The Corporation and the State
Jesse Walker | November 10, 2008, 2:00pm
The latest debate at
Cato Unbound is devoted to the topic "When Corporations Hate Markets." The lead essay, by the libertarian philosopher Roderick Long, argues that
Corporate power depends crucially on government intervention in the marketplace. This is obvious enough in the case of the more overt forms of government favoritism such as subsidies, bailouts, and other forms of corporate welfare; protectionist tariffs; explicit grants of monopoly privilege; and the seizing of private property for corporate use via eminent domain (as in Kelo v. New London). But these direct forms of pro-business intervention are supplemented by a swarm of indirect forms whose impact is arguably greater still....
In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles. Small wonder that big business, despite often paying lip service to free market ideals, tends to systematically oppose them in practice.
Not content to criticize lefties and conservatives who conflate the corporate state with
laissez faire, Long argues that many libertarians have only added to the confusion:
If libertarians are accused of carrying water for corporate interests, that may be at least in part because, well, they so often sound like that's just what they're doing (though here, as above, there are plenty of honorable exceptions to this tendency). Consider libertarian icon Ayn Rand's description of big business as a "persecuted minority," or the way libertarians defend "our free-market health-care system" against the alternative of socialized medicine, as though the health care system that prevails in the United States were the product of free competition rather than of systematic government intervention on behalf of insurance companies and the medical establishment at the expense of ordinary people.
The whole article is
here. Watch the
Cato Unbound site for response essays by the liberal writer Matthew Yglesias, the leftist writer Dean Baker, and the libertarian writer Steven Horwitz.
Stretch | November 10, 2008, 4:09pm | #
It's a little surprising that more here haven't read any of Long's writing before. As for the subject matter, although worthy of intense debate, it's hardly as if the ideas of corporate personhood, limited liability etc. have never been attacked on libertarian grounds before. There's a long history of such.
Simply put, it's probably unlikely that corporations could actually grow to their current size without the help of government. After all, at a certain point diseconomies of scale play a huge role, and the costs of running such a large, unweildy operation are prohibitive without being able to socialize them through the government.
As for big-box book stores, I don't know any specifics, but they certainly benefit from eminent domain abuse, a corporate income tax that they can afford but smaller competitors can't, socialized shipping costs etc. These sorts of gov't favors are at the heart of every major corporation and yes, there are benefits from that, but there are also drawbacks. It really is hard to argue that the corporations we see today could actually exist in a market free from gov't interference. Hey, if they could, more power to them, but as it stands they don't.
As for car lots, as someone who was responsible for opening several there are 2 major problems. 1.)Local zoning- no small town petty bureaucrat wants anything to do with a car lot (so you have to pay them off--I mean pay to have "studies" done about the viability of auto sales in the area). The local stuff is way worse than any federal rules. 2.) Banks simply don't want to finance a recently opened car lot...they got burned in the late 90's selling bad paper for cars like they just did for houses (no, they never learn). You need to be in business for years before they'll seriously consider running paper for you.
As far as PA goes, anyone can sell up to 5 cars a year without a license.
Stephan Kinsella | November 10, 2008, 4:49pm | #
The best comment so far in response to Long is Peter Klein's post on the Mises Blog:
Long on the Corporation, which states:
The current issue of Cato Unbound features
Roderick Long's critique of "Conflationism," defined as the "pervasive conflation of corporatist plutocracy with libertarian laissez-faire." As Roderick rightly points out, in the mixed economy large corporations are among the prime beneficiaries of government largess, such that a wholesale defense of "big business" is silly and counterproductive for libertarians. However, Roderick spoils (for me, anyway) an otherwise excellent summary by jumping to the unwarranted conclusion that today's corporations are, on average, larger, more hierarchical, and more diffusely owned than the firms that would emerge under laissez faire:
In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles.
As I've pointed out many times (
1,
2,
3) to Roderick and to Kevin Carson, from whom Roderick draws much of his analysis on this point, this is a purely speculative counterfactual, and an unconvincing one at that. Roderick and Kevin do a fine job documenting a slew of government policies that favor large, complex, vertically integrated firms: direct subsidies, of course, but also indirect benefits from intellectual property law, bootlegger-and-baptist-style restrictions on market entry, transportation subsidies, various aspects of the tax code, etc. From this they conclude that smaller, more "egalitarian" enterprises, such as worker-owned cooperatives, would tend to flourish under the free market.
