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Mutualist Blog: Free Market Anti-Capitalism

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

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Location: Northwest Arkansas, United States

Monday, December 29, 2008

Organization Theory Book Now for Sale at Amazon

Organization Theory: A Libertarian Perspective

It's been almost four years work. I hope you like it. Thanks to Gary Chartier for the excellent job preparing the pdf for the publisher and designing the cover.

Sunday, December 21, 2008

How to Kick Your Friends in the Teeth

My first commentary piece for C4SS.

Thursday, December 18, 2008

Little Help Here?

I heard Caroline Kennedy on TV today saying her family had "spent generations" in something called "public service."

Now, ordinarily when I think of service, I think of somebody who does something I'm willing to pay for voluntarily, and does so better than his competitors. Nothing done by anybody in that family comes to mind as a public service--except for maybe Joe Kennedy, who provided bootleg whiskey to people who wanted it despite the interference of a bunch of federal goons. Other than that, I got nothin'.

Anybody got any idea what the lady was talking about?

Saturday, December 13, 2008

Conflation Conflict, Continued (Unfortunately)

I thought I'd let the "conflation conflict" go, barring any significant new arguments, because in my opinion it can't go much further without simply rehashing the arguments that have already been made (case in point). But material like the following must not be left unanswered.

In the comments to my original "Conflation" post, Stephan Kinsella challenged P.M. Lawrence:
BTW I assume you would be for removing all corporate income tax, since it is based on the entity fiction? This is yet another way the state *harms* corporations.

Lawrence responded that the argument was
disingenuous; by itself, it would make things worse - by itself. Over and over, we have pointed out that selectively removing some burdens while leaving others can make things worse, even if all burdens should be removed. It's like scraping barnacles off one side of a ship; not only would the ship not speed up much, the side that still had barnacles would start going back, and because the ship would go in circles it would make less headway overall.

This is true of a wide range of distorted situations; if you have 10 uncorrelated distortions, the distance from optimality will be proportional to the 10, but if you remove 5 of them that are all correlated one way, the remaining 5 will all be correlated the other way and the distance from optimality will be proportional to 5 squared, i.e. 25. The actual suboptimality will be proportional to the square root of that, but of course gains and losses to individuals within that aggregate will be proportional to the distance from optimality - there will be serious gainers and losers, from a smaller aggregate loss.

What is more, Kevin Carson has already pointed out that corporate income tax tends to make resources stay inside corporations rather than trickling down to natural persons. This strengthens those artificial entities over natural persons.

In a subsequent comment he added, by way of clarification:
I can see Kevin Carson's point about getting rid of it, but with Australia's franked dividend approach I think it would be a low priority to get rid of it here. That is, I think it should be eliminated at about the same time as personal income tax, which I feel should be phased out by turning it into a SAYE scheme from which people could draw down amounts above a cap. That cap would fall to zero at an ever reducing cut off age matched to an ever increasing age benefit entitlement age (here, those are paid from consolidated revenue). The best way of transitioning from corporate tax probably involves compounding it for issues of shares to an endowment fund, which should be decentralised from the state to charitable services as rapidly as possible. At or after that time, corporations themselves should be restructured as partnerships, with bearer shares to convert former shareholders into de facto limited liability sleeping or silent partners (unless and until they came out to vote or something), and with the managers the active unlimited liability partners (with a debt to pay off to buy themselves in, and novated on retirement to cut their liability after that). Then let firms shake out as events dictate.

Finally, Kinsella commented:
Glad to know you are for the state imposing the corporate income tax and for the double-taxation of shareholders it implies. IF you hate shareholders, might as well want them punished, eh?

From all this, Kinsella distilled a post at Lew Rockwell Blog in which he 1) ignored Lawrence's direct contradiction of Kinsella's claim that identified the left-libertarian position as pro-corporate income tax; 2) selectively edited the material to conceal the fact that Lawrence in fact aims at an end-state without the corporate income tax, but wants to phase in the abolition and coordinate it with other tax reductions to minimize destabilizing effects; 3) edited out Lawrence's acknowledgement that I favored abolition and that Lawrence's position differed from mine.

