Our conversation on the relationship between markets and corporations has been attracting comment from around the blogosphere. Since a number of the concerns that have been raised elsewhere are ones that may be of interest to readers of the present exchange, I thought it might be worthwhile to discuss a few of them here.
Peter Klein, in “Long on the Corporation,” is skeptical of my argument that in a freed market “firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned).” Klein agrees with me that large corporations benefit in many ways from governmental favoritism, but insists that small firms may benefit just as much:
a) On the one hand, large corporations “are under stricter antitrust and regulatory scrutiny, are more likely to be the victims of political rent extraction … and are subject to stricter disclosure requirements … than their smaller competitors.”
b) Moreover, “[t]rade 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.”
c) On the other hand, smaller firms “benefit from state-funded incubators, SBIR awards, regional development grants, and a host of other interventions designed to foster ‘entrepreneurship.’”
d) Moreover, “the worker-owned cooperative, the partnership and proprietorship, the decentralized ‘open-production’ system, all suffer from serious incentive, information, and governance problems” which I and other left-libertarians have not adequately addressed. I had pointed to the popularity of the comic-strip Dilbert as an illustration of the surreal insanities that pervade the corporate form, but Klein responds that “in a hypothetical society in which cooperatives were the main organizational form there would be a funny cartoon about the mind-numbing inefficiency – the endless group meetings, the continual arguments among stakeholders, the culture of complacency – in the coop world.”
In light of these factors, Klein concludes that “[w]hich set of effects outweighs the other”—in other words, whether pro-corporate or anti-corporate policies have the greater impact, and accordingly whether big corporations would prosper less or more in a freed market than they do today—is “impossible to say, ex ante,” and he accordingly speculates that our “preference for small-scale production is based primarily on aesthetic, rather than scientific, grounds.”
In fact I don’t have any aesthetic aversion to mere firm size per se. (I was recently accused on a libertarian e-mail list of having an anti-urban bias and longing to live like a hobbit in the Shire. Actually I would much rather live in London or Paris.) I do have an aversion to corporate hierarchies, but I would describe that aversion as more ethical than aesthetic—an opposition to seeing people pushed around, even in ways that don’t violate libertarian rights. (Rights-violations are the only forms of oppression that should be fought by force, but they’re not the only forms of oppression that should be fought.) But in any case, I don’t think my economic predictions are based on my ethical aversions; so let me address Klein’s four objections in turn.
With regard to (a), I don’t deny that states place some burdens on large corporations that they don’t place on smaller firms. But how likely is it that the net burden is greater for large than for small, given the greater ease with which more concentrated interests can affect governmental decisions?
With regard to (b), it’s certainly true that trade barriers, war, and state education have a negative impact on the international division of labor. But precisely as a consequence, one of their chief effects is to boost corporate power at home: trade barriers and war insulate large firms from foreign competition, while state education functions primarily to prepare children to become compliant employees. Hence the factors Klein lists are not appropriately thrown onto the anti-big-business side of the scale; they must be divided between the two sides. Which side weighs most may be open to dispute, but it is worth noting that large corporations have historically been among the most enthusiastic supporters of trade barriers, war, and state education; so clearly they at least (perhaps mistakenly) regard these measures as more beneficial than harmful to their interests.
With regard to (c), it is also true that many small businesses receive plenty of government aid. But once again, it is unlikely that such aid on average benefits small firms at the expense of large ones, given the natural advantage that concentrated interests have over dispersed ones in influencing governmental policy. Moreover, 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.
With regard to (d), Klein thinks that non-corporate forms suffer from vaguely defined property rights. 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. (Certainly Klein is aware of principal-agent problems in the current corporate form, since he has written about them extensively.)
Klein thinks that in a world where worker-managed enterprises were more prevalent, “endless group meetings” would be as much a target of satire as cubicle culture is today. But why would it be? In a freed market, enterprises that engaged in endless group meetings would be weeded out by the need to compete against more efficient firms that managed to avoid such silliness.
