No, Libertarians Are Not Corporate Shills

intentions vs results

Stay Informed
Never miss a blog post again
I am often accused of supporting “Reaganomics” or “trickle-down economics” or being “a tool of the corporate elite,” or some other such thing. An implication is that my economic views are conservative, and basically amount to apologetics for the wealthy. Naturally, these ad hominem attacks always come from the “left.”

I think this perspective exists for a few reasons: lack of economic understanding, a conflation of modern capitalism with real free markets, and some psychological traits that would be the subject of another article.

People who view themselves as “progressive” or “left wing” believe that they are rebelling against corporate power and defending the little guy. I believe that most laypeople on the left truly are well-intentioned, and would like to improve the lives of the common man. Unfortunately, the policies that they advocate do precisely the opposite: concentrate wealth upwards.

In this post, I intend to argue that corporate power is just another arm of the state. There is nothing inherently wrong with corporations, but modern capitalism is largely a history of corporations behaving badly. Modern capitalism – NOT the free market – is a system where the power elite are able to extract wealth from the masses and concentrate it into the hands of the few. They do this, not through the extraction of Marx’s “surplus value”, but through creating artificial scarcities and rents through the power of the state.

Put simply, the state is the enforcement mechanism for economic privilege. For those who would like a more economically equal world, it is the state that should be the focus of attention. Leftists who support things like welfare and the minimum wage believe they are helping win some battles on behalf of the working man, but a far better solution would be attack the system of state-enforced economic privilege itself.

Before diving into just some of the ways in which the state is enriching the wealthy, I’d like to quote at length from a recent article by Richard Ebeling:

“Suppose someone were to ask you the easiest and quickest way to drive by car from New York City to San Francisco, California. Since the shortest distance between two points is a straight line, the most reasonable answer would be for this person to take Interstate Highway 80, which runs East-West between these two cities.

Now suppose that this person, instead, starts driving south from New York City on Interstate Highway 95, which would get him, eventually, to Miami, Florida. You tell him that he is on the wrong route; not only will it take him much longer to get to California if he stays on Interstate 95, but he may end up never getting to San Francisco at all.

Rather than thanking you for correcting him and figuring out the best and most time saving way to get back onto Interstate 80, he accuses you of not wanting him to get to California. He wants to know what you have against him and the people of California. Why are you sabotaging his chance to finally find “happiness” in California?

You assure him that you have nothing against either him or California. Indeed, you explain, you’ve even been to California and it’s a very nice place to visit and maybe even to live. You are just pointing out that he is following the wrong route to get to his desired destination, and in that easiest and quickest way as he had originally asked.

He responds by asserting that you clearly have something against him and have some hidden agenda to prevent people from getting to California.

A person saying such things would, to most of us, seem strange or even bizarre. It is, however, the way many critics of the free market respond when an economist or some other proponent of economic liberty explains that government intervention in the market, regulation of business enterprises or redistribution of income and wealth are not the best and most efficient policies to provide an economic and social climate most conducive to opportunity, prosperity and freedom for as many people in society as is possible.

Free market critics frequently assert that the free market advocate “hates the poor,” “doesn’t care for humanity,” is “insensitive to human suffering” and only wants to help “the rich.” And how can we know this? Because he dissents from the governmental interventionist, regulatory and redistributive policies proposed to cure the ills of society.”

Note that, for each of the below foundations of corporate power, there is a lot more that could be said. The intention of this post is to be more of an overview, or introduction, to how the state is the primary driver of corporate power.

 

Monopoly Central Banking

Far and away the largest driver of massive corporations and wealth inequality is the institution of central banking. Indeed, central banking and artificially low interest rates are a major tenet of modern progressive views on monetary policy, despite their professed intention to reduce inequality.

The Federal Reserve creates money from nothing, and those who get to use that money first benefit. The increase in money supply will decrease the value of money, or increase the price of other goods. But this only happens over time as the money moves through the economy. So if the government gets to use this money first – generally to support the military industrial complex, big banks, auto companies, and other favored business interests – they get extra (free) money without having to pay higher prices. Everyone else who gets access to that money later ends up needing to pay higher prices, and is essentially robbed of the value of their savings. This process of prices adjusting in a non-uniform way is called the Cantillon Effect, and is routinely ignored by progressives.

But this isn’t the only way monopoly central banking hurts the poor and enables giant corporations and those who are already wealthy to rake in record profits. The central bank is tasked with setting interest rates, and there is an inherent tendency to keep interest rates low in order to foster investment (and to concentrate wealth). In fact, progressives are very adamant about keeping interest rates low. Just ask, as usual, Paul Krugman. But lowering the interest rate makes savings less attractive and encourages investors to seek higher yields, which pushes up the price of securities, particularly stocks (and housing, and other assets). Of course, it is the wealthy who overwhelming own these assets, and thus they are the beneficiaries of these “progressive” policies. Money printing leads to inflation and lowers the reward for saving, hurting everyone else in the economy who isn’t heavily exposed to these securities.

