The Corporate State

Life is too short to spend much time on the Democratic Underground, but this article by Ernest Partridge popped up in one of my Google watch lists.  I highlight only because it contains this straw man:

The dogmatism of free market absolutism resides in the belief that the unregulated market never fails to be beneficial to all; the belief, in other words, that there are no malevolent effects of unconstrained market activity, no "back of the invisible hand." From this belief follows the insistence that the free market is self-correcting, and that there is thus no need for regulation � that, in Ronald Reagan�s enduring words, "government is not the solution to our problems, government is the problem."

I can't think of any thoughtful defender of capitalism and free markets that ever would have said that the market "never fails" or that it is "beneficial to all" or that there are never bad outcomes or that the market is perfectly self-correcting.

Bad, stupid shit happens all the time in free markets.  For example, BP idiotically dumps a few zillion barrels of oil into the Gulf of Mexico.  In a free society, BP will be out billions of dollars in cleanup costs and damage settlements -- it might even bankrupt itself if governments allow that to happen, and thus will never again be able to do something so careless.  Markets can't prevent a first dumb action, like huge leveraged bets on ever-increasing housing prices, but markets can make sure the folks involved don't have the resources to do it again -- that is, except if governments bail them out from their mistakes.

The point is not that markets are perfect -- the point is that they are superior in both function and the retention of personal liberty to the alternative of giving governments coercive power to use force against individuals to change market outcomes.  The point is not that individuals don't do destructive things within the context of free markets.  The point is that they have a lot less power to do harmful things over long periods of time than if one gave that person coercive power in a government job backed by police forces and armies.   There is only a limited amount of damage anyone can do when they depend on the uncoerced cooperation and agreement of their counter-party.   A tobacco company CEO doesn't have a hundredth the power to ruin peoples lives as does one member of Congress. Fifty years of slimy cigarette advertising doesn't have the power of one Congressional mandate.  Go to Chicago, Detroit, Baltimore -- which has been worse for these cities -- the private campaign to sell cigarettes or the government led war on drugs?

Its clear from later in the article that the author is yet another person with a list of pet peeves who wants to use force on the American citizenry to get his way.  The author doesn't like cigarettes, so intervention with tobacco companies is a valid role for government.  OK, well I can't stand reality TV shows, so much so that I would rather be in a room of smokers than a room with "the biggest loser" on TV, but you don't see me wanting to give government power to do something about it.

But what is amazing to me is how much his examples actually make the libertarian point for limitation of government.  Try his first one:

Private Prisons. Good for the corporations: more prisoners, "three strikes" laws, mandatory sentencing. The cost to society: less rehabilitation and early release, increased government expenditures and taxes. It is noteworthy that the United States has the largest prisoner to population ratio in the industrialized world.

You have to really re-read history to come to the conclusion that American incarceration rates are mainly driven by privatization of prisons.   My sense is the causality is the other direction - we have passed crazy drug laws and mandatory sentencing for sometimes petty crimes and have had to turn to private actors with private capital to keep up with the demand to construct new prisons.

Like the author, I hate this incarceration trend, but its really a stretch to blame this on privatization.  And, I am the first to deride the symbiotic relationship between powerful corporations and the government.  I have written on any number of occasions that both political parties in this country seem to be trying to build a European-style corporate state.  So, even if I don't think he has history quite right here, I am willing to concede the point.  Because, in fact, this seems to me an indictment of exactly what he is trying to defend -- the government interventionist state.

The only reason corporations lobby the government is that the government has the unique power to coercively intervene in markets.  Corporations try to engage this power for their own benefit and to step on competitors, both current and future.  The root cause failure here is not the fact that private companies try to engage this power, but that this power exists at all.

Amazingly, he makes the same argument about war:

War, Inc. Good for the corporations (i.e., the military-industrial complex and "private contractors" such as Halliburton and Blackwater): more wars, expenditure of rockets, bombs and ammunition (requiring restocking of inventories). Cost to society: avoidance of diplomatic solutions, increased military budget and battlefield casualties, disobedience to international law (e.g., the Geneva and Nuremberg protocols).

