Untangling the Corporatist Knot

There is much I agree with in Roderick Long’s essay. In particular, I think the general framework that he has laid out for libertarians to talk about the relationships among corporations, the market, and the state is precisely how we should engage those issues. To the extent that defenders and critics of markets both conflate the interests of businesses big or small and the interests of the population as a whole in free(d) markets, the conversation becomes muddy and confused. Moreover, to the extent that libertarians are the source of the conflation, attempts to have our arguments heard sympathetically by the left are more likely to fail. Given that the right, or at least the Republican Party, has been just as guilty of conflation as the left, and given that political power now rests more on the left, perhaps it is time to make sure our arguments are clearer on these matters so that we can find ways to ally with the left and move forward on issues of common concern, such as ending the various ways in which the state privileges private and corporate actors.

Long raises one of my own favorite examples of the conflation problem: “privatization.” I would like to see us ditch the term “privatization” for two reasons. First, many of the things government does and then “contracts out” are things that no one should be doing in the first place, either publicly or privately. The use of private contractors in Iraq is the most obvious example here. Libertarians need to join, and many have joined, those on the left who have objected to the use of private contractors to do the dirty work of the war. We need to make it quite clear that this (and the war more generally) is not what is meant by free markets, despite what people like Naomi Klein seem to think.

Second, in the cases where state-provided goods and services could be better supplied in the market, the real goal is not “privatization” but “de-monopolization.” What advocates of free markets should be arguing is that the monopoly privilege bestowed by government is the source of trouble, regardless of whether the organization receiving that privilege is public or private. Rather than selling off or contracting out these monopoly privileges, we should abolish them and reduce any other barriers to entry in the industries in question.

Similarly, Long’s discussion of “de-regulation” can be applied to other examples. Removing limits on what private sector firms can do while simultaneously cushioning or completely bailing them out for their losses is not “de-regulation” as libertarians understand it. This pattern has been particularly common in the financial industry, which is itself a model of the sort of corporatism that both libertarians and the left should oppose, despite simplistic recent commentary referring to it as a “free market.” Long’s example of the current troubles is to the point, as I have argued elsewhere.

The same argument has been made about the Savings and Loan crisis in the 1980s. S&Ls were indeed “de-regulated” in the sense that they were allowed to expand into commercial real estate. However, at the same time, the maximum level of deposit insurance was raised substantially, protecting the S&Ls from the full costs of taking on too much risk. Add in then-current laws that made it very difficult for S&Ls to branch across state lines and diversify their portfolios and thereby reduce their exposure to risk, and this combination of “more choice, less responsibility” turned disastrous. Making the fine distinctions Long is doing is absolutely critical to understanding both what a “freed market” would look like and why existing problems cannot be simplistically blamed on “free markets” or “de-regulation.”

In fact, what is often missed in these discussions is that genuine market competition is a form of regulation. Competition disciplines firms to meet the wants of consumers at prices they can afford. Profits signal firms to continue in the same general direction, while losses guide them toward change. The prices, profits, and losses in a truly free market perform a variety of “regulatory” functions. Much of the discussion about markets and regulation would be improved if we focused more on comparative analyses of what sorts of institutions regulate firm behavior in what sorts of ways and toward what ends, rather than throwing around “de-regulation” in the sloppy ways it has been used.

Despite my overall agreement with Long’s argument, there is one major criticism I want to raise. As someone who has written extensively and positively about Wal-Mart, I might be open to the charge of “vulgar libertarianism” that Long explores. In his blog comments on Long’s essay, Will Wilkinson makes several of the points I would make about Wal-Mart specifically. Instead, I will raise a more general point.

Often libertarians find ourselves “playing defense.” By that I mean that we want to respond to criticisms of existing firms such as Wal-Mart that are couched in anti-free market language, and that are often full of factual errors about the behavior of such firms and the consequences for the economy. This need to respond often grows from a sense that if such arguments are left without a response, they might well justify further expansion of the state. As Long himself admits, at least some of the benefits that are produced by current corporations are the results of genuine entrepreneurship that is completely compatible with a freed market. My own view is that he understates the degree to which such success can be attributed to the genuinely market elements of the behavior of most firms rather than their explicit and implicit state subsidies. Even if I’m right about that, I nonetheless completely agree with Long that working to end those subsidies and criticizing Wal-Mart for taking/asking for them should be part and parcel of a defense of the freed market.