On top of all this, he published the material under the highly misleading title "Left-Libertarians: Pro-Corporate Tax"--suggesting that PML was inconsistent or hypocritical, or was inadvertently giving away the real, esoteric Left-Libertarian doctrine that we hide from the Gentiles.

P.M. Lawrence is a polymath with a wide-ranging body of knowledge on history and economics, and in particular an MBA with some direct knowledge of the inside world of corporate management. His critical intelligence and erudition have always been enthusiastically welcomed here. PML has never made any pretense of being a left-libertarian, left-Rothbardian, or mutualist, or anything else but an interested reader who likes to point out error (wherever he finds it) and offer helpful information.

He is not guilty of any hypocrisy whatsoever, orof any inconsistency with his stated principles. And to suggest that his remarks reflect a pro-corporate tax position on the libertarian left, or amount to some sort of defining doctrinal statement on behalf of left-libertarianism, is utterly misleading and disingenuous.

Such a "gotcha" approach--and in a venue which does not allow reader comments, no less--suggests that Kinsella has exhausted his supply of legitimate arguments.

Update. Although no doubt we fail to see eye to eye on what exactly I found objectionable in his previous post, Stephan Kinsella has obligingly informed his readers of those objections.

Thursday, December 11, 2008

The Conflation Conflict, Continued

Part V: Stephan Kinsella vs. Kevin Carson

A. Kinsella's response to my comments directed at him

From being an observer on the sidelines of the debate, I have become a participant. In the comments to my last post, Stephan Kinsella made a serious, point-by-point critique of many of my arguments (he followed it up with a blog post at Mises.Org). In the process, several other readers jumped in with relevant arguments of their own. The only way to do them all justice is in a proper blog post.

Kinsella first addressed my arguments directed at him personally, commenting: "Kevin, I'm not quite sure what you disagree with in my comments." He began by quoting his earlier statement, with which I had taken issue.

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 genuine tendency.

He then added, by way of emphasis:

When most leftists--certainly most non-libertarian leftists--attack the corporation, they do so on anti-market grounds (at least in substantial part).

Next, he cited another of my criticisms:

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, [Kinsella] 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.

Kinsella replied:

I was not referring to the real tendency of the state favoring one person over another thru its policies, but of the oft-cited concept "bargaining power" which permeates leftist reasoning used to invalidate contracts and undermine property rights. It is the equation of economic influence with physical force that is used to justify laws against actions that are not initiations of violence. We libertarians are opposed to the initiation of violence, not to the initiation of "economic force," whatever that is.

Scumble commented on the exchange:

The way it sounded to me was that accusations of "leftism" were being used to discredit an argument. You may be right that "leftists" use a term in a certain way, but that doesn't mean the terms cannot be used in another way....

I don't think anyone participating in the discussion uses the idea of "economic power" in the same way as a liberal might. There is a more subtle point about how certain people or organisations have disproportionate influence on the state, and that is where money becomes powerful. The combination of money and violence is what distorts everything.

I think we all know that anti-market arguments are confused, but the disagreements emerge around what does and does not represent "market phenomena". In a sense conservative libertarians are allowing the left to frame the debate by reacting negatively to issues that have been somehow apportioned as necessarily statist, when this is not the case at all.

To which Kinsella came back with:

I agree. I basically mean "socialist" by this, in a sense antithetical to libertarian principles. I realize Carson and Long et al. are not socialists. I do believe the leftist hostility to commerce, individualism, free markets, etc. and ignorance of economics and individualist political principles makes their arguments against "capitalism" flawed. The left-libertarians and other libertarians who rightly criticize modern statist corporatism need to be wary of this....