I am staggered to see that someone who is defending giving more power to the government is simultaneously highlighting examples where this power is misused so horribly  (and what could be a more despicable crime by legislators than incarcerating more people or starting wars just to help a favored corporate interests).  I don't think wars are started primarily to help armaments manufacturers, but if they are, then this kind of failure by politicians is FAR worse than any he could point out in unregulated markets, only making my point for me.  Markets are not perfect, but the cure of government use of force is worse than the disease.

Since the author dwells on cigarettes, just look at the so-called tobacco settlement.  Supposedly, this was the great government hammer wielded against cigarette companies to punish them for years of selling a dangerous product.  But in fact, all the settlement did was cement the market position of largest tobacco companies.  The settlement effectively made government a financial partner with tobacco companies, and since it was implemented, the government has wielded its power to protect the companies who were involved in the settlement against competition (particularly from low-price upstarts) so as to protect its own cash flow.  The position of the major tobacco companies has never been as secure and profitable.

I think the author's response would be that if we ban corporate election spending, then all would be well.  This does not pass any kind of smell test.  First, corporate giving has been effectively banned (or at least severely limited) for 20 years, and we see the staggering influence corporations have none-the-less.  We only have to look at Europe, where the troika of politicians, large corporations, and large unions run those states to their own benefit, to the detriment of all others (e.g. smaller businesses, business without political contacts, workers outside of favored fields like autos, young workers, etc.)  This symbiotic relationship occurs without campaign cash being a major element.

If you want to understand how this works, just look at recent legislation like cap-and-trad and health care.  Legislators propose some populist interventions in a market to help themselves get re-elected.  Corporations who might naturally oppose such interventions agree to support legislation in exchange for a number of subsidies and special protections. Trades occur that have little to do with campaign contributions.  Just look at the influence GE wields in getting special deals for itself.

The GM bankruptcy was a classic example.   GM is given a big taxpayer bailout and some cuts in labor costs.  In exchange for labor cost cuts, unions get the government to squash secured creditors of GM in their favor in dividing up ownership and also get some special considerations in pending health care legislation.  Secured creditors allow this to occur because they got TARP funds from the government.   Politicians get active support from GM and the UAW in getting out the vote, positive PR, etc.  The only people who lose are taxpayers, all the other automobile competitors, and workers in every other industry who must pay taxes to support auto workers special deal.

By the way, don't tell me that this is not what you want, that if only we have the right people (e.g. yourself) in power this will never happen.  Wrong.  It always happens.  Every dang time.  The incentives are overwhelming.  Given politicians the power to do that one good intervention you want, and you have also given them the power to do a thousand that you don't want.

Postscript: By the way, please do not ever take a "progressive" seriously when they say they care about the poor.  Take this for example:

Outsourcing of jobs. Good for the corporation: increased profits and return on investment of stockholders. Cost to society: poverty, loss of educational opportunities, redistribution of wealth "upward," shrinkage of customer base, economic depression.

Another way of stating outsourcing is say that it is "transferring a job from a rich American to a poor person in a developing nation."  As a country becomes richer and more educated, low-skilled jobs are not going to continue to get done by college grads.  PhD's, in general, are not going to stitch underwear.  Low skilled jobs in a wealthy society do get outsourced, and these new low-skilled jobs in developing nations become the seed or the catalyst for future wealth-creation and development.

This is one ironic problem that progressives in this country have -- even the poorest Americans would be middle class in many of the countries of the world.  If progressives really want to transfer wealth from the rich to the poor, everyone in the US would pay and no one would receive a dime, it would all flow to other countries.