But central banking doesn’t just make rich individuals richer, it also leads to massive corporate profits, in particular relative to wage rates. As I said earlier, preferred corporations (banks, hedge funds, weapons manufacturers, etc.) are the first recipients of the expanded credit. Let’s say Lockheed Martin is the recipient of an extra $10 million in credit. They use this money to invest in a new weapons plant to expand production. This leads to an immediate increase in $10 million in sales for the construction and other contracting firms who build the plant. But investment expenditure in fixed capital is amortized in cost calculations. If this plant is assumed to depreciate over the course of, say, fifty years, then the only cost on Lockheed’s books this year would be $200,000. In other words, there is a net increase of $9.8 million in profits for these big companies with early access to credit.

Moreover, credit expansion and lower interest rates tend to foster increased capital expenditure for longer term increases in production rather than immediate expenditure on labor. As such, the returns to capital will tend to be higher than that of labor.

There are many other negative effects of monopoly central banking, but I want to restrict this discussion to a very basic overview of how it worsens inequality and improves the corporate bottom line. In this respect, progressives are consistent advocates for the most egregious of economic injustices.

 

Corporate Personhood

In America, there is the legal concept of “corporate personhood,” which means that corporations have many of the same legal rights and responsibilities that an individual would. A major aspect of this is that it allows corporations themselves to sue or be sued – that is, the corporation is considered an entity apart from those individuals who comprise it.

In and of itself, the concept of corporate personhood is not immoral. Corporations, as groups of individuals, should be entitled to the same kinds of freedoms that individuals have. The immorality stems from treating corporations as persons with respect to limited liability. The corporate entity itself is liable for damages they may cause, but the owners or shareholders are not held responsible.

That means that corporate owners can do immoral things without so much regard for the consequences, because they will not be considered personally responsible. This is the main reason a business incorporates itself anyways; why do you think it’s called a limited liability company (LLC)? Ultimately, this allows investors to hire managers who have a legal mandate to pursue profits – but it lets them keep their distance from the way the profits are pursued. This makes a significant difference; imagine how business would change if stockholders knew that they would be liable for the actions of their managers? In other words, if an investment in a company would mean risking the stockholders’ own assets, the way business is done could change radically.

Very few people, anarchist/libertarian or not, would give limited liability to human beings and their direct actions. Most people are aware that having real consequences for your actions helps prevent you from engaging in undesirable or bad actions. Corporate personhood thus subsidizes bad behavior.

In a world where there wasn’t limited liability for shareholders of corporations, the structure of capital would be radically different. That’s not to say that similarly structured organizations couldn’t arise out of a network of legitimate contractual relationships, but I would expect it to be the exception rather than the rule. If shareholders were held individually liable, then buying a share of stock in a company becomes a much more risky and harrowing ordeal. Before doing so, one would want to thoroughly research the company as well as the other shareholders in order to determine how risky such a move might be. Perhaps the free market would supply some kind of insurance for these decisions, thus smoothing over some of those transaction costs. Either way, modern limited liability acts as a subsidy to shareholders by either reducing risk or essentially paying for their insurance policy.

Admittedly, this is an area within libertarian theory of which there is much disagreement. I don’t intend to delve deeply into the debate here. I don’t have enough of a legal background to feel competent in debating this point, to be honest. But my libertarian “intuition” suggests that limited liability is wrong, and it certainly concentrates capital far more than a world without it. For an alternate libertarian take on limited liability, see Stephan Kinsella’s argument here.

 

Intellectual Property And The Patent System

Another way that the state secures undue rents for massive corporations is through the thoroughly mercantilist patent system. Patents grant exclusive monopoly privilege for the practical use of ideas, and impose ridiculously harsh penalties on those who attempt to utilize these ideas on their own terms. In other words, patents create artificial scarcity, and this allows the patent holder to charge higher prices by excluding all competition.

Property is only a meaningful institution in the face of scarcity. We rarely consider it to be “my” oxygen in day to day life. However, when going scuba diving, oxygen is scarce and property relations become relevant again. If I write a book, and somebody else prints it, gives me credit, and makes money from it, there is no scarcity involved. But by getting it copyrighted, I impose scarcity by preventing other people from using their own property in nonviolent ways. I’ve in effect become a partial owner of everyone else’s resources; others no longer have the right to use paper and ink as they see fit. As Murray Rothbard said:

“The man who has not bought a machine and who arrives at the same invention independently, will, on the free market, be perfectly able to use and sell his invention. Patents prevent a man from using his invention even though all the property is his and he has not stolen the invention, either explicitly or implicitly, from the first inventor. Patents, therefore, are grants of exclusive monopoly privilege by the State and are invasions of property rights on the market.”

People often claim that without patents, people will stop innovating. But this is unequivocally false:

“This is borne out by F. M. Scherer’s testimony before the Federal Trade Commission in 1995. Scherer spoke of a survey of 91 companies in which only seven “accorded high significance to patent protection as a factor in their R & D investments.” Most of them described patents as “the least important of considerations.” Most companies considered their chief motivation in R & D decisions to be “the necessity of remaining competitive, the desire for efficient production, and the desire to expand and diversify their sales.” In another study, Scherer found no negative effect on R & D spending as a result of compulsory licensing of patents. A survey of U.S. firms found that 86% of inventions would have been developed without patents. In the case of automobiles, office equipment, rubber products, and textiles, the figure was 100%.”

