically. AT&T was a paradigm case of the seeming invulnerability of crony capitalism. How entrepreneurial capitalism eventually, and partially, won against crony capitalism is of interest, not just for historical reasons, but more importantly because similar battles still need to be fought. As we have learned from Leighton and López’s Madmen, Intellectuals, and Academic Scribblers, the key agents in these battles, are the political entrepreneurs.

The first major startup to successfully compete against AT&T was MCI. The story was usefully told in 1986 by Larry Kahaner in his On the Line: The Men of MCI Who Took On AT&T, Risked Everything and Won! MCI was founded by Jack Goeken, who arguably was more inventor/engineer, than he was entrepreneur. Beyond the very earliest days, the dominant agent in the growth of MCI was Bill McGowan, some of whose successes show him to have been an able political entrepreneur.

Goeken had founded MCI using microwave relays to send voice messages between Chicago and St. Louis. Rather than simply grow the MCI that Goeken had founded, which would have made sense in terms of economies of scale, McGowan set up several separate little local MCIs, each financed by local investors (Kahaner 1986, p. 58). The FCC was committed to localism in awarding radio and TV licenses, and McGowan, as political entrepreneur, saw this decentralized structure as a way to win approval from the FCC.

When McGowan eventually sought to extend MCI’s service to Europe, he faced the formidable Conference of European Postal and Telecommunications Administrations (CEPT) whose 34 nations had jointly agreed that none of them would strike a deal with independent voice carriers (Kahaner 1986, pp. 218-219). McGowan’s most effective point man in the effort was Seth Blumenfeld, who realized that the nations of CEPT did not trust each other, and who sought the weakest link that might be convinced to ignore the CEPT agreement. He eventually focused on Belgium, one of the smaller nations in CEPT, that had less in common with the other nations, and that had a reputation for decisions based on good economics, rather than bad crony relationships. MCI offered Belgium modest payments per minute for communications routed to Europe through Belgium. Belgium agreed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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