About this Issue

This issue tackles a grave misconception: the idea that corporations and markets are synonymous, and that what’s good for the one is good for the other.

Astute economists have noted that far too often, corporations act to restrict the free operation of the market. Corporations that have become successful in a free or quasi-free market don’t like to face competition any more than any other entity, and their success gives them the resources, unfortunately, to stifle would-be competitors. In these cases, corporations and governments can often find themselves in an unholy alliance against consumers, other firms, and liberty itself: corporatism, in other words — a system that seems to value corporations as an end in themselves.

And after that — what’s an advocate of the free market to do?

In this month’s lead essay, philosopher and libertarian theorist Roderick Long examines the often tangled relationship between governments, corporations, and those who argue both for and against laissez-faire capitalism. Is a truly libertarian politics possible? Or do libertarians always run the risk — despite their best intentions — of sounding like, or acting like, apologists for an alliance between the state and corporations?

In the rest of the issue, we will hear from three authors with different takes on corporatism and its relationship to free-market advocacy. Political analyst Matthew Yglesias has expressed skepticism about libertarian and free-market advocacy in the past, owing to corporate entanglements. Economist Steven Horwitz has argued that many of our current economic troubles owe precisely to corporate entanglements with the state, and has urged liberals and libertarians to recognize the many potential points of agreement they might find on these issues. And economist Dean Baker has criticized what he refers to as the “conservative nanny state,” or the ways in which the wealthy use their resources to harness government power to their own advantage. Be sure to stop by through the week as our contributors debate these very important issues for the future of a free economy.

Lead Essay

Corporations versus the Market; or, Whip Conflation Now

Defenders of the free market are often accused of being apologists for big business and shills for the corporate elite. Is this a fair charge?

No and yes. Emphatically no—because corporate power and the free market are actually antithetical; genuine competition is big business’s worst nightmare. But also, in all too many cases, yes—because although liberty and plutocracy cannot coexist, simultaneous advocacy of both is all too possible.

First, the no. Corporations tend to fear competition, because competition exerts downward pressure on prices and upward pressure on salaries; moreover, success on the market comes with no guarantee of permanency, depending as it does on outdoing other firms at correctly figuring out how best to satisfy forever-changing consumer preferences, and that kind of vulnerability to loss is no picnic. It is no surprise, then, that throughout U.S. history corporations have been overwhelmingly hostile to the free market. Indeed, most of the existing regulatory apparatus—including those regulations widely misperceived as restraints on corporate power—were vigorously supported, lobbied for, and in some cases even drafted by the corporate elite.[1]

Corporate power depends crucially on government intervention in the marketplace.[2] This is obvious enough in the case of the more overt forms of government favoritism such as subsidies, bailouts,[3] and other forms of corporate welfare; protectionist tariffs; explicit grants of monopoly privilege; and the seizing of private property for corporate use via eminent domain (as in Kelo v. New London). But these direct forms of pro-business intervention are supplemented by a swarm of indirect forms whose impact is arguably greater still.

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.[4]

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. Even those who accept the intellectual property as a legitimate form of private property[5] can agree that the ever-expanding temporal horizon of copyright protection, along with disproportionately steep fines for violations (measures for which publishers, recording firms, software companies, and film studios have lobbied so effectively), are excessive from an incentival point of view, stand in tension with the express intent of the Constitution’s patents-and-copyrights clause, and have more to do with maximizing corporate profits than with securing a fair return to the original creators.

Government favoritism also underwrites environmental irresponsibility on the part of big business. Polluters often enjoy protection against lawsuits, for example, despite the pollution’s status as a violation of private property rights.[6] When timber companies engage in logging on public lands, the access roads are generally tax-funded, thus reducing the cost of logging below its market rate; moreover, since the loggers do not own the forests they have little incentive to log sustainably.[7]

In addition, inflationary monetary policies on the part of central banks also tend to benefit those businesses that receive the inflated money first in the form of loans and investments, when they are still facing the old, lower prices, while those to whom the new money trickles down later, only after they have already begun facing higher prices, systematically lose out.

And of course corporations have been frequent beneficiaries of U.S. military interventions abroad, from the United Fruit Company in 1950s Guatemala to Halliburton in Iraq today.

Vast corporate empires like Wal-Mart are often either hailed or condemned (depending on the speaker’s perspective) as products of the free market. But not only is Wal-Mart a direct beneficiary of (usually local) government intervention in the form of such measures as eminent domain and tax breaks, but it also reaps less obvious benefits from policies of wider application. The funding of public highways through tax revenues, for example, constitutes a de facto transportation subsidy, allowing Wal-Mart and similar chains to socialize the costs of shipping and so enabling them to compete more successfully against local businesses; the low prices we enjoy at Wal-Mart in our capacity as consumers are thus made possible in part by our having already indirectly subsidized Wal-Mart’s operating costs in our capacity as taxpayers.

Wal-Mart also keeps its costs low by paying low salaries; but what makes those low salaries possible is the absence of more lucrative alternatives for its employees—and that fact in turn owes much to government intervention. The existence of regulations, fees, licensure requirements, et cetera does not affect all market participants equally; it’s much easier for wealthy, well-established companies to jump through these hoops than it is for new firms just starting up. Hence such regulations both decrease the number of employers bidding for employees’ services (thus keeping salaries low) and make it harder for the less affluent to start enterprises of their own.[8] Legal restrictions on labor organizing also make it harder for such workers to organize collectively on their own behalf.[9]

I don’t mean to suggest that Wal-Mart and similar firms owe their success solely to governmental privilege; genuine entrepreneurial talent has doubtless been involved as well. But given the enormous governmental contribution to that success, it’s doubtful that in the absence of government intervention such firms would be in anything like the position they are today.

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. Small wonder that big business, despite often paying lip service to free market ideals, tends to systematically oppose them in practice.

So where does this idea come from that advocates of free-market libertarianism must be carrying water for big business interests? Whence the pervasive conflation of corporatist plutocracy with libertarian laissez-faire? Who is responsible for promoting this confusion?

There are three different groups that must shoulder their share of the blame. (Note: in speaking of “blame” I am not necessarily saying that the “culprits” have deliberately promulgated what they knew to be a confusion; in most cases the failing is rather one of negligence, of inadequate attention to inconsistencies in their worldview. And as we’ll see, these three groups have systematically reinforced one another’s confusions.)

Culprit #1: the left. Across the spectrum from the squishiest mainstream liberal to the bomb-throwingest radical leftist, there is widespread (though not, it should be noted, universal)[10] agreement that laissez-faire and corporate plutocracy are virtually synonymous. David Korten, for example, describes advocates of unrestricted markets, private property, and individual rights as “corporate libertarians” who champion a “globalized free market that leaves resource allocation decisions in the hands of giant corporations”[11]—as though these giant corporations were creatures of the free market rather than of the state—while Noam Chomsky, though savvy enough to recognize that the corporate elite are terrified of genuine free markets, yet in the same breath will turn around and say that we must at all costs avoid free markets lest we unduly empower the corporate elite.[12]

Culprit #2: the right. If libertarians’ left-wing opponents have conflated free markets with pro-business intervention, libertarians’ right-wing opponents have done all they can to foster precisely this confusion; for there is a widespread (though again not universal) tendency for conservatives to cloak corporatist policies in free-market rhetoric. This is how conservative politicians in their presumptuous Adam Smith neckties have managed to get themselves perceived—perhaps have even managed to perceive themselves—as proponents of tax cuts, spending cuts, and unhampered competition despite endlessly raising taxes, raising spending, and promoting “government-business partnerships.”

Consider the conservative virtue-term “privatization,” which has two distinct, indeed opposed, meanings. On the one hand, it can mean returning some service or industry from the monopolistic government sector to the competitive private sector—getting government out of it; this would be the libertarian meaning. On the other hand, it can mean “contracting out,” i.e., granting to some private firm a monopoly privilege in the provision some service previously provided by government directly. There is nothing free-market about privatization in this latter sense, since the monopoly power is merely transferred from one set of hands to another; this is corporatism, or pro-business intervention, not laissez-faire. (To be sure, there may be competition in the bidding for such monopoly contracts, but competition to establish a legal monopoly is no more genuine market competition than voting—one last time—to establish a dictator is genuine democracy.)

Of these two meanings, the corporatist meaning may actually be older, dating back to fascist economic policies in Nazi Germany;[13] but it was the libertarian meaning that was primarily intended when the term (coined independently, as the reverse of “nationalization”) first achieved widespread usage in recent decades. Yet conservatives have largely co-opted the term, turning it once again toward the corporatist sense.

Similar concerns apply to that other conservative virtue-term, “deregulation.” From a libertarian standpoint, deregulating should mean the removal of governmental directives and interventions from the sphere of voluntary exchange. But when a private entity is granted special governmental privileges, “deregulating” it amounts instead to an increase, not a decrease, in governmental intrusion into the economy. To take an example not exactly at random, if assurances of a tax-funded bailout lead banks to make riskier loans than they otherwise would, then the banks are being made freer to take risks with the money of unconsenting taxpayers. When conservatives advocate this kind of deregulation they are wrapping redistribution and privilege in the language of economic freedom. When conservatives market their plutocratic schemes as free-market policies, can we really blame liberals and leftists for conflating the two? (Well, okay, yes we can. Still, it is a mitigating factor.)

Culprit #3: libertarians themselves. Alas, libertarians are not innocent here—which is why the answer to my opening question (as to whether it’s fair to charge libertarians with being apologists for big business) was no and yes rather than a simple no. If libertarians are accused of carrying water for corporate interests, that may be at least in part because, well, they so often sound like that’s just what they’re doing (though here, as above, there are plenty of honorable exceptions to this tendency). Consider libertarian icon Ayn Rand’s description of big business as a “persecuted minority,”[14] or the way libertarians defend “our free-market health-care system” against the alternative of socialized medicine, as though the health care system that prevails in the United States were the product of free competition rather than of systematic government intervention on behalf of insurance companies and the medical establishment at the expense of ordinary people.[15] Or again, note the alacrity with which so many libertarians rush to defend Wal-Mart and the like as heroic exemplars of the free market. Among such libertarians, criticisms of corporate power are routinely dismissed as anti-market ideology. (Of course such dismissiveness gets reinforced by the fact that many critics of corporate power are in the grip of anti-market ideology.) Thus when left-wing analysts complain about “corporate libertarians” they are not merely confused; they’re responding to a genuine tendency even if they’ve to some extent misunderstood it.

Kevin Carson has coined the term “vulgar libertarianism” for the tendency to treat the case for the free market as though it justified various unlovely features of actually existing corporatist society.[16] (I find it preferable to talk of vulgar libertarianism rather than of vulgar libertarians, because very few libertarians are consistently vulgar; vulgar libertarianism is a tendency that can show up to varying degrees in thinkers who have many strong anti-corporatist tendencies also.) Likewise, “vulgar liberalism” is Carson’s term for the corresponding tendency to treat the undesirability of those features of actually existing corporatist society as though they constituted an objection to the free market.[17] Both tendencies conflate free markets with corporatism, but draw opposite morals; as Murray Rothbard notes, “Both left and right have been persistently misled by the notion that intervention by the government is ipso facto leftish and antibusiness.”[18] And if many leftists tend to see dubious corporate advocacy in libertarian pronouncements even when it’s not there, so likewise many libertarians tend not to see dubious corporate advocacy in libertarian pronouncements even when it is there.

There is an obvious tendency for vulgar libertarianism and vulgar liberalism to reinforce each other, as each takes at face value the conflation of plutocracy with free markets assumed by the other. This conflation in turn tends to bolster the power of the political establishment by rendering genuine libertarianism invisible: Those who are attracted to free markets are lured into supporting plutocracy, thus helping to prop up statism’s right or corporatist wing; those who are repelled by plutocracy are lured into opposing free markets, thus helping to prop up statism’s left or social-democratic wing. But as these two wings have more in common than not, the political establishment wins either way.[19] The perception that libertarians are shills for big business thus has two bad effects: First, it tends to make it harder to attract converts to libertarianism, and so hinders its success; second, those converts its does attract may end up reinforcing corporate power through their advocacy of a muddled version of the doctrine.

In the nineteenth century, it was far more common than it is today for libertarians to see themselves as opponents of big business.[20] The long 20th-century alliance of libertarians with conservatives against the common enemy of state-socialism probably had much to do with reorienting libertarian thought toward the right; and the brief rapprochement between libertarians and the left during the 1960s foundered when the New Left imploded.[21] As a result, libertarians have been ill-placed to combat left-wing and right-wing conflation of markets with privilege, because they have not been entirely free of the conflation themselves.

Happily, the left/libertarian coalition is now beginning to re-emerge;[22] and with it is emerging a new emphasis on the distinction between free markets and prevailing corporatism. In addition, many libertarians are beginning to rethink the way they present their views, and in particular their use of terminology. Take, for example, the word “capitalism,” which libertarians during the past century have tended to apply to the system they favor. As I’ve argued elsewhere, this term is somewhat problematic; some use it to mean free markets, others to mean corporate privilege, and still others (perhaps the majority) to mean some confused amalgamation of the two:

By “capitalism” most people mean neither the free market simpliciter nor the prevailing neomercantilist system simpliciter. Rather, what most people mean by “capitalism” is this free-market system that currently prevails in the western world. In short, the term “capitalism” as generally used conceals an assumption that the prevailing system is a free market. And since the prevailing system is in fact one of government favoritism toward business, the ordinary use of the term carries with it the assumption that the free market is government favoritism toward business.[23]

Hence clinging to the term “capitalism” may be one of the factors reinforcing the conflation of libertarianism with corporatist advocacy.[24] In any case, if libertarianism advocacy is not to be misperceived—or worse yet, correctly perceived! —as pro-corporate apologetics, the antithetical relationship between free markets and corporate power must be continually highlighted.

 

Notes

1 For documentation and analysis see Weinstein, James, The Corporate Ideal in the Liberal State, 1900-1918 (New York: Farrar Straus & Giroux, 1976); Kolko, Gabriel, The Triumph of Conservativm: A Reinterpretation of American History, 1900-1916 (Glencoe: The Free Press, 1963); Kolko, Gabriel, Railroads and Regulation, 1877-1916 (Princeton: Princeton University Press, 1965); Weaver, Paul, The Suicidal Corporation: How Big Business Fails America (New York: Touchtose, 1988); and Shaffer, Butler D., In Restraint of Trade: The Business Campaign Against Competition, 1918-1938 (Lewisburg PA: Bucknell University Press, 1997). For briefer accounts see Childs, Roy A., “Big Business and the Rise of American Statism,” Reason, February 1971, pp. 12-18, and March 1971, pp. 9-12 (online: http://praxeology.net/RC-BRS.htm), and Stromberg, Joseph R., “The Political Economy of Liberal Corporatism,” Individualist (May 1972), pp. 2-11 (online: http://tmh.floonet.net/articles/strombrg.html).

2 This is especially true if, as some libertarians argue, the corporate form itself (involving legal personality and limited liability) is inconsistent with free-market principles. (For this position see Van Dun, Frank, “Is the Corporation a Free-Market Institution?,” Freeman 53 no. 3 (March 2003), pp. 29-33 (online: http://www.fee.org/pdf/the-freeman/feat7.pdf); for the other side see Barry, Norman, “The Theory of the Corporation,” Freeman 53 no. 3 (March 2003), pp. 22-26 (online: http://www.fee.org/pdf/the-freeman/feat5.pdf ).) For the purposes of the present discussion, however, let us assume the legitimacy of the corporation.

3 Long, Roderick T., “Regulation: The Cause, Not the Cure, of the Financial Crisis” (online: http://www.theartofthepossible.net/2008/10/09/regulation-the-cause-not-the-cure-of-the-financial-crisis)

4 Long, Roderick T., “Those Who Control the Past Control the Future,” 18 September 2008 (online: http://www.theartofthepossible.net/2008/09/18/those-who-control-the-past-control-the-future); cf. Long, Roderick T., “History of an Idea; or, How an Argument Against the Workability of Authoritarian Socialism Became an Argument Against the Workability of Authoritarian Capitalism,” 2 October 2008 (online: http://www.theartofthepossible.net/2008/10/02/history-of-an-idea), and Carson, Kevin A., “Economic Calculation in the Corporate Commonwealth,” Freeman 57 no. 1 (June 2007), pp. 13-18 (online: http://tinyurl.com/6cm3wo). For a more detailed case see Carson, Kevin A., Studies in Mutualist Political Economy, Booksurge (2007; online: http://mutualist.org/id47.html), and Carson, Kevin A., Organization Theory: An Individualist Anarchist Perspective, forthcoming (online: http://mutualist.blogspot.com/2005/12/studies-in-anarchist-theory-of.html).

5 Another disputed issue among libertarians; see, e.g., Cato Unbound’s June 2008 symposium on “The Future of Copyright” (online: http://www.cato-unbound.org/archives/june-2008-the-future-of-copyright).

6 Rothbard, Murray N., “Law, Property Rights, and Air Pollution,” Cato Journal 2 no. 1 (Spring 1982), pp. 55-99 (online: http://www.cato.org/pubs/journal/cj2n1/cj2n1-2.pdf).

7 Ruwart, Mary J., Healing Our World In an Age of Aggression (Kalamazoo: SunStar, 2003

pp. 117-119.

8 On this latter point see Johnson, Charles, “Scratching By: How Government Creates Poverty as We Know It,” Freeman 57 no 10 (December 2007), pp. 12-17 (online: http://www.fee.org/pdf/the-freeman/0712Johnson.pdf).

9 For some of the ways in which purportedly pro-labor legislation turns out to be anti-labor I practice, see Johnson, Charles, “Free the Unions (and All Political Prisoners),” 1 May 2004 (online: http://radgeek.com/gt/2004/05/01/free_the).

10 Especially given that many anti-corporate libertarians identify themselves as part of the left, e.g., the Alliance of the Libertarian Left (online: http://all-left.net).

11 Korten, David C., When Corporations Rule the World, 2nd ed. (San Francisco: Berrett-Koehler, 2001), p. 77.

12 Long, Roderick T., “Chomsky’s Augustinian Anarchism” (online: http://www.theartofthepossible.net/2008/09/04/chomskys-augustinian-anarchism)

13 Germà Bel, “Retrospectives: The Coining of ‘Privatization’ and Germany’s National Socialist Party,” Journal of Economic Perspectives 20 no. 3 (Summer 2006), pp. 187-194. Bel’s article unfortunately shows little sensitivity to the distinction between libertarian and corporatist senses of “privatization.”

14 Rand, Ayn, “America’s Persecuted Minority: Big Business,” Capitalism: The Unknown Ideal (New York: Signet, 1967), pp. 44-62. In fairness to Rand, she was not entirely blind to the phenomenon of corporatism; in her article “The Roots of War” (Capitalism, pp. 35-44), for example, she condemns “men with political pull” who seek “special advantages by government action in their own countries” and “special markets by government action abroad,” and so “acquire fortunes by government favor… which they could not have acquired on a free market.” Moreover, while readers often come away from her novel Atlas Shrugged (New York: Penguin, 1999) with the vague memory that the heroine, Dagny Taggart, was fighting against evil bureaucrats who wanted to impose unfair regulations on her railroad company, in fact Taggart’s struggle is against evil bureaucrats (in league with her power-hungry brother/employer) who want to give her company special favors and privileges at its competitors’ expense. For an analysis of what Rand got right and wrong about corporatism, see Long, Roderick T., “Toward a Libertarian Theory of Class,” pp. 321-25, in Social Philosophy & Policy 15 no. 1 (1998), pp. 303-349 (online: http://praxeology.net/libclass-theory-part-1.pdf and http://praxeology.net/libclass-theory-part-2.pdf).

15 See Long, “Roderick T., “Poison As Food, Poison As Antidote,” 28 August 2008 (online: http://www.theartofthepossible.net/2008/08/28/poison-as-food-poison-as-antidote).

16 Carson, Kevin A., “Vulgar Libertarianism Watch, Part 1,” 11 January 2005 (online: http://mutualist.blogspot.com/2005/01/vulgar-libertarianism-watch-part-1.html).

17 Carson, Kevin A., “Vulgar Liberalism Watch (Yeah, You Read It Right)” 21 December 2005 (online: http://mutualist.blogspot.com/2005/12/vulgar-liberalism-watch-yeah-you-read.html).

18 Rothbard, Murray N., Left and Right: The Prospects for Liberty (Cato Institute, 1979; online: http://www.lewrockwell.com/rothbard/rothbard33.html)

19 The relationship between big business and big government is like the relation between church and state in the Middle Ages; it’s not an entirely harmonious cooperation, since each would like to be the dominant partner (and whether the result looks more like socialism or more like fascism depends on which side is in the ascendant at the moment), but the two sides share an interest in subordinating society to the partnership. See Long, “Poison As Food,” op. cit.

20 See Long, Roderick T., “They Saw it Coming: The 19th-Century Libertarian Critique of Fascism” (2005; online: http://lewrockwell.com/long/long15.html)

21 John Payne, “Rothbard’s Time on the Left,” Journal of Libertarian Studies 19 no1 (Winter 2005), pp. 7-24 (online: http://mises.org/journals/jls/19_1/19_1_2.pdf).

22 See, for example, the group blogs LeftLibertarian.org and TheArtOfThePossible.net.

23 Long, Roderick T., “Rothbard’s ‘Left and Right’: Forty Years Later” (2006; online: http://mises.org/story/2099)

24 William Gillis has likewise suggested abandoning “free market” in favor of “freed market”:

“You’d be surprised how much of a difference a change of tense can make. ‘Free market’ makes it sound like such a thing already exists and thus passively perpetuates the Red myth that Corporatism and wanton accumulation of Kapital are the natural consequences of free association and competition between individuals… . But ‘freed’ has an element of distance… . It moves us out of the present tense and into the theoretical realm of ‘after the revolution,’ where like the Reds we can still use present day examples to back theory, but we’re not tied into implicitly defending every horror in today’s market.” Gillis, William, “The Freed Market,” 31 July 2007 (online: http://williamgillis.blogspot.com/2007/07/freed-market-one-of-tactics-ive-taken.html).

Response Essays

Politics Compromises the Libertarian Project

The central point of Roderick Long’s essay seems completely correct to me—powerful actors in society seek to use their power in order to manipulate the state apparatus to get what they want. Corporations are powerful actors in our society, and they want money. Thus, what corporations are after in politics is political action that gets them money and whether or not this coincides with the dictates of a purist laissez faire vision is a matter of mere happenstance.

In what I find a puzzling move, Long thinks that the main upshot of this is to cast doubt on the legitimacy of castigating libertarians as corporate stooges. I would say the real upshot is to cast doubt on the cogency of the libertarian enterprise. Thinkers affiliated with the libertarian movement have had many smart things to say on individual topics, but the overall concept of a state apparatus that simply sits on the sideline watching the free market roll along is impossibly utopian. People are going to try to manipulate the state to advance their own ends.

But of course not all is lost. Much of the world labors under hopelessly corrupt governments, wherein the police and security services are little more than shakedown operations or enforcers for local bigwigs. But elsewhere, justice is administered with a modicum of efficacy. Similarly, there are real alternatives to run-amok corporate dominance of the policy environment. There are better and worse civil services in the world, and even within individual countries some agencies work better than others. There are labor unions and advocacy groups—environmental, human rights, feminist, pro-life, and so forth—that compete with businesses and with each other to influence the direction of policy.

What there aren’t are places where politics just somehow doesn’t happen. The libertarian utopia is no more realistic than the socialist utopia of a perfectly informed and perfectly benevolent central planner.

Meanwhile, putting libertarians themselves third on the list of culprits for inducing confusion between market principles and corporate domination seems both too generous and too kind. The blame, such as it is, ought to land not on vaguely named “libertarians” and certainly not on a set of ideological principles. But at the same time, the predominant cause of people seeing libertarians as shills for business interests is the fact that an awful lot of shilling for business interests does, in fact, take place under the banner of self-described libertarian institutions.

It’s awkward, in these circumstances, to bring up the Cato Institute. And of course Cato engages in many activities that have nothing to do with any corporate interests. And much of this work is exemplary—particularly in the realm of national security where Cato has often been willing to tread on terrain that other mainstream DC policy organizations seem to deem too risky.

That said, it’s striking to me that on what would seem to me to be the simple and straightforward libertarian case that we should make Social Security benefits less generous, Cato has nothing much to say. Instead, it has an elaborate Project on Social Security Choice aimed at restructuring the program into one of mandatory, privately managed savings accounts. It’s not immediately obvious to me what this proposal has to do with libertarianism, but it would seem to offer some prospect of profits for fund managers. Whether monetary contributions from individuals working in the financial services industry, or else a desire to align more closely with the partisan political agenda of the Republican Party (itself largely dominated by the interests of American business rather than free market principles), or some combination of the two motivate the preference is beyond my ability to say.

Similarly, the free-market case for a revenue-neutral carbon pricing scheme seems fairly impeccable to me. But instead of organizing its climate change efforts around seeking to ensure that any future carbon pricing plan be as close to revenue neutral as possible, Cato prefers to steadfastly defend the rights of industry to unload air pollution unimpeded. Or consider the fact that Randal O’Toole is indignant about the prospect of public expenditures on mass transit systems, but appears to have little to say about public funding of highways. This, too, looks more like a case of narrow business interests than sterling free market principles.

That said, the larger problem is that libertarianism, even at its very best, tends to suffer from an impoverished set of ideas about how corporate domination of the public policy space might be prevented. The political left has, by contrast, the tradition of community organizing, a set of public interest advocacy organizations, allies in the trade union movement, efforts to improve the quality and independence of the civil service, and various notions about changing the methods by which campaigns are financed in the United States. This is hardly a perfect toolkit, and it can be enhanced in some ways by drawing on libertarian insights, but it’s something. And libertarians tend to be either indifferent or hostile to it, campaigning against public financing, strong labor unions, and the civil service.

In practice, libertarianism seems to have little to say about how to bring about political change except to work hand-in-hand with business lobbies when the interests of business and free markets are aligned, or else when business interests are masquerading as libertarianism.

I raise this less in the spirit of complaint than to illustrate a genuine problem. Curbing certain sorts of infringements of market activity that serve to only further enrich the already rich is essential. And American progressives aren’t doing all that great a job of doing it. We could use allies, and we could use good ideas. And there are some models out there. The Institute for Justice, for example, takes on some causes I disagree with. But their campaigning against things like an Oklahoma law requiring a license before you call yourself an “interior designer” and other forms of senseless occupational licensing has identified a very real problem. And they’ve developed a litigation strategy that’s borne some fruit and seems to hold some promise. The world could use more such ideas, and hopefully through conversations such as this one some will emerge.

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.

Libertarians and Corporate Power: Actions Speak Louder Than Words

Roderick Long feels that progressives have unfairly maligned libertarians as defenders of corporate power. In response, Matt Yglesias makes the obvious point that many of their prominent political interventions certainly seem to have this effect. Rather than construct the scorecard for the number of times the libertarians have been with the angels (as opposed to the dark side of the force) I’d rather just work with libertarians where there should be a common agenda with progressives.

Long notes several places where corporations use the power of the state to enhance their monopoly power and increase their profits. One item that features prominently on Long’s list is intellectual property. It’s high on my list too. The economic distortions and inequities created by government granted patent and copyright monopolies are enormous.

While there may be areas in which patents are an effective policy for promoting innovation, the abuses associated with patents for prescription drugs should be libertarians’ poster child for government policy gone crazy. The country is projected to spend almost $250 billion for prescription drugs this year (more than $800 per person). In the absence of government patent monopolies, we would spend close to one-tenth of this amount. Those generic drugs that Wal-Mart can profitably sell for $4 a prescription are not chemically distinct from the brand name drugs that can cost several hundred dollars.

Every self-respecting libertarian knows what happens when government intervention raises prices by several thousand percent above the free market price: we get all sorts of pernicious rent-seeking activity. And we see this pernicious activity in full glory in the pharmaceutical industry.

The pharmaceutical industry employs an army of tens of thousands of “detailers” who go around pushing their drugs on doctors. The detailers are hired for their effectiveness as salespeople (former cheerleaders are hugely over-represented in this group), not their ability to effectively convey relevant medical information. In fact, recent research indicates that the detailers convey little or no accurate medical information in their conversations with doctors. In short, the detailers are an entirely unnecessary cost that may often lead to patients not getting the best drug for their condition.

The abuses don’t end with marketing. The pharmaceutical industry controls the flow of information based on the research it conducts. Medical journals constantly struggle to find mechanisms to prevent industry paid pieces from finding their way into print under the guise of neutral scholarship. There is also an ongoing struggle to force the pharmaceutical companies to disclose their research results when they raise questions about the effectiveness of their drugs or indicate harmful side effects.

In addition, the quest for patent rents diverts the bulk of research dollars into the development of copycat drugs that are designed to duplicate the function of already existing drugs, rather than the development of breakthrough drugs that would address conditions for which no treatments currently exist.

We can tell even worse tales about the abuses that result from copyright protection, even though no one dies directly as a result of this form of government intervention. In the absence of copyright monopolies we could download all of the world’s music, movies, books, video games, and software at no cost. Instead, we get huge corporations like Disney, Time-Warner, and Microsoft that make enormous profits off these government created monopolies.

Their enforcement efforts have required terrorizing people for making unauthorized copies of copyrighted material. In a recent case, a single mother was fined several hundred thousand dollars for allowing her computer to be used to download 24 songs over the web. The entertainment industry has gotten the government to prohibit the production of electronic devices because they had inadequate protection against duplicating copyrighted material. They had a Russian computer scientist arrested when he visited the United States because he gave an academic lecture that explained how an encryption lock could be broken. They even went after the Girl Scouts for singing copyrighted songs without permission.

The extraordinary abuses that we see every day as a result of patent protection for prescription drugs and copyright protection should be sending libertarians through the roof, and perhaps it does. But, where are the libertarians’ research programs on alternatives to patents for financing drug research or alternatives to copyrights for financing creative and artistic work? (I couldn’t find either program on Cato’s website.)

I’m not raising these issues as debating points. I absolutely believe that copyrights and patent monopolies for prescription drugs are extremely pernicious forms of government intervention into the market. I can’t understand why any serious libertarian would not be as bothered as I am. How can it be okay to threaten to arrest people who would sell a life-saving drug for a few dollars a prescription because the government has given a patent monopoly to the company that sells the same drug for a few thousand dollars a prescription?

I plead agnosticism as to the larger question of whether government intervention is responsible for supporting concentration in industry in general. Clearly in many cases it does and in those cases progressives should have no problem making common cause with libertarians.

In fact, progressives very often get the story quite wrong in characterizing issues as “government versus market.” Certainly the current financial crisis provides an obvious example of such confusion. No one was really pushing for “deregulation” in the sense of getting the government completely out of the market.

The financial industry’s agenda was to get one-sided deregulation. They wanted to preserve the government security blanket of “too big to fail,” while removing prudential controls that limited their ability to take on risk. In effect, what the financial industry wanted (and got) was government insurance that they didn’t have to pay for. This surely is not the libertarian agenda; this is the agenda of a politically powerful industry (with allies in both major parties) that will get everything it can out of Washington.

In short, I would like to see more of the anti-corporate side of the libertarian agenda. There may be many areas in which libertarians and progressives take opposing positions, but there are many areas in which we should have common ground. I am not interested in keeping the scorecard. I just want to see libertarians be as aggressive in confronting the interventions that support corporate power as they were in confronting Social Security.

Cato Scholars Respond

Editors’ note: 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.

 

Regarding public transit, Randal O’Toole writes:

In response to Mr. Yglesias,

Thousands of years of human history have revealed only three ways of allocating scarce resources: markets, politics, and religion. It is trite to say there is no pure free market, socialist, or theocratic economy; all economies use a mixture of these three tools. The goal of the libertarian project has been to move our economy towards the free-market pole.

Personally, I consider myself a pragmatist, not a true libertarian. I want systems that work. Most often, this means using market tools, but I am not above allowing government some role if it works. Usually, however, government only works when it is tempered by market incentives.

Transportation policy is a good example. Mr. Yglesias says,

Consider the fact that Randal O’Toole is indignant about the prospect of public expenditures on mass transit systems, but appears to have little to say about public funding of highways. This, too, looks more like a case of narrow business interests than sterling free market principles.

In 1919, my home state of Oregon was the first state to approve a gas tax as a way of funding roads. Private toll roads could have worked, but tolls were slow and clumsy and the popular worry at the time was that private roads would be monopolistic the way the railroads had been.

By 1931, every state and the federal government had followed Oregon’s example of charging gas taxes as a user fee for driving on public roads. The system worked for many years because it offered feedback to both users and highway agencies. Users were paying for most of the cost of the roads and would limit the amount of driving they would do because of that cost. Agencies would not build bridges to nowhere because drivers wouldn’t purchase enough gas to pay for such bridges.

The system broke down when inflation raised the cost of road construction faster than the rise in cents-per-gallon gas taxes. While tolls could vary with the amount of traffic, gas taxes also failed to give users signals to avoid the congestion that resulted from inadequate highway budgets.

Rather than fix these problems, in 1983 Congress started diverting highway user fees to mass transit. Transit agencies sought to get as much of these taxes as they could and agencies that came up with the most expensive proposals ended up with the most money. While highway engineers had no incentives to build bridges to nowhere, transit agencies did have incentives to build rail lines to nowhere.

Suddenly they were no longer user fees, but taxes. So Congress started earmarking gas taxes to specific projects, something it had never done before. Those earmarks exponentially grew from 10 in 1982 to more than 6,000 in 2005.

In all of my writings—two books and numerous essays on the subject—I’ve urged that we go back to user fees. I’ve further argued that tolls make better user fees than gas taxes and modern electronic tolls solve the tollgate problems that drivers objected to in 1919. I’ve opposed measures to raise sales taxes to pay for roads in various cities around the country.

I’ve spent more time criticizing expensive transit proposals than expensive road proposals for a simple reason: there are a lot more inane rail transit projects than inane highway projects. Some of the best highways being built today—such as the Tampa-Hillsborough Expressway and the Ft. Bend Parkway—are toll roads paid for entirely out of tolls. But there are no rail transit projects whose user fees will cover operating costs, much less capital costs.

Pure libertarians argue that transportation should be completely privatized because a private company will be more efficient than a government agency, even one funded exclusively out of user fees. Maybe so, but for me it is too soon to debate that. First, we have to convince people that transportation should be funded out of user fees and not taxes.

The transit industry has people bamboozled into thinking that transit always loses money (it doesn’t), so therefore it should lose money (it shouldn’t), so don’t bother to count the subsidies or worry when some transit services cost taxpayers $1 a ride and others cost $100 a ride. Our allocation of scarce resources to transit is now based on a religion—call it envirotarianism—with the result that anyone who questions the cost is considered a tool of “narrow business interests.” In reality, the transit lobby is five to ten times bigger than the supposedly all-powerful highway lobby.

Despite all the talk of our “addiction to the automobile,” the history of highway construction in this country was never so extreme. So it is entirely appropriate for me to focus more of my attention on transit.

By the way, it is worth noting that I personally hate driving and love trains and long-distance cycling. If the United States were built for my preferences, we’d have high-speed passenger trains and bike paths everywhere. But the numbers in both the United States and Europe show this won’t work: rails are so expensive that our mobility and incomes would be a lot lower and transportation costs much higher.

 

Regarding carbon taxes, Jerry Taylor writes,

In the course of making his argument that Cato frequently makes counterproductive alliances of convenience (from a strict libertarian perspective, anyway) with corporate special interests, Matthew Yglesias writes:

The free-market case for a revenue-neutral carbon pricing scheme seems fairly impeccable to me. But instead of organizing its climate change efforts around seeking to ensure that any future carbon pricing plan be as close to revenue neutral as possible, Cato prefers to steadfastly defend the rights of industry to unload air pollution unimpeded.

I’m not sure how one might define a “free market case” for a revenue-neutral carbon pricing scheme, but the economic case for it would require evidence that (1) the benefits of the tax shift would exceed the costs, and (2) that the proposed tax shift is a less expensive means of addressing climate change harms than other possible remedies.

Regarding (1), the argument is intuitively plausible but is, in fact, quite problematic. And you don’t need to be a Cato libertarian to come to this conclusion. You will find great skepticism about the claim that a tax shift would on balance prove economically positive from economist Lawrence Goulder (a supporter of carbon taxes, by the way) in “Environmental Taxation and the ‘Double Dividend’: A Reader’s Guide,” National Bureau of Economic Research Working Paper 4896, October 1994. Also good is A. Lans Bovenberg and Ruud de Mooij, “Environmental Levies and Distortionary Taxation,” American Economic Review, September, 1994. As energy economist Stephen Smith observes after surveying the relevant economic literature on eco-tax shifts:

Ecotaxes are likely to involve distortionary costs at least as high as those involved in raising equivalent revenues through existing taxes. If the question is posed whether we would choose to use energy taxes, in preference for existing taxes on labour and other bases, in the absence of any environmental benefits, then the answer is almost certainly that we would not. Energy taxes would be likely to involve just as much distortion of the labour market as income taxes, and at the same time distort the commodity market. Only if there are expected to be environmental gains can the use of environmental taxes be justified, and the case for ecotax reform must be made primarily on the basis of the environmental gains that would result (Stephen Smith, “Environmental and Public Finance Aspects of the Taxation of Energy,” Oxford Review of Economic Policy 14:4, 1998, pp. 80–81).

Read that last sentence again. So, are the benefits that might flow from a carbon tax (defined at the monetarized value of the temperature reductions that might follow) greater than the costs of the same? Energy economist Richard Tol’s review of the published economic literature suggests that the monetarized damages that follow from a ton of carbon emissions at the margin (if mean estimates of future climate change from the IPCC are to be believed) likely works out to about $2 (Richard Tol, “The Marginal Damage Costs of Carbon Dioxide Emissions: An Assessment of the Uncertainties,” Energy Policy 33, 2005, pp. 2064-2074). Hence, if a carbon tax is set above $2 dollars, it will may very well deliver more social costs than benefits.

Regarding (2), Indur Goklany makes a strong case that adapting to climate change and applying targeted public policy initiatives to directly address subsequent harms is much cheaper—and much more effective—than a policy of reducing greenhouse gas emissions (Indur Goklany, “What to Do about Climate Change,” Policy Analysis 609, Cato Institute, February 5, 2008). Moreover, Goklany points out that this conclusion holds even if we accept the worst-case scenarios spun out in the Stern Review on the economics of climate change.

Of course, Matthew Yglesias is free to disagree with the above. But the case for a revenue-neutral carbon pricing scheme is not “fairly impeccable” … from an economic perspective, anyway. There are ample grounds for disagreement, and that’s true even if we ignore the debate about the underlying science.

 

Regarding intellectual property, Timothy Lee writes (also posted here),

In today’s installment of Cato Unbound, Dean Baker calls libertarians to task for their failure to take a more skeptical stance toward the government-granted monopolies we call copyright and patent protections:

Their enforcement efforts have required terrorizing people for making unauthorized copies of copyrighted material. In a recent case, a single mother was fined several hundred thousand dollars for allowing her computer to be used to download 24 songs over the web. The entertainment industry has gotten the government to prohibit the production of electronic devices because they had inadequate protection against duplicating copyrighted material. They had a Russian computer scientist arrested when he visited the United States because he gave an academic lecture that explained how an encryption lock could be broken. They even went after the Girl Scouts for singing copyrighted songs without permission.

The extraordinary abuses that we see every day as a result of patent protection for prescription drugs and copyright protection should be sending libertarians through the roof, and perhaps it does. But, where are the libertarians’ research programs on alternatives to patents for financing drug research or alternatives to copyrights for financing creative and artistic work?

My area of expertise is information technology policy, so I haven’t written much about pharmaceutical patents, but as a Cato scholar I’ve certainly spilled plenty of ink criticizing the excesses of copyright and patent law as it applies to information technology. Here is the study I did in 2006 criticizing the Digital Millennium Copyright Act, which was responsible for putting that Russian computer scientist in jail. Here is an op-ed I wrote for the New York Times last year pointing out that software patents have become an impediment to innovation in the software industry. Here is an article I wrote this summer for Reason magazine pointing out the problems the DMCA is creating for music consumers. And I’ve done dozens of posts at the Technology Liberation Front criticizing the recent expansion of copyright and patent restrictions. For example, in 2006 I did about 20 posts examining various software patents and pointing out how they were impeding progress in the software industry.

Moreover, we’ve written extensively about methods for producing creative works without copyright protection. These include free software, selling advertising, catering to core fans, selling security, and selling services. Cato published an excellent study in 2006 about the rise of “amateur-to-amateur” culture, which largely thrives outside the constraints of copyright. The growth of these alternative approaches to content creation suggests that in the future, copyright is likely to be less, rather than more, important than it was in the 20th century.

With that said, I can’t agree with Baker that all copyright and patent monopolies are illegitimate. Copyright and patent protections have existed since the beginning of the republic, and if properly calibrated they can (as the founders put it) promote the progress of science and the useful arts. Like any government intervention in the economy, they need to be carefully constrained. But if they are so limited, they can be a positive force in the American economy.

In the patent context, I understand that Baker advocates policies that would have the government more directly involved in rewarding specific innovations by giving cash prizes to innovators who solve hard technical problems. This post isn’t the place to evaluate that proposal in detail, but let me just note two flaws that come immediately to mind. First, while rent-seeking is a problem with any government program, patents included, a prize system seems like it would be particularly prone to gaming by interested parties. The rules would almost certainly be designed so that the best-connected firms, rather than the most innovative firms, get the most prizes.

Second, even if such rent-seeking could be minimized, the more fundamental problem with a prize regime is that the most important inventions tend to solve problems that people didn’t even realize they had until someone came along and found a solution. A scheme of government funded prizes will be inevitably backward-looking, rewarding people for solving the problems that are regarded as important today, while neglecting problems that are less widely recognized but may turn out to be more important in the long run.

Regardless, I agree with Baker that the copyright and patent systems have serious flaws, and I am glad to see scholars on the left advocating reforms. Indeed, one of the nice things about these issues is that they don’t break down along predictable ideological or partisan lines. The DMCA was signed by Bill Clinton, and the most damaging changes to patent law were enacted by a Democratic Congress in the 1980s, so there’s plenty of work to be done educating politicians on the left-hand side of the political spectrum. I think Baker will find the proposals in the copyright and patents chapter of the forthcoming edition of Cato’s Handbook on Policy congenial, and I hope he’ll forward it to his favorite members of Congress. Like him, I’m less interested in keeping score and more interested in promoting good public policy, regardless of the ideological label attached to it.

The Conversation

Keeping Libertarian, Keeping Left

As I’ve noted elsewhere: “Part of being a left-libertarian is that on the one hand you’re constantly trying to prod fellow libertarians into moving farther left, while on the other hand you’re constantly trying to show fellow leftists that libertarianism is already farther left than they realise.”

I might add that when you do both in the same piece, libertarians tend to hear mostly the criticism of libertarians, while leftists tend to hear mostly the criticism of leftists.

Thus for Dean Baker, from the left, my chief message was apparently that “progressives have unfairly maligned libertarians as defenders of corporate power;” and for Matthew Yglesias, likewise from the left, my chief aim was apparently “to cast doubt on the legitimacy of castigating libertarians as corporate stooges.” But from the libertarian side, Steven Horwitz worries that I may be too quick to charge libertarians with being corporate stooges. (And elsewhere on the web my article has been read as outright anti-libertarian.) I claim, of course, as always, the position of golden mean.


Reply to Matthew Yglesias

All three of my interlocutors agree with me that the state, as it stands, uses its power to benefit large corporations. The chief question at issue between Matthew Yglesias and myself is how best to remedy this situation. There would seem to be three possible options:

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.

Yglesias seems to think that the libertarian solution is (2), which he rejects as unrealistic. The “concept of a state apparatus that simply sits on the sideline watching the free market roll along” is “impossibly utopian,” Yglesias argues, because people will inevitably “try to manipulate the state to advance their own ends.” Hence Yglesias favors (3) instead.

But of course the libertarian—or at least the radical libertarian—agrees with Yglesias that a passive bystander state is utopian, and so favors (1) rather than (2). But for the libertarian, (3) is impossibly utopian as well; the incentival and informational perversities that beset the state are inherent in its monopolistic nature, so that the hope of achieving benign outcomes via the state is a chimera. (1) may be difficult to achieve given the prevailing political climate, but unlike (2) and (3) it poses—or so we libertarians claim—no inherent, ineradicable tendency to instability, and so is the least utopian option of the three.

Now it is true, as Yglesias rightly points out, that some states are more favorable to corporate power than others, and it is on this fact that Yglesias founds his hopes for reform. But given the state’s inherent liability to be influenced by concentrated over dispersed interests, this is a bit like pointing out that some heroin addicts are less unhealthy than others—the observation is true enough, but it’s no argument for seeking the right kind of heroin.

Yglesias notes that, as he sees it, “what corporations are after in politics is political action that gets them money and whether or not this coincides with the dictates of a purist laissez faire vision is a matter of mere happenstance.” Yglesias lists this as one of our points of agreement, but in fact from my point of view there’s no “happenstance” about it; corporate opposition to free markets is systematic, because free markets are systematically inimical to corporate power. (Note: I don’t consider “repeal regulations on me but not on my competitors” to be a selectively pro–free market policy; I see it as purely and wholly anti—free market.)

Yglesias also describes the libertarian utopia as a place “where politics just somehow doesn’t happen.” I’m not sure whether this as meant as a description of (1) or of (2), but in any case it depends what is meant by “politics.” If by “politics” is meant the legalized oppression practiced by governments, then certainly libertarians are fighting for the abolition of politics, just as we fought for the abolition of slavery two centuries ago. But in a broader sense of the term, libertarians need have no objection to politics; as Don Lavoie points out, there is “much more to politics than government”:

Wherever human beings engage in direct discourse with one another about their mutual rights and responsibilities, there is a politics… . in the sense of the public sphere in which discourse over rights and responsibilities is carried on … . The force of public opinion, like that of markets, is not best conceived as a concentrated will representing the public, but as the distributed influence of political discourses throughout society… . Inside the firm, in business lunches, at street corners, interpersonal discourses are constantly going on in markets. In all those places there is a politics going on, a politics that can be more or less democratic… . Leaving a service to “the forces of supply and demand” does not remove it from human decision making, since everything will depend on exactly what it is that the suppliers and demanders are trying to achieve… . What makes a legal culture, any legal system, work is a shared system of belief in the rules of justice—a political culture. The culture is, in turn, an evolving process, a tradition which is continually being reappropriated in creative ways in the interpersonal and public discourses through which social individuals communicate.[1]

Yglesias concludes that “libertarianism, even at its very best, tends to suffer from an impoverished set of ideas about how corporate domination of the public policy space might be prevented,” since it “seems to have little to say about how to bring about political change except to work hand-in-hand with business lobbies.” I’m not sure what versions of libertarianism Yglesias has in mind when he refers to libertarianism at its very best, but if he thinks that libertarians have had nothing to say about political change other than working hand-in-hand with business lobbies, then I must conclude that his familiarity with libertarian literature has been rather narrow. (I note in passing that the three supposedly libertarian policies that Yglesias criticizes—replacing Social Security with forced private savings, defending the rights of industry to pollute, and favoring tax-funded highways over tax-funded mass transit—are widely rejected and sharply criticized by many libertarians.)

Yglesias’s own suggested strategies for political change are a mixed bag. Some of them, such as campaign finance legislation and strengthening the civil service, seem to involve a mere shift of power from the corporate class to the political/bureaucratic class—cold comfort for those who see little to choose between them. Libertarianism is equally opposed to monopolistic power whether it is wielded by corporations or by bureaucrats; again, Yglesias’s solution seems to involve shifting the reins of monopolistic power from one party to another, which for a libertarian misses the point—we don’t want people’s lives to be directed by politicians instead of by businesspeople, we want people to be free to direct their own lives.

But Yglesias’s other suggestions—community organizing, public-interest advocacy organizations, and seeking allies in the trade union movement—are ones I think libertarians would do well to take. (Those of us in the Alliance of the Libertarian Left have been advocating just these sorts of measures for some time.) And while it is true that many libertarians oppose “strong labor unions,” Yglesias overlooks a vocal pro-union minority within the libertarian movement; I commend to his attention the writings of Kevin Carson, Charles Johnson, and Brad Spangler. In the nineteenth century, libertarians were at the forefront of various causes considered “left-wing” today, including the labor movement, the feminist movement, the abolitionist movement, and the antiwar movement; the causes of libertarians’ long rightward detour and the left’s long stateward detour are a long-debated topic, but in any case it is long past time for libertarians and the left to slough off their respective authoritarian accretions and rediscover their common radical heritage.

Reply to Steven Horwitz

Steven Horwitz and I disagree about fairly little here (and his apprehension that I am on the verge of charging him with “vulgar libertarianism” is unwarranted; for the record, by the nonexistent powers vested in me I hereby certify Steven Horwitz as a non-vulgar libertarian!). But he does think that I understate the extent to which the success of large firms like Wal-Mart is due to genuine entrepreneurship as opposed to governmental patronage; to the extent that this is so, there is a libertarian case for defending Wal-Mart (and the like)—and Horwitz refers to his own paper comparing Wal-Mart’s response to hurricane Katrina with that of FEMA.

I heartily agree with Horwitz that Wal-Mart did a far better job of disaster relief than FEMA; I also agree with him that Wal-Mart’s superior performance in this regard is to be attributed to its operating in a more competitive context and so facing less extreme incentival and informational perversities. Where we disagree, perhaps, is over the size of the gap between the competitive context to which Wal-Mart owes its success and the competitive context that would exist under genuine laissez-faire. I think it’s large enough that the preferability of Wal-Mart over FEMA looks a bit like the preferability of Mussolini over Hitler; yes, Mussolini was better than Hitler, and that can be worth pointing out, but I’d rather spend time looking for an alternative to both of them.[2] (And if a firm that, e.g., treats its employees as badly as Wal-Mart does could really thrive in a freed market, that might well justify skepticism as to the value of markets.)

Horwitz notes his agreement with Will Wilkinson’s argument that “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.” Two points: First, I never claimed that funding for highways was the primary means by which Wal-Mart benefits from governmental intervention; it’s only one of a long list. (For those who share Wilkinson’s and Horwitz’s skepticism of the extent to which large firms like Wal-Mart benefit from state patronages and would suffer from diseconomies of scale in a free market, I recommend Kevin Carson’s two books[3] on the subject.) Second, 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.

Horwitz contrasts two strategies for replying to the charge that free markets create socioeconomic inequalities; one is to acknowledge, indeed to emphasize, the existence of these inequalities, but to blame them on government rather than the market; the other is to point out that the inequalities are actually less extreme than is often supposed, thus showing that even as hampered as it is, the market is still managing to improve the prospects of the poorest. Horwitz maintains that while I champion the first strategy, the second is both more accurate and “more rhetorically effective.” In particular, Horwitz worries that if libertarians become fearful of pursuing the second strategy lest they be accused of “vulgar libertarianism,” they will miss opportunities to rebut statist arguments, and we will end up with even more statism than we otherwise might.

I’m happy to agree that there are cases when the second strategy is quite accurate; even hampered markets can work surprisingly well. I think we may disagree, though, about the extent to which serious inequality pervades our society—and it is for precisely that reason that I’m also skeptical of his further claim that the second strategy is more rhetorically effective. Certainly there are many respects in which the living conditions of the poor have improved over the years. But there are also many respects in which they haven’t improved or have gotten worse; and even those aspects that have improved are still pretty bad—especially compared with what we could expect to see in a freed market. So when people hear free-market advocates assuring them that their lives are great and getting better, when the everyday reality they experience tells them the opposite, they’re likely to conclude that free-market advocates are apologists for existing inequalities.[4] At any rate, I find I make much more headway with leftists by explaining prevailing inequalities as creatures of the state than by downplaying them.

Reply to Dean Baker

I agree with pretty much everything that Dean Baker says in his piece about the horrific results of copyright and patent law, and consequently I have little to add beyond “Amen!”—and another “Amen!” to his closing wish to “see libertarians be as aggressive in confronting the interventions that support corporate power as they were in confronting Social Security.” (And I would likewise recommend that Baker take a look at the Alliance of the Libertarian Left to see some of the ways that libertarians are doing this.) Finally, in response to Baker’s question: “where are the libertarians’ research programs on alternatives to patents for financing drug research or alternatives to copyrights for financing creative and artistic work?” I will point him to the resources listed at the Molinari Institute’s anti-copyright page.


Notes


1 Don Lavoie, “Democracy, Markets, and the Legal Order: Notes on the Nature of Politics in a Radically Liberal Society,” pp. 112-116; in Social Philosophy & Policy 10, no. 2 (Summer 1993), pp. 103-120. See also the discussion of the “authoritarian theory of politics” in Roderick T. Long and Charles Johnson, “Libertarian Feminism: Can This Marriage Be Saved?” (online: http://charleswjohnson.name/essays/libertarian-feminism).

2 Note to all careless readers out there: if you think I just claimed that Wal-Mart is comparable to Hitler, you need to reread; a similarity of relations does not entail a similarity of relata.

3 Carson, Kevin A., Studies in Mutualist Political Economy, Booksurge (2007; online: http://mutualist.org/id47.html), and Carson, Kevin A., Organization Theory: An Individualist Anarchist Perspective, forthcoming (online: http://mutualist.blogspot.com/2005/12/studies-in-anarchist-theory-of.html).

4 See my discussion of Barbara Ehrenreich in “Proletarian Blues,” Austro-Athenian Empire, 25 November 2006 (online: http://praxeology.net/blog/2006/11/25/proletarian-blues).

On State Funding and Innovation

I am glad to see that Roderick is largely in agreement with my comments on patents and copyrights. As I am afraid that Tim Lee’s comment has misrepresented my views on alternatives to drug patents, I’ll take this opportunity to clarify what I view as the best system.

I do not support a prize system, for many of the reasons mentioned by the author. A prize system would preserve what I see as some of the worst problems of the patent system, most importantly encouraging secrecy in research.

My ideal system would be a system in which the government allocates a pot of money (@$30 billion a year—approximately equal to private R&D in the pharmaceutical sector) that would be awarded in long-term contracts to a relatively small number of master contractors. For example, there can be 10 master contractors getting grants of roughly $30 billion each spread over 10 years.

The model here should be government contracts for major projects, like building an airport. There are certainly problems with such contracts, but these problems seem relatively minor compared with the costs associated with charging hundreds of dollars for drugs that would sell for just a few dollars in a competitive market.

There are two conditions on the funding. First, all results are posted fully and promptly. This will allow researchers throughout the world to quickly gain the benefit of research funded through this system. They will be able to independently analyze the data and compare findings across studies. This should substantially hasten the research process.

Second, all patents are placed in the public domain subject to copyleft rules. This means that any drugs based on this research can be produced and sold as generics. Researchers outside the system can take advantage of research in the publicly funded system, but they must either place any derived patents in the public domain or negotiate an agreement with the contractor who holds the patent. This should result in the vast majority of new drug patents being placed in the public domain.

Of course this is not a perfect system and there may well be better alternatives, but the point is to get the discussion started. It is remarkable how little attention mainstream economists pay to such an enormously important issue. Perhaps a progressive-libertarian alliance can force economists/policy makers to take this issue seriously.

Owning Ideas Means Owning People

Timothy Lee writes:  “I can’t agree with Baker that all copyright and patent monopolies are illegitimate.” I’m actually not sure that’s Baker’s view (in his original response Baker remarks in passing, “there may be areas in which patents are an effective policy for promoting innovation”), but it is my view, so let me say briefly why I don’t regard intellectual property as a legitimate form of property.

The objects of ownership in the case of intellectual property are supposed to be abstract objects; but what does ownership over an abstract object amount to?  Ownership is supposed to solve conflicts over use, but there cannot literally be conflicts over the use of abstract objects; I don’t have to wait until you’re done thinking the Pythagorean theorem before I can start thinking it. Putative conflicts over the use of abstract objects are always really conflicts over the concrete items in which those abstract objects are embodied.

An abstract object, such as a design for a new kind of mousetrap, gets its foothold in concrete reality only by being embodied in, say, a mind that is thinking of it, or a sheet of paper that describes it, or an actual mousetrap built in accordance with it.  But if those concrete objects are already owned – the mind by the person whose mind it is, the paper and the mousetrap by whoever made or bought them – then the question of who has rights over those things is already settled, and there can be no further question of who owns the design itself.  If the originator of the design were to claim exclusive rights over it, he or she would thereby be claiming, in practice, the right to control someone else’s property – someone else’s individual mind or individual sheet of paper or individual mousetrap.  Intellectual property is thus essentially a claim of ownership over other people and the products of other people’s labor, and so is necessarily illegitimate; in forbidding the free circulation of ideas it constitutes a form of censorship as well.

In defense of intellectual property, Lee notes that “Copyright and patent protections have existed since the beginning of the republic, and if properly calibrated they can (as the founders put it) promote the progress of science and the useful arts.”  That they have existed since the beginning of the republic is true, but not a compelling argument for their legitimacy. (Slavery existed for the first century of the republic also.) As for their being needed to promote “science and the useful arts,” even if this were true it wouldn’t justify the violation of liberty involved – but it is doubtful that it is true, given that most scientific and artistic progress throughout history was accomplished without intellectual property protections, and in many cases was in fact possible only because there were no such protections (as inventions built on previous inventions, and artworks on previous artworks).  The protectionist argument that intellectual innovators won’t have sufficient incentive to create unless they’re protected from competition doesn’t seem to hold up historically.

I can’t work up much enthusiasm for Baker’s alternative proposal, however.  Baker writes:

My ideal system would be a system in which the government allocates a pot of money (@$30 billion a year – approximately equal to private R&D in the pharmaceutical sector) that would be awarded in long-term contracts to a relatively small number of master contractors. For example, there can be 10 master contractors getting grants of roughly $30 billion each spread over 10 years. The model here should be government contracts for major projects, like building an airport.

In light of the massive rent-seeking, favoritism, and costly boondoggles that plague government contracts, Baker’s proposal seems worrisomely similar to the kind of destructive corporate welfare and monopoly privilege that I discussed in my first essay.

Contrary to what both Lee and Baker imply, there are ways of promoting the “progress of science and the useful arts” without invoking state aggression against liberty or property — ways that would secure many of the benefits of copyright and patent protection without violating libertarian scruples.  These ways include contractual stipulations, charitable patronage, and organized boycotts.

Let me say a bit about the latter case, the organized boycott.  During the late medieval period a system of commercial law arose in Europe called the Law Merchant, its creation prompted in part by the lack of uniform legal standards owing to the unwillingness of governmental courts in one country to enforce contracts made under the laws of another country.  Bypassing the inefficient (because monopolistic) government courts, merchants from different countries joined together in developing their own rules and courts; being denied the enforcement powers of the state, mercantile courts could rely only on boycotts to secure compliance with their decisions.  A similar situation arose in 17th-century Amsterdam: when government courts refused to enforce certain forms of financial contract, merchants continued to make such contracts anyway, relying on the power of boycott for enforcement. In both cases, the threat of boycott was sufficient to ensure that parties abided by their contracts. [1]

There is little reason to suppose that payment for the labor of intellectual innovators could not be guaranteed in the same way, via an organized system of voluntary boycotts rather than by governmental force.  Being voluntary, such a system would avoid the rights-based objections to copyrights and patents; moreover, the kinds of protections that would be sustainable under a voluntary regime would be unlikely to include the extreme, disproportionate excesses of current IP law.

Note

[1] On the Law Merchant see Tom W. Bell, “Polycentric Law,” Humane Studies Review 7, no. 1 (Winter 1991/92; http://osf1.gmu.edu/~ihs/w91issues.html; on the Amsterdam case see Edward Stringham, “The Extralegal Development of Securities Trading in Seventeenth-Century Amsterdam,” Quarterly Review of Economics and Finance 43 (2003), pp. 321–344; http://www.sjsu.edu/stringham/docs/Stringham.2003.QREF.Amsterdam.pdf.

 

Markets Achieve What the Left Wants Too

First, I happily accept Roderick’s certification as a “non-vulgar libertarian.” I’m hoping he’ll get me the keys to the secret restroom, which I’m sure is cleaner than those in regular libertarian organizations (and certainly cleaner than those in the statist status quo) because these are cleaned by the owner-worker-managers themselves, rather than through hierarchical job assignments.

More seriously, he raises the question of whether my “playing defense” perspective runs the risk of minimizing the problems that really exist in a statist society. Specifically, he wonders whether pointing to the real gains of the poor leaves me and others open to other ways in which the poor have become worse off in recent years, thanks to various state policies. He also suggests that as far as left-libertarian dialogue goes, it might be more constructive to find places of agreement on the ways in which inequalities pervade the current system.

Again, I think Roderick and I have a disagreement of degrees, not principle. I also think it’s centrally important that libertarians point to the variety of injustices and inequalities that pervade the current system. For example, in my own work on gender and the family, I have pointed to the ways in which the current income tax system in the United States, through its combination of progressivity and not allowing married couples to treat each one’s income separately, is extremely biased against the labor force participation of secondary earners. Their first dollar gets taxed at the highest rate paid by the primary earner. Given that women are more likely to be the secondary earners (for cultural reasons that a thicker libertarianism could join with the left in trying to change), this ends up punishing married women who wish to work. That punishment is even greater when one considers the other costs associated with working (e.g., finding affordable day care in a highly regulated market). Simple changes to the tax system, or even going to a low and flat tax, would rectify this situation and help to put the genders on more equal ground in the labor market. Here’s a case where libertarians could join with the feminist left in working to change the tax system in a way that reduces a state-created gender inequity.

Even as we agree with the left about the existence of real inequalities in the status quo, sometimes one of the most effective things libertarians can do is to identify how market processes might better serve the left’s stated ends than their own preferred policies do. For me, this is one of the advantages of the data showing the better consumption possibilities for the poor. Most of that growth, I would argue, has come from the underlying market processes that have reduced the prices of new innovations and made luxuries into basics, all while the same processes have generally raised the value of human labor so that all of these goods can be afforded. Markets, including Wal-Mart, have done more for poor Americans than any government program, at least in the long run if not the short run. As I’ve said elsewhere, given Wal-Mart’s success in improving the living standards of poorer Americans, through both jobs and cheaper goods, if it were a government program, it would be the greatest anti-poverty program ever (and it would be cheered by the left for the same reasons it should be today, even as one recognizes its imperfections).

By the same token, libertarians can also point to government interventions such as minimum wage laws and occupational licensure laws that limit the labor market opportunities of the poor, particularly those of color, and engage the left in conversation about whether such policies really do serve their ends better than the results of free(d) markets.

Finally, let me note, and I know Roderick agrees with me here, that libertarians have paid far too little attention to the ways in which state intervention is a source of racial and gender inequities. That’s not to say we have paid no attention to them, but it is to say that if we are going to engage the conversations over policy that are taking place on the left (and among many academics), we are going to have to pay more attention to them.

More importantly, if libertarian ideas are ever going to be significantly attractive to more women and people of color, and perhaps more young people regardless of race and gender, we are going to have to do a lot better in showing how our ideas can speak to their concerns and their rightful claims of historical injustice. Aside from the fact that white men are becoming even more of a minority themselves so appealing to women and people of color is no long optional, much earlier in its history, libertarianism stood in solidarity with the concerns of these groups, who they rightly saw as victims of state oppression and for whom freed markets and freedom in general would go a long way in helping.

Nothing makes me prouder to be a free-market economist than knowing that the epithet “the dismal science” was coined by people like Ruskin and Carlyle who complained that a world of laissez-faire as defended by economists such as J. S. Mill and others would undermine the racial hierarchies of Victorian England. The “dismalness” of economics was that it saw a future of racial equality and leveled hierarchies thanks to the results of the free market. I wish more of my libertarian colleagues would recognize our past identity being at the forefront of concerns about issues of race and gender and engage with our friends on the left about the best means to achieve so many ends that we share. Much as we should reject corporatism in favor of truly freed markets, libertarians should push ourselves away from the right’s reflexive rejection of the discussion of race and gender as “political correctness” and realize that for most of our history our opposition to corporate-state power and our sympathy for the victims of state-caused inequalities of race and gender made us the “politically correct” ones.

Artistic Freedom Vouchers

In response to Roderick’s Round II comment on intellectual property, I don’t see that he has a viable alternative mechanism for financing work that I think we agree must get done. The idea of voluntary payments is intriguing, but can we do that in a way that insures that sufficient funds are devoted to the task?

I have a proposal for an “artistic freedom voucher” which would be a refundable tax credit (e.g. $100) that could only be used to support creative or artistic work. Potential recipients register in the same way that charitable or religious organizations register for non-profit status. The condition of getting the money is that you are not eligible to receive copyright protection for any work produced for a substantial period of time (e.g. 3–5 years) after receiving money through this system.

Obviously this is not entirely voluntary. You are taxing people to pay for the voucher (with some element of redistribution), but where the money goes is entirely up to the individual. My expectation is that a vast amount of uncopyrighted material circulating freely over the web would quickly crowd out the copyrighted material, but what actually happens would of course depend on market outcomes.

I don’t know if this story offends libertarian sensibilities, but at least in my book it involves much less intervention than the copyright system.

Returning to drugs, I do think it’s important to have an efficient funding mechanism; I do want to see more research into lifesaving drugs. I am not convinced that Roderick’s mechanisms are workable or efficient.

To my mind its essential that research be fully open. Innovation will proceed much more rapidly if researchers can quickly benefit from the results of their colleagues. It is not open now, and I don’t see how it would be open with the mechanisms he has described.

This raises a second point. I don’t think that we can accurately award credit for the inventers/innovators of a particular drug or scientific breakthrough and I hate to see us waste a lot of effort trying. Science is an inherently social process, with every researcher building on the work of their predecessors. We can always pick someone out as the person who published the key paper or got the important patent, but very often the person getting credit may just be taking a small step building on the work of others who have done the heavy lifting.

This is why I prefer a system where researchers are paid upfront, with opportunities for advancement and even large prizes based on their performance. But, I hate to see a situation where their compensation is entirely dependent on being able to claim credit either for a patent or through some other process (like the ones described by Roderick). This will lead to a situation in which people who are good at claiming credit get well-compensated, and considerable resources are devoted to the effort.

On final point on my proposed funding mechanism: I really do want to see drugs sold at their marginal cost. We should not have situations in which people struggle with paying the bill for drugs that are made expensive through patent protection or any other mechanism. The drugs are cheap to produce and they should be sold cheaply.

It doesn’t make sense to make the patient bear the cost of drug research just because they happen to be the one needing a drug. It makes much more sense to treat this as a form of insurance. You pay for the research in advance—in the event you need the drug, you get it at its cost of production. We could do this an entirely voluntary insurance system, except I don’t know how to prevent free-riding in this story, hence my use of the tax system.

Anyhow, I hope that we can spark more interest into alternative mechanisms of financing innovation and creative work. The current system is an outrage from both an economic and moral perspective and it’s hard to believe that we can’t do better.

The Case for Case-by-Case Evaluation

I find Steve Horwitz’s claim that “Markets, including Wal-Mart, have done more for poor Americans than any government program, at least in the long run if not the short run” to be a bit puzzling. If this means that the absence of governance à la Joseph Stalin is a more important determinant of our well-being than is, say, the existence of unemployment insurance then, yes, of course this is true. But the question facing government programs is not whether they are more or less beneficial than the existence of a market economy, the question is whether the programs are more beneficial than would be the absence of programs.

And of course the answer, to me, comes up differently according to the program. And this is where things get tricky. Horwitz cites minimum wage laws and occupational licensure requirements as examples of non-beneficial programs. I’m not sold either way on the minimum wage, but definitely agree about the licensing. At the same time, things like rules that prevent dental hygienists from practicing without being supervised by a dentist aren’t being perpetrated by “the left,” they’re being perpetrated by dentists. It’s a classic example of concentrated benefits and diffuse costs. And the question, to my mind, is what is to be done about it. If it were the case that electing politicians who are given to waxing effusive about the virtues of free markets (i.e., Republicans) was likely to mitigate such abuses, I would look more kindly on such politicians. But in practice, it doesn’t seem to make much of a difference.

And then there’s a different set of regulatory issues, notably those dealing with the environment, where the benefits of regulation are diffuse and the costs are concentrated on the polluting firms. Here I side against the free marketers, but this is where market rhetoric seems to have a lot of efficacy. Which isn’t to point to a flaw in market rhetoric per se, but merely to the reality that any set of rhetorical strategies is more likely to succeed when it has a lot of money and political influence behind it. But if you want to convince people on the left that an alliance is worthwhile, you need to make the case not merely that market principles could in theory help the poor by dismantling some barriers to economic opportunity, but find some concrete projects on which to collaborate. Otherwise, market and anti-regulatory rhetoric will continue to be associated with what it accomplishes in practice—serve the ends of politically powerful entities when it’s convenient to them.

Governments Work for Special Interests, Markets Work for Ordinary People

As I’m in substantial agreement with Steve Horwitz’s response, I’ll concentrate on the contributions of Yglesias and Baker.

Reply to Matthew Yglesias

Matthew Yglesias is puzzled by Horwitz’s contention—and by extension my own—that markets are more beneficial than government programs. It’s not so much that he disagrees with it as that it seems to him beside the point: “the question facing government programs is not whether they are more or less beneficial than the existence of a market economy, the question is whether the programs are more beneficial than would be the absence of programs.”

I suspect the reason that Yglesias and Horwitz are talking past each other here is that Yglesias is thinking of the market economy as a basic background fact, on top of which one may or may not add various government programs. Even if oxygen is more crucial to human survival than clothing and shelter, it would be puzzling to point this out as an argument against food and shelter; analogously, I suspect Yglesias thinks, even if markets are more important for human well-being than government programs, that’s no argument against government programs.

From a libertarian standpoint, however, the market is not a substratum that persists unaffected through changes in policy; the market is the sphere of voluntary transactions, and so every law that either mandates or prohibits some transaction (for what else do government programs generally do?) shrinks the market. Libertarians object to such shrinkage both on grounds of justice (forcible interference with our neighbors’ peaceful activities treats those neighbors as though they were our property rather than our equals) and on grounds of efficiency (every reduction in the sphere of activities open to free competition increases the scope of the incentival and informational perversities endemic to monopoly).

Yglesias mentions that he opposes free-market solutions to pollution, but he doesn’t say what he takes those free-market solutions to be or why he opposes them. I fear he may think that the libertarian solution to pollution is to leave firms free to pollute; no, the libertarian solution is to make firms legally accountable for the damage they cause, thus preventing them from socializing the costs of their polluting activities.[1] Naturally enough, then, polluting firms tend to oppose the libertarian approach to pollution. Environmental regulation, however distasteful they may find it, is far less threatening to polluters than judicial liability, because it is easier for firms to “capture” a concentrated mass of regulators than a dispersed abundance of juries.

Since free-market rhetoric has so often been used as a cover for corporatist policies, how, Yglesias asks, can we now make use of it without thereby enabling the very corporatist strategies we oppose? The answer, I suggest, is that our use of free-market language must self-consciously and explicitly emphasize the difference between genuine and phony free-market solutions. We must persistently call BS whenever corporatist stratagems are either credited to or blamed on the free market—whether it is a President Sarkozy attributing the financial crisis to some supposed regime of laissez-faire or a President Bush wrapping the biggest corporate welfare handout in history in the mantle of the free market. We must develop a new (or revive an old) way of speaking about free markets, one openly aligned with left-wing ideals and openly hostile to corporate interests. While such a left-libertarian language will encounter resistance from traditional libertarians and traditional leftists alike, it is being explored and shaped even now by those on the libertarian left.[2] I invite libertarians and leftists alike to join in the process.

Reply to Dean Baker

Dean Baker is skeptical as to whether replacing “intellectual property” laws with a noncoercive system of securing payment for intellectual innovators can ensure “that sufficient funds are devoted to the task.” My question is: “sufficient” by what standard? That of consumer preferences—or of special interests? If we prefer that consumer preferences prevail, then the venue for making such decisions should be the one that is most responsive to consumer interests—and that is the relatively accountable market sphere as opposed to the relatively unaccountable political sphere.

Baker is “not convinced that [my] mechanisms are workable or efficient.” How well would the specific mechanisms I’ve described work? Would they be the ones that prevail in a freed market? Like Baker, I don’t know. What I do know is that in a freed market any entrepreneur who could figure out how to overcome obstacles to satisfying the demand for intellectual innovation would stand to make a profit, and entrepreneurs in that situation are likely to devise solutions that those (like Baker and myself) whose income does not currently depend on solving such problems are not going to be as driven to discover. (Need I mention the lighthouse?) Moreover, on the market different ways of addressing these problems have to compete against each other, thus allowing their respective merits and flaws to be assessed.

By contrast, the salary of politicians and bureaucrats does not depend to the same extent on the ability to solve such problems—indeed in many cases there’s an inverse correlation, as government functions that perform less effectively tend to get more money thrown at them—so we would be unwise to look to them for as much creativity in addressing these issues; furthermore, whatever solution they do devise is likely to be imposed monopolistically on everyone, thus short-circuiting the competitive discovery process and leaving us unable to determine how well or badly the chosen solution would fare against competitors. Should the problem of securing adequate remuneration to intellectual innovators be entrusted to a system that creates incentives to solve it, or one that does not?

With regard to the funding of pharmaceutical research, Baker says he would have no objection to “an entirely voluntary insurance system” if only he could see “how to prevent free-riding.” Let me remind him that there once existed a voluntary system of health insurance for the working poor that was quite effective at keeping costs down and policing free riders – until the government shut it down.

[1] See once again the pieces I cited earlier – Murray Rothbard’s “Law, Property Rights, and Air Pollution” and Mary Ruwart’s “The Pollution Solution” and “Destroying the Environment.” For the application of libertarian principles to cases where the responsibility of each individual contributor to a pollution problem is marginal, see my own On Making Small Contributions to Evil.”

[2] By the “libertarian left” or “left-libertarianism” I refer to the fusion of libertarian and left-wing concerns that prevailed among 19th-century radical libertarians; was revived in the 1960s and 1970s by writers like Samuel Konkin (founder of the “Movement of the Libertarian Left”), Karl Hess, and (for a time) Murray Rothbard; and continues to be developed within the Alliance of the Libertarian Left. This usage is not to be confused with the recent, more narrow use of the term “left-libertarianism” to describe a neo-Georgist view on land ownership held by such writers as Michael Otsuka, Peter Vallentyne, and Hillel Steiner.