I don't regard myself as a "conservative" libertarian at all--but as a libertarian. But sure, we should not let the left frame the debate.

Brad Spangler wrote:

Before getting pedantic about the NAP, consider that we're discussing how the economic influence of particular market actors is derived from physical force in the first place.

Kinsella followed up his critique of bargaining power with the reiteration that corporate influence over the state "is not what the term 'bargaining power' refers to, AFAIK," and that

the idea of "bargaining power" is economically illiterate and is used to justify statist laws that prohibit or regulate peaceful action between consenting adults. The Marxiod notions of alienation of and exploitation of labor are also flawed and lead to flawed reasoning and conclusions.

And Araglin responded:

Where Kinsella goes wrong, IMO, is in saying that "bargaining power" is an analytically useless category. If a law protects one set of employers from competition from other employers (including potential new entrants), then the favored incumbents can use that legal privilege in order to negotiate with their employees for lower wages (than they would otherwise have been able to get away with), and their customers for higher prices (than they would otherwise have been able to get away with). This, in my book is an instance of artificially generated "bargaining power."

To explicate this concept in terms of standard Austrian price theory, see Menger or Bohm-bawerk's canonical expositions of the difference in price that tends to emerge when only one buyer (or seller) faces a number of sellers (or buyers), as compared to when several buyers (or sellers) face a number of sellers (or buyers). Not every exercise of this sort of "bargaining power" constitutes a rights-violation vis-a-vis the counter-party to the resultant contract (e.g., when an innocent incumbent employer benefits from the imposition of a regulation); hence, only non-coercive responses to such exercises of "bargaining power" could be squared with libertarian principles.

Exactly. Kinsella is correct that much of the Leftist criticism of corporate power, and its references to bargaining power, are motivated by anti-capitalist sentiment. He is correct that the reasoning of such critics is often "flawed." But to us an expression he is fond of, so what?

No matter how flawed or sloppy their reasoning, they object to phenomena that exist in the real world. Their sloppy reasoning about the causes of those phenomena, their failure to grasp the distinction between political coercion and "market power," and their failure to discern the former behind the latter, are all real failings. But they are failings that result from the same cause as the tendency of the libertarian Right to minimize corporate power, and to reflexively circle the wagons against Leftist critiques. Both result from the historic split between libertarianism and the Left in the late 19th century, and the subsequent rightward gravitation of much of the mainstream libertarian movement.

This later comment by Kinsella, from the same comment thread, is also relevant:

we libertarians are opposed to Marxism, you know--and it's not so out of bounds for me to detect it in the face of talk of alienation of workers; criminal capitalism; "expropriation" of workers; and so on.

Much of Kinsella's reaction here reflects, in my opinion, the cultural atmosphere specific to libertarianism from the 20th century on, rather than the principles of libertarianism as such. And much of what he finds so objectionable and suggestive of "Marxism" is by no means a trademark of the statist Left. Early classical liberalism shares many of its historical roots in common with the early socialist movement. Not only did it have a significantly more left-wing flavor, compared to the libertarianism of the twentieth century, but many of its left-wing strands overlapped with market-oriented strands of libertarian socialism. Some of the most titanic figures of nineteenth century free market libertarianism occupied this zone: Thomas Hodgskin, Herbert Spencer, the American Individualists, and Henry George, for example. And the rhetoric coming out of the early, radical classical liberal movement, including lots and lots of stuff about class exploitation, would no doubt give Kinsella hives. Some of the Boston anarchists (the circle that included Tucker and the Liberty group) participated in the Second International and celebrated May Day, for crying out loud.

To the individualists and other left-wing free marketers, the socialist and worker's movements were not an abomination against which they defined themselves. They were a larger current to which both they and the state socialists belonged. And they regarded the state socialists, for the most part, as erring bretheren who rightly objected to class exploitation and other pathologies of existing capitalism, but drew the wrong conclusions about how to eliminate it.

