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Mutualist Blog: Free Market Anti-Capitalism

To dissolve, submerge, and cause to disappear the political or governmental system in the economic system by reducing, simplifying, decentralizing and suppressing, one after another, all the wheels of this great machine, which is called the Government or the State. --Proudhon, General Idea of the Revolution

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Saturday, February 18, 2006

Susan Witt on Independent Local Economies

Via Bill Grennon on the Distributism list. A guest editorial in Vermont Commons by the E. F. Schumacher Society's Susan Witt.

If our common interest is to help establish a more independent Vermont Republic, then part of that effort will be to build a more independent Vermont economy—one in which, as economist Fritz Schumacher advocates in Small Is Beautiful: Economics as if People Mattered, the goods consumed in a region are produced in a region. Therefore, as the brilliant regional planner and intuitive economist Jane Jacobs argues in Cities and the Wealth of Nations, the strategy for economic development should be to generate import-replacement industries. She would have us examine what is now imported into the state and develop the conditions to instead produce those products from local resources with local labor. Unlike the branch of a multi-national corporation that might open and then suddenly close, driven by moody fluctuations in the global economy, a locally owned and managed business is more likely to establish a complex of economic and social interactions that build strong entwining regional roots, keeping the business in place and accountable to people, land, and community.

Leopold Kohr suggested that small markets were like harbors in a storm, insulated from the worst effects of large, anonymous commodity markets and financial fluctuations. The smaller the market area, the more likely that there will be ongoing relationships between buyers and sellers, regulated by local social ties; the expectations of sellers in regard to their market, and buyers in regard to their source of supply, will likewise be more stable and predicable. And local economic networks like LETS systems enable providers of goods and services to deal directly with one another, and translate their skills directly into exchange-value, without depending on the whims of an institutional employer.

Look at it this way: if a market gardener exchanges produce for the services of a plumber, that exchange relationship won't provide either one with an outlet for all his produce. But the farmer will have a reliable and stable outlet for the portion of his produce consumed by the plumber, and be able to reliably meet his plumbing needs--and vice versa. If they participate in a small LETS network, the more trades that are incorporated into the network, the more goods and services each participant will have a reliable source of, and the larger the portion of his own output will have a predictable outlet. The members will all be securing a major part of their need for goods and services, and obtain employment directly from one another, without any danger from the vagaries of the national economy, banking system, or currency.

Whatever economic needs you currently meet through the subsistence, barter, and gift economies, you'll likely continue to be able to meet even in a depression.

What then, is the responsibility of concerned citizens to help build a sustainable Vermont economy? An independent regional economy calls for new regional economic institutions for land, labor, and capital to embody the scale, purpose, and structure of our endeavors. These new institutions cannot be government-driven, and rightly so. They will be shaped by free associations of consumers and producers, working co-operatively, sharing the risk in creating an economy that reflects shared culture and shared values. Small in scale, transparent in structure, designed to profit the community rather than profit from the community, they can address our common concern for safe and fair working conditions; for production practices that keep our air and soil and waters clean, renewing our natural resources rather than depleting them; for innovation in the making and distribution of the basic necessities of food, clothing, shelter, and energy rather than luxury items; and for more equitable distribution of wealth.

Building of new economic institutions is hard work. Most of us rest complacently in our role as passive consumers, not co-producers and co-shapers of our own economies. But it is work that can be done, and fine beginnings are being made right here in Vermont in the development of local currencies, worker-owned businesses, community land trusts, and business alliances for local living economies.

11 Comments:

Anonymous Anonymous said...

I realize you hate large businesses Kevin, but I don't understand why smaller=better in your view. You write about "innovation" in "food, clothing, shelter", about keeping air and soil clean, about renewing natural resources, all under the motivation for profiting the community rather than "profit from the community".

But from what I can see all those things could also be provided in a libertarian world where rights were enforced and companies were still big. For example, polluting companies would be held responsible for their pollution, etc.

