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A Critique of “The Grapes of Wrath:” Causes of Poverty Then and Now

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The “Grapes of Wrath” is a fictional account inspired by terrible plight of Oklahoma Sharecroppers during the “dust bowl” period that also coincided with America’s “Great Depression.” The actual causes of the circumstances, outside of the natural (drought, wind, crop failure), are barely hinted at in the film which instead presents the bewildered outlook of the tenant farmers who have no idea why the events of the movie are occurring, while implying the culprits are the rich and “well to do”, and also simultaneously presenting government as both co-conspirator and savior. The one-sided nature of the film and its contradictions regarding government are merely symptoms of it being fiction and presenting the image its author, or director, desired and while it is excellent in helping us understand the personal trials of the sharecroppers and highlighted an obvious failure in the system it did not provide clear understanding of what the failure was or why it happened. The best way to understand the hardships of the “Okies” and apply those lessons today, then, is to look at the actual history of that time period. After a brief study of the history it becomes apparent that the events depicted in “The Grapes of Wrath” are the result of ill-conceived government enforced property rights, government distortion of the markets, and corporatism, which can all be applied to current poverty issues. In addition to the causes of poverty that effected the “Okies” today we also have inflationary monetary policy, heavy regulatory burdens for entrepreneurship, and the drastic expansion of the size of the federal government that has led to its ever growing consumption of otherwise productive resources.

Terry Anderson and Peter Hill in “The Not So Wild, Wild West: Property Rights on the Frontier” describe how in the late 1800s, the federal government pursued an aggressive homesteading policy in the west. Advertising “free land” was politically popular and it was a way to quickly secure the nations expanding territory. However, in doing this the federal government ignored privately established property rights negotiated between Indians and ranchers or amongst early settlers of the lands and redistributed arbitrary plot sizes with residency and improvement requirements that were not market based. The result of this was a “race for property rights” that led to both land owners with insufficient capital to successfully use the land, they could only afford the “free land” and not the equipment, seed, etc. to profit from it, and to the landowner-tenant farmer system. Landowners from other regions and around the state of Oklahoma claimed stakes during homesteading land races and then rented the land to tenant farmers. Since the land was “free” and did not constitute the landowner’s primary residence or income he had less incentive in the maintenance or improvement of the land and the tenants often could not afford to make improvements or did not think of the land as their own and thus could not justify extra expenses to improve the landowner’s property.

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Filed under Economics, Politics
Oct 16, 2011

American Government: True or Perverse According to Aristotle?

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Its been over 2000 years since Aristotle provided his insights into all areas of philosophy, including politics, and yet many of his observations are still useful today. One concept that still has value is that of “true forms of government” and perversions of those forms. Aristotle explained that “true forms of government…are those in which the one, or the few, or the many , govern with a view to the common interest; but governments which rule with a view to the private interest, whether of the one, or of the few, or of the many, are perversions.” (Tilly, 2005:424). He also provided three examples of true forms of government and their perverse forms: Monarchy is the rule of one for the common good and tyranny is the perverse form where the king or dictator seeks his own interest to the detriment to the common interests; Aristocracy is the rule of rich benefactors of society while oligarchy is rule by rich exploiters of their lessers; the final example is Constitutional government is the rule of the masses through established law, again for the common good and the perversion, according to Aristotle, is democracy where the masses live parasitic lives exploiting the rich whom they outnumber and replacing established law with arbitrary decrees. (Tilly, 2005: 424) Another category not included by Aristotle that follow the rule by one, few, or many and perversion based on pursuit of common or contra common interests could be voluntary society, the rule by none with members seeking the mutual benefit of one another through market based exchange, and its perversion lawlessness, a dog eat dog world where each member seeks to gain through the coercion of his neighbors. Even with this fourth category this form of categorization is to simple to capture all of the complexities and subtleties of government types, mechanisms, and their various perversions, nor does it seem to recognize the various degrees of perversion between the “true form” and the perverse form. Also, it does not address the major controversy of discerning what is in the “common interest” or who decides what is in the common interest. There are very few, if any, issues that will have unanimous agreement and so each decision pursuing one goal over another will be against some part of the common, and yet they will be obliged to follow regardless due to the nature of the state as being a monopoly of coercive power over the geographic area they reside in.