The problem is that their argument cuts both ways. Certainly large firms benefit from the state. But so do small firms. Corporations are under stricter antitrust and regulatory scrutiny, are more likely to be the victims of political rent extraction (in Fred McChesney's sense), and are subject to stricter disclosure requirements (SOX being only the most visible, recent example) than their smaller competitors. Small firms benefit from state-funded incubators, SBIR awards, regional development grants, and a host of other interventions designed to foster "entrepreneurship." Trade barriers, war, state control of education, and a host of other interventions retard the international division of labor, reduce stocks of human capital, and lower the marginal product of labor, all of which reduce the scale and scope economies that favor large-scale production.
Which set of effects outweighs the other? It is impossible to say, ex ante. The firm on the purely free market could be larger, more vertically integrated, and more hierarchical than the typical corporation under the mixed economy. Moreover, the worker-owned cooperative, the partnership and proprietorship, the decentralized "open-production" system, all suffer from serious incentive, information, and governance problems, almost none of which are mentioned in the anti-corporation libertarian literature. I suspect this literature's preference for small-scale production is based primarily on aesthetic, rather than scientific, grounds.
Ebeneezer Scrooge | November 11, 2008, 12:23am | #
Roderick Long,
Excellent article, and I largely agree. Though like others here, I'm not at all convinced that companies would be smaller, prices would be lower, and wages would be higher, as you assert.
But as one who's spent his career working for large corporations, I have another beef with them that you didn't talk about. It's the fact that corporations are highly prone to "go along" when the government wants to impose legal stupidities, whereas one man empires are far more likely to fight it.
Example: affirmative action requirements. I work in the aerospace industry. It's almost trite to say, but people die when we screw up. So I have a HUGE beef with pushing the promotion and advancement of "women and minorities" by slight of federal regulation. The first, the middle, and the last requirement for promotions in this industry must be competence, and nothing should be allowed to over ride that.
Yet, I'm watching it happen right now. Yes, there are quotas that I know mangement is trying its best to meet, to promote more women and minorities, especially into the upper technical and management ranks. We're watching incompetents get promoted way above their merit. What blows my mind though, is that our VPs are on board with and jamming it down our throats.
Corporations do not think like, or work like, a personally owned company. When the government wants to impose stupid rules, corporate boards say "you want to do *what*? oh, well, okay......" Contrast this with Howard Hughes telling congress just where the bear goes in the woods.
Corporations today are nothing like the rational actors that free market theory is based upon, and it's a direct consequence of the T's & C's that corporations are allowed to operate under -- in other words, the way governments have written corporate law.
I'm not a lawyer so I don't know how it would be done. But corporations are going to continue doing damage until we change the T's & C's, so that corporations function more like rational actors in the market place.
Are you aware of any work that's been done along these lines?
OTOH, we need to not do away with corporations. Aerospace is not the only industry I've worked in, but all of them have been highly capital intensive. There is a need and place for big corporations and they do confer great economic benefits.
Ebeneezer Scrooge | November 11, 2008, 12:35am | #
JP,
As a result, we have the American of today -- someone who is accustomed to having things "taken care of" by a large bureaucracy, someone who imagines that goodies just "come from the central office" and that costs are just "written off," someone who sees the economy as a zero-sum game in which the more money the boss makes, the less the worker makes. No wonder people are so deaf to the small-government message.
Amen to that. Working inside a large corporation can really warp your sense of how the world works. And not just the real cost of resources, which you mention.
A corporation, because it belongs to "the shareholders", effectively belongs to no one. It's a funny little world and it's a lot like socialism. :) There I said it, now everybody can skewer me. But I believe that this environment does mess up people's sense of perspective on many things.
And there's another aspect to this, which I think libertarians are prone to miss. We need our mega-corporations today, to handle our many capital intensive industries (auto, aerospace, etc). But as these big corporations get bigger, they get stronger, and this necessitates an inherently larger government to control them. Especially since they've grown into international congolomerations.
Unless Uncle Sam wants to wake up one morning, and find out that Corporation X "just said no" to obeying some laws, because they don't feel like it anymore. [if you're an anarchist I guess that would be okay, but I'm not]
Big strong economies require big strong governments to impose the rules of fair play on them. Yes I'd like government to be as small as possible, but sometimes I wonder how much smaller we could really get away with. Are we talking 10% smaller, or 20% or 30%?
If libertarians ever want to get serious about being a real political force, it would behoove them to think about how much they could get away with shrinking government down. "Smaller, smaller, smaller!" is not clear, and at some point it's not really advisable anymore.
Ebeneezer Scrooge | November 11, 2008, 12:53am | #
Hazel Meade
In other words, there are cases where the market may produce monopolies or near-monopolies, or huge monolithic corporations,and that it's actually more efficient and better for everyone if they do.
I largely agree with you, but would argue that we The American People should be making a distinction, that we historically have not made. When are free market conditions possible, and when are they not possible? When they are not possible, we might want to consider alternate approaches.