Another example of “playing defense” in this way is the literature arguing that the conventional view that the rich are getting richer and the poor poorer is wrong to one degree or another. Faced with the claim that “capitalism” has generated massive inequalities, libertarians can do one or both of two things (assuming we believe that addressing the question requires more than an Atlas-like shrug). The first is to use a Long-like strategy and try to demonstrate the ways in which state intervention is responsible for these inequalities, and then argue that a freed market would, perhaps, produce less inequality. The second is to show that the data being trotted out are misleading about the real degree of inequality or income mobility and to argue that even in the highly distorted, unfree market we have, the underlying market forces are not producing massive inequality, the further impoverishment of the poor, or restricting mobility. One could make a similar argument about the increasing consumption possibilities available to poor Americans. I believe that not only is the second strategy more rhetorically effective, it is also right more often than Long seems to believe.

Libertarians like me who make arguments of the second sort can easily be accused of “vulgar libertarianism.” There might be cases where that claim is valid, but I don’t think the accusation is fair when the analyst tries her best to distinguish processes that characterize how markets work in general from the particular real-world processes that reflect the results of various government interventions. For example, if much of the claimed growth in inequality is the statistical artifact of the way in which people move through the life-cycle of income earnings and/or changes in the demographic characteristics of households, rather than a genuine increase in inequality or loss of mobility, there seems no necessary reason to reject that as being “vulgar libertarianism” and portray it as a defense of the statist status quo. This point is especially important as many of us see such arguments as crucial to heading off proposals that would, in fact, move us farther, perhaps much farther, away from freed markets based on a misinterpretation of the data. That is what I mean by playing defense, and whether or not this is “vulgar libertarianism,” it might well be an effective way to preserve real elements of freedom in the interventionist status quo.

I do think libertarians need to engage in meaningful analysis of the current economy, and sometimes that might end up with us making arguments that there are good things happening in the imperfect here and now, resulting from the market processes that still exist. I happen to think there are and that the successes of firms such as Wal-Mart really do reflect market realities that would exist even in a freed market, even as I recognize the large role played by state intervention in such processes. Despite my sincere agreement with much of Long’s argument, I worry that the charge of “vulgar libertarianism” might cause us to shy away from empirically demonstrating the very real gains that even a palsied invisible hand can provide. If so, I think we will have taken away an important arrow in the libertarian quiver, albeit one that, as Long so clearly points out, must be handled with great care.

Also from this issue

Lead Essay

  • In this month’s lead essay, philosopher and libertarian theorist Roderick T. Long draws a sharp contrast between corporatism and libertarianism properly understood. He argues that liberals, conservatives, and even libertarians have all been guilty to some degree of obscuring this difference, and that the quality of our political discourse has suffered accordingly. He suggests that libertarians should guard themselves against falling into the trap of “vulgar libertarianism,” in which all things good spring from business, and particularly from business as usual. Corporations, he argues, should be no more free from scrutiny than any other institution in society, and often businesses have done more than their share to hamper free economic relations in the industrialized world.

    One implication of all of this is that the truly free market is farther away than we imagine. Long suggests several ways in which a freed market would be different from what we see around us today. Notably, nearly all of these differences are to the benefit of the consumer and the small or start-up business. These likely outcomes of laissez faire suggest new grounds for left-liberals and libertarians to revise their thinking on economic issues and on politics more generally.

Response Essays

  • In his response to Long, Matthew Yglesias argues that although corporations naturally seek to win special privileges from the state, libertarianism is far from the obvious solution to the problem. Instead, he reiterates the charge that libertarians often act as corporate apologists and suggests that the net effect of any “free market” advocacy will tend strongly toward corporate power. Liberals may have much to learn from libertarians on certain issues and in some policy areas, but the laissez-faire solution to corporate political influence is unworkable.

  • Steven Horwitz offers several examples of so-called “de-regulation” that only served to benefit corporations, while leaving the government, and therefore the taxpayers, to shoulder the risks of the market. He argues that market competition is a form of regulation, albeit a kind worth wanting, as it forces corporations to respond to consumer demand and punishes them when they fail to meet it. He takes issue with Long’s lead essay by arguing that “playing defense,” that is, defending today’s corporations when they act consonantly with a fully freed market, is a valuable part of libertarian advocacy. One must nonetheless take issue with these same corporations when they violate the principles of laissez faire and distinguish carefully between these cases.

  • In his response essay, Dean Baker declines to tally up a “score” of how well libertarians, or other groups, have defended a truly impartial, laissez faire economy. Instead, he suggests intellectual property as an obvious area where libertarians must challenge corporate power to distort the market. Patents that make health care more expensive and copyrights that artificially restrict whole areas of our culture are obviously concessions to corporatism, and the “extraordinary abuses” undertaken to enforce these privileges should be vigorously challenged. Although libertarianism has been skeptical of both patents and copyrights, Baker suggests that this is an area deserving still further attention, and one in which liberals could perhaps become solid allies.

  • The discussion this month has focused to a greater than usual degree on the activities of certain Cato Institute policy scholars. The editors thought it appropriate to solicit responses, and we present them here in their entirety.