When applying these categories to modern American government, it is necessary to create another category not mentioned earlier. Aristotle mainly addressed government of direct rule, either by one, few, or many, but America is not ruled directly but through representatives. The power holders are not in the polity, per se, but use proxies to exercise their will. The true form of this government would be representative constitutional government, where the representatives act in the, so called, common interest within strict limits of established law and the perversion is corporatism, where the representatives’ actions are detrimental to the public in order to gain favor or wealth from organized interest groups or from wealthy individuals or businesses. Currently, it would seem that American government is closest to this perverse form, corporatism. The masses have very little political participation, usually limited to a portion voting once every 2-4 years, with not further recourse or actions available to them for the remaining duration of time. However, organized interest groups and wealthy members are able to lobby and influence the polity at will and they find ways to use state coercion against the masses and each other to gain a perceived advantage, as opposed to seeking mutually beneficial means to achieve advantage, though perhaps slower or lesser than what is possible to achieve by exploiting others through the state.

The very nature of any state is to move towards its perverse form of government. All of the precautions taken during its formation such as federalism, written constitution, division of powers, etc. are simply recognition of this natural degradation and are meant to act as resistance to slow the inevitable process. The only way for this process to be “reset” is for the government to become intolerable to the people, causing them to revolt and re-establish a new state so that the process can begin again. This again was recognized in the formation of the United States, Thomas Jefferson wrote in the Declaration of Independence, “whenever any form of government becomes destructive of these ends, it is the right of the people to alter or abolish it, and to institute new government…” The only possible category that can avoid this cycle is that of the voluntary society. So long as all individuals are able to leave and/or form new government-like institutions, then each institution will be forced to act in the common interest since its members will leave, since there is no monopoly or arbitrary exertion of coercion based on geographic boundaries, if the perceived costs of being a “citizen” or member of that institution ever exceed the benefits. All members will be voluntary and their consent to the authority of their chosen institution will be explicit, as opposed to the “implied consent” that existing governments claim to have.

 

Tilly, C. (2005). Regimes and Contention. In T.A. Janoski, A.M. Hicks, & M.A. Schwartz (Eds.), Handbook of Political Sociology: States, Civil Societies, and Globalization (423-440). Cambridge, UK: Cambridge University Press.

Its been over 2000 years since Aristotle provided his insights into all areas of philosophy, including politics, and yet many of his observations are still useful today. One concept that still has value is that of “true forms of government” and perversions of those forms. Aristotle explained that “true forms of government…are those in which the one, or the few, or the many , govern with a view to the common interest; but governments which rule with a view to the private interest, whether of the one, or of the few, or of the many, are perversions.” (Tilly, 2005:424). He also provided three examples of true forms of government and their perverse forms: Monarchy is the rule of one for the common good and tyranny is the perverse form where the king or dictator seeks his own interest to the detriment to the common interests; Aristocracy is the rule of rich benefactors of society while oligarchy is rule by rich exploiters of their lessers; the final example is Constitutional government is the rule of the masses through established law, again for the common good and the perversion, according to Aristotle, is democracy where the masses live parasitic lives exploiting the rich whom they outnumber and replacing established law with arbitrary decrees. (Tilly, 2005: 424) Another category not included by Aristotle that follow the rule by one, few, or many and perversion based on pursuit of common or contra common interests could be voluntary society, the rule by none with members seeking the mutual benefit of one another through market based exchange, and its perversion lawlessness, a dog eat dog world where each member seeks to gain through the coercion of his neighbors. Even with this fourth category this form of categorization is to simple to capture all of the complexities and subtleties of government types, mechanisms, and their various perversions, nor does it seem to recognize the various degrees of perversion between the “true form” and the perverse form. Also, it does not address the major controversy of discerning what is in the “common interest” or who decides what is in the common interest. There are very few, if any, issues that will have unanimous agreement and so each decision pursuing one goal over another will be against some part of the common, and yet they will be obliged to follow regardless due to the nature of the state as being a monopoly of coercive power over the geographic area they reside in.

 

When applying these categories to modern American government, it is necessary to create another category not mentioned earlier. Aristotle mainly addressed government of direct rule, either by one, few, or many, but America is not ruled directly but through representatives. The power holders are not in the polity, per se, but use proxies to exercise their will. The true form of this government would be representative constitutional government, where the representatives act in the, so called, common interest within strict limits of established law and the perversion is corporatism, where the representatives’ actions are detrimental to the public in order to gain favor or wealth from organized interest groups or from wealthy individuals or businesses. Currently, it would seem that American government is closest to this perverse form, corporatism. The masses have very little political participation, usually limited to a portion voting once every 2-4 years, with not further recourse or actions available to them for the remaining duration of time. However, organized interest groups and wealthy members are able to lobby and influence the polity at will and they find ways to use state coercion against the masses and each other to gain a perceived advantage, as opposed to seeking mutually beneficial means to achieve advantage, though perhaps slower or lesser than what is possible to achieve by exploiting others through the state.

