Patri Friedman on Seasteading

Via Chris Moody of Cato: Patri Friedman will be speaking on seasteading at the Cato Institute Tuesday, April 7.

Monopoly, and the Legacy Benefits of State Intervention

Chris Wages, at My Quiet Life, quotes a statement I made in an earlier blog post:

The faux “free market” rhetoric of the ASI and other neoliberals will be nothing but bullshit until they first deal with initial questions of justice in the starting distribution of property titles. Otherwise, their version of the “free market” really just means a massive looting spree, followed by the proclamation “No coercive intervention in the market starting… NOW!”

He then ties this generalization in with his friendly critique of an article by Cato's Adam Thierer (quite good, on the whole) on the government role in creating the AT&T monopoly. As it applies to telecommunications, he says, my comment above can be restated as:

That is .. “NOW”, only after the government (read: the taxpayer) has funded and subsidized the industry to the point of total domination and competition-free self-sufficiency. “NOW” we can pretend to be in favor of the “free” market. This is the fallacy of the Cato Institute’s repeated professions of support for “free” market. The “free” market they are campaigning for is one in which the balance of power is tilted in favor of large oligarchies of corporations by decades of government funding and subsidization that continues to this day.

In the comment thread, t rev responded:

Look, of course the status quo isn’t fair, of course it’s the historical outcome of a series of what are quite arguably monstrous criminal activities. But, so what? Things are as they are. It’s not enough to say that crimes were committed unless you have a plan of action to rectify the situation that isn’t going to make things even worse. We just want to keep similar things from happening in the future.

And finally, my rejoinder to t rev:

Unfortunately, t. rev, the typical vulgar libertarian response to “things as they are now” is to adopt some policy that will lock the present winners into control of their ill-gotten gain. Adopting a formally libertarian policy, without regard to how it will affect the strategic distribution of power in the existing state capitalist system, is a lot like the Romans at Cannae welcoming the withdrawal of the Punic center as “a step in the right direction.” Any just free market regime must take into account the present distribution of power, the desired end state, and how its steps toward that desired end state will strengthen or weaken the present distribution of power in the meantime. In other words, something like Chris Sciabarra’s “dialectical libertarianism.”

Now, whether (as Chris Wages says) the legacy benefits of past federal action are enough to lock telecom monopolies into a permanently privileged status, or whether the ostensibly "deregulated" industry still depends on an ongoing framework of hidden subsidies and privileges. I lean toward the latter alternative, although you can take the counter-factual speculation for what it's worth. My gut feeling is that most centralized corporate dinosaurs would simply collapse if subjected to a genuinely deregulated free market, without any taxpayer subsidies of any kind. Leaving that aside, though, I have some definite ideas on t rev's question of what to do now. One of them is treating corporations, the majority of whose profits depended on state intervention, as the property of their work force or clientele: transforming them into either producer or consumer cooperatives, preferably decentralized to the smallest feasible units of local control, and then coordinating their relations through some combination of unregulated markets and bottom-up federation.

telecommunications , telecom , subsidies , regulations , deregulation

Naomi Klein: The Shock Doctrine

Naomi Klein. The Shock Doctrine: The Rise of Disaster Capitalism (New York: Metropolitan Books/Henry Holt, 2007)

Naomi Klein, to a casual reader, might seem to hate the free market. Or at least she hates what most people think of as the free market, based on the conventional use of that term by mainstream politicians and journalists. And the usual vulgar libertarian suspects (see here and here and here) have reacted with exactly the kind of by-the-numbers polemics you'd expect. (She's met with a more open-minded reception from real libertarians. See, for example, Sheldon Richman, "Naomi Klein: Free Market Ally?" and Kehlkopfmikrofon, "Left-Libertarian Perspectives on Naomi Klein.")

If Klein hates what she mistakenly believes is the free market, the blame is pretty easy to assess: for the most part the very same folks at Cato, the Adam Smith Institute, and their ilk, that have their panties in such a wad over her book. As I've repeatedly said in the past, if I thought the free market actually meant what those people mean when they talk about "free markets," I'd hate it myself.

It's hard to spend any time at all in the allegedly "libertarian" parts of the Web without being deluged by commentary defending corporate globalization, CO2 emissions, Third World landed oligarchies, Nike's sweatshops, Wal-Mart, Big Pharma's profits, CEO salaries, and Microsoft's market share, all based on the principles of "the free market."

From Smith to Ricardo and Mill, classical liberalism was a revolutionary doctrine that attacked the privileges of the great landlords and the mercantile interests. Today, we see vulgar libertarians perverting "free market" rhetoric to defend the contemporary institution that most closely resembles, in terms of power and privilege, the landed oligarchies and mercantilists of the Old Regime: the giant corporation. When the "free market" is perverted to defend such odious interests, it's not hard to see why sane people view it with the same apprehension they normally reserve for the bubonic plague. Make no mistake: I hate such commentary, and the agenda behind it, with every fiber of my being. But it's not the free market.

If Germany had won the war, there would probably be a mushroom proliferation of Nazi "free market" think tanks (not inconceivably staffed by a considerable portion of the Austrian diaspora returned from America) defending the profits of Krupp and I.G. Farben in terms of "free market principles," along with the Nazi equivalent of Nike sweatshops in Eastern Europe and black Africa. All decent people would hate such intellectual vermin and their monstrous version of the "free market." The version of the "free market" defended by neoliberals and vulgar libertarians in our own world is only better in degree, and even that probably not by much.

Klein uses the term "disaster capitalism" to refer to the neoliberal modus operandi of "waiting for a major crisis, then selling off pieces of the state to private players while citizens [are] still reeling from the shock, then quickly making the 'reforms' permanent."

It's a very real phenomenon. As an account of the process of neoliberal "reform" as it occurred in country after country, and a chronicle of the corrupt collusion between government and corporate interests in formulating the "reforms," it is an outstanding reference work. The endnotes alone are immensely valuable.

My main objection, to repeat, is to her misuse of the term "free market" to describe such policies. Most of the examples of "free market reform" Klein describes could be more accurately described as "economic fascism." What passes for "free market reform," "deregulation," and "privatization" among the neoliberals is probably at least as statist as the various social democratic and mixed economy models to which neoliberalism is opposed. As Nicholas Hildyard argues in "The Myth of the Minimalist State,"

Far from doing away with state bureaucracy, free market [sic] policies have in fact reorganised it. While the privatisation of state industries and assets has certainly cut down the direct involvement of the state in the production and distribution of many goods and services, the process has been accompanied by new state regulations, subsidies and institutions aimed at introducing and entrenching a "favourable environment" for the newly-privatised industries.

The state has actually played a central role in implementing free market [sic] policies and, moreover, has a continued "intimate and ubiquitous" involvement in regulating the minutiae of the market economy -- a direct consequence of the hand-in-glove relationship that free market [sic] governments have fostered between "adjusted" state institutions and market interests....

A good example is the standard neoliberal model of "privatization," as carried out by Milton Friedman in Chile and Jeffrey Sachs in Russia. As Klein herself puts it in regard to New Orleans' massive post-Katrina conversion to charter schools (involving almost the entire school system), neoliberal "privatization" of public functions usually results in "publicly funded institutions run by private entities according to their own rules." [p. 5] Another variant of the same phenomenon is taxpayer-funded vouchers, a favorite of the folks at Cato, the ASI, and the Heritage Foundation. It was implemented in Pinochet's Chile, among other places.

Perhaps the most egregious example of this phenomenon is the fascist economy that has grown up around the national security state, including both the "private" firms that act as camp followers to the U.S. military in its wars abroad, and the "private" firms contracting with Homeland Security and other police state agencies at home. Klein, who aptly calls it the "disaster capitalism complex," considers it the booming sector of the economy in the same way as housing until recently, and the tech sector before that.

In my opinion the very term "private sector," in regard to such entities, is grossly misleading. Big business interests whose profits depend on direct subsidies and protections from the state are, in fact, a part of the state. If Marx was right in calling the state "the executive committee of the ruling class"--and I think he was--then the owners and managers of the corporate economy make up the lion's share of that ruling class. Corporate directors and senior management from the state capitalist sector constantly shuffle, in classic revolving door style, into political appointments in the state apparatus and then back to "private" employment.

Brad Spangler put it this way:

...one robber (the literal apparatus of government) keeps you covered with a pistol while the second (representing State-allied corporations) just holds the bag that you have to drop your wristwatch, wallet and car keys in. To say that your interaction with the bagman was a “voluntary transaction” is an absurdity. Such nonsense should be condemned by all libertarians. Both gunman and bagman together are the true State.

Large corporations are neither passive victims nor passive beneficiaries of the state; they act through the state. Or rather, to a large extent they are the state. It makes about as much sense to separate them from the state, as it would have made to separate the landholding class from the state in Medieval times.

And here's how the Libertarian Alliance's Sean Gabb described the model of fake "privatization" promoted by the Adam Smith Institute:

As reconstructed in the 1980s - partly by the Adam Smith Institute - the new statism is different. It looks like private enterprise. It makes a profit. Those in charge of it are paid vast salaries, and smugly believe they are worth every penny....

But for all its external appearance, the reality is statism. And because it makes a profit, it is more stable than the old. It is also more pervasive. Look at these privatised companies, with their boards full of retired politicians, their cosy relationships with the regulators, their quick and easy ways to get whatever privileges they want....

As with National Socialism in Germany, the new statism is leading to the abolition of the distinction between public and private. Security companies, for example, are being awarded contracts to ferry defendants between prison and court, and in some cases to build and operate prisons. This has been sold to us on the - perfectly correct - grounds that it ensures better value for money. But it also involves grants of state powers of coercion to private organisations. All over the country, private companies are being given powers of surveillance and control greater than the Police used to possess.

....There has been no diminution in the economic power of the State, only a change in its mode of operation....