But libertarianism was largely reformulated, in the early 20th century, as a right-wing ideology in reaction to the Left. And part of its modern-day cultural baggage, as a legacy of having largely redefined itself in opposition to the Left, is a visceral reaction to stuff that "sounds commie."

A major focus of my work has been recovering the libertarianism of the nineteenth century, which shared so many of the values with the rest of the Left, but saw free markets as a friend to those values.

B. Kinsella's response to my overall argument

Next, Kinsella moved on to a critique of my comments on the other writers. Since they're all closely related, and my rebuttal involves essentially the same principles, I'll quote all of them together. For clarity, all of my original comments from the previous post are labeled CARSON, and the reader remarks from the comment thread have their respective names attached. My final comments follow the blockquoted material. Is everyone thoroughly confused now?

CARSON: 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.

KINSELLA: Who cares if there is a "vagueness" (read: complexity) in the ownership of corporate assets? How is this unlibertarian? Why is it any outsider's business?

CARSON: 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.

KINSELLA: Libertarianism does not require any "pretense" that "management represents shareholders or that the latter are the owners in any real sense." It only requires respect for property rights and not interfering in capitalist acts between consenting adults. That is, if you can somehow show that "management" does NOT "represent" shareholders, or that they are not "the owners" in "any real sense"--so what? Whose rights are being violated? If you don't like the way a firm is organized, don't work there; don't invest in it. Beyond that: in a libertarian society we need only identify who has the right to control a given resource; and who is responsible for the commission of various torts or crimes. If a collection of people (shareholders, directors, managers, creditors) whatever all agree to some complicated internal set of rules that specify their right to control a set of private assets, then their rights are not violated (they all agreed to it), and outsiders have no business complaining, any more than they would have a right to complain about the "messiness" of ownership claims within a neighborhood that has an ambiguously drawn set of restrictive covenants. For example if I buy a share of Wal-Mart stock I am in some sense an owner, but only in specified ways--I don't have the right to use the Wal-Mart HQ for a picnic etc. I have agreed to a contractual set of rules that divide control--day-to-day control is given to managers; and a set of procedures determines how changes to the rules or to the decision-makers is made. From the perspective of an outsider, Wal-mart property is owned by a set of people (shareholders plus directors plus managers).

CARSON: "Corporate management, in fact, is a self-perpetuating oligarchy in control of a free-floating mass of unowned capital."

KINSELLA: Unowned? Hogwash. Walmart's inventory and factories and stores are not unowned by any stretch of the imagination. Just because some anti-market or anti-capitalist types don't like the messiness and complexity of the internal rules governing rights of control (ownership) of these assets is utterly irrelevant. You don't have to work for them, or invest in them. This "unowned" comments has a whiff of Georgism about it.

CARSON: "It uses its purported representation of shareholders as a legitimizing ideology to insulate it from accountability to internal stakeholders"

KINSELLA: And here we have the leftist buzzword: "stakeholder". This is routinely used by governments to justify infringing property rights.

Again: in libertarianism, the corporation does not need to justify anything--so it does not need to pretend it "represents" anyone. If a group of people agree to pool their money and become shareholders, this just means they have agreed to collectively purchase some things with their money, and to have specified rights of control and rights to gain or dividends, that is their business. The consent of the parties is all that is needed to justify it.

As for "stakeholders," it depends on who this means. For people that are employed by, or contract with, or invest in, or sell to or buy from the company--their rights are defined by contract already.

That "whiff of Georgism" really required some heavy-duty reaching. By "unowned," I mean simply that the purported ownership of the corporate entity by shareholders, and the purported representation of shareholders by management, are myths. Shares are not "marketable ownership claims" in any real sense. The entity is not the property of shareholders in any meaningful sense. It is indeed the de facto property of the management, in the sense that they exercise genuine control off of it and use it primarily in their own interests. But as with the de facto power of the Party apparat and the managerial bureaucracy in the old USSR, that flies in the face of the official ideology. Corporate management does everything possible to legitimize its power in the name of shareholder supremacy and its own status as the shareholders' hired help, and does everything possible to conceal or distract attention from its own de facto ownership.