  • caseyboy

    Well said. Although not the point of your comments I learned an interesting fact today. Greece passed its own cap and trade type law back in 2005. The cost of a gallon of gas there is approximately $7. Green jobs have not been forthcoming, but unemployment in the private sector has spiked as jobs go elsewhere. Why are progressives in such a hurry to make America like Europe?

  • morganovich

    casey-

    this study of green jobs (or more to the point lack thereof) from spain might interest you:

    http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf

  • Dr. T

    caseyboy asked: "Why are progressives in such a hurry to make America like Europe?"

    Because almost all "progressives" (what an oxymoronic name) believe that they will become members of the new society's privileged classes: government workers, union workers, or executives in a government-favored corporations. Progressives want to look down on successful entrepreneurs, small businesspeople, and self-employed workers. Progressives can never emulate such people, but by replacing capitalism with a socialism-fascism-corporatism hybrid, they will climb above (and on top of) the people they simultaneously envy and hate.

  • me

    Thank you for another stellar post!
    I have yet to hear any critique of free markets that doesn't actually critique the fact that the markets describe weren't all that free to begin with...

  • Henry Bowman

    caseyboy writes

    Why are progressives in such a hurry to make America like Europe?

    I think the simple answer is that they absolutely loathe freedom. On top of that, many have been 'educated' by a system that hates the U.S. Back in the 1980s, Yuri Bezmenov, ex-KGB, explained it reasonably well.

  • perlhaqr

    By the way, don’t tell me that this is not what you want, that if only we have the right people (e.g. yourself) in power this will never happen.

    Ha ha! But if I were in power it wouldn't happen, because I'd use my possession of gov't authority to cut back on the influence of the gov't.

    But in general, you're probably right. There are almost certainly less than the population of Congress, within the population of the United States, that has as radical a passion for raw liberty and disdain for gov't intervention as I do. Hell, I select for people like that in my life, and I know two others like me in person, and one more by reputation. (And when I get out to the East Coast next, I'm going to buy Billy Beck a beer and get to know him in person, too. ;) )

  • http://mjb.biglaughs.org m

    I think, in the long run, a free market is nearly perfectly self-regulating. The problem is, the long run can be a long time. And nearly perfect isn't perfect...

  • Methinks

    This guy carefully avoids saying "they claim free markets create Utopia". But, that's what he's saying.

    Compared to what the back of the very visible hand of a ruling class of schmucks like him creates, markets create utopia.

    I'm tired of defending the free market to jackholes like this guy. I want HIM to defend all of the hell wrought by the diseased policies of the systems he champions. We can start with Soviet Socialism and end with Greece. Free markets never bring about utopia and only left wing drones ever claim they do. Socialism ALWAYS brings about poverty and sheer hell.

  • hanmeng

    I love it when my liberal relatives, friends and colleagues speak scornfully of "the rich", whose income they claim to want to confiscate and distribute to the poor, even though they themselves are not only far wealthier than poor people in other countries, but they even earn more than the average American.

  • Michael

    I've been seeing this "markets shouldn't fail" in a number of stories. Walking, to horse and buggy, to trolley, to car, each is better than its predecessor. Why can't progressives see progress?

    (rhetorical question)

  • ParatrooperJJ

    There were no labor cost cuts in the GM bankruptcy. That's one of the major reasons it will never survive. Had GM been allowed to proceed normally into backruptcy, the union contracts would have been voided and the company would have survived, but Barry would never allow that.

  • ADiff

    There a school of thought that contends the only defensible argument for socialist intervention in free markets is to manage those imperfections resulting from negative outcomes resulting in social threats to the free market itself. While it's aggregately optimal, there are always be those whom the market hurts. When these are a threat to the survival of the market itself, intervention to mitigate there number (or alter their composition) may be viewed as a 'business investment' in the market system itself. Such interventions are not in the interests of equity, and certainly not entitlement, but rather pure self-interest. Socialism, then, is for the elite, exactly the same thing 'bread and circuses' were to the Roman aristocracy.