I think you'd be interested to read Paul Graham's essay about Inequality and Risk. Even you yourself talk about "sharing risk" in the post, and that is exactly what your small communities are going to do: Spread out economic risk at the cost of reduced overall productivity. In the world you envision, I'm hard pressed to imagine chipmakers like Intel, hardware makers like Western Digital, or carmakers like GM being in business. Everyone would shout "You're becoming too big, too wealthy! Wealth back to the community!", and then the community would be poorer. Even if everyone voluntarily became mutualists, wouldn't the world actually be poorer rather than richer?

February 18, 2006 5:22 PM  
Anonymous Bill Grennon said...

how are corporations going to be big if all state granted privileges like limited liability, corporate personhood, and intellectual property laws are rolled back?

if we had a true cost pricing system in place that doesn't allow negative externalities to be shifted to those being excluded from the commons violating their absolute property rights to their labor then all local production would be cheaper.

plus a citizens dividend capitalized from the enclosure of the natural commons puts an absolute floor on wages.

all of these will drive economic rent (profit, interest, rent) out of the system.

February 18, 2006 5:59 PM  
Blogger Larry Gambone said...

To add to what Bill just wrote, an economy of scale - if one is necessary - need not be developed in the authoritarian-centralist manner of the capitalist corporation. It can be done in a liberetarian-decentralist manner thru federation - like a credit union federation. Big capitalist enterprises are simply unnecessary...

February 18, 2006 9:21 PM  
Anonymous Anonymous said...

how are corporations going to be big if all state granted privileges like limited liability, corporate personhood, and intellectual property laws are rolled back?

It's not clear to me that size is mostly determined by government privilege. Maybe a Thomas Edison comes along and invents something and becomes rich. Doesn't overall wealth suffer if people look on such activities as evil and destructive to the "community"?

Also see this blog discussion at mises.org on how corporations might function in a libertarian society: http://blog.mises.org/blog/archives/004269.asp

(The upshot is that many of the things you mention - intellectual property, limited liability, etc - can still be somewhat provided for in the form of contract.)

plus a citizens dividend capitalized from the enclosure of the natural commons puts an absolute floor on wages.


Is that even english?

an economy of scale - if one is necessary - need not be developed in the authoritarian-centralist manner of the capitalist corporation. It can be done in a liberetarian-decentralist manner thru federation - like a credit union federation. Big capitalist enterprises are simply unnecessary...

I don't know a lot about credit unions, but they don't look like they could compete with Intel at microchip production. Even if we admit that big corporations are unnecessary, some people (like traditional anarchists) talk as if people trying to run corporations will be mugged and beaten up for "appropriating the worker's product" and such. You guys seem to think that corporations could exist but the vast majority of people will choose alternative forms of economic organization. What if you're wrong, and people end up preferring large corporations? Would you give up on your beliefs then, or would you just maintain that couldn't ever happen?

And I'd be interested what Kevin has to say about the Graham essay as well. Does he admit that since risk is shared reward is diminished, or does he deny the connection between risk and reward?

February 18, 2006 11:54 PM  
Anonymous Bill Grennon said...

"Maybe a Thomas Edison comes along and invents something and becomes rich"

how with intellectual property laws severely rolled back?

"Doesn't overall wealth suffer if people look on such activities as evil and destructive to the "community"?"

wealth comes from actual labor not from extracting economic rent (profits)protected by state privilege...

"many of the things you mention - intellectual property, limited liability, etc - can still be somewhat provided for in the form of contract"

yes and it will most likely look like an open source copyleft contract - one can use and improve so long as one doesn't profit from.

do you know what a citizens dividend capitalized from the socially created economic rent that today is privatized?

"I don't know a lot about credit unions, but they don't look like they could compete with Intel at microchip production"

the question is can Intel compete without limited liability, intellectual property laws and with true cost pricing?

February 19, 2006 3:51 AM  
Blogger Kevin Carson said...

Anonymous,

The thing is, I don't think there'd be nearly as many big companies in a big world, because I don't think they could survive in a free market. The issue isn't whether people would be socially conscious enough to take their business to smaller, locally owned competitors. The real issue is whether the big companies could beat the small competitors in terms of price. Without the government teat to suck on, I don't think they could.