Sometimes neoliberal "privatization" involves not just the contracting out of public functions with continued taxpayer funding, but the auctioning off of state assets. The process generally goes something like this: The World Bank cultivates technocratic elites within a Third World government, educating them in the neoliberal model of economic development and promoting their autonomy from democratic political pressure. The World Bank acts collusively with these elites to arrange loans for building the transportation and utility infrastructure needed for Western industry to build profitable facilities in the country. When the country incurs a crushing debt load, owing to the collusion between domestic technocratic elites and the World Bank, the World Bank and IMF use the debt as leverage to impose a "structural adjustment reforms," including "privatization" of the very infrastructure that was created at taxpayer expense to subsidize Western industry. Naturally, the infrastructure is bought up by Western capital--the same interests it was originally built at taxpayer expense to serve--for pennies on the dollar. During the privatization process, the Third World government may invest more money in the infrastructure, to make it salable, than it gets from the sale. And following "privatization," the new owners' first order of business will be systematic asset stripping, with the income from sale of capital assets exceeding what they paid for the infrastructure. Pretty neat, huh?

Sean Corrigan described the process in more colorful terms:

Does he [Treasury Secretary O'Neill] not know that the whole IMF-US Treasury carpet-bagging strategy of full-spectrum dominance is based on promoting unproductive government-led indebtedness abroad, at increasingly usurious rates of interest, and then – either before or, more often these days, after, the point of default – bailing out the Western banks who have been the agents provocateurs of this financial Operation Overlord, with newly-minted dollars, to the detriment of the citizenry at home?

Is he not aware that, subsequent to the collapse, these latter-day Reconstructionists must be allowed to swoop and to buy controlling ownership stakes in resources and productive capital made ludicrously cheap by devaluation, or outright monetary collapse?

Does he not understand that he must simultaneously coerce the target nation into sweating its people to churn out export goods in order to service the newly refinanced debt...?

Joseph Stromberg referred to such privatization of state assets as "funny auctions, that amounted to new expropriations by domestic and foreign investors."

Proposals to auction off Iraqi properties, with the state acting as effective owner, would likely lead, if implemented, to a massive alienation of resources into the hands of select foreign interests.

...and for Stromberg, a real free market libertarian, remember, this is a bad thing.

The textbook case of "funny auctions" was the looting carried out under the supervision of Yeltsin and Sachs. The Russian state ministers transferred enormous public funds into banks owned by the oligarchs--themselves major figures in the state and former Communist Party leadership. The oligarch's banks, in turn, conducted the privatization auctions of state industry--and they bid on it themselves, using the embezzled funds received from the government. [p. 233] Klein refers to it as "the strip mining of an industrialized state." [p. 242] This, by the way--and Yeltsin's suspension of parliament and rule by decree--went largely unremarked on by the same people currently squealing about Putin's authoritarianism. The difference is that Putin is using his muscle against the oligarchs and even Western capitalist interests.

Neoliberal "privatization" may leave a larger share of functions under nominally private direction, but the new "private" enterprises operate within a web of protections, advantages and subsidies defined by the state.

A much better model for privatization is that of Murray Rothbard and Karl Hess. As Hess argued in 1969, real free market libertarians don't reflexively defend anything that's called "property."

The truth, of course, is that libertarianism wants to advance principles of property but that it in no way wishes to defend, willy nilly, all property which now is called private.

Much of that property is stolen. Much is of dubious title. All of it is deeply intertwined with an immoral, coercive state system which has condoned, built on, and profited from slavery; has expanded through and exploited a brutal and aggressive imperial and colonial foreign policy, and continues to hold the people in a roughly serf-master relationship to political-economic power concentrations.

Hess called for creative libertarian analysis, confronting issues of "the revolutionary treatment of stolen "private" and "public" property in libertarian, radical, and revolutionary terms." For example, he asked, "What... should happen to General Motors in a liberated society?"--a question that's never been raised at the Cato Institute or the Heritage Foundation, I'll wager. ["The Student Revolution," The Libertarian (soon renamed The Libertarian Forum) May 1, 1969, p. 2.]

Rothbard attempted to provide some answers to the question Hess raised. He argued that state property should simply be treated as "unowned," and then homesteaded by those currently occupying and using it. In the case of utilities and other public services, this would mean turning them into consumer cooperatives. Universities would be turned either into consumer cooperatives, owned by student guilds, or into producer co-ops owned by the faculty. State-owned industry should be handed over to its workers. He even argued that private industry that got the majority of its profits from the state should be treated as state property and homesteaded by its workers. ["Confiscation and the Homestead Principle," The Libertarian Forum June 15, 1969 p. 3]

In the specific case of the post-Soviet economies and other state socialist countries attempting market reforms, he argued in "How and how not to desocialize" that state property should be privatized on the principle of "all land to the peasants, all factories to the workers!" ["How and How Not to Desocialize," The Review of Austrian Economics 6:1 (1992) 65-77]

That was, incidentally, the form of privatization actually envisioned by Solidarity at the fall of the pro-Soviet regime: the transformation of all state enterprises into workers' co-ops. But under the influence of the Chicagoids who infested Poland, with their dire threats of capital flight, the new Solidarity government was browbeaten into opening the country up to corporate looting. That was the model envisioned by Gorbachev (surely a more legitimate claim to the name of "free market reform" than what actually occurred), before a wrathful deity visited Russia with the triple calamity of Yeltsin, Sachs, and the oligarchs. I'll take emerods in my secret parts any day.

Neoliberal policies depart from genuine free market principles in numerous other ways.

For example, they tend to be adopted in contexts where corporate elites desire to roll back the bargaining power of labor. The governments that adopt Chicago School policies also tend to terrorize unions and other forms of poltical organization by workers in ways that no genuine believer in free markets could possibly support (any implied commentary on George Reisman is very much intentional).

A large part of he appeal of Chicago School economics was that, at a time when radical-left ideas about workers' power were gaining ground around the world, it provided a way to defend the interests of owners... [p. 52]

As the countries of the South American cone, one after another, fell under military dictatorships and played host to pestilential swarms of Chicago Boys, the first targets of their terror were the trade unions and their parties. And they were actively encouraged by Kissinger. [p. 97] The main purpose of the infamous Operation Condor was to organize mutual support among the intelligence operations of the South American military dictatorships, in identifying and assassinating the leaders of the left-wing opposition. In several countries of the region, military coups were followed immediately by raids on trade union headquarters, and by military raids on factories in which union organizers and radicals--helpfully pointed out by managers--were "disappeared." [p. 106]

Now, even by the avowed principles of the vulgar libertarians, labor and capital are supposedly coequal "factors of production." Imagine the reaction at Cato or the ASI if corporate headquarters were raided and terrorized in the way that union headquarters were, or if prominent and influential capitalists were tortured, murdered, and "disappeared," and later discovered in ditches with their faces hacked off, as a means of intimidating them and reducing the bargaining power of capital in the market. The difference, for the Catoids and Misoids, is that such treatment of labor is a regrettable necessity, or an aberration in the "political" realm that did not affect the fundamentally "free market" orientation of the regime; identical policies carried out against capital, on the otherhand, would be directly repugnant to their "free market" principles. The control of the state by the owners of one "factor of production" (capital), and the use of state power to terrorize the owners of another "factor of production" (labor-power) on behalf of capital, is just as repugnant to free market principles as the reverse case.

There's nothing inherent in free market principles, as such, that implies greater affinity for owners than workers. In fact, one can make a free market argument (as I repeatedly have) that the state's interventions in the market have served mainly the interests of the owning classes, to the great detriment of the bargaining power of labor. Taft-Hartley, for example, surely had that effect. So did the draconian police state regime imposed on the British working classes (e.g. the Laws of Settlement, the Riot Act, and the Combination Laws) during the early Industrial Revolution. The state's enforcement of artificial scarcity in land and capital, by maintaining entry barriers and other special privileges on behalf of landlords and capitalists, makes the means of production artificially scarce and expensive for workers so that they are forced to sell their labor in a buyer's market. Instead of jobs competing for workers and driving down the rate of profit until wages equal the full product of labor, which would be the case in a free market without such special privilege, we have instead a state of affairs in which workers are forced to compete for jobs and drive down wages, and pay a form of tribute for access to the means of production.

The neoliberal version of "free markets" tends to reflexively support any title to "private property" in land, with absolutely no regard to issues of just acquisition. In all the Latin American countries where the Chicago Boys were given free rein, land reforms were reversed and the peasants' land restored to the latifundistas and other feudal landed oligarchs. And every time a left-leaning Third World government nullifies the illegitimate titles of such feudal elites, and gives the land to its rightful owners--the peasants working it--the predictable squeals of outrage start among the Catoids.

The only form of property the Catoids and other vulgar libertarians don't respect is the property of ordinary working people. In Sri Lanka after the Tsunami, and in New Orleans after Katrina, one of the top items on the agenda, as a condition for disaster relief aid, was to eliminate legal barriers to expropriating and evicting poor people from land desired by commercial interests. In Sri Lanka, the reconstruction plan was drafted by a coalition of businesspeople, of whom the largest portion represented the tourist industry that coveted beachfront property. The plan they came up with included the eviction of entire beachfront villages so their land could be used for hotels, and the use of disaster relief funds to provide corporate welfare for superhighways and industrial port facilities.[pp. 292-293, 297] The same pattern was followed in India and Indonesia, with peasants forbidden to rebuild on their own land, driven into holding camps, and their land (and lots of aid) given to hotel companies. [p. 399] In Honduras after Hurricane Mitch, the mining laws were changed to make it easier to evict peasants from land the mining companies wanted. [p. 395]

But there is absolutely no legitimate basis in free market principle for the artificial property rights of feudal landlords. I admit I'm not a typical free market advocate in that regard. As an individualist anarchist, I tend to be hostile toward absentee landlords in principle; that sets me apart from the libertarian mainstream, which is predominantly Lockean (with a large minority of Georgists thrown in for good measure). But even the Lockean principles of Murray Rothbard and his followers are fundamentally hostile to the artificial property rights of quasi-feudal landlords like the latifundistas of Latin America. Rothbard denounced such feudal property titles in no uncertain terms.