A free market functions according to theory only when you have multiple producers and multiple customers. If this condition does not hold on either or both sides of the equation, then you don't get free market behavior according to the theory -- and I for one question whether we should, under such conditions, continue to follow free market principles.
But then, to me free markets are a tool, a means to an end, and not a religion.
Example: streets and roads. You can have 25 restaurants competing within a four block square in a big city. But are we really going to have 25 different competing systems of streets, to get us to and from these restaurants? No way, there isn't enough real estate. You're simply never going to get the kind of competitive environment in streets and roads, that you get with restaurants.
I've never been convinced that private ownership of our streets and highways, would be catagorically better than what we've got now. Though some combination of public and private might be better in some circumstances.
Another example: public utilities. We're not going to have 25 competing companies trying to sell us gas and electricity, house to house. Not anytime soon. This is another place where free markets will never operate according to free market theory.
The Europeans have done some really smart things with public utilities, that you can't find anything like here in the US. For example district heating and cooling systems, that are smarter from both and engineering and economics perspective. The improved efficiencies cut pollution too, for those who are into Gaia worship.
We should draw lines, as clear as possible, between where free markets can and cannot function (and yes there will be grey areas too). Then consider our options, because free markets may not be the best option. The defense industry is another good example where things are never going to work along the lines of free market theory.
Fluffy | November 11, 2008, 8:52am | #
See? Non-falsifiable, but it will get you mad artistic cred.
It's only non-falsifiable in the sense that all claims about history are ultimately non-falsifiable.
If we accept a reasonable and common sense standard of proof, all we have to do is look at the historical record.
We can start by looking at the
physical record. Look at towns built in the 19th century, and then look at towns built in the 20th century, and observe the differences between the two. Although the 19th century was not libertopia and had its own set of state interventions, they were much less all-encompassing than those of the 20th. It is certainly not merely an attempt to gain "artistic cred" to say that the life patterns of the 19th century more closely reflect what would arise in a free market than the life patterns of the first inhabitants of Levittown, NY. You're acting like this is a controversial assertion, or one that is so arbitrary that we can't even examine its truth value, and that's just silly.
And I don't think I'm applying the "one drop" rule here, either. When every detail of the physical environment is micromanaged by planners, when the entire society is built around a mode of transportation that required, and received, massive state support to take root, when something as basic to everyday life as electric power is delivered in a centralized mode that was specifically chosen and favored by planning and legislation, when entertainment spends a century dominated first by broadcast media whose structure was put in place by law and then dominated by state-sponsored monopoly cable media, etc. etc. etc., I think we've gone well beyond "one drop".
By the way, with regard to the argument that arose here about how one corrects this problem, I am probably on your side. I don't think massive tax and regulatory punishments are the proper way to proceed. I would say the best way to proceed would be to say that if we're in a "corporatism hole", we should stop digging. But to correct what's already happened - I don't know if we can. At some point you have to apply the Hobbesian principle that you have to stop the cycle of expropriation at some point, and if that leaves some unjust advantages in place you have to hope they'll go away over time. There's no way to restore a starting position of perfect justice, and attempts to do so will run into the Proudhonistic fallacy.
Jeremy | November 12, 2008, 9:32am | #
OK, I didn't want to bring this up, but I'm just going to come out and say it now that discussion has died down.
In the essay, Dr Long writes:
This is especially true if, as some libertarians argue, the corporate form itself (involving legal personality and limited liability) is inconsistent with free-market principles. ... For the purposes of the present discussion, however, let us assume the legitimacy of the corporation.
I think Dr Long does a marvelous job of making his case without bringing this point into the equation. But my view is that you really can't directly attack the privileged structure of our economy without discussing entity status.
In a voluntary society, it's possible that people will, of their own free will, agree to perceive, for instance, the thousands of employees of GE as comprising one "entity". But it's not at all guaranteed. The state provides an enormous stabilizing force for business merely by allowing them to form organizations, and the integrity and identity of those organizations are not subject to our voluntary consent.
Limited liability is a huge privilege, too, but I think entity status - and the corporate personhood doctrine that accompanies it - is the root. There was once a time when the state was ok with calling whole sectors of the population less than human, turning people into property. Now the state turns property into people - magically.
Granted, I can't prove people wouldn't of their own free will treat corporations as if they had equal rights with flesh and blood humans in a totally voluntary society. But I don't see any reason why they would, and I don't see how the corporation can do business as an entity without expressly getting the voluntary consent of even most people, which is dubious. There might be some industries where people are willing to acknowledge the identity and integrity of firms, but in most cases people want to do business and live around other people, not abstractions of contracts and assets.
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