 

The very nature of any state is to move towards its perverse form of government. All of the precautions taken during its formation such as federalism, written constitution, division of powers, etc. are simply recognition of this natural degradation and are meant to act as resistance to slow the inevitable process. The only way for this process to be “reset” is for the government to become intolerable to the people, causing them to revolt and re-establish a new state so that the process can begin again. This again was recognized in the formation of the United States, Thomas Jefferson wrote in the Declaration of Independence, “whenever any form of government becomes destructive of these ends, it is the right of the people to alter or abolish it, and to institute new government…” The only possible category that can avoid this cycle is that of the voluntary society. So long as all individuals are able to leave and/or form new government-like institutions, then each institution will be forced to act in the common interest since its members will leave, since there is no monopoly or arbitrary exertion of coercion based on geographic boundaries, if the perceived costs of being a “citizen” or member of that institution ever exceed the benefits. All members will be voluntary and their consent to the authority of their chosen institution will be explicit, as opposed to the “implied consent” that existing governments claim to have.

 

Tilly, C. (2005). Regimes and Contention. In T.A. Janoski, A.M. Hicks, & M.A. Schwartz (Eds.), Handbook of Political Sociology: States, Civil Societies, and Globalization (423-440). Cambridge, UK: Cambridge University Press.

Its been over 2000 years since Aristotle provided his insights into all areas of philosophy, including politics, and yet many of his observations are still useful today. One concept that still has value is that of “true forms of government” and perversions of those forms. Aristotle explained that “true forms of government…are those in which the one, or the few, or the many , govern with a view to the common interest; but governments which rule with a view to the private interest, whether of the one, or of the few, or of the many, are perversions.” (Tilly, 2005:424). He also provided three examples of true forms of government and their perverse forms: Monarchy is the rule of one for the common good and tyranny is the perverse form where the king or dictator seeks his own interest to the detriment to the common interests; Aristocracy is the rule of rich benefactors of society while oligarchy is rule by rich exploiters of their lessers; the final example is Constitutional government is the rule of the masses through established law, again for the common good and the perversion, according to Aristotle, is democracy where the masses live parasitic lives exploiting the rich whom they outnumber and replacing established law with arbitrary decrees. (Tilly, 2005: 424) Another category not included by Aristotle that follow the rule by one, few, or many and perversion based on pursuit of common or contra common interests could be voluntary society, the rule by none with members seeking the mutual benefit of one another through market based exchange, and its perversion lawlessness, a dog eat dog world where each member seeks to gain through the coercion of his neighbors. Even with this fourth category this form of categorization is to simple to capture all of the complexities and subtleties of government types, mechanisms, and their various perversions, nor does it seem to recognize the various degrees of perversion between the “true form” and the perverse form. Also, it does not address the major controversy of discerning what is in the “common interest” or who decides what is in the common interest. There are very few, if any, issues that will have unanimous agreement and so each decision pursuing one goal over another will be against some part of the common, and yet they will be obliged to follow regardless due to the nature of the state as being a monopoly of coercive power over the geographic area they reside in.

 

When applying these categories to modern American government, it is necessary to create another category not mentioned earlier. Aristotle mainly addressed government of direct rule, either by one, few, or many, but America is not ruled directly but through representatives. The power holders are not in the polity, per se, but use proxies to exercise their will. The true form of this government would be representative constitutional government, where the representatives act in the, so called, common interest within strict limits of established law and the perversion is corporatism, where the representatives’ actions are detrimental to the public in order to gain favor or wealth from organized interest groups or from wealthy individuals or businesses. Currently, it would seem that American government is closest to this perverse form, corporatism. The masses have very little political participation, usually limited to a portion voting once every 2-4 years, with not further recourse or actions available to them for the remaining duration of time. However, organized interest groups and wealthy members are able to lobby and influence the polity at will and they find ways to use state coercion against the masses and each other to gain a perceived advantage, as opposed to seeking mutually beneficial means to achieve advantage, though perhaps slower or lesser than what is possible to achieve by exploiting others through the state.

 

The very nature of any state is to move towards its perverse form of government. All of the precautions taken during its formation such as federalism, written constitution, division of powers, etc. are simply recognition of this natural degradation and are meant to act as resistance to slow the inevitable process. The only way for this process to be “reset” is for the government to become intolerable to the people, causing them to revolt and re-establish a new state so that the process can begin again. This again was recognized in the formation of the United States, Thomas Jefferson wrote in the Declaration of Independence, “whenever any form of government becomes destructive of these ends, it is the right of the people to alter or abolish it, and to institute new government…” The only possible category that can avoid this cycle is that of the voluntary society. So long as all individuals are able to leave and/or form new government-like institutions, then each institution will be forced to act in the common interest since its members will leave, since there is no monopoly or arbitrary exertion of coercion based on geographic boundaries, if the perceived costs of being a “citizen” or member of that institution ever exceed the benefits. All members will be voluntary and their consent to the authority of their chosen institution will be explicit, as opposed to the “implied consent” that existing governments claim to have.