10. The Problem of Land Theft

...suppose that centuries ago, Smith was tilling the soil and therefore legitimately owning the land; and then that Jones came along and settled down near Smith, claiming by use of coercion the title to Smith’s land, and extracting payment or “rent” from Smith for the privilege of continuing to till the soil. Suppose that now, centuries later, Smith’s descendants (or, for that matter, other unrelated families) are now tilling the soil, while Jones’s descendants, or those who purchased their claims, still continue to exact tribute from the modern tillers. Where is the true property right in such a case? It should be clear that here, just as in the case of slavery, we have a case of continuing aggression against the true owners—the true possessors—of the land, the tillers, or peasants, by the illegitimate owner, the man whose original and continuing claim to the land and its fruits has come from coercion and violence.... In this case of what we might call “feudalism” or “land monopoly,” the feudal or monopolist landlords have no legitimate claim to the property. The current “tenants,” or peasants, should be the absolute owners of their property, and, as in the case of slavery, the land titles should be transferred to the peasants, without compensation to the monopoly landlords....

11. Land Monopoly, Past and Present

Land monopoly is far more widespread in the modern world than most people—especially most Americans—believe. In the undeveloped world, especially in Asia, the Middle East, and Latin America, feudal landholding is a crucial social and economic problem—with or without quasi-serf impositions on the persons of the peasantry.... [American "free market"] preachments naturally fall on deaf ears, because “free market” for American conservatives obviously does not encompass an end to feudalism and land monopoly and the transfer of title to these lands, without compensation, to the peasantry....

American conservatives... exhort the backward countries on the virtues and the importance of private foreign investment from the advanced countries, and of allowing a favorable climate for this investment, free from governmental harassment. This is all very true, but is again often unreal to the undeveloped peoples, because the conservatives persistently fail to distinguish between legitimate, free-market foreign investment, as against investment based upon monopoly concessions and vast land grants by the undeveloped states. To the extent that foreign investments are based on land monopoly and aggression against the peasantry, to that extent do foreign capitalists take on the aspects of feudal landlords, and must be dealt with in the same way....

Another divergence of neoliberal "market reform" from the real thing is its treatment of odious debt. In country after country, even as the neoliberals lauded the global "sweep of democracy," they refused any forgiveness of debts acquired by the previous military regimes--such debts acquired, by the way, largely to create the subsidized transportation and utility infrastructure necessary to render Western capital investments profitable (when not used, that is, to fund the repressive military and police apparatus). [pp. 156-157]

The neoliberal version of "market reform," as opposed to the real thing, tends to take a jaundiced view of tort liability law and its use to hold corporate interests accountable for the harm they do. We've seen this domestically, with "tort reform" being a top item on the corporate agenda during the past two decades. In Iraq, the CPA puppet regime indemnified American crony capitalists of liability for any actions taken in that country. [p. 358] In effect, Bremer resurrected the venerable principle of extraterritoriality. Real free market libertarians, on the other hand, view a vigorous tort law regime as the free market alternative to the regulatory state. Real free market libertarians consider the evisceration of traditional common law liability in the nineteenth century, by judges in the service of commerical interests, to be a bad thing. In a genuine free market order, corporations that dumped waste or polluted groundwater would be eaten alive by lawsuits.

Finally, although Klein devotes little attention to it, a central preoccupation of the Washington Consensus, and in the model of disaster capitalism imposed in the areas under its thumb, is "intellectual property" [sic]. Although I haven't managed to track it down, I still recall a statement by Paul Bremer in 2003 announcing that the goal of the Coalition Political Authority was to create a market democracy with "strong intellectual property rights." Now so-called "intellectual property" is an abomination to free market principles.

The main function of patents, domestically, was to enable the cartelization of industry through patent control. General Electric and Westinghouse, for example, cartelized the home appliance industry by an exchange of patents. The power of AT&T was rooted in the Bell Patent Association. Internationally, patents give transnational corporations a monopoly on the newest generation of production technology, effectively enabling them to lock host countries into supplying sweatshop labor for foreign-owned industry. "Intellectual property" is especially important to the new global economy. It's hardly coincidental that the sectors of the American corporate economy that flourish in the global economy are all heavily dependent either on direct subsidies, on patents and copyrights, or both: agribusiness and biotech, software, entertainment, electronics, and arms. If patents, copyrights, and excessive trademark rights disappeared, most of the global economy would vanish right along with them. The first order of business of any genuine free market regime would be to repudiate--totally--the IP accords of the Uruguay Round of GATT. The first order of business in Washington, of course, would be to declare it a terror state.

Klein herself admits at times that the neoliberal policies she rightly condemns are not consistent with genuine free market principles. For example:

Friedman framed his movement as an attempt to free the market from the state, but the real-world track record of what happens when his purist vision is realized is rather different. In every country where Chicago School policies have been applied over the past three decades, what has emerged is a powerful ruling alliance between a few very large corporations and a class of mostly wealthy politicians--with hazy and ever-shifting lines between the two groups. In Russia, the billionaire private players in the alliance are called "the oligarchs"; in China, "the princelings"; in Chile, "the piranhas"; in the U.S., the Bush-Cheney campaign "Pioneers." Far from freeing the market from the state, these political and corporate elites have simply merged, trading favors to secure the right to appropriate precious resources previously held in the public domain--from Russia's oil fields, to China's collective lands, to the no-bid reconstruction contracts for work in Iraq.

A more accurage term for a system that erases the boundaries between Big Government and Big Business is not liberal, conservative or capitalist but corporatist. Its main characteristics are huge transfers of public wealth to private hands, often accompanied by exploding debt, an ever-widening chasm between the dazzling rich and the disposable poor and an aggressive nationalism that justifies bottomless spending on security. For those inside the bubble of extreme wealth created by such an arrangement, there can be no more profitable way to organize a society. But because of the obvious drawbacks for the vast majority of the population left outside the bubble, other features of the corporatist state tend to include aggressive surveillance (once again, with government and large corporations trading favors and contracts), mass incarceration, shrinking civil liberties and often, though not always, torture. [p. 15]

It's clear that Chile was never the laboratory of "pure" free markets that is cheerleaders claimed. Instead, it was a country where a small elite leapt from wealthy to super-rich in extremely short order--a highly profitable formula bankrolled by debt and heavily subsidized (then bailed out) with public funds. When the hype and salesmanship behind the miracle are stripped away, Chile under Pinochet and the Chicago Boys was not a capitalist state featuring a liberated market but a corporatist one. Corporatism, or "corporativism," originally referred to Mussolini's model of a police state run as an alliance of the three major power sources in society--government, businesses and trade unions--all collaborating to guarantee order in the name of nationalism. What Chile pioneered under Pinochet was an evolution of corporatism: a mutually supporting alliance between a police state and large corporations, joining forces to wage all-out war on the third power sector--the workers--thereby drastically increasing the alliance's share of the national wealth....

...[P]erhaps shock treatment was never really about jolting the economy into health. Perhaps it was meant to do exactly what it did--hoover wealth up to the top and shock much of the middle class out of existence. [p. 86]

...[China] is a mirror of the corporatist state first pioneered in Chile under Pinochet: a revolving door between corporate and political elites who combine their power to eliminate workers as an organized political force. [p. 190]

But following every such burst of clarity, she immediately resumes identifying the neoliberal agenda with the "free market." For example, the passage on p. 15 block quoted above is followed directly, in the very next paragraph, by this sentence: "From Chile to China to Iraq, torture has been a silent partner in the global free-market crusade." By my count, she misuses "free market" in this way some times.

I think I understand why she does it. That is, after all, the conventional usage of "free market" in mainstream American politics and in the mainstream press. Just this past week, I heard a pinhead on some conservative talk radio show contrast the Canadian single payer healthcare system to "our free market system" of healthcare--the latter industry being, in fact, about as heavily subsidized, protected and cartelized as the aerospace industry.

Although she seems aware that what the neoliberal politicians and journalists call the "free market" agenda is in fact a highly statist form of corporatism, she does not seem to be aware that their use of the free market label is heavily contested by a genuine, philosophically consistent strand of free market thought. Although she often judges the neoliberal version of "free markets" by their corporatist reality, she neglects even to consider the possibility of an intellectually honest free market movement that judges such corporatism illegitimate in terms of genuine free market principles.

And in taking the neoliberal use of "free market" at face value, she also seems unaware of just what an enormous ideological victory she's handing the corporate ruling class.

As Sean Gabb argued, it's about as legitimate to identify the existing neoliberal model of corporate globalization with "free markets" and "free trade" as it would be to call the Soviet oligarchy under Stalin with "workers' power." The transnational corporations and financial elites, and the neoliberal court intellectuals who service them, have appropriated the language and symbolism of the classical liberal movement to legitimize their corrupt power interests. In much the same way, Stalin appropriated the libertarian and humanist symbolism of the nineteenth socialist movement to letitimize the exploitative class system under the Party apparat.

The neoliberals have no more right to the heritage of the classical liberal movement--to the thought of Thomas Hodgskin, Benjamin Tucker, Lysander Spooner, and Franz Oppenheimer--than Stalin had to the red banner and the Internationale. The language of free market liberalism ought to burn their filthy mouths; by their very use of the term, they set themselves up as an abomination of desolation in the holy place.

Most importantly, one of the most effective weapons we have against corporate power and its intellectual mouthpieces is to demonize the neoliberals in terms of their own professed "free market values," and show them up for the corporate welfare parasites they really are.