Bill Gates is an excellent example. He is the proverbial turtle on top of a fencepost--he had lots of help getting up there. First of all, the roots of cybernetic technology lie in U.S. government R&D during WWII. The government role continued with the heavily militarized electronics R&D of the 1950s (something over half of it funded by government); government was especially interested in miniaturized circuitry for guidance systems. Government was also the main purchaser of the early mainframe computers; without such an artificial market for those behemoths, cheaper and more powerful models might never have been developed. The infrastructure of the worldwide web was built with Pentagon money, under the auspices of DARPA. And Gates relies heavily on copyright laws to protect himself against competitors selling cheap knockoff versions of his OS.

Intellectual property and limited liability, which Bill G. mentions, are two forms of government-enforced privilege. The people at Mises are probably right that some of it could be achieved contractually, but not all. Contract could create limited liability against creditors, but not limited tort liability against third parties. And the transaction costs of enforcing purely contractual IP against third parties, preventing file-sharing, etc., would be a lot higher; might well be prohibitively expensive, in a system where legal services were provided on the free market and priced at cost.

But the subsidies go a lot further. There are government subsidies to R&D and to technical training, which result in much more high-tech and capital-intensive forms of production than would otherwise exist on a free market. Likewise for depreciation loopholes. The corporate interest deduction for debt involved in mergers and acquisitions shifts the tax burden off of those engaged in such concentration, and onto those not so engaged. Transportation subsidies benefit those engaged in long-distance shipping, and give them an artificial competitive advantage against small firms producing for local markets.

The basic structure of existing state capitalism promotes bigness.

I read the Paul Graham essay, and I think he got it backwards. Reducing inequality is not a matter of the government having to intervene to hurt the rich, and thereby counter the market's natural tendency toward inequality. The present degree of inequality results from government intervention to subsidize the concentration of capital, and to guarantee monopoly returns to capital and land. The only thing necessary to reduce inequality is for government to STOP taking from the poor and giving to the rich.

The risk premium is nothing but an actuarial mechanism; all it does is redistribute what was created by producers. Distributing risk doesn't reduce the size of the overall pie, or reduce productivity; it might reduce the "reward" of those who beat the odds, but it mightily reduces the risk that everybody else won't have any reward at all. And the "reward" comes from what is produced; the reward to be distributed comes from production, not from the lottery. There ain't no such thing as a free lunch.

Anyway, it's a moot point, because most of the risk of major innovations is externalized on the taxpayer. Risk is socialized, while profit is privatized.

There's a limit in the free market to how rich anybody can become from innovation, because if market entry is free from government-enforced entry barriers, the natural cost trajectory of any innovation will be toward cost of production. The inventor will reap short-term entrepreneurial profit, until his competitors can copy his innovation and start selling it cheaper. It's only possible to derive long-term profits when the government locks you into control of an innovation.

February 19, 2006 11:34 AM  
Blogger Mike said...

I think the focus on the local is overdone. There would still be gains from long distance trade due to comparative advantage.

February 19, 2006 4:04 PM  
Anonymous Anonymous said...

Dear Kevin:
I want to share with you two points regarding the common left-libertarian/mutualist claim that Limited Liability confers a "subsidy" upon the Corporate Form, which lends corporations a competitive advantage that they would not enjoy under a legal regime that perfectly conformed to the dicates of Natural Justice.

Just in case this conception of what constitutes a subsidy is not what you mean when you use the term, I also offer a third point, which I hope is somewhat responsive to your concerns.

I suspect from your comment that you would unqualifiedly agree with my first point, but I'm interested to what you think of my second and third points.

1. The Limited Liability of shareholders for a corporation's contractual obligations in no way functions to subsidize the Corporate Form. The election to incorporate on the part of a busienss (and the election of others to contract with that business pot-incorporation) is functionally equivalent to that same business insisting on the inclusion a set of contractual terms that would place limitations on the class of assets that the other party to the contract could reach in the event that the business defaults on its contractual obligations.