Klein might well respond that in a freed market, large firms would be forced to become more efficient too. Doubtless they would. But for familiar Misesian-Hayekian-Rothbardian reasons, there are limits to how large such firms can get before the diseconomies of scale overtake the economies and calculational chaos ensues; and absent the ability to socialize the diseconomies (as corporatist policies enable them to do), such firms must then fail. Assuming that such problems could be overcome by sufficiently clever entrepreneurship is comparable to assuming that state-socialist central planning can be made to work by sufficiently wise bureaucrats and sufficiently patriotic citizens.
Incidentally, I offered the comic strip Dilbert not as evidence of the irrationality of corporate hierarchies but as a reminder of it. Those who have worked in such environments know from their own experience how completely clueless the highly paid upper managers tend to be about what is actually happening, and how much of the firm’s success depends on workers simply ignoring the insane directives from above and doing what needs to be done. When those with such experience hear free-market advocates assuring them that their daily experience is just how things would continue to be in a free market, they are likely to conclude “so much the worse for free markets.” But in fact they should conclude that something artificial is propping up these hierarchies; and their own experience with the firm’s actual dependence on workers bypassing such hierarchies should make them skeptical of the conventional wisdom as to the inefficacy of workers’ self-management.
As in the structure of a national economy, so in the structure of the firm, the way an organization really operates is not always reflected in the paper flow charts of the official models. Just as supposed command economies like the Soviet Union have been kept economically afloat mainly by the unacknowledged persistence of black markets, so the success of hierarchical firms is due in large part to the unacknowledged reality, albeit hampered and stunted, of worker’ self-management. And just as the remarkable success of even hampered markets gives us reason to be optimistic about what unhampered markets would achieve, so the ability of workers’ self-management to bring about positive results even when hampered by hierarchy—a reality familiar to millions of people as part of their daily lives, even if it is largely invisible to official “theories of management”—gives us reason to expect still greater successes from workers’ self-management not so hampered.
And that is why I am relatively unmoved by Klein’s list of incentival difficulties facing worker-managed enterprises. If you see a man managing to walk, albeit with an uneven stagger, while carrying an enormous barrel of rocks strapped to his back, it seems reasonable to suppose that he would walk still better without the barrel; and a physician’s assurances that without the barrel the man actually could not walk at all will be unconvincing.
Will Wilkinson, in “Utopia Tennis,” reacts to my description of three possible approaches to solving the problem of corporate influence on government:
1. Either abolish or radically diminish the power of the state.
2. Keep the state as it is but demand that it remain neutral and noninterventionist.
3. Use the state actively as a tool against corporate power.
I had argued that (2) and (3) are not feasible, given the inherent nature of the state’s monopolistic structure; thus I favored (1). Wilkinson thinks I neglect a possible fourth option, (1.5)—a moderate rather than radical reduction in state power. Against my presumed insistence that (1.5) is impossible, Wilkinson points to a number of societies that have “come a long way over the past several decades in a freer market direction.”
But I’ve never claimed, and do not think, that moderate reductions in state power are impossible. What I do think is that merely moderate reductions in state power are not an adequate solution to corporatism. After all, although the popular notion of the nineteenth-century U.S. as a laissez-faire free-for-all is a fantasy (even if we exclude, as we shouldn’t, legal restrictions on the economic activities of women and nonwhites), it’s still true that the interventionist policies that fueled corporatism in that era are by many measures significantly less extensive than those we have today.
Wilkinson further describes as “obviously false” my contention that “achieving benign outcomes via the state is a chimera”; for Wilkinson, “[m]any states evidently succeed in achieving relatively benign outcomes.” But I don’t see how this is supposed to be “evident”—unless the claim is just shorthand for the claim that “many states are evidently compatible with the existence of relatively benign outcomes,” which is certainly true. But if people who drink small doses of poison are healthier than those who drink large doses, that doesn’t make it “evident” that small doses of poison can achieve relatively benign outcomes. Any measure that shrinks the scope of voluntary cooperation by expanding the scope of compulsion thereby makes things both a bit less just and a bit less efficient.