There is, in fact, a considerable degree of mirror imaging between the mainstream right and left, when it comes to this understanding of free markets. The corporate economy and its court intellectuals have a vested interest in promoting the belief that big business got that way because of superior efficiency and other competitive virtue in the "free market." Big government liberals, on the other hand, have a parallel vested interest in pretending that the concentration of wealth and corporate power is the inevitable result of the normal market process, and the only way to stop it is to create a centralized government bureaucracy run by them.

Klein buys into the liberal side of this matrix reality when she regurgitates Art Schlesinger's goo-goo myth of the New Deal, referring to the Great Depression as a "market-created disaster" and the New Deal as "the end of laissez-faire." [p. 54]

A genuine laissez-faire economy would have produced something about as far from the state of affairs in 1929 as you could get. Absent the role of the state-promoted national railroad system in creating a centralized national market for firms operating on a national scale, absent the cartelizing effects of patents and tariffs, and absent the cartelizing effects of "Progressive" Era regulation, I would expect the American pattern of industrialization to have looked a lot more like something envisioned by Kropotkin and Lewis Mumford, and a lot less like something out of Schumpeter and Chandler.

Klein also buys into the Schlesingerite idea that American big business "grudgingly accepted" the New Deal. [p. 251] Big business didn't grudgingly accept the New Deal; it designed the New Deal. I strongly recommend G. William Domhoff's work (especially The Power Elite and the State and The Higher Circles) on the role of GE's Gerard Swope and the Business Advisory Council in formulating FDR's economic agenda. The blueprint they originally came out with, the NIRA, was a classic example of the kind of corporatist economy that Klein refers to elsewhere. It might have come from the desk of Hjalmar Schacht in Nazi Germany: it essentially organized every major industry into a state-authorized and state-protected cartel, with the avowed purpose of restricting production and keeping up prices. In other words, had it been allowed to stand it would have done, successfully, exactly what the great trusts at the turn of the century had tried and failed to do, by private means.

While acknowledging a legitimate role for markets, Klein calls for tempering "market fundamentalism" by such expedients as

requir[ing] corporations to pay decent wages, to respect the right of workers to form unions, and for governments to tax and redistribute wealth so that the sharp inequalities that mark the corporate state are reduced. [p. 20]

This implies that such "sharp inequalities" actually result from the unregulated market, and not from active state intervention on behalf of privileged capitalist elites. In fact our billionaire plutocracy and CEOs like Welch and Nardelli are not the products of a free market. They're turtles on fenceposts. In a genuine free market, organized around the principle of equal exchange and free from special privilege, the natural tendency is for prices to fall to production cost and for short-term entrepreneurial profits for innovative behavior to fall to zero as competitors enter the market and adopt new techniques. The only way to draw perpetual profits from innovation is to erect market barriers. R.A. Wilson made essentially this argument in The Illuminatus! Trilogy:

If you and I exchange equal goods, that is trade: neither of us profits and neither of us loses. But if we exchange unequal goods, one of us profits and the other loses. Mathematically. Certainly. Now, such mathematically unequal exchanges will always occur because some traders will be shrewder than others. But in total freedom— in anarchy— such unequal exchanges will be sporadic and irregular. A phenomenon of unpredictable periodicity, mathematically speaking. Now look about you, professor— raise your nose from your great books and survey the actual world as it is— and you will not observe such unpredictable functions. You will observe, instead, a mathematically smooth function, a steady profit accruing to one group and an equally steady loss accumulating for all others. Why is this, professor? Because the system is not free or random, any mathematician would tell you a priori. Well, then, where is the determining function, the factor that controls the other variables? You have named it yourself, or Mr. Adler has: the Great Tradition. Privilege, I prefer to call it. When A meets B in the marketplace, they do not bargain as equals. A bargains from a position of privilege; hence, he always profits and B always loses. There is no more Free Market here than there is on the other side of the Iron Curtain.

Interestingly, an article in New Scientist observed that wealth among the richest 3% of the population followed a power law distribution described by Pareto: in layman's terms, "to him that hath, much shall be given." The distribution of wealth for everyone else, on the other hand, corresponded to the law that describes the spread of energies of atoms in a gas.

Klein also takes at face value the corporate liberal rhetoric used to sell the IMF and World Bank in the 1940s [p. 162]--when, as pointed out by Gabriel Kolko in The Politics of War, their actual purpose was to subsidize the disposal of surplus American goods and capital in foreign markets. The World Bank and IMF were created as an adjunct of William Appleman Williams' "Open Door Imperialism," a safety valve for the chronic overproduction and overaccumulation under state capitalism.

Klein sees the spread of anti-Washington and anti-neoliberal regimes, especially in Latin America, as a sign of hope; this is the subject of her conclusion, appropriately titled "Shock Wears Off." The usual suspects at Cato, predictably, have turned Chavez and Morales as whipping boys. But the economic model pursued by the "Bolivarian revolution" is arguably no more statist than that of the Washington consensus. The land policy of Chavez and Morales, and of the Landless Workers Movement in Brazil, is far more legitimate from a free market standpoint than the Catoids' instinctive sympathy for the latifundistas. And Chavez's nationalizations and his subsidies to the cooperatives are no more statist than the policies pursued under the Washington consensus; they're just statist in a different direction. Frankly, when a former ruling class starts tasting a bit of the repressive medicine it was formerly accustomed to spooning out, it's hard for me to work up too much moral outrage.

The Catoid reaction to Chavez is fairly typical of vulgar libertarianism: corporate welfare and special protections for the rich are kinda sorta bad, in principle, maybe, I guess, and we oughta possibly, maybe, get around to writing a position paper on it someday... But welfare and protections for the poor and for aid to cooperative enterprise, now--they're flaming red ruin on wheels! A Pinochet who terrorizes unions and transfers land from the peasants to the oligarchy, well, that's too bad, I guess, but you've gotta break a few eggs, and yada yada yada.... But a Chavez who uses a bit of muscle on Western-owned corporations--why that's an outrage!

The reaction among American elite circles to the authoritarianism of Yeltsin and that of Chavez, respectively, speaks volumes. Nothing Chavez has done yet has remotely approached the openly avowed "Pinochet option" taken by Yeltsin, and his use of tanks to shut down the Russian parliament. None of Chavez's nationalizations remotely approaches the sheer scale of looting that transferred state assets directly into the bank accounts of the oligarchs.

Like Klein, I also see Chavez and allied regimes as a net positive force. Until about a decade ago, the Washington Consensus was almost universally regarded as "the only game in town." Now these new regimes, as statist in many ways as they admittedly are, are presenting a fundamental challenge to the statist global order that corporate capital depends on. The Washington Consensus is no longer the only game in town. If we're going to have one superpower, it's better that it be restrained by another one.

I've argued in the past that one of the best things we could hope for would be a concerted repudiation of neoliberalism, by a large enough number of Third World countries that they couldn't be crushed by American invasion or covert action. I can imagine a substantial agenda of "libertarian socialist" policies to be pursued by such a coalition, that would be closer to genuine free market principles than anything festering in the bowels of the Heritage Foundation. For starters, genuine land reform: nullifying the feudal titles of the landed oligarchies, granting full and permanent title to those cultivating, and restoring the land stolen in recent decades to those evicted from it (or their descendants). For another, a model of privatization that turns state services into consumer cooperatives, and state industry into worker cooperatives. For yet another, absolute and total repudiation of so-called "intellectual property" [sic] accords. Such a Third World coalition might wield, as its doomsday weapon, the threat of a coordinated repudiation of debt and/or of the dollar as reserve currency, and call on a coalition of Eurasian nuclear powers to protect them from military attack.

I am no social democrat. I'm under no illusions about the central role of big business in formulating the New Deal. I don't like statism of any kind. In my opinion, New Deal liberalism and the Reagan-Thatcher model of neoliberalism are like two farmers. The first farmer thinks he can get more work out of his livestock, in the long run, if he feeds them well and gives them comfortable shelter and sufficient rest. The second farmer thinks he can get more work out of them if he works them to death and then replaces them. There's no question that both "farmers" view us as "livestock," and that their prime concern is with their own profit. But I know which farm I'd rather live on.

Quite frankly, if my only choices are corporate liberalism and social democracy, and a banana republic on the neoliberal model, I'll take the former any day. If I get to choose between the paternalism of Brave New World and the jackboot in my face of 1984, it won't take me long to decide. I'm not ashamed to say that if my only choices are the welfare statist and neoliberal versions of statism, I'll take the kind of statism whose yoke weighs less heavily on my own back.

But my hope is that the social democratic statism of the Chavez-Morales bloc in the Third World, aligned with the European variant of mixed capitalism, will serve as an effective counterbalance against the neoliberal world order, and provide enough breathing room that both systems will be open to genuine libertarian change. My hope is that Chavez's aid to cooperatives and the solidarity economy, when all is said and done, will even out the previous statism in the other direction, and leave in place a decentralized and cooperative economy that will be able to survive on a stable basis when the oil subsidies are withdrawn and Chavez is long gone. My hope, above all, is that, as the two world power blocs fight each other to a standstill, we--the working people in both blocs--can build a genuine alternative from the ground up, in the interstices of both systems. We can build an economic order based on self-governing neighborhoods, cooperatives, LETS systems, peer production, mutual aid associations, human-scale technology, community-supported agriculture, and the informal and household economies, linking all those facets together into a coherent counter-system, that will be ready to replace the corporate economy in the one sphere and the bureaucratic state in the other when the two systems of power reach their limits. We can, in short, build the foundation of the new society within the shell of the old.

Finally: I must stipulate that I regard Klein's symbolic identification of economic shock treatment with the literal electroshocks used by CIA interrogators and Third World secret police as quite forced. Nevertheless, her chapter on the history of the American role in refining and promoting torture, from the development of the techniques in MK Ultra, through their promotion by the Green Berets and SOA in an endless series of atrocities, to the use of the very same techniques against Jose Padilla and the detainees at Gitmo and Abu Ghraib, is a brilliant work of research in its own right. For any serious student of the subject, the chapter alone is worth the price of the book.