2. Except in cases where a tortfeasor-employee possessed "specific authority" from the shareholders to commit the tortious act(s), the Limited Liability of shareholders for the employee's torts would only constitute a subsidy to the Corporate Form (in the sense that I defined "subsidy" above) if the currently-prevailing doctrine of Respondeat Superior is itself morally justified. I deny that it is justifed. The doctrine of Respondeat Superior provides that "Master(s)," here the shareholders, are strictly liable for the torts of their "Servants," here employees of the corporation. Under Corporate Law as it now exists, the corporate entity itself is the "Master," and therefore (under Respondeat Superior) tort claimants may reach assets held by the corporation. Because of Limited Liability, tort claimants may not reach the personal assets of the shareholders. It seems to me that there is nothing objectionable about the doctrine of Limited Liability to the extent that it merely shields the personal assets of not-directly-negligent shareholders from the claims of tort claimants. Rather, Limited Liability works to restore (in an incomplete fashion) the just or natural allocation of liability which would obtain if the pernicious doctrine of Respondeat Superior were not in force. If one rejects the doctrine of Respondeat Superior (as I do), then it seems as if one is committed to the position that (in cases where the plaintiff has merely demonstrated the wrongfulness of the employee's act(s), not only should the plaintiff not be able to reach the personal assets of the shareholders, but NEITHER SHOULD the plaintiff be able to reach the assets of the Corporation itself. It is for this reason that I hinted that Limited Liability only incompletely restored the allocation of liability that would obtain in the absense of Respondeat Superior/Vicarious Liability.

3. If one defines "subsidy" not as a deviation from the dictates of Natural Justice (as was assumed above), but rather as a loophole (which gives shareholders access to the benefits of Natural Justice without extending those same benefits to the residual claimants of unincorporated businesses (whether they be Sole Proprietors or Partners in a General Partnership), then I suppose Limited Liability would constitute subsidy. Rather than end this subsidy by closing the "loophole," it would be far better to restore an equal playing field for all forms of business organization by jettisoning the doctrine of Respondeat Superior altogether. As matters now stand, this loophole merely provides an incentive for firms to incorporate when they would otherwise not do so. Its not clear to me how this in any way subsidizes "bigness," (unless one defines as big any firm large enough to afford to pay the pittance of a fee to incorporate) nor does it constitute a "privilege" (since under the General Incorporation statutes that exist in every jurisdiction, any firm that wants to can incorporate).

I look forward to reading the responses that you or other readings might have to these comments.

Cheers,
Araglin

February 19, 2006 4:29 PM  
Blogger Kevin Carson said...

mike,

"Comparative advantage" is relative, depending on your total cost package. And shipping goods from the factory to the customer is part of that cost package. So whether transportation is subsidized has a big effect on the magnitude of comparative advantage. Start charging weight-distance fees at tollbooths along the Interstate, and the charges will eat up a lot of "comparative advantage" real fast.

Araglin,

Sorry it's taken me so long to respond, because your comments deserve thoughtful consideration. I don't know enough about corporation law to be able to figure out all the pros and cons of getting rid of the "respondeat superior" rule, but it sounds to me like it would pierce the veil of corporate personhood and make officers of the corporation directly liable, civilly and criminally, for bad behavior. Certainly worth more looking into.

February 24, 2006 11:02 PM  
Blogger Kevin Carson said...

P.S. To the extent that management bad behavior is directly pursuant to official policies adopted by a board of directors legally responsible to the stockholders, I don't know that absolving the stockholders of responsibility would be a good thing in that case.

February 24, 2006 11:10 PM  
Anonymous Anonymous said...

Dear Kevin (and anyone else who's still reading this thread),
Thanks for taking the time to chew over and to respond thoughtfully to my somewhat lengthy comment from several days back. I have a couple of further remarks, which may clarify my still somewhat inchaote views on this subject.

You said:
"I don't know enough about corporation law to be able to figure out all the pros and cons of getting rid of the "respondeat superior" rule, but it sounds to me like it would pierce the veil of corporate personhood and make officers of the corporation directly liable, civilly and criminally, for bad behavior."