Finally, Wilkinson is puzzled at my claim that (1) is less unstable than (2). “If (2) is unstable because people will demand state interference in the economy given a state,” he writes, “then (1) is unstable because people tend to demand states.”
But the crucial difference between (1) and (2), as I see it, is not that under (2) people demand more statism, but rather that under (2) people are able to socialize the costs of such demand. First, individuals can vote, without cost to themselves, for coercive policies whose primary costs will be borne by others. Second, as I’ve argued elsewhere, monopoly government magnifies the power and influence of the wealthy:
Suppose I’m an evil billionaire, and I want to achieve some goal X that costs one million dollars. Under a free-market system, I have to cough up one million of my own dollars in order to achieve this goal. But when there’s a powerful government in charge, I can (directly or indirectly) bribe some politicians with a few thousands in order to achieve my million-dollar goal X. Since the politicians are paying for X with tax money rather than out of their own pocket, they lose nothing by this deal.
The demand for statism is thus more effective under (2) than under (1), because under (2) that demand gets subsidized.
Finally, J. H. Huebert and Walter Block, in “In Defense of Corporations, Tax Breaks, and Wal-Mart,” take exception to my claim that “[c]orporate power depends crucially on government intervention in the marketplace”; specifically, they object to the concept of “corporate power.” Since a corporation is “merely a group of individuals who have entered into a particular type of business relationship,” Huebert and Block conclude that it “has no power to speak of”; instead, “only the state has power.”
But what exactly do they mean by this? They do not deny—indeed they readily grant—that “sometimes the state uses its power to confer benefits, direct and indirect, on corporations,” and moreover that “big business and big government team up to rip you off …. [a]ll the time.” So perhaps their claim is that when government intervenes on behalf of corporations, the corporations are only the beneficiaries of that power, not holders of it. (Though if that’s what they mean, they shouldn’t have granted that “big business and big government team up to rip you off,” but should have limited the claim to big government alone.) But if so, I don’t understand the claim.
Suppose some thug with a gun threatens to kill me unless I do whatever Huebert and Block command. Perhaps Huebert and Block have petitioned the thug to do this; perhaps they haven’t. But in either case, thanks to the thug’s threat, Huebert and Block are now in a position to demand obedience from me that they could not have successfully demanded but for the thug’s intervention. Don’t Huebert and Block now have power over me, thanks to the thug’s threats? If so, why don’t government policies that systematically advantage some firms at the expense of their competitors likewise count as conferring power on such favored firms? I could understand it if Huebert and Block were saying that all power depends on government intervention (though I would disagree with that too); but to deny that government confers power on anyone but itself is a surprise.
While granting that corporations receive government privileges, Huebert and Block point out that non-corporations do too. So if there is “nothing special or different about government privileges for corporations,” they ask, why have I chosen to “single them out” (especially since I have not chosen to challenge the legitimacy of the corporate form itself)? My answer is that the primary and disproportionate beneficiaries of government privilege tend to be corporations, particularly large corporations. If the primary and disproportionate beneficiaries of government privilege were tiny gnomes from Neptune I’d be complaining about pro-Neptunian-gnome favoritism instead.
Huebert and Block maintain that my “apparent view that big business needs the state to survive” is “unfounded.” But I’ve never said that there would be no large firms in a freed market; all I claim is that firms would tend to be smaller and more numerous than today. I’m not sure why Huebert and Block would find that claim objectionable, since they themselves acknowledge not only that “some larger firms do use the apparatus of the state to steal an advantage over smaller competitors,” but furthermore that “[a]s a matter of history, things work out this way more often than in the opposite direction” (emphasis mine). In short, while Klein is agnostic as to whether pro-big-business legislation tends on balance to outweigh anti-big-business legislation, Huebert and Block take my side of the dispute.
So in that case what are they disagreeing with me about? Apparently their objection is that “Long’s ‘big bashes small’ is by no means a necessary facet of the mixed economy,” since there are “numerous cases of relatively small businessmen bribing members of the state apparatus for favors, which put them at an advantage vis-à-vis all their competitors, large and small.”
Again, I’m not sure I understand the objection.
Are they taking me to say that only large firms receive government favors? But of course I never said that.