The Conflation Conflict

Roderick Long created quite a stir with his recent article in Cato Unbound, "Corporations versus the Market; or, Whip Conflation Now."

He attracted some criticism for his list of the ways that government intervention benefits big business, specifically, against its smaller competitors and against the general public:

As I have written elsewhere:

One especially useful service that the state can render the corporate elite is cartel enforcement. Price-fixing agreements are unstable on a free market, since while all parties to the agreement have a collective interest in seeing the agreement generally hold, each has an individual interest in breaking the agreement by underselling the other parties in order to win away their customers; and even if the cartel manages to maintain discipline over its own membership, the oligopolistic prices tend to attract new competitors into the market. Hence the advantage to business of state-enforced cartelisation. Often this is done directly, but there are indirect ways too, such as imposing uniform quality standards that relieve firms from having to compete in quality. (And when the quality standards are high, lower-quality but cheaper competitors are priced out of the market.)

The ability of colossal firms to exploit economies of scale is also limited in a free market, since beyond a certain point the benefits of size (e.g., reduced transaction costs) get outweighed by diseconomies of scale (e.g., calculational chaos stemming from absence of price feedback)—unless the state enables them to socialise these costs by immunising them from competition – e.g., by imposing fees, licensure requirements, capitalisation requirements, and other regulatory burdens that disproportionately impact newer, poorer entrants as opposed to richer, more established firms.

Nor does the list end there. Tax breaks to favored corporations represent yet another non-obvious form of government intervention. There is of course nothing anti-market about tax breaks per se; quite the contrary. But when a firm is exempted from taxes to which its competitors are subject, it becomes the beneficiary of state coercion directed against others, and to that extent owes its success to government intervention rather than market forces.

Intellectual property laws also function to bolster the power of big business.

But what ignited the real controversy was his claim that the net impact of government intervention promotes larger firm size than would prevail in a free market:

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.

Part I. Roderick Long vs. Peter Klein

The first and most important negative reaction came from Peter Klein:

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....

Klein listed a number of specific objections to Long's argument, based on past arguments with both Long and me.

The problem is that [Long's and Carson's] 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.

Further, Klein challenged Long on his failure to address the large body of literature on the organizational weaknesses of worker cooperatives. He cited arguments in an earlier blog post of his at Organizations and Markets on the agency and incentive problems entailed in "Vaguely Defined Property Rights" in alternative organizational models (i.e., stakeholder ownership as an alternative to traditional residual claimancy by shareholders). In such organizations, he argues, free rider problems result from property rights not being adequately defined to ensure that actors "bear the full costs or receive the full benefits of their actions." Agency problems result, as well, from property rights being "non-tradable, insecure, or unassigned." Cooperatives and stakeholder organizations also have a problem with short time horizons among their members.

An anonymous email correspondent of Stephan Kinsella's (surely not Mary Rosh!), remarking on Klein's critique, wrote

Long is taking some haymakers right on the chin. I don't see how he makes an effective rebuttal. He should throw in the towel.

Klein's response is what I was waiting for. A truly devastating dissection of Roderick's argument, which now lies in shambles....

I give him credit for kickstarting a very welcome conversation on the corporation. Caplan is right -- this conversation has been ridiculously lively. But as the conversation continues, Long's contribution is getting more and more demolished. That's not surprising. Long's anti-corporate view relies heavily on Carson, and many of Carson's positions can't stand up to serious scholarly scrutiny. When Long presided over a symposium issue of JLS on Carson's work, it was obvious that he sympathizes with it, but he played it safe by criticizing a relatively minor mistake by Carson. Now that he has openly defended one of Carson's more central claims, he is getting the same pummelling that Carson would take if his scholarship ever received more mainstream attention.

Well, golly! As unprepared as I am to deal with criticisms by mainstream academicians and all, I'll give it my best shot.

From my perspective way out here in the outer reaches of crankdom, anyway, Klein's arguments don't seem all that "devastating." His examples of antitrust law and protectionism aren't even relevant to the point at issue. Antitrust law, in the handful of occasions where it has been used to significant effect, has affected the balance of power--not between large and small firms--but between gigantic firms and absolutely gargantuan firms (i.e., between oligopoly firms and monopoly firms). And protectionism benefits mainly national industrial giants at the expense of transnational firms (when Long's argument concerns the role of state intervention in enabling those giant national firms to come into existence in the first place).

As P.M. Lawrence pointed out in the comments to Klein's critique,

This affects the competitiveness of mega-firms with large firms. It has no bearing on the competitiveness of smaller firms with these.

Long responded, along similar lines, that trade barriers "insulate large firms from foreign competition," which means "they must be divided between the two sides."

Antitrust law, in particular, is a poor choice of example. The Clayton Act was showcased by Gabriel Kolko in The Triumph of Conservatism as an example of Progressive Era legislation passed at the behest of big business to restrain competition. Its practical effect, through restraints on "unfair competition," was to bolster attempts by trade associations to restrict price cutting. It thereby permitted, for the first time, stable oligopoly markets under the control of a handful of firms. As Butler Shaffer elaborated, in In Restraint of Trade, the "unfair practices" subsequently defined by FTC regulation included "selling of goods below cost or below published list of prices for purpose of injuring competitor...."

As for Klein's arguments on the agency problems resulting from vaguely defined property rights in cooperatives, this strikes me as almost a mirror-image description of the agency problems in the conventional, allegedly shareholder-owned corporation. As Long responded,

I found this claim puzzling, since “vaguely defined property rights” are notoriously a problem that plagues the corporate form. It is unclear who owns the corporation, given that there is no identifiable group whose relationship to the corporation involves the usual characteristics of ownership such as unlimited liability (in tort). Note that I’m not claiming that shareholders ought to have unlimited liability; at any rate, I see the point of the argument that their separation from direct day-to-day control makes their exemption from liability reasonable. (I’m undecided as to whether I agree or disagree with that argument, but at any rate I don’t automatically dismiss it.) But the case against regarding them as fully liable seems like an equally good case against regarding them as full owners; it turns them into something more like clients of the corporation, leaving it unclear where the real ownership lies. Perhaps some division of ownership between shareholders and managers can be achieved contractually in a way that mirrors current corporate structure, but even so, corporate ownership will then be neither more nor less “vague” than in non-corporate forms of enterprise.

Klein, in his rejoinder, fixated mainly on Long's reference to limited liability, arguing against holding shareholders stritly liable for the corporation's actions and debts. But this is a bit like Lincoln's Jesuit who, accused of killing ten men and a dog, triumphantly produced the dog in court. From reading the paragraph above, it should be clear that Long mentioned limited liability as one facet of a broader problem: the vagueness of ownership rights in the corporation, given the ambiguous division of control between management and shareholders. Klein failed to address the broader issue at all.

Klein's rejoinder also included a restatement of the agency problems resulting from a lack of tradable ownership claims, which mean that

owners do not share the gains from increases in the capital value of the firm, and have reduced incentives to pursue long-term objectives.

There is, in fact, a considerable body of literature on the agency problems resulting from vaguely defined property rights in the conventional corporation. The problems, briefly stated: that tradeable instruments do not constitute ownership claims in any real sense; that internal stakeholders like human capital have no property rights in the equity they create (and hence no incentive to increase productivity); and that management not only self-deals from capital it did not contribute, but also appropriates the productivity gains created by others' efforts, and therefore has the time horizons of a Turkish tax farmer. Corporate mangement--standing in as "owner" to risk capital that involves no personal loss, and assigning transfer prices to goods for which there is no outside market--resembles nothing so much as the management of state enterprises under Lange's market socialism, "playing at market" in Mises' memorable phrase.

Shareholders have few or no genuinely enforceable ownership rights now, for which reason management has "reduced incentives to pursue long-term objectives." There is also a wide body of literature on the short time horizons of corporate management: their gutting of human capital, stripping of assets, and hollowing out of long-term productive capability in order to maximize short-term paper returns and game their own bonuses and stock options. Robert Jackall (Moral Mazes) uses the terms "starving" and "milking." If anything, corporate management's tendency toward such behaviors has been grossly exacerbated by the ostensible resurgence of "shareholder capitalism" and the "entrepreneurial firm" since the 1980s.

Luigi Zingales, for example, argues ("In Search of New Foundations," The Journal of Finance, August 2000) that a major problem is that much if not most of the value of the ostensibly shareholder-owned corporation results from the human capital contributed by internal stakeholders, but that this value is not reflected in formal ownership rights. The result is that much of the value created by internal stakeholders is expropriated by management, thus undermining the incentives of human capital to invest its efforts in the organization.

The root of all these problems is the very pretense that management represents shareholders or that the latter are the owners in any real sense, which is as transparently false a legitimizing ideology as the claim of Soviet industrial management to represent the workers or the workers' state. Corporate management, in fact, is a self-perpetuating oligarchy in control of a free-floating mass of unowned capital. It uses its purported representation of shareholders as a legitimizing ideology to insulate it from accountability to internal stakeholders, and is free to expropriate the latter's efforts because of the vaguely defined property rights in the organization.

More generally, hierarchy and the separation of labor from residual claimancy are inherently prone to incentive and agency problems, because conflict of interest is the primary result of the authority relationship. Authority is a means for externalizing costs on subordinates and appropriating the fruit of their efforts. Worker cooperatives require far less front-line supervision precisely because the work force has residual claimancy and internalizes the results of its ownership. In addition, the cooperative avoids many of the Hayekian information problems involved in the centrally planned corporation because those in possession of distributed or idiosyncratic knowledge about production are in control of the work process.