In fact, the patent system hinders technological development – development which tends to benefit the masses the most. If someone invents something and secures a patent, they lose the incentive to do further research and build upon the now existing body of knowledge. Others can no longer incrementally add to or improve upon this invention, simply by decree. And because of this state-enforced monopoly, the inventor no longer needs to fear competitors doing exactly this – improving the invention. The end result, then, is stagnation.

carlin hats

More importantly to the issue at hand, the patent system concentrates economic power into huge multinational corporations. Simply put, giant corporations scoop up as many patents as they can, not for the sake of innovation, but to exclude competition and protect monopoly profits. Sometimes, a couple of huge firms will come together with a patent “pooling” agreement, which improves their combined market share at the expense of the smaller players in their industry. Cartels like this actually do succeed – unlike purely private cartels, which are inherently unstable – because they are based on privilege that is granted by the state, and backed up with very high penalties. In fact, it is often the case that corporations will get patents not so that they can use the technology, but specifically to prevent others from using it. Look at oil companies and alternative energy patents.

In addition, hiring patent lawyers and the entire process of procuring and defending patents is expensive, and thus far more prohibitive for small businesses and inventors than massive corporations with their hordes of lawyers and significant R&D budgets. Individuals who create new products and get them patented may be inclined to sell those patents to larger firms, due to the uncertainty of being able to defend it. And the employees who actually do the inventing as part of the R&D departments for large corporations are usually required to sign over the patent rights as a condition of employment. In other words, there is a strong tendency that leads away from innovation and towards centralization of corporate power because of the patent system.

Compounding the immorality of the whole patent arrangement is government funding of research. All sorts of grants are given out to companies in order to research some new development (oftentimes military-related), and these companies then get to charge state-enforced monopoly prices for the product of this research, despite having not invested in the research themselves. Essentially, taxpayers end up footing the bill for themselves to be exploited by major corporations – courtesy of state intervention.

Furthermore, international patent regimes are critical for making sure that transnational corporations maintain their monopoly power. This was the major effect of GATT – to lock in a Western monopoly on modern technologies and to ensure that there can never be meaningful competition from the Third World.

 

Subsidizing Infrastructure And Socializing Costs

An often overlooked area in which the state subsidizes massive corporations is through providing infrastructure. It does this primarily by funding major transportation systems, cheap fossil fuels, and providing security. This is a fact that I’ve found is routinely ignored by most on the left, with the exception of Noam Chomsky. But then, he is an anarchist too….

Anyways, it is important to remember than any time the government spends money, this money was originally expropriated from the taxpayers. So it is not government that ultimately pays for roads, bridges, and so on. It is you and me. These services are not provided for free.

Let’s start by considering transportation. While historically, private entrepreneurs have been responsible for creating and improving roads, the US government has largely taken over that function. And not just roads – just about every major piece of transportation infrastructure in the US has been created or significantly subsidized by government. Some examples:

  • The Interstate Highway System
  • Civil aviation infrastructure
  • Railroad land grants back in the late 19th century, where government provided free or significantly below-cost land to railroad producers

Government builds roads?

Again, this was all done using money stolen from the people, and often through the forced theft of land via eminent domain. In other words, all this infrastructure was funded, and all the sacrifice that went into building it, was provided for by average folk. Naturally, the corporations tasked with building this infrastructure were immediate winners. But a more subtle and insidious consequence was in how this changed the fundamental structure of production.

In short, the cost of transportation was socialized, which nearly eliminated the incentive for people to produce and consume locally. Local industry suffers at the expense of larger, more distant corporations, which were able to take advantage of economies of scale that could not possibly have existed on the free market. Clearly, Walmart and other giant corporations that liberals seem to hate on so much could never have come to exist without this government appropriation of resources and infrastructure subsidies. Without this absurd subsidy, giant conglomerates could never compete with smaller, local manufacturing. Not only that, but problems like suburban sprawl and pollution from our cars wouldn’t be happening on nearly the same scale; communities would be more locally organized, and towns and cities would be built with bike and foot transportation in mind.

If you want to learn more about the sordid history of transportation subsidies, you can do no better than reading Kevin Carson.

In tandem with socializing the costs of transportation, the state has helped subsidize the cost of energy, also required for the mass distribution models that many major corporations depend on. It has done this largely via eminent domain, seizing land in which to build pipelines for moving energy cheaply and quickly. Perhaps even more importantly, the taxpayer-funded US Navy guards sea lanes so that oil can be transported far more cheaply.

In fact, the government’s funding of security in general is a massive subsidy to large corporations. Larger organizations with more assets will naturally have higher insurance costs and would need to spend more money on police/security. But the taxpayers have that (largely) taken care of. I’m not going to dive into what a world of purely privatized security might look like here, but it is clear none the less that security is essentially a corporate subsidy.

 

Regulations

Regulations, practically a buzzword among the progressive community, are one of the primary means by which large corporations benefit through the use of the