Or are they complaining about my assertion that benefits to large firms tend to outweigh those to small ones? Presumably not, because they say they agree with me about that.
Or are they objecting to the claim that the tendency for governments to favor large firms over small ones is necessary as opposed to being merely a historical accident? Well, I haven’t claimed that it’s necessary in an a priori apodictic sense. (Though if it were, the existence of subsidies to small businesses would hardly disprove the necessity of the tendency.) But I don’t think it’s a mere accident either. It may not be inevitable that concentrated interests win out over dispersed ones in the political marketplace, but it’s certainly the way to bet; thus bigness tends to result in governmental favors. It’s also not inevitable that recipients of government favors will make use of them to expand their operations and socialize their diseconomies of scale, but again, it’s the way to bet; thus governmental favors conversely tend to result in bigness.
Huebert and Block suggest that it is impossible to predict whether large or small firms would dominate a freed market, since people’s preferences cannot be predicted, and it is these preferences, “the decisions of producers and consumers,” that “determine … the size of firms.” But the fact that diseconomies of scale eventually overtake economies of scale is an economic principle, not something that can be altered by “the decisions of producers and consumers.” (That’s why state-socialist central planning wouldn’t work even if everybody involved really really wanted it to.)
Huebert and Block likewise see “no compelling reasons why McDonald’s would go away but local hamburger stands would thrive if the state were to disappear,” since “consumers will still value the convenience and consistent quality” that McDonalds supplies “with minimal help from the state.” I don’t know whether McDonalds would disappear in a freed market, but I do think there is good reason to suppose that much of its success is due to not-so-minimal help from the state rather than to mere consumer preferences. Companies like McDonalds that depend on nationwide distribution benefit disproportionately from highway subsidies, which thus constitute a net redistribution from local restaurants to big chains; McDonalds has also been one of the companies whose advertising costs have been subsidized by taxpayer dollars via the USDA’s Market Promotion Program—a perk their smaller competitors do not receive. 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? (McDonalds also benefits from differential subsidies for the meat industry, though in this case more at the expense of less meat-oriented firms than at the expense of smaller firms per se.)
At this point Huebert and Block offer a particularly strange argument: from the fact that “tiny grocery stores exist cheek by jowl with large corporations in this industry,” they invite us to “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.” Unless I’m missing something, this point seems to support my side of the argument more than theirs; the fact that many small firms manage to prosper even despite the massive competitive advantage that large firms currently receive from government seems pretty strong evidence that small firms would fare even better in a freed market.
Huebert and Block worry that I have fallen into the statist-left error of confusing tax breaks with subsidies. Here I fear that Huebert and Block have read my article too hastily, so let me remind them of exactly what I said. Here it is again:
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.
As the above passage makes clear, what is coercive about selective tax breaks is not that a given firm receives a tax break but that its competitors do not.
As Huebert and Block correctly point out, by libertarian principles taxation is theft, and so “when a person or a business avoids paying taxes, they avoid being stolen from.” “How,” they ask, “can that ever be wrong?”
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.
The same point applies to Huebert’s and Block’s charge that I am “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.” What, they ask, could Wal-Mart have done to avoid such blame?
But I wasn’t primarily interested in blaming Wal-Mart for benefiting from transportation subsidies (and I certainly don’t think using the public highways is anything to be guilty about, so their tu quoque digression misses the mark). Wal-Mart benefits from a variety of governmental programs, some of which it actively lobbies for (many more than Huebert and Block acknowledge, I think; see “Shopping for Subsidies: How Wal-Mart Uses Taxpayer Money to Finance Its Never-Ending Growth” by P. Mattera, et al.) and some it doesn’t. Perhaps highway subsidies fall in the latter category. 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. (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.)