I have found that the most useful contributions of radical organization theory are often derived from the insights of mainstream organization theory, logically implicit in mainstream theory but never developed to its obvious conclusion in mainstream work. Zingales' argument, for example, is based on a classic article by Sanford Grossman and Oliver Hart ("The Costs and Benefits of Ownership," Journal of Political Economy 94:4, 1986) on the way assignment of property rights in the firm affects incentives; parties without residual claimancy, they argue, will be less likely to invest in the productivity of the firm because of the lack of ownership rights in their share of the increase. It's also a commonplace of organization theory that residual claimancy should normally be vested in the owner of the hardest to monitor factor or the factor with the highest agency costs, in order to economize on monitoring costs. As I argue in Chapter Nine of my forthcoming book, labor (as a result of the problems inherent in incomplete contracting and endogenous enforcement) is almost always the factor hardest to monitor.

Residual claimancy by workers is so rare, despite being the most efficient solution to the agency problems involved in hierarchy and the separation of labor from ownership, because it conflicts with the structural presuppositions of actually existing capitalism. The conventional firm presupposes hierarchy and the divorce of labor from ownership, and then tries to find a mechanism to elicit effort from those who have no rational interest in maximizing productivity. All the management fads of the week, from the 1990s on, are reminiscent of the old anarchist joke about the cook who tries serving poison mushrooms with white sauce, poison mushrooms with brown sauce, grilled poison mushrooms, etc., and wonders why he can't find a recipe that doesn't give him the bellyache. All the management theory experiments with hierarchy-plus-this and hierarchy-plus-that are attempts to find, against all odds, an efficient way of organizing business enterprise based on inherently irrational principles.

In his response to Klein, Long also addressed the example of government aid to small businesses. The effect, he said, was not to promote small business at the expense of large, but to promote small business at the expense of smaller.

...to borrow Bastiat’s phraseology, the small firms that benefit from government assistance are those that are seen; the ones that are most harmed by government action are those that are unseen because they are prevented from coming into business in the first place. In the absence of licensure, zoning, and other regulations, how many people would start a restaurant today if all they needed was their living room and their kitchen? How many people would start a beauty salon today if all they needed was a chair and some scissors, combs, gels, and so on? How many people would start a taxi service today if all they needed was a car and a cell phone? How many people would start a day care service today if a bunch of working parents could simply get together and pool their resources to pay a few of their number to take care of the children of the rest? These are not the sorts of small businesses that receive SBIR awards; they are the sorts of small businesses that get hammered down by the full strength of the state whenever they dare to make an appearance without threading the lengthy and costly maze of the state’s permission process. The assistance that small firms receive comes largely at the expense, not of larger firms, but of still smaller firms—or of those who would start such smaller firms if they could.

As Jesse Walker has observed:

Removing occupational licensing laws alone would unleash such a flood of tiny enterprises—many of them one-man or one-woman shows, sometimes run part-time—that I doubt the elimination of antitrust law and small-business setasides would offset it. Especially when large businesses have proven so adept at using antitrust and setasides for their own purposes.

A genuine freed market, then, might well see what Sam Konkin described as the dissolution of the proletariat in the entrepeneuriat.

Klein, in his rejoinder, responds to this with his own argument from "the unseen":

But the same argument applies to large firms. We see those that benefit from government action, but we don't see those that are harmed--the small firms that would have become large, the large firms that would have become larger or more diversified or more hierarchical or whatever, were it not for the predator state. Imagine the large, highly efficient firms we might see in a truly free market!

The problem with this argument is the discrepancy between the room for growth at the low and high ends of the size spectrum, respectively. At the lower end, the ability of individuals to form small businesses with almost no capitalization outlays, relying mainly on the spare capacity of the household capital they already own (starting a neighborhood bakery with one's ordinary kitchen oven, starting a cab service with a car and cell phone, etc.), would likely result in at least an order of magnitude increase in the number of small businesses. What corresponding room for expansion is there at the high end of the spectrum? The gap between the largest firms that exist now and the largest conceivable firm isn't all that great; compared to the explosion of self-employment in the household and informal economy, and the proliferation of small ad hoc businesses outside of current local licensing and "safety" regimes, what significant difference is there between an industry controlled by three or four oligopoly firms engaged in slightly unstable administered pricing, and an industry controlled by a single monopoly firm engaged in perfect administered pricing? At the high end of the spectrum, as both Long and P.M. Lawrence pointed out, the alternative is between enormous and gargantuan. At the small end, it's a choice almost between two different worlds.

What I find especially astonishing is that Klein ignores the high-end limits to growth implied by his own article, the classic "Economic Calculation and the Limits of Organization." By the line of argument set out in that article, the predominant oligopoly firms in the existing manufacturing sector are already demonstrably above Rothbard's threshold of calculational chaos. Rothbard argued, specifically, that rational calculation becomes impossible whenever no external market exists for an intermediate good. Since, in fact, the majority of intermediate goods used by the typical manufacturing corporation are firm-specific, their transfer prices must be assigned internally rather than based on outside markets.

Part II. Roderick Long vs. J.H. Huebert and Walter Block

Will Wilkinson objected to Long's emphasis on transportation subsidies as a centralizing force (favoring Wal-Mart's "warehouses on wheels" business model, in particular).

...when the primary subsidy is the national and local automobile-centric transportation infrastucture, I can’t really see the point in picking on a company that makes consumers better off by making the most of the tax-funded infrastructure everyone uses.

J.H. Huebert and Walter Block make a similar argument.

it's not clear why government roads give Wal-Mart an advantage over local businesses. Perhaps Long is arguing that Wal-Mart wouldn't be able to deliver goods to its stores but for the roads, and then local businesses (selling locally produced goods?) would remain in business....

We hate to commit the tu quoque fallacy, but do not Roderick Long and his leftist confreres also use these vehicular thoroughfares? If so, this charge of his against Wal-Mart comes with particular ill grace from that source. And while there might be a hermit or a Rip Van Winkle who does not utilize statist streets and roadways, virtually everyone is "guilty" of this behavior – and the market for everyone’s products (even philosophy lectures) is distorted by the roads’ presence.

This argument, that everyone benefits from infrastructure, is a common one. But as Long pointed out,

the fact that everyone uses the tax-funded highway system doesn’t mean that everyone benefits from it equally; firms with wider distribution, and so higher shipping costs, benefit more from public highways than their competitors, and to this extent public funding of highways constitutes a net redistribution from local firms to nationwide firms.

It should be self-evident that when the state subsidizes particular inputs, it amounts to a shift in competitive advantage toward firms whose business model relies most heavily on those inputs, and away from those whose business model does not.

Huebert and Block continue on the same issue, recycling the familiar argument that the free market might make long distance transportation cheaper:

But there is no reason to think that Wal-Mart – or some other big business – wouldn't find other ways of delivering goods over long distances in a free market. Indeed, but for government intervention in the market for roads and transportation generally, it is entirely possible that there would be better, cheaper means for Wal-Mart to get goods to its stores.

The free market might very well provide cheaper roads, in the sense of their total net cost. But the problem is not so much their net cost from the standpoint of society as a whole, as the portion of net cost that is borne by those who impose that cost. As Long argues:

Huebert and Block speculate that, but for state intervention, Wal-Mart might have at its disposal some even cheaper means of distribution. No doubt it would. But surely what’s at issue is not Wal-Mart’s absolute cost level, but whether, thanks to government intervention, its costs are artificially lower than those faced by its competitors.

As for the rest of the Huebert-Block critique, it doesn't just tend toward incoherence. It's already there. In making their criticisms they display the most superficial awareness, not only of the actual content of the articles by Long and by Charles Johnson that they're criticizing, not only of the Rothbardian tradition which they ostensibly espouse, but of what they've written elsewhere in the same article.

For example, their objection to Long's use of the term "corporate power":

Long writes that "Corporate power depends crucially on government intervention in the marketplace."

But what does he mean by "corporate power"? A corporation is merely a group of individuals who have entered into a particular type of business relationship. The corporate form allows them to be known collectively by their business's name instead of their own names. And it allows them to enter into contracts under which they limit their own liability – something which is perfectly legitimate under libertarianism. (Objectivist historian Robert Hessen has made this point well in his book, In Defense of the Corporation....)

The corporation, therefore, has no power to speak of.

Instead, only the state has power.

But as Long points out, Huebert and Block go on to write, scarcely twelve lines later:

There is a kernel of truth in Long’s viewpoint – some larger firms do use the apparatus of the state to steal an advantage over smaller competitors. As a matter of history, things work out this way more often than in the opposite direction.

After essentially restating Long's argument, Huebert and Block compensate by putting a different argument in Long's mouth:

But Long appears to assume that big firms should always gain at the expense of their smaller rivals.

Huh? As Long explicitly stated (in a comment under Klein's initial critique):

We both agree that there are governmental benefits and governmental burdens flying in all directions; the question is whether there's any perceptible systematicity as to the direction of benefits and burdens.

His argument, from the beginning, has been not that government benefits big business alone, but that "the primary and disproportionate beneficiaries of government privilege tend to be corporations, particularly large corporations."

And Long provides a number of citations to no less an authority than the Big Dawg himself, one Murray Newton Rothbard, on the existence of corporate power.

Incidentally, in speaking of corporate power I am simply following the example of Murray Rothbard—a theorist of whom Huebert and Block, Rothbardians both, ordinarily think quite favorably. Rothbard had no problem referring to the “corporate power elite” (here), or describing political favoritism as a case where “government confers this power on a particular business” (here), or labeling our current political system a “corporate state” (here). Moreover, Rothbard defined the “ruling elite” (here) as consisting not only of the “kings, politicians, and bureaucrats who man and operate the State,” but also those “groups who have maneuvered to gain privileges, subsidies, and benefices from the State.” Of course Huebert’s and Block’s status as Rothbardians does not mean that they must agree with Rothbard about everything; and perhaps this is an area where they think Rothbard went astray. But in that case, if, as they say, my “importance as a libertarian philosopher” makes my comments “all the more alarming,” Huebert and Block must presumably be still more alarmed at the potentially malign influence of such similar comments coming from Rothbard, a far more prominent and influential libertarian thinker than myself. Or if they aren’t, why aren’t they?