    And once again both of life's greatest truisms are proven:

    1) The more things change, the more they stay the same.

    and

    2) No good deed goes unpunished.

  • ADiff

    There a school of thought that contends the only defensible argument for socialist intervention in free markets is to manage those imperfections resulting from negative outcomes resulting in social threats to the free market itself. While it's aggregately optimal, there are always be those whom the market hurts. When these are a threat to the survival of the market itself, intervention to mitigate there number (or alter their composition) may be viewed as a 'business investment' in the market system itself. Such interventions are not in the interests of equity, and certainly not entitlement, but rather pure self-interest. Socialism, then, is for the elite, exactly the same thing 'bread and circuses' were to the Roman aristocracy.

    And once again both of life's greatest truisms are proven:

    The more things change, the more they stay the same.

    and

    No good deed goes unpunished.

    [ This is a slight variation of a previous post that wasn't posted...as experiment to try to ascertain the criteria by which such are filtered...so forgive me if both eventually post and are redundant ]

  • ADiff

    Nope...neither post appears to have made it past the filter, for some undetermined reason or other....

  • caseyboy

    morganovich - thanks for the link. Very enlightening. Of course cap & trade isn't about "green jobs" or "energy independence". It is all about inserting the government into the middle of our energy industry.
    ParatrooperJJ - you are right on the money. The GM bailout was the most inappropriate bailout of the bunch. Squeezing out secured lenders to the advantage of the union that most people believe helped to put GM in the dumper in the first place.

  • http://www.crisispapers.org Ernest Partridge

    You write: "I can’t think of any thoughtful defender of capitalism and free markets that ever would have said that the market “never fails” or that it is “beneficial to all” or that there are never bad outcomes or that the market is perfectly self-correcting"

    For a starter, look again at the quote from the Milton and Rose Friedman: ""A free market [co-ordinates] the activity of millions of people, each seeking his own interest, in such a way as to make EVERYONE better off.." (Free to Choose, pp 13-4).

    And Milton Friedman again: ""There is NOTHING wrong with the United States that a dose of smaller and less intrusive government would not cure."

    Here's another from Jacob Halbrooks: "“In the free market, the individual would have to produce a good that the other person desired in order to receive a good in return. Adam Smith's "invisible hand" of the market guides ALL participants in society to promote the best wishes of EVERYONE ELSE by pursuing his own wants and desires.” (The once valid link to the source in geocities.com has since been withdrawn).

    And finally, regarding environmental policy from Robert J. Smith: "The problems of environmental degradation, pollution, overexploitation of natural resources, and depletion of wildlife ALL derive from their being treated as common property resources. WHENEVER we find an approach to the extension of private property rights in these areas, we find superior results." ("Privatizing the Environment," Policy Review, Spring, 1982, p. 11.)

    Enough absolutes for you? (Note CAPS).

    Ernest Partridge

  • ADiff

    Ernest,

    Your quotes are dramatic, but out of context in the sense you're applying them. When Friedman uses the term "everyone" what he's referring to is the aggregate, the body of all persons as a whole. This is fairly clear from his writings, in general. Quoting these excerpts to argue he states that no individual ever does worse in a free market is either simplistic misunderstanding due to limited familiarity with the author or the subject or it's disingenuous. I'm far less familiar with Halbrooks, but the quoted passage seems very clearly a discussion of aggregates too. You really haven't made your case at all, really more the opposite.

    The last quote, which isn't a discussion of aggregate optimality, but simply a re-statement of the idea of 'The Tragedy of the Commons', and appears inarguable on its face. Of course one needs enough familiarity to appreciate the meaning of the nomenclature used (i.e. the wildlife of Arizona is owned by the State, but it not treated as a "common property resource", it's actually managed very much as if it were "private property"). This really is off topic from the other two as it doesn't suggest inherent flaws in common ownership, just in how consumption is managed. It also, as I see it, rather more proves Mr. Meyer's point than the contradiction you assume, falsely, you're making.