The only de jure legal property rights inhere in a legal entity entirely separate from the shareholders, and de facto property rights inhere in the management which controls that entity and its capital assets despite never having purchased rights in the property they control. One might just as well argue that every factory and shop in the USSR was the property of some de jure owner, and that everyone working there did so willingly with their share in the returns defined contractually.

Kinsella's idea that the corporation is formed contractually by shareholders pooling their money is a throwback to the Dartmouth College case. For the overwhelming majority of the largest corporations there is no such agreement and no such contract. The status of the corporation as a contractual arrangement between owners was undermined by the very developments Kinsella celebrates: the supplanting of the concession doctrine by general incorporation, and the rise of markets in securities. As understood under the earlier doctrine, the property rights of the individual shareholder really were analogous to those of a partner. The understanding is exemplified by the majority opinion in the Dartmouth College case, in which any amendment to a corporate charter, or indeed "any fundamental corporate change," was considered a breach of the shareholder's contract, a "taking" of his property. All such changes had to be consented to unanimously by shareholders, in exactly the same manner as members would consent to the change in terms of a partnership.

General incorporation and the rise of securities markets resulted in a serious attenuation of shareholder property rights in the corporation. They resulted, by the early twentieth century, in a common legal understanding in which "the modern stockholder is a negligible factor in... management," and in which a sharp distinction was made between the status of "investor" and "proprietor." The shift was encouraged by the rise of public securities markets. Until the 1890s, public issues of stock were rare and public trading (outside of railroad stock) almost unheard of. In an environment in which the issuance of stock was still largely private and associated with the formation of joint-stock companies, it was more plausible to regard investment in a corporation as equivalent to buying into a partnership. The creation of public equity markets, in which shares were commonly acquired by those with no direct role in the formation or governance of the firm, and bought on an anonymous market rather than issued directly to the shareholder by the firm, made the cultural holdover far less tenable. It became virtually impossible to maintain with a straight face the earlier "trust fund" doctrine of Dartmouth and other decisions, in which the shareholder was a partner with absolute property rights in the governance of the corporation. By the turn of the century, the board of directors was clearly coming to be seen as the agent, not of shareholders, but of the corporation as a separate entity. [See Horwitz, The Transformation of American Law 1870-1960, pp. 93-99]

CARSON: ...and is free to expropriate the latter's efforts because of the vaguely defined property rights in the organization.

KINSELLA: And here we have what appears to me to be Marxian reasoning: the "expropriation of efforts"? What? I'd like to see exactly whose "labor" is being "stolen"? An employee? Hey, he isn't compelled to work for them.

CARSON: More generally, hierarchy and the separation of labor from residual claimancy are inherently prone to incentive and agency problems.

KINSELLA: Here we go with complaints about the separation of labor from "residual claimancy." Libertarianism does not require labor to not be "separated" from XYZ; it does not base property rights on whether there are or are not "incentive" or "agency" "problems". If incentive or agency problems that arise when using a given firm structure, presumably people over time will invest in or employ more efficient structures. If they don't--hey, it's their money.

CARSON: 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."

KINSELLA: How can you "expropriate" value? Do people own their value? Workers do not have any ownership claim to a company they have worked for--they have a claim to whatever they have contractually agreed to, that's all.

First of all, regarding the "so what" challenge Kinsella raises so many times, the answer should be obvious from the context in which the quoted material was written. So what? So, that's what Klein and I were arguing about in the first place.