Consider also this Rothbard quote, courtesy of Peter Klein:

...in the contemporary world of total neo-mercantilism and what is essentially a neo-fascist “corporate state,” bigness is a priori highly suspect, because Big Business most likely got that way through an intricate and decisive network of subsidies, privileges, and direct and indirect grants of monopoly protection.

In addition, this argument from Huebert and Block has a couple of other weaknesses.

First, Hessen argued, not that the corporation is currently a contractual means by which investors agree to limit liability, but that that benefit could be achieved by free contract absent the current statutory regime of general incorporation. And in any case, the argument misses the point: that by making the process automatic and providing a ready-made procedure for it, rather than requiring investors to negotiate it with other parties from scratch, the state privileges the corporate form against other alternatives and weakens the bargaining power of those who would prefer not to deal with it. I mean, doesn't NLRB certification just recognize an entity that could be formed entirely by contract?

And second, their emphasis on the corporation-state dichotomy ignores the issue of the corporation's role as a component of the state, or of the coalition of ruling class forces in control of the state. Murray Rothbard himself was quite friendly toward the Power Elite analysis of C. Wright Mills and G. William Domhoff, which stressed the rotating pool of personnel between the top political appointees of the state and the senior management and boards of directors of the corporation. Or as Brad Spangler put it, the guy holding the bag is as much a robber as the guy holding the gun.

Huebert and Block also make the rather astonishing argument that the very existence of any small business at all alongside big business proves something (I'm not sure what, exactly) about the relative privileging of big against small:

From the fact, however, that tiny grocery stores exist cheek by jowl with large corporations in this industry, we can deduce that there cannot be advantages for the latter that are so strong as to drive into bankruptcy the former, even in our mixed economy. Similarly, there are small restaurants that continue to serve the public, in the face of gigantic chains and franchises such as McDonalds, Wendy’s, Burger King, etc. Long gives us no compelling reasons why McDonald’s would go away but local hamburger stands would thrive if the state were to disappear.

If this argument means anything--and to be charitable I suppose we must assume it does--it means that the state's privilege to bigness isn't sufficient to drive small business off the field altogether. I'm not aware of anyone who would argue differently, because obviously it would be an extremely difficult argument to sustain on empirical grounds. The disagreement, rather, concerns the extent to which McDonald's could survive alongside small local restaurants in a freed market.

In his response, Long not only cited McDonald's reliance on subsidized transportation for its business model and its benefiting from the USDA Market Promotion Program (a benefit unavailable to mom and pop burger joints). He also reiterates his argument from "the unseen," used against Klein above:

Moreover, it costs $250,000 to start a McDonalds franchise; would such franchises really be competitive with small local firms if the cost of starting the latter were not set artificially high by licensure, zoning, quality standardization, and other regulatory requirement?

Huebert and Block also object to Long's treatment of differential tax breaks as benefiting some businesses against others, drawing on the old Austrian argument that tax loopholes are entirely different from subsidies.

They are, indeed, entirely different--at least technically. But as I have argued elsewhere, they have the same practical effect as subsidies. The effect of offering tax loopholes to those firms engaged in favored business models (e.g. accelerated depreciation, the R&D credit, the deduction of interest on debt, exemption of stock transactions involved in mergers from capital gains) has exactly the same effect, mathematically, as would obtain from starting with a tax rate of zero and then imposing punitive taxes on the competitors of those following such business models.

Long himself has been careful to avoid any generalizations about culpability for such tax benefits. Nevertheless, he argues, they clearly benefit some businesses at the expense of others, and make some business models artificially competitive.

But of course I never said it was wrong to accept selective tax breaks. If a neighborhood thug breaks everyone’s leg but mine, because he likes me, I’m not obligated to demand that he break mine too. My point was just that if I then win all the footraces against my neighbors, I probably owe my success to the thug’s intervention – perhaps innocently so, assuming I did nothing to encourage the thug’s policy, but innocent or not, I still can’t say it was simply through my own talents and effort that I succeeded.

Along the same lines, Huebert and Block write,

Apparently Long is blaming Wal-Mart for profiting from selling goods that were transported over government roads that already existed and were not built for Wal-Mart's benefit. It is not at all clear what Wal-Mart could do to avoid criticism for this. What method of transporting goods isn't subsidized?

But to repeat, the point is not that Wal-Mart is culpable for benefiting from such subsidies--merely that they do benefit, and that their business model requires such subsidies. Once again, quoting Long:

But whether or not Wal-Mart is to blame for highway subsidies, the fact remains that it does benefit from them more than its local competitors do, and to this extent its success is not a product of the market and so is not a reliable predictor of what we might expect to see if the market were freed.

Perhaps the most egregious misreading Huebert and Block make is of Charles Johnson's blog post on labor unions, and Long's use of it in his own article.

Long also laments that our hampered free market doesn't give unions enough power. He writes: "Legal restrictions on labor organizing also make it harder for such workers to organize collectively on their own behalf."

Given that the law allows some workers to not only organize themselves but also coercively organize others, it's not clear what Long is talking about. To support his claim, he cites a blog post which laments that U.S. labor laws do not go far enough. We should support current labor laws, says Long's source, but ideally we will return to the days of more "militant" unions.

You remember "militant" unions – the kind that used to (and, well, still do) beat and kill workers who do not cooperate with them. Long and his "comrade," of course, make no mention of the unions' bloody history.

It's hard to find a charitable explanation, short of dyslexia, for H & B's mischaracterization of Johnson's argument as a lament that "U.S. labor laws do not go far enough." As Long points out,

...Huebert and Block duly clicked on the link; but evidently they read Johnson’s piece with even more haste than they read mine, for they produce a truly bizarre summary of it: according to Huebert and Block, Johnson “laments that U.S. labor laws do not go far enough. We should support current labor laws . . . but ideally we will return to the days of more ‘militant’ unions.” In fact Johnson’s article calls for the repeal of all labor legislation ad its replacement by an unregulated labor market....

As for the rest of it, since Johnson's entire post was an extended analysis of the specific ways in which the law restricts the freedom to organize collectively, Long's rejoinder recapitulated the argument (no doubt thanklessly) for H & B's benefit, and Johnson followed it up with a rejoinder of his own, I refer you to them. Suffice it to say here that essentially every characterization made by H & B is nearly a 180 degree reversal of Long's and Johnson's actual argument.

H & B continue, on the same subject:

Unions are like a tapeworm on the economy, sucking sustenance out of businesses. The entire rust belt is a result of unions demanding wages higher than worker productivity. The present problems of the Detroit Three (Ford, Chrysler, General Motors) are mainly dues to their foolishness in not withstanding the unwarranted demands of the United Auto Workers.

Replace "unions" and "wages" with "CEOs" and "salaries," and you get a pretty accurate assessment of the situation. The present problems of the Detroit Three, in fact, are mainly due to the mismanagement and pathological management accounting system described by William Waddell and Norman Bodek: valuing inventory as an asset, absorbing overhead by "selling it to inventory" instead of addressing it directly, and treating management as a fixed cost, while treating human capital as a variable cost.

One of the coauthors expressing this outrage over union greed, by the way, is also a well-known defender of price-gougers as heroes of the free market. But as I've said elsewhere, any time you see libertarians attacking a specific example of behavior they normally defend in principle, you can guess the principle in this specific case is being used to the benefit of workers. As Brad Spangler once challenged the author of an anti-union diatribe at Mises.Org,

Are you implying that sellers ought only passively accept or decline deals and never assertively negotiate with a potential buyer, merely so long as more than one potential buyer exists?...

1) If so, do you apply that dictum universally, or just in the case of labor deals?

2) If so, AND if you limit that view solely to the labor market, then I must ask what (in economic terms) is so special about labor?

If so, AND if you apply it universally, then I must say you're really doing yourself a disservice when it comes to selling a home or car....

That statement [that there is no way to sell anything for a higher price than the highest bidder is willing to pay] sort of misses the point -- namely, that rhetorical efforts to systematically discourage assertive negotiation by one subset of transaction participants (under color of economic thought) are a misguided effort to cripple the market's own discovery process for determining what "the highest bidder is willing to pay."

Part III. Roderick Long vs. Stephan Kinsella

Some of Long's critics focused, not so much on the argument itself, as what it "sounds like." Stephan Kinsella, in comment under Klein's first post at Mises Blog, objected to Long's reference to

the surreal insanity that actually characterises the daily work experience in large businesses--"Dilbert" is popular because it's so depressingly accurate. It's a lot to swallow to suppose that that situation owes little or nothing to governmental distortions.

His response:

The Dilbertish portrayal of the "daily work experience" as depressing has a Marxian whiff about it, doesn't it? And it lacks a sense of perspective--cubicle life seems far preferable to working in the coal mines, which itself must have seemed preferable to a pre-industrial hand-to-mouth subsistence existence.

In a subsequent comment, he wrote:

And it is indeed true that criticisms of corporate power are usually anti-market ideology, and should be dismissed as such. Critics of corporations are in the grip of anti-market ideology, as Roderick notes. When left-wingers complain about corporate libertarians, they are confused. They are not responding sincerely or honestly to a genine tendency.

This is not the first occasion on which Kinsella has dismissed arguments on such "sounds like" grounds. For example, in an argument over whether the state, by reducing the transaction costs of establishing the corporate form, shifted bargaining power toward those who prefer the corporate form, responded:

The notion of "bargaining power" is leftist to the core.