Nothing about the corporate form shields anyone acting on behalf of the firm from tort liability for their own personal behavior. That is, low-level employees, corporate officers, and directors are always liable for their own tortious acts. The question is whether it makes sense to hold the corporate entity STRICTLY liable for the torts of employees (respondeat superior/vicarious liability answers yes. I answer no.).

I have no problem with holding officers, directors, or shareholders jointly and severally liable in specific cases where a plaintiff has been able to prove that these actors were COMPLICIT in the commission of the tort (whether through their official policies or by their implied consent). What I object to is the claim that the mere relationship of employer ("Master") to employee "Servant") can justify strict liability on the part of an employer for the (not-specifically-authorized) torts of an employee. In my view the mere existence of an employer/employee relationship shouldn't render specific proof of complicity unnecessary to get the employer on the hook for the employee's malfeasance.

One nuance:
There are situations where an employer might WANT an employee to behave tortiously, but want not to be vicariously liable for those torts. In those cases, in the absence of vicarious liability, employers might adopt official policies explictly forbidding employees from acting in a tortious manner but through its other practices re: promotion, retension, raises, etc. might provide a plaintiff with sufficient evidence to show that the employer had INFORMALLY authorized the tortious behavior. It's impossible for a legal theorist to exhaustrively innumerate all circumstances under which employers SHOULD be liable in advance; however, working through nitty gritty factual situations to determine just when complicity does or does not exist is the true genius of common law courts.

In sum:
The limited liability of shareholders for the tortious acts of employees commited within the "scope of their employment" is a good thing to the extent that this "limitation" merely operates to partially restore the (non) liability that shareholders would enjoy absent Respondeat Superior. On the other hand, in any case that a plaintiff was able to make out a case that the Board or dominant shareholders actually encouraged or invited (or, even, was negligent in failing to prevent) the tortious actions on the part of the employee, they ought to be jointly and severally liabile for the full amount of the damages traceable to the tortious conduct.

You also said:
"P.S. To the extent that management bad behavior is directly pursuant to official policies adopted by a board of directors legally responsible to the stockholders, I don't know that absolving the stockholders of responsibility would be a good thing in that case."

In such a case, the management would clearly be responsible for their own bad behavior. Since that bad behavior was "directly pursuant to official policies adopted by the board of directors," it's possible that any given board member should be personally liable as well. Possible, but not inevitable. Suppose only 5 of 9 Board members had voted in favor of the "official policies." There, it would make sense to hold THOSE 5 responsible, but why the 4 who voted against the policies?

As for the desirability of holding shareholders personally liability, as I argued above, it ought to be necessary for a plaintiff to establish their complicity before getting a judgment entered against them.

Only rarely does any individual shareholder in a large, publicly-traded corporation have any control whatsoever over the actions of the Board. I very much doubt that you would you be willing to say an individual citizen has control over 'his' government sufficient to render him responsible for the acts of said government. The situation of an individual shareholder vis-a-vis the corporation is almost entirely analogous.

The exception would be in the case of a shareholder with a controlling interest (say he owned 20+% of the outstanding stock) who weilded that interest to handpick the members of the Board with the specific intention that the Board institute official policies encouraging tortious behavior on the part of officers and employees.

The mere showing that a shareholder BENEFITED from the tortious action ought not to enough to establish liability. To see why, suppose there were two grocery stores in town and you owned one of them. Suppose further that a criminally-deranged pyromaniac were to burn down your competitor's grocery store. As a consequence of this act of arson, your profit margins would most likely go through the roof. Would this benefit alone (that is, absent proof that you hired the arsonist) operate to render you responsible for losses to your competor? Of course not.

On the other hand, if a shareholder benefits from the tortious action of corporate officers, had actual or constructive knowledge of that behavior, had the power to stop it, YET failed to do so, it would be fair to infer complicity. In fine, plaintiffs should have the burden of proving complicity. Courts shouldn't just ASSUME it exists in order to hold shareholders liable for the misdeeds of employees.

Thanks for your time and consideration,
Araglin

February 27, 2006 12:18 PM  

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