Long argued for the worker cooperative as a solution to many of the agency and information problems of the conventional corporation, and also argued that the conventional corporation nevertheless predominated despite these problems because the state protected it from the inefficiency costs and competitive penalties of that form of organization. Klein responded that there was a large body of organizational theory literature on the agency problems of cooperatives, and provided a partial list--chief among them vaguely defined property rights. I responded, in turn, that the conventional corporation was even more prone to the same agency problems discussed in the literature, and that its property rights in particular were at least as vaguely defined as those of the cooperative.

Kinsella says if I don't like the inefficiencies and vaguely defined property rights of the corporation, I don't have to work there or shop there. People will do so, or not do so, as it suits their interests. Beyond that, again, so what? But to repeat, that's precisely what Long, Klein and I were arguing about. In a freed market, these agency problems attending vaguely defined property rights would be offset, or not, by the increased efficiencies offered by the corporate form from one case to the next, and the corporate form would be adopted or abandoned accordingly. True enough, as far as it goes. Long and I both argue that the inefficiencies exceed the efficiencies for most large corporations, and that such large organizational size nevertheless persists because the state artificially shifts the boundary. The main area of dispute, between Long and me on the one hand and Klein on the other, is precisely what the respective inefficiencies of the conventional corporation and the cooperative actually are, and therefore whether it's likely that the conventional corporation predominates to a greater extent than would be the case in a free market. That's so what.

Regarding the terms "appropriated" and "expropriated," of which Kinsella made so much, P.M. Lawrence requested clarification:

Over at his rebuttal, Stephan Kinsella builds a great mountain on that single use of the word "expropriated", so I think you should clarify:-

- whether it is your term or whether you are quoting Luigi Zingales; and

- that "expropriated" is the correct term when there are property systems in place that are being overridden, but that something like "appropriated" is the correct term when there are not (your context makes it clear what you are talking about, but Stephan Kinsella omits that context).

As Lawrence suggests, they are technical terms from organization theory. And I should have consistently used the term "appropriate," since it suggests the absence rather than the overriding of clearly defined property rights. The term refers to the ability of one party, in the presence of poorly defined property rights that do not efficiently internalize the results of action, to free ride on the value created by the efforts of another party. They are frequently used in the work of Oliver Williamson, and are useful for summarizing the arguments on stakeholder property rights made by Grossman and Hart and by Zingales. I thought they were appropriate to use in the context of Klein's questions regarding the organization theory literature, particularly on the ways that vaguely defined property rights create agency problems. I should have made it clear that they were org theory terms.

And the concept is by no means a monopoly of the left-libertarian tendency in org theory. It was at the heart of Robert Jensen's critique of the bureaucratic corporation and his support for the injection of entrepreneurialism into corporate management. As he perceived it, corporate management, because of poorly designed incentive systems, was engaged in self-dealing that expropriated shareholders and violated their fundamental obligation as agent for the shareholders.

In this case, I think Kinsella was so bemused by the terms "appropriation" and "expropriation," and their seeming Marxist connotations, that he did not pay adequate attention to the arguments I cited from Grossman and Hart or Zingales. The point was that, because of the vaguely defined property rights within the corporation, the equity or book value created by members of the organization is not efficiently allocated among them in such a way as to maximize individual effort or minimize agency problems. And again, to anticipate another possible "so what?" response from Kinsella, I brought all this up specifically in response to Klein's assertions about what the org theory literature has to say about the agency problems and inefficiencies created by vaguely defined property rights in the cooperative.

When I said as much in the comments to the earlier post, it provoked this response from Kinsella.

Yes, I read "expropriation" as meaning what it typically means -- theft, typically organized theft by an institution such as the state. As when a host state expropriates property of a company under international law. If you just mean that corporations (firms in general? I am never sure if you are against only big firms; or only corporations; or only big corporations; or only big for-profit corporations) are inefficient--sure. All firms have various inefficiencies and incentive and agency problems. They also overcome other problems (yes, as Klein adumbrates in his classic piece). When the costs of a firm (due to agency, incentive, calculation, etc. problems) become prohibitive and are not outweighed by the gains, then this poses some limits to the size and/or structure/organization of that entity, as determined by competition on the market. I do not see what is supposed to be so illuminating about this fairly simple insight.