In that case, Murray Rothbard must have been "leftist to the core," since he repeatedly remarked on the effect of state policies in making some factors artificially scarce in relation to others, and thus artificially inflating their returns.

Such an approach is ironic, given Kinsella's vulnerability to a similar line of attack. For example, criticisms of "intellectual property"--one of his own pet issues-- are also usually associated with "anti-market ideology." In fact, I personally encountered a Randroid who refused to hear any arguments against IP law as a monopoly because it "reminded him of" what he constantly heard from the "commies." This is the same line of "reasoning" used by neocons' who dismiss Justin Raimondo as a "librull" because anti-war arguments these days are conventionally associated with the Left.

Part IV. Roderick Long vs. Bryan Caplan

Bryan Caplan raises a series of objections to Long's assessment of the prevailing effect of government intervention. First, immigration:

...I'm afraid Rod overlooks much more important beneficiaries of government privilege than corporations: Lower-skilled workers in the First World. Lower-skilled workers in places like the U.S. earn several times as much as equally-qualified people in the Third World. The reason is clearly immigration restrictions--with modern transportation and credit markets, there's no way that price differentials of that size could long persist....

My point is that compared to immigration restrictions, government privileges to corporations are barely worth mentioning - and yes, that includes the unprecedented bailouts of 2008.*

[* Consider: If the only effect of immigration restrictions were to double the earnings of 70,000,000 Americans from $10,000 per year to $20,000 per year, the annual effect of immigration restrictions would equal the cost of the notorious $700 billion bailout!]

The most glaring problem with Caplan's argument is the fundamental self-contradiction involved in his statement of it. At one point, he reassures us, "I'm the first person to point out that immigration hurts lower-skilled Americans less than most people think." Now surely, if unrestricted immigration could in fact result in the wages of 70 million people being halved, that's probably not less of a hurt to lower-skilled Americans than "most people think." But the contradiction deepens. As evidence of his reassurance on the relative harmlessness of immigration, he links to an earlier post of his in which he cited George Borjas' estimate that immigration has reduced the wages high school dropouts by 8%. Caplan, in that post, argues that the long-term effect of immigration on dropout's wages is only half that, and the effect on all wages is zero:

Immigration has enabled millions to live vastly better lives with no long-run effect on average wages.

So which is it? Will immigration hurt lower-skilled Americans more or less than most people think? Will it cut the wages of seventy million people in half, by 8%, by 4%, or by zero?

On a less fundamental level, there are problems with the way Caplan frames the issue. First, he neglects the extent to which state policy has shaped the overall economic structure within which labor is hired in the first place. The state's policies of subsidizing technical education, R&D, capital accumulation and firm size have promoted a business model based on capital substitution and deskilling, and led to a two-tier labor force. In an American economy based on the integration of small-scale electrical machinery into local craft production (in other words, an economy on the model of Emilia-Romagna rather than Sloan and Chandler), there probably wouldn't be nearly as many unsilled workers in the first place.

Second, he neglects the extent to which the existence of large, low-wage labor forces in the Third World, seeking employment in the West, is the product of neoliberalism--an economic model in whose development the state has played a central role. If a few hundred million less peasants had been evicted from their land over the past several decades, in a modern-day reenactment of the Enclosures, the pool of people willing to accept wage labor on whatever terms offer would likely be diminished. If neoliberal and Washington Consensus policies had not promoted a model of economic "development" based on extractive industries, cash crop farming, and the supply of sweatshop labor to foreign capital, rather than small-scale industrialization for local markets, likewise, the available supply of immigrant labor would probably be diminished.

In short, Caplan accepts as "normal" the current structure of the state capitalist economy, the current balance between skilled an unskilled labor in the American economy, and the current wage levels and desire for foreign work in the Third World at face value. Then he examines how a change in a single factor, holding all the other factors in the mercantilist-corporate economy constant, would affect labor. This is what C. Wright Mills called "crackpot realism." A good example of crackpot realism is Ralph Kramden, speculating on the outcome of one of his get-rich-quick schemes: "Norton, when I'm a rich man, I'll have a phone put in here on the fire escape, so I can make my big business deals when I have to sleep out here in the summer."

Caplan's argument also begs the question of just how effective current immigration restrictions actually are. Arguably, the neither-fish-nor-fowl regime currently in place has little effect in terms of constraining employers' access to illegal immigrant labor, if they actually want it badly enough. As often as not, the state looks aside with a wink and a nudge as employers hire illegal aliens. The main effect of their formal illegal status is to increase their dependence on keeping the employer's favor for their continued stay here, and thus reduces their bargaining power. For this reason, employers relying heavily on an illegal workforce are most prone to modern-day slavery and other abhorrent practices. And arguably, the present regime is the worst of all possible worlds from the standpoint of the bargaining power of native labor. If borders were genuinely and completely closed, of course, the bargaining position of native workers would be improved. But if immigration were completely unrestricted, it's plausible that absolute levels of immigration would increase modestly at most, while immigrant workers would be much more likely to organize openly against their employers and protest unacceptable working conditions. At present, employers have access to about as much illegal help as they want, despite the laws on paper, but can use the technical "illegal" status to reinforce workers' reliance on the as patron and prevent them standing up for their rights.

Caplan's second objection is that government aid cannot ultimately benefit corporations. Against Long's argument, which he restates as "government support for corporations allows them to survive despite blatant inefficiency," Caplan writes:

But does this really make sense? Suppose, for example, that the government made corporations tax-exempt. Would this actually benefit corporations? In the short-run, yes. But these short-run profits would encourage the formation of more corporations - and the dissolution of non-corporations. This process would continue until corporations earned only a normal rate of return. Even with favorable tax treatment, corporations based on "insane directives" would still go bankrupt.

This doesn't mean that differential tax treatment is harmless. When you encourage less efficient forms of business, you reduce production, and the world gets poorer. But the primary victims of these inefficiencies aren't small businesses; they're consumers - the ultimate inelastic resource.

Huh? Caplan seems to be taking the factor of differential tax benefits to corporations in isolation, holding constant all other factors like ease of market entry and restraints on competition within an industry, and then arguing that aid to corporations would cause them to outbreed their habitat like deer and suffer a large-scale die-off. But the argument is not simply that government policy favors the existence of something that's called a "corporation." It's that the government skews the market toward fewer, larger firms and toward a stable oligopoly structure that shuts smaller, more efficient competitors out. The whole point, from the standpoint of big business, is for the handful of incumbent firms to control output and prices and restrict market entry in order to prevent competition from lowering the rate of profit.

Third, Caplan argues that double taxation of corporate income, under the corporate income tax, discourages corporations "when they are more efficient than other forms of organization." The corporate income tax, Caplan writes,

matters less than it used to, but the U.S. federal government still gets 15% of its revenue from it. That's about $375 B. Except for the year of the bail-out, it would be very hard for all corporate welfare combined to approach this figure.

Of course, if I'm right about tax incidence, the main effect of the double taxation of corporate income isn't that corporations suffer. The main effect, rather, is that we discourage corporations when they are more efficient than other forms of organization.

Now, this may occur at the small end of the scale, when a sole proprietor considers incorporating to shield his income from liability; if his income is taxed twice, he may decide the benefits of the corporate form are not worth it.

But again, the debate does not concern the magical virtues of everything with an "LLC" after its name. The corporate form is important primarily to the extent that it affects the main dynamic under question: the balance of power between large and small firms. For the question actually being debated--the contribution of government policy to the predominance of big business--Caplan's is a singularly unfortunate choice of examples.

The real "main effect" of the corporate income tax is to encourage retention of earnings rather than the payout of dividends that might be reinvested by shareholders in other portfolio items (e.g., smaller, more efficient startup firms). The overwhelming majority of new capital investment in the large corporation is financed by retained earnings. And as Martin Hellwig argues, in most cases this does not mean that large corporations must carefully prioritize in order to ration new capital investment within the strictures of retained earnings. It means that the capital available from retained earnings exceeds the opportunities for sensible investment. The effect is that the big keep getting bigger, and experience a glut of capital; capital tends to pool inside the large organizations, while small startup firms are stunted from lack of circulation.

This effect is reinforced, by the way, by SEC security registration regulations which restrict the investment opportunities available to ordinary small investors largely to large, established national firms. Only "accredited" investors, who tend to fall in the top two percent of income, can buy stock in small, local firms.

All this is in addition to other effects of the corporate income tax. For example, Caplan mistakenly compares the total incidence of corporate income tax liabilities with "corporate welfare," as if the relevant comparison were between the liabilities and benefits to "corporations" as a whole. But the debate concerns the relative competitive advantage conferred on big business as against small. And the relevant information for such an assessment is not the total scale of "corporate welfare," in the sense of direct government expenditures. It is the differential application of the corporate income tax between large and small corporations. The corporate income tax is an ideal cartelizing device, heightening the difference in privilege between favored and nonfavored firms. And the firms favored by differential tax exemptions are, overwhelmingly, those described by Thomas Ferguson as the centerpiece of FDR's big business coalition (large, export-oriented, capital-intensive, and high tech). They are, essentially, the commanding heights of the corporate economy: primarily Galbraith's "technostructure" and the large group of firms that received the majority of their R&D funding from the state during WWII and the decades immediately following. When the cumulative effect of the R&D credit, the exemption of interest, and the depreciation allowance are taken into account, firms that hit the trifecta (capital- and tech-intensive firms that engage most heavily in mergers in acquisitions) often pay little or no corporate income tax.

The difference in privilege is heightened by the fact that what income tax does fall on the largest, most favored corporations can be passed on through administered pricing, whereas the share that falls on smaller firms in the competitive sector cannot.

Suffice it to say that any enemy of big business should have, among his top priorities, the abolition of the corporate income tax--or at the very least, closing all tax loopholes and then lowering the tax rate to revenue-neutral levels.