Huebert and Block point out that Wal-Mart started out as a small business. Indeed it did. So what? I’ve never claimed that it’s impossible for a small business to succeed under corporatism, only that corporatism makes it artificially difficult. But let’s assume that Wal-Mart achieved its initial success without government help. (I don’t know that that’s true, but I’m willing to stipulate it for the sake of argument.) The question is whether its continuing success is due solely to market forces; I’ve argued that it isn’t. Huebert and Block find it “morally obscene” to criticize Wal-Mart “for surviving despite government’s attacks upon it.” But that’s not what I criticize it for. To the extent that Wal-Mart owes its success to some combination of a) genuine entrepreneurial talent and b) legislation for which it did not lobby, I have no blame to cast; pointing out that entrepreneurship has been illegitimately supplemented by state patronage is thus far to blame only the givers of the patronage, not yet the receivers. But alas, to a significant degree Wal-Mart also owes its success to c) legislation for which it did lobby, and I certainly do blame it for that. Why Huebert and Block are defending this thieving organization I cannot imagine.
Huebert and Block are particularly incensed by my discussion of unions. They are puzzled at my claim that “restrictions on labor organizing … make it harder for such workers to organize collectively on their own behalf.” What restrictions, they ask, am I talking about?
I had answered this question, I thought, by linking to a discussion by Charles Johnson. In fact 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, on the grounds that labor legislation favors a certain kind of labor movement—one “created by government bureaucrats who effectively created a massive subsidy program for conservative unions which followed the AFL and CIO models of organizing”—at the expense of a labor movement that genuinely serves workers’ interests.
They also interpret Johnson’s call for “militant” unions as a call for violent unions—which is pretty obviously not what Johnson means. The fact that such violence is at least as prevalent among the “conservative unions” that Johnson criticizes as among the “militant unions” he favors—a fact that Huebert and Block themselves point out in passing—ought to have suggested to them that their interpretation of “militant” was on the wrong track. (What did Johnson mean by “militant”? Well, um, read the article.) It is certainly true that over the course of history unions have often employed aggressive violence against employers and fellow workers alike, both directly and through the intermediary of the state; it is likewise true that over the course of history employers and businesses have often employed aggressive violence against unions, again both directly and through the intermediary of the state. If anti-union aggression on the part of business is, as Hubert and Block would presumably contend, merely a sin on the part of the particular businesses who have practiced it and not an indictment of business per se, then why do they insist on regarding pro-union aggression as an indictment of unions per se? It seems like a puzzling double standard.
Huebert’s and Block’s suggestion that I am likely to “rejoice” that “under an Obama administration, these economic scourges are likely to obtain even more power” is further evidence that they have been reading in haste; of course Obama’s policies are likely to do little else but further reinforce the state-corporatist type of unions that Johnson and I were criticizing. Since they cite Kolko’s and Shaffer’s work, Huebert and Block are evidently well aware of, and sympathetic to, the research showing that much allegedly anti-business regulation was really devised to prop up business interests. I urge them to explore the similar literature showing that, analogously, much allegedly pro-labor legislation has really been anti-labor; Johnson’s article, if they’ll read it a bit more carefully, is a good place to start.
Huebert and Block conclude that libertarians “should win with their own ideas, on their own terms, and avoid pandering to statists of any stripe.” I entirely agree. But to Huebert and Block it apparently seems that I am violating this advice by embracing “the ideas and rhetoric of the left.”
Nonsense! These ideas were ours first, when we libertarians were the original left. We pioneered the ideas that today are associated with the left—class conflict, anti-corporatism, and worker empowerment (as well, incidentally, as feminism, antiracism, antimilitarism, and environmentalism). We let the statist left steal these ideas and rhetoric from us during our long and unfortunate alliance with the right; but the statist left never had any legitimate claim to them, since left-statist policies are actually inimical to all these goals. (As Rothbard once put it, left-statism is the confused pursuit of libertarian goals by anti-libertarian means.) Left-libertarianism is not a call to dilute libertarianism by introducing alien elements; it’s a call to recover our own distinctive heritage.
 For further discussion, pro and con, of the stability of free-market anarchism see the essays collected in Edward P. Stringham, ed., Anarchy and the Law: The Political Economy of Choice (Transaction, 2007), and Roderick T. Long and Tibor R. Machan, eds., Anarchism/Minarchism: Is a Government Part of a Free Country? (Ashgate, 2008).
 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?