He reiterated this statement at Lew Rockwell Blog, along with the following:

...the left-libertarians keep playing a type of bait and switch with their terminology. Someone cheers on the return of "militant" unions: when this is objected to, on the grounds that we libertarians oppose union violence, then they crawfish and dance around and say that if one reads thru 17 email chains he'll see they didn't mean "violent," for heaven's sake. When I object to accusations that companies "expropriate" the "value" of the "efforts" of "stakeholders"--they say by "expropriate" they don't really mean "expropriate"; and by "stakeholder" they don't mean what leftists usually mean by it; and by "bargaining power" they don't mean what leftists usually mean by it.

If someone can give me a dictionary to translate it might be helpful.

In response to these charges, P.M. Lawrence accused Kinsella of being too lazy, or too obsessed with his emotional reactions to my terminology, to read what was directly in front of his eyes--let alone going through "17 email chains":

KINSELLA: "and is free to expropriate the latter's efforts because of the vaguely defined property rights in the organization." And here we have what appears to me to be Marxian reasoning: the "expropriation of efforts"? What? I'd like to see exactly whose "labor" is being "stolen"? An employee? Hey, he isn't compelled to work for them.'

LAWRENCE: That "stolen" is made up. The answer is clear from the earlier, fuller statement, not covered by that selective quotation: "... 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." It's not formally "stolen" because there are no formal ownership rights, and it is unethical to the extent that the constrained lack of choice forced people into that vulnerability (see above about all corporations being similar). "Appropriated" might have been clearer in this respect, but "expropriated" also conveys the idea that these things are taken from people who would otherwise have had them. This passage also implicitly defines "stakeholder" - a person who would otherwise have had some of that, who contributed to its being there.

KINSELLA: Yes, I read "expropriation" as meaning what it typically means -- theft, typically organized theft by an institution such as the state.

LAWRENCE: Why not read it the way it was first used, with context and all? "... 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." Likewise it tells you what "stakeholder" is. That doesn't take tracking through several posts. So "If someone can give me a dictionary to translate it might be helpful" probably wouldn't work. He had that right in front of him, but a dictionary would just be something else he wouldn't chase up.

Again, I concede that I should have explicitly stated that I was using "appropriate" and "expropriate" as technical terms from organization theory. But looking back on what I originally wrote, I believe Lawrence is right. Figuring out what I meant did not require recourse to the Secret Mutualist Dictionary, or tracking through 17 email chains, or any other such heroic measures. It simply required reading the statements Kinsella selectively quoted in the context in which it appeared, which was right in front of him--no mouse-clicking required. In that context, I think my meaning was quite clear. My meaning could only have been mistaken by someone who was so wrapped around the axle about what my language "sounded like," or how it made him feel, that he was unwilling or unable to read carefully.

Kinsella also provided this helpful summary of the debate:

Here's a summary of the discussion so far:

Long/Carson: "Corporations are imperfect, and thus proprietorships and cooperatives are what would emerge on the free market."

Klein: "Proprietorships and cooperatives are also imperfect [various arguments and examples given], so they might not dominate on the free market."

Long/Carson: "Yes, but corporations are imperfect!"

Actually, I think it went more like this:

Long/Carson: Corporations are imperfect and proprietorships and cooperatives are what would emerge on the free market because they are less imperfect.

Klein: You're neglecting the body of org theory literature on how imperfect proprietorships and cooperatives are in particular [various arguments and examples given], so they might not dominate on the free market.

Long/Carson: But the imperfections ascribed to cooperatives in the literature, arguably, applies even more strongly to the corporation [various arguments and examples given], so it's likely that cooperatives would be an improvement.

Kinsella: Huh? So what?

Sunday, December 07, 2008

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.