Unintended Corporatism

I think Matt may have misread the argument in my last post, at least on one point. I most definitely was not arguing that the left was the source of the occupational licensure laws that are so problematic for poor Americans. I agree with Matt that this is a classic concentrated benefits and dispersed costs story where rent-seeking by incumbents (along with support from some paternalists in classic Baptists and Bootleggers fashion) spreads the costs by denying entry to potential suppliers and raising prices to demanders. My point was not to blame the left. My point was to suggest, and Matt seems to agree, that this is an issue where the left and libertarians can work together to remove barriers to upward mobility. Asking the state for protection against competition is not limited to the corporate world; it also comes from small entrepreneurs trying to block new entrants as well as other sources such as unions, who often support such licensure laws so as to prevent competition from lower-wage labor, both domestic and foreign. If we’re going to oppose corporatism, we should probably oppose it no matter the size of the “firm” involved.

My point about Wal-Mart wasn’t so much that Wal-Mart is a substitute for government programs, but rather that when people, both on the left and right, set up barriers to entry to Wal-Mart, they are in fact causing harm to the poor, both as buyers of Wal-Mart’s cheap goods and as potential employees. That is, of course, an empirical claim that might be wrong. However, because I think it’s true, I also think that Wal-Mart’s critics on the left are engaging in behavior that prevents them from achieving their own stated ends of improving the lives of the poor. We should indeed evaluate government welfare programs on their own merits, but we shouldn’t unnecessarily increase the perceived need for them by preventing companies like Wal-Mart from providing cheap necessities and jobs for working class Americans.

It’s also worth noting that Wal-Mart’s competition is, I’m sure, all too happy to sit on the sidelines roasting marshmallows around the fires others have lit in places where Wal-Mart is facing political barriers to entry. Preventing Wal-Mart from entering a market only works to serve the interests of its competition. Call it “unintended corporatism,” but it doesn’t change the fact that putting political barriers in the way of one firm is not substantively different from giving a subsidy to its competition. Opponents of corporatism who also wish to use the state to put barriers in the way of the market behavior of firms they don’t like are really feeding the very beast they claim to want to starve.

Moving away from Wal-Mart specfically, I would argue that a consistent anti-corporatist perspective means that no producer (including labor) gets to use the state to concentrate benefits on itself while spreading the costs to its competition and consumers. Whether we like the firm or not, whether the firm is large or not, or even whether we’re talking about labor rather than capital, is not the issue. Using the state to benefit oneself at the expense of others is.

Free Market Firms: Smaller, Flatter, and More Crowded

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.[1]

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.[2]

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.

Notes

[1] 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).

[2] 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?

Better Incentives for Research, Not Perfection

I will try to make one quick concluding point in my exchange with Roderick on patents. I realize that he doesn’t like my system because it requires that we tax people to pay for the research. But if he will agree for a moment not to make his perfect the enemy of his good, let me compare the system that I proposed with the current system.

The country is currently spending about $250 billion a year on prescription drugs, with just under $90 billion coming through various government funded programs. Let’s imagine that we eliminate patent protection tomorrow. We would be able to buy the same drugs for around $25 billion a year in a world in which all drugs could be sold as generics.

Now we still have to pay for the research. My ballpark guesstimate is that we could replace the research done by the pharmaceutical industry with $30–$40 billion of publicly funded research (this is approximately equal to what they claim to spend).

Now, if we hypothesize that this is in fact the case, which is better: a world in which we tax people $90 billion dollars to buy drugs at patent protected prices, or a world in which we tax people $30-$40 billion to pay for research, and all drugs are sold at market prices?

I know my answer to that question, I’m interested in Roderick’s.

When Corporations Hate Markets: Best of the Blogs

Editor’s note: Every month, we search the blogosphere for the most noteworthy responses to Cato Unbound. The following are just a few from among the extraordinary number of replies that this issue has prompted.

Wirkman Virkkala writes:

I have grave doubts about any left/libertarian alliance. The left is so addicted to moralistic symbolism, group identification, and a whole panoply of tacky ritual activities like “protest marches,” that it’s hard to put much hope in that movement — now almost wholly committed to big government — and its members’ ability to grow up. But we’ll see.

Darian Worden writes:

The only thing I would have to add (cuz I’m a picky bastard) is to Long’s discussion of deregulation. There is regulation by government, and there is regulation by the market. The former operates through coercion and political favoritism. The latter operates through competition, true consequences, free unions, and independent product testing. The former can only be increased at the expense of the latter. Thus when government regulations are increased, free market regulation necessarily suffers, and it is in this way only that “deregulation” can be blamed for economic troubles. When libertarians say that we are in favor of deregulation, we run the risk of appearing to want businesses to get away with anything, when we are actually presenting the best possible restraint on business: the power of the market.

William Collins writes:

[W]hile I enjoyed reading Roderick Long and John Schwenkler on corporatism and libertarianism, I’m left wondering how exactly one would go about liberalizing a broad range of economic activities in our current political environment. I’ve always thought that the idea of regulatory capture was one of the more persuasive rebuttals to various progressive policies, but I’m not sure why corporations would suddenly cease to influence the political process in the midst of a thorough-going effort to liberalize the economy.

At the Foundation for Economic Education, Sheldon Richman writes:

This error [of conflating free markets and corporatism] is tragic not only because it is an error — no two things could differ more starkly than laissez faire and the corporate state — but also because it drives away potential libertarians who are repelled by government intervention on behalf of capital, such as the various bailouts of favored financial companies. We cannot too frequently repeat that free markets would not only be free of government regulation but also of privilege, such as guarantees and the “too big to fail” doctrine. In the free market, profit and loss would be private, unlike today where losses are increasingly socialized (imposed on taxpayers) if the failing company is big and well-connected.

Arnold Kling writes:

Crony capitalism comes to us in the form of bootleggers and baptists. (The original Bootleggers and Baptists model comes from Bruce Yandle, as Wikipedia explains.)

Anyone who claims to oppose crony capitalism is a baptist. A crony capitalist is a bootlegger. The problem for Republicans is that if they make friends with bootleggers, then they get accused by Democrats of being crony capitalists. On the other hand, when Democrats make friends with bootleggers, including Freddie Mac, Fannie Mae, Goldman Sachs, George Soros, and Warren Buffett, they are immune from charges of crony capitalism.

So, the Democrats get most of the baptists—the people who say they want to rein in corporate power—as well as plenty of bootleggers. On top of that, they have the minorities.

On the Republican side, the baptists are the libertarians, who are sympathetic with Long. The problem is that the baptists want to drive the bootleggers out of the Republican Party, which would leave the Democrats as the only party that can collect campaign contributions from the bootleggers. Moreover, the libertarian baptists are culturally misaligned with actual Baptists.

Kevin Feasel writes:

If libertarians could use intellectual judo to get the left to remove oligopoly-forming market restrictions, bully for them, but as far as I can see it, it’d be like teaching a scorpion not to sting, for it is in the nature of the leftist to desire control and centralization (having “the best people” running things, as they can do anything).

Tyler Cowen writes:

“Libertarianism in practice” will be excessively pro-corporate but so are most ideologies. Rahm Emanuel, for instance, served on the board of Freddie Mac and earned $16 million in a two-year stint at an investment bank. Wall Street has been the single biggest backer of his political career. He won’t be pushing to destroy this sector but I don’t take those facts to be some great refutation of Obama as a President.

Sometimes the left-wing tactics, especially supporting labor unions, are exactly what lead to greater corporatism. Look at the forthcoming GM bailout. Or consider France, which has strong labor unions but arguably it is also more corporatist than is the United States.

Colson of Somewhat-Hypothesis.com writes:

I fail to see where Yglesias derives his concept that libertarian utopianism is “no more realistic” than a socialist one. My question to Mathew would be: why? Given, progressives have, for the most part of a century, ruled the American political roost while wearing the stripes of both political parties. For all the evidence we have, given America’s hell-bent adherence to a mixed economy, we can say that progressivism has failed to achieve its own unrealistic utopianism of a well-managed government with a highly regulated and efficient business environment. Why? Because progressivism ignores many basic facts. You have to be willing to suspend belief in unintended consequences, ignore the reality of scarcity, and be willing to negate individual liberty if it suits the needs of the majority. If anything, progressive policies attempting to deliver on progressive utopianism have failed on a greater order of magnitude. Yet few progressives are willing to admit this, if even to themselves.

Charles Johnson writes:

The problem here is that Yglesias seems to be treating this as a ceteris paribus comparison: as if the right question to ask is whether people would be better off with the government program in place or in a situation which is exactly identical, but without the government program.

There are two problems with this. First, unless there is some strong reason to believe that ceteris will stay paribus in the absence of a government program, the real alternative is between a government program and market alternatives to that program. So, for example, Yglesias mentions ex ante environmental regulations. But he rigs the match by apparently comparing outcomes with ex ante environmental regulations to outcomes from a market situation which is basically the same as the present, but in which corporate polluters are free to go on polluting with impunity. An un-rigged comparison would be one between ex ante environmental regulations and free market means of addressing pollution that the ex ante regulations have either directly suppressed or crowded out — like the use of pollution nuisance suits or a more robust use of free market grassroots activism, through boycotts, “sustainability” certification, social investing, and so on. Maybe these kind of tactics would not be as effective as ex ante regulation, or maybe they would be more effective; but in either case, this is the comparison that actually needs to be made, and as far as I can tell Yglesias hasn’t given any argument to support a claim that market methods would do worse. Indeed, there’s some good reasons to think that they might do better. Since freed-market methods are by their nature decentralized, and not dependent on political lobbying or electioneering, they are also not subject to the same problems of regulatory capture by those who can put “a lot of money and political influence behind” their interests.

Update: Bryan Caplan writes:

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. In fact, as a recent paper by Clemens, Montenegro, and Pritchett points out, the “price wedge” between the First World and the poorest Third World countries is the largest that has ever been measured. When you recall that labor earns about 70% of GDP, it should be clear that we’re talking about a massive distortion in a massive market.

Closing Thoughts

As our conversation draws to a close (at least within the context of this forum), areas of disagreement unsurprisingly remain. Matthew Yglesias and I disagree as to whether the theoretical case for free-market solutions is systematic or piecemeal; Steve Horwitz and I disagree on the extent to which Wal-Mart and similar firms owe their success to government intervention; Dean Baker and I disagree about the relative merits of reformism versus abolitionism (he’s worried about making the perfect the enemy of the good, while I fear that gradualism in theory is perpetuity in practice – though for the record I do agree with Baker that his reformist proposal would be preferable to the current system).

But we can all agree that there are a lot of government policies that systematically promote corporatism, that these policies are often cloaked in deceptive free-market rhetoric, and that we need more cooperation and dialogue between libertarians and the left on these matters.

As regards strategies for addressing the problem, we may or may not agree on which politicians to vote for, which concrete policy reforms to support, or whether to work within the political system at all. But there is one all-purpose strategy to which we can all usefully contribute, regardless of which further approaches we favor – namely to get the word out. We don’t have to keep letting either nominally pro-market or nominally anti-market propagandists get away with conflating corporatist policies with free-market ones. The more loudly and consistently we explain the distinction, point out instances of conflation, and delineate the ways in which government policies directly or indirectly prop up big business, the harder we can make it for corporate interests to use the language of free enterprise to gain political privilege.