 

Tilly, C. (2005). Regimes and Contention. In T.A. Janoski, A.M. Hicks, & M.A. Schwartz (Eds.), Handbook of Political Sociology: States, Civil Societies, and Globalization (423-440). Cambridge, UK: Cambridge University Press.

Filed under Philosophy, Politics
Apr 6, 2011

Corporate Power and Democracy

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Since the American Revolution, Democracy has become the dominant political system in Western and large capitalist societies.  The driving factor is that democratic governments are thought to derive their legitimacy from popular sovereignty, as opposed to divine sovereignty.  However, the states and their people recognized the impracticality of actual direct democracy and opted instead for republicanism, or representative government.  Since this form of governance is still based in popular sovereignty and the theoretical rule “of,” “by,” and “for” the people, it is still often referred to as “democracy.”  As democracy has been observed over time, political scientists have redefined it”as a system whereby elites competed for the votes of a largely passive electorate.”  This position became known as “elite pluralism,” and its success rests on the idea that “as long as one group of elites was without power, its members could appeal to the public to replace the incumbents with those presumably more favorable to their interests.” (Mizruchi and Bey, 2005,311)  Since the success of this type of democracy requires competition, or division, of the elites, many detractors of democracy in capitalist states claim that the elites are, in fact, unified due to “common interests in maintaining their privileges” as well as “common socialization experiences (including attendance at elite prep schools and universities), common membership in social clubs and policy-making organizations, and social and kinship ties.” (Mizruchi and Bey, 2005,311)  Many also believe that these unifying traits are not only shared by the political elites, that are symptomatic of representative democracy, but also in the capitalist class.  If this were to be proved the case, then the elites meet the full requirements for a group to be powerful, “resources and unity,” and would threaten the effectiveness or success of democracy.  The extent that this threat, based on the possible causes and perceived “degree of business unity” the topic of four contemporary theories regarding corporate power and democracy, highlighted by Mark S. Mizruchi and Deborah M. Bey and discussed below. (Mizruchi and Bey, 2005,312)

The “Elite Theory,” by G. William Domhoff, posited “that a power elite, drawn from the social upper class, corporate leaders, and officials of policy-making organizations, collectively dominates American politics,” and that all of the unifying traits mentioned earlier are, in fact, present.  However, despite many revisions and the sophistication in Domhoff’s theories, he points to actions by the state that are opposed by business and those that they advocate as both being in the interest of business, and neither, according to Domhoff, detract from the “view that the elite perpetually dominates” and “thus raises questions about nonfalsifiability” and the overall legitimacy of this theory.(Mizruchi and Bey, 2005, 323)

The next two theories are best understood in the context of the “Berle and Means Thesis,” which basically states that “because of the large and increasing size of corporations, and because of the consequent difficulty of maintaining substantial family holdings in individual firms, stock holdings in large U.S. corporations gradually dispersed.  The consequence of this dispersal…was the usurpation..of power by the firm’s managers.  These managers…were viewed as a self-perpetuating oligarchy, unaccountable to the owners who had elected them.” (Mizruchi and Bey, 2005, 312)  With this in mind, Michael Useem, found that since the “largest single block of stockholders by the 1990s was not individuals,…but institutional investors,” they were the dominant power holders in business.(Mizruchi and Bey, 2005, 324)  Useem, however, made no claim to their unity and so his theory mostly contradicts that the managers are unaccountable, at least in recent decades, due to the influence of institutional investors.  The third theory, proposed by Gerald Davis, also attempts to negate the Berle and Means thesis by claiming that it makes no difference if a corporation is owner or manager run since they both must conform to “pressure from an amorphous, but no less real, source,” the “capital market.” (Mizruchi and Bey, 2005, 324-325)  The elites are “compelled to vow allegiance to ‘shareholder value'” and their “structures and policies are driven by anticipations of their economic consequences.” (Mizruchi and Bey, 2005, 325)  However, while Davis tries to use this observation to show a unity of purpose and political domination by the anonymous members of the “capital market,” but the very nature of this group, where no individuals, elite or otherwise, or their interests can be specified indicates that Davis’s theory simply creates a generalization so broad that almost anyone could be a part of it.  If that is the case, then the dispersal and division of interests that would exist in the “capital market” would actually be a boon to democracy if they were the truly the dominating force.

The fourth theory is conceptually different than the previous theories due to its international scale.  “Several scholars have suggested that with the increasing globalization of economic activity” and “the extent to which corporations have the ability to move capital outside their borders” giving “them leverage over their host states…national governments have lost the ability to regulate their own business communities.” (Mizruchi and Bey, 2005, 329)  This would certainly appear to diminish the power of national governments, but it does not necessarily mean an increase in corporate power, or the general business community, since that would still require unity in effort, which faces all of the difficulties present in the earlier theories.

I would like to close with my theory on corporate power and politics.  The first part explains why corporate interests seem to be advanced, overall, in spite of real conflicting interests within the corporate community. The state holds a monopoly over “legal” coercion and this is its only real service it has to offer on the marketplace.  The “passive electorate” is not as concerned, or as dependent a customer, of government coercion; whereas, corporations are interested in using state coercion to prevent or reduce competition and to advance its interests.  So overall, the government responds to the market for coercion, acting in the interests of various corporate entities who are most able to afford it, in means of resources and influence to protect the political elites’ privileges.  This does not require unity from the various corporate interests and the inconsistency of the policies enforced through state coercion seem to support that there is no need for unity from the corporate community in order for the state to act generally in their favor.  This on its own is destructive to society and damaging to the democratic ideal but does not cause a complete collapse of they system because of the lack of unity.  However, this trend may very likely lead to the second part of this theory which will lead to the collapse of democracy.  As the state continues to use coercion to choose the “winners” and “losers”, whether among the corporate community or between the corporate community and the rest of the electorate, there will be fewer and fewer parties competing or seeking the state’s coercive service.  Common sense dictates that it is easier for a few to coalesce, than the many, and so this increased centralization of both political and corporate elites will make it much more likely that complete unity, and the destruction of democracy will occur.

Mizruchi, M.S., & Bey, D.M. (2005). Rule Making, Rule Breaking, and Power. In T.A. Janoski, A.M. Hicks, & M.A. Schwartz (Eds.), Handbook of Political Sociology: States, Civil Societies, and Globalization (310-330). Cambridge, UK: Cambridge University Press.

Mar 30, 2011

Monopoly and Competition: Government Intervention and its Effects on the Free Market

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One of the roles of government, debated even among those of a libertarian or small government perspective, is that of regulating monopolies and ensuring competition. On a larger political scale, the debate may focus on how free or how socialized should a market be, but among those that believe the markets should be as free as possible there is still concern over monopoly practices and how the government could be used as a tool to respond to them. The first step in understanding and forming conclusions in this debate is to determine a definition of monopoly. The three offered here are: One seller or producer of a good or service; the establishment of a monopoly price; and a firm or corporation that has been granted market power and special status by the government, either directly or indirectly. Also, the requirements for competition must be established, which economic textbooks may point to as: many small buyers and sellers; standardized product; and no barriers to entry or exit.1 After close inspection of the definitions of monopoly and the textbook requirements for competition, I hope to demonstrate that “barriers to entry or exit” are the only true requirement to competition and that all barriers are due to coercion, either from government or criminal activity among businesses and individuals.

The first definition of monopoly is that of one seller or producer of a good or service. This is the most literal definition (“monos” means “only and “polein” means “to sell”) and the most common understanding of the word monopoly. While this is a very clear cut and precise definition of monopoly its application is much less so and its use to justify government intervention is even more hazy. The application of this definition becomes difficult when one has to determine what constitutes a single product or service. Since there will be some sort of differentiation between every product offered by different people one could rationally claim that everyone is a monopolist. For example, while Hershey’s Chocolate company may not be a monopolist of chocolate they are monopolists of “Hershey’s Kisses” and John’s doctor is a monopolist of medical services to John. This is further complicated if we accept that fact that the point that the differentiation is substantial to lead to a product being categorized by a different product is solely in the mind of the consumer and can not be defined by any specific attributes or by committee. The second flaw with the use of this definition is when it is used to justify government intervention in the markets based on misconceptions of individual rights and freedom. While individuals do have the freedom to act on available choices they are not entitled to any certain number of choices. If there truly was only the choice of purchasing a product or service from one producer or not purchasing it at all then the individual is free to act on that choice, not require more choices be made available to him. Murray Rothbard uses the example of “Crusoe and Friday bargaining on a desert island” where they “have very little range or power of choice; their power of substitution is limited. Yet if neither man interferes with the other’s person or property, each one is absolutely free. To argue otherwise is to adopt the fallacy of confusing freedom with abundance or range of choice. No individual producer is or can be responsible for other people’s power to substitute.”2

The second definition, achieving monopoly price is explained best by Ludwig von Mises: “If conditions are such that the monopolist can secure higher net proceeds by selling a smaller quantity of his product at a higher price than by selling a greater quantity of his supply at a lower price, there emerges a monopoly price higher than the potential market price would have been in the absence of monopoly.”3 The concerns raised by the proponents of this defintion are that a single producer or a cartel made up of a few producers will restrict supply in order to gain increased profit margins at a higher price point on the supply-demand curve. However, this will only be profitable for products or services whose prices are inelastic above the “theoretical” competitive price. The flaw in this defintion is determining “competitive price” versus “monopoly price.” Since in the free, or unhampered, market every seller will “absolute control…over the price he will attempt to charge for any particular good…the question is whether he can find any buyer at that price. Similarly,…any buyer can set any price at which he will purchase a certain good; the question is whther he can find a seller at that price.”4 Naturally, sellers will seek the highest price and consumers will seek the lowest price and whatever price they agree on, absent coercion, is the competitive price. Along the same line, how would one determine if the producer was moving from a “sub competitive price” to the competitive price for their goods as opposed to moving from the competitive price to a monopoly price. The “demand curve is not simply ‘given’ to a producer, but must be estimated and discovered” and any restriction may simply be a correction of past supply to demand errors by the producer.5 These flaws lead to the conclusion that there can be no definable monopoly price on the free market since all prices are based on free-exchange between buyer and seller and whatever terms they come to are by definition the competitive price.

The third definition of monopoly is the original definition of government granted, direct or indirect, market power or protected status. Lord Coke, a definitive source of Common Law in 17th Century England, defined monopoly as “an institution or allowance by the king, by his grant, commission, or otherwise . . . to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.”6 The formation of monopolies and the negative consequences of monopoly power is made possible only due to government intervention and it is therefore ironic that one of the few areas where limited government advocates tolerate government intervention is in the regulation of monopolies. Monopolies are created through barriers to entry into their market and government is the creator of these barriers, which include explicit grants of monopoly status, in industries deemed “public utilities” or “natural monopolies”, patents, license requirements, and economies of scale.7 Another barrier is the entire system of corporatism, the alliance between big business and government to create regulations and other burdens on new entrants into the market in order to hamper competition.

The most obvious, and accepted as necessary by some, way the government creates monopolies is by granting exclusive franchises to industries deemed “public utilities.” Some common examples have been energy providers (gas and electric), telephone service providers, and cable tv. The rationalization used is that certain industries, due to high fixed costs, economies of scale, and land usage limitations, are better served by having a single provider. The conclusion is that government should choose a single provider and protect them from competition while at the same time heavily regulating the selected monopoly to prevent monopoly pricing and pass the savings of the increased efficiency on to the customer. However, history does not seem to support this theory. Many industries that claim they are “public utilities” were competitive in the past or became competitive after time spent with protected monopoly status and the customer did not see great advantage in the monopoly years, especially when taxes used to subsidize the utilities are taken into account and other government intervention is not present in the competitive years. “In one of the first statistical studies of the effects of rate regulation in the electric utilities industry, published in 1962, George Stigler and Claire Friedland found no significant differences in prices and profits of utilities with and without regulatory commissions from 1917 to 1932.”8 Also, substitutes or alternative technology prevents the formation of “natural monopolies” on the free market. For example, when three competing gas companies tried to merge in 1888, an inventor named Thomas Edison “introduced the electric light which threatened the existence of all gas companies” and while all had “heavy fixed costs which led to economies of scale…no free-market or ‘natural’ monopoly ever materialized.”9 In 1940, economist Horace M. Gray noted that “public utility status was to be the haven of refuge for all aspiring monopolists,” to include, “radio, real estate, milk, air transport, coal, oil, and agricultural industries…who found it too difficult, too costly, or too precarious” otherwise. The label of “public utility” is arbitrary and history has shown that government designated monopolies to do serve the public well and stifle innovation and technological progress as well as violate the rights of entrepreneurs who wish to enter protected industries.

One of the first industries to be deemed a “natural monopoly” or “public utility” was the telecommunications industry, led by AT&T. Initially the monopoly was due to patents that Alexander Graham Bell held from 1876 to 1894. During this time period AT&T held between 85-100 percent of the market power for telephone systems and adoption was slow with average daily calls per 1,000 people increasing from 4.8 in 1880 to only 37 in 1895; the number of telephones per 1,000 people also increased slowly from 1.1 in 1880 to 4.8 in 1895. However, after the patents expired and competition was able to set in daily calls per 1,000 jumped from 37 in 1895 to 391.4 in 1910 and telephones per 1,000 people also increased much more rapidly, going from 4.8 in 1895 to 82 in 1910.10 The government, however, did not see this competition and rapid expansion of services and options as a good thing, instead they saw it as “duplicative,” “destructive,” and “wasteful” and during a Senate Commerce Committee hearing in 1921 it was stated that “telephoning is a natural monopoly.”11 This was in spite of the apparent boom in competitors and service. AT&T lobbied for this “natural” monopolization and put itself “squarely behind government regulation, as the quid pro quo for avoiding competition.”12

From the AT&T case we can see that it was able to form its original monopoly, before the government explicitly granted it monopoly status, through another government barrier to competition, patents. Patents are probably the most common and most accepted, among capitalists, form of government barriers to competition since they supposedly protect the innovations of individuals and allow them to reap the benefits of research, investment and ingenuity without someone else profiting from an idea they did not share the costs in discovering. However, there is strong evidence that patents are unnecessary and in fact stifle innovation instead of promoting it as intended. The telephone industry demonstrated this earlier but another example would be in the field of steam engines and steam power. In 1768, James Watts patented the steam engine and used his political clout to extend the patents until 1800. He aggressively pursued his competitors with patent violations and prevented many innovations from taking place in the area of steam power or improvements in the steam engine. As a result, “during the period of Watt’s patents, the United Kingdom added about 750 horsepower of steam engines per year. In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; however between 1810 and 1835 it is estimated to have increased by a factor of five.”13 The book, Against Intellectual Monopoly, documents many examples like this in almost all fields. Without patents, the original innovators will still find advantage since people are only likely to imitate successful innovations that would mean the original innovators would have time to establish themselves and gain market power and brand name recognition before competitors really started entering the market.

The requirement of Licenses to conduct a particular type of business or to work in a particular field are another widely accepted form of government intervention that creates a barrier to entry for potential competition. One of the reasons for this is that licenses are not sold to the public as protection for existing businesses from potential competitors or as a restriction on the supply of labor to artificially raise wages above market level for favored professions, but instead is billed as a means to protect the consumer by ensuring quality service. However, just like the other barriers to competition, licenses, when required by law, do more harm to the consumer by reducing available options when there is a strict quota on the number of licenses available or when smaller competitors can not afford licensing fees; monopoly pricing due to cartelization since “the governmental administration of licensing is almost invariably in the hands of members of the trade”14 who have an obvious interest in limiting entry into their field to individuals who are of similar mind to keep prices higher.

All of the barriers mentioned so far and others have become part of the system of corporatism that is actually the dominant force in US and western markets, not capitalism. The high fixed price that leads to economies of scale and prevents smaller businesses from competing is government. “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.”15 In this essay we have mostly focused on the direct barriers to competition placed by the government but there are also many less obvious ways that government intervention helps favored corporations such as inflationary credit expansion, where the first to receive the new dollars will get to use them before the inflationary effects kick in and corporate law itself that allows the individuals who act, or make decisions, in a business to separate themselves from the liabilities involved with those decisions causing a serious accountability issue in our markets today. A “corporation is an artificial being, invisible, intangible, and existing only in contemplation of the law.”16 This arbitrary grant of artificial personhood status to businesses is yet another barrier to free competition and a fraud is committed when corporate law is presented as part of capitalism and the free market or as advantageous to consumers.

In conclusion, monopolies, oligopolies, unnaturally high market concentrations all stem from government intervention into the free market placing various barriers to the entry and exit of competing businesses. This is done in the guise of regulating or promoting capitalism but is actually within a system of corporatism, the alliance of big business and big government. Big business works with big government to “socialize costs in exchange for a share of profits.”17 Big business also likes big government because “it has a competitive advantage over small business in doing business with it and negotiating favors. Big government, in turn, likes big business because it is manageable; it does what it is told.”18 This alliance has distorted our markets and increased the power of both partners at the expense of competition, consumers, and citizens.

1Jacqueline Brux, Economics Issues and Policy Fourth Edition, (Ohio: Cengage Learning, 2008), 246.

2Murray Rothbard, Man, Economy, and State: A Treatise on Economic Principles (Alabama: Ludwing von Mises Institute, 2004), 653.

3Ludwig von Mises, Human Action: A Treatise on Economics (Alabama: Ludwig von Mises Institute, 2008), 278

4Murray Rothbard, Man, Economy, and State: A Treatise on Economic Principles (Alabama: Ludwing von Mises Institute, 2004), 662.

5Ibid., 690

6 Quoted in Richard T. Ely and others, Outlines of Economics (3rd ed.; New York: Macmillan & Co., 1917), pp. 190–91.

7Jacqueline Brux, Economics Issues and Policy Fourth Edition, (Ohio: Cengage Learning, 2008), 251-253.

8Thomas DiLorenzo, “The Myth of Natural Monopoly”, The Review of Austrian Economics Vol.9, No.2 (1996), 49-50.

9Ibid., 48

10Adam Thierer, “Unnatural Monopoly: Critical Moments in the Development of the Bell System Monopoly”, The Cato Journal Vol. 14 No. 2 (Fall, 1994)

11Ibid.

12Ibid.

13Michele Boldrin, David Levine, Against Intellectual Monopoly (New York: Cambridge University Press, 2008), 1.

14Murray Rothbard, Man, Economy, and State: A Treatise on Economic Principles (Alabama: Ludwing von Mises Institute, 2004), 1095.

15Roderick Long, “Corporations Versus the Market; Or, Whip Conflation Now”, Cato Unbound, 10 November 2008.

16Frank van Dun, “Is the Corporation a Free-Market Institution?,” Ideas on Liberty, March 2003.

17Robert Locke, “What is American Corporatism?,”, Front Page Magazine, 13 September 2002.

18Ibid.

Mar 29, 2010

Corporate Welfare and Corporatism

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Corporations are firms or companies (private, publicly traded, for profit, and/or non-profit) that agree to be regulated by certain rules, corporate law, that regulates the relationships and interactions of corporate management, shareholders/owners, employees, creditors and the government. Companies agree to these rules because they provided limited liabilities to all actual persons who are a part of the corporation by creating an artificial “person hood” status for the corporation and limiting the liabilities to that entity. The government also uses its state power to protect, from competition through tariffs and regulation, and subsidize these entities. In return, the government is able to manipulate the economy through few points, they can regulate the significantly fewer large corporations easier than they could coordinate and regulate different stores on every corner, and they will be working with voluntary and cooperative participants who want the continued benefits of state power. Understanding “corporate welfare” is a bit more complex since no one wants to claim to support such measures but nearly all political parties and platforms do in some form or another. In fact, the entire concept of the “corporation” is a form of corporate welfare, or redistributing wealth or interfering in the market on behalf of companies or firms. Support for corporate welfare is never described as such but almost the entire political class does support it in its more overt forms or it’s more subtle indirect forms. Libertarians, on the other hand, oppose all forms of corporate welfare when they are not being negligent or inconsistent with their principles.

The left supports several types of corporate welfare. The recent “Kelo” case involving eminent domain gave private lands to corporate interests and was decided by liberal judges. Also, many of the regulations that are supposedly done to restrict corporate actions are supported by the corporations themselves because it makes it more difficult for new competitors to enter the market. Roderick T. Long in an essay written for the Cato Institute, “Corporations versus the Market” wrote that , “the ability of colossal firms to exploit economies of scale is also limited in a free market…unless the state enables them to socialize these costs by immunizing 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.” (1)

The right also supports several types of corporate welfare, but they may be more dangerous since they shroud their policies in the cloak of the free market. For example, they advocate tax breaks for certain businesses or industries 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.” (1) The right’s use of privatization is often of a similar nature. In free market terminology privatization would be the removal of government and its influence from an industry but the right often uses it to mean a transfer of monopoly status over an industry to some contracted firm or corporation. Thus the monopoly status is maintained and the governments involvement and influence is still present.

The right and left both justify the more overt types of corporate welfare that they end up supporting, such as TARP and the bailouts of the auto and financial industry, as necessary evils. However, necessary evil is a contradiction as if something is necessary than it must be good and not evil. Here we can apply one of Ayn Rand’s famous quotes “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.” In this case, either the bailouts were necessary and good, having a positive effect, while the principle that labeled them evil must be ill founded or the principle that makes such bailouts evil is correct and they were not in fact necessary. The contradiction should force us to check the two premises “necessary” and “evil” and see which one is wrong.

Libertarians, and the position I support, holds that all corporate welfare is wrong. The current “conflation” of corporatism and capitalism is especially dangerous since it rallies and multiplies the opponents of free markets who somehow see them tied to pro-corporate policies and also allows statist policies to be sold under the mantle of the free market. The current failures of “capitalism” and the “free market” are really only failures of the current system which is often labeled capitalism but is only one step away from socialism. In socialism, the state owns industry but in our current system, often labeled capitalism, the State offers privatized profits and socialized costs in exchange for regulation and willing “subjects” to form an alliance between government and industry; this corporatism should not be confused with real capitalism or free markets.

1. http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflation-now/

Another good article I read while doing my research, but did not have room to include in my post was:
http://97.74.65.51/readArticle.aspx?ARTID=22594
An article in FrontPageMag.com

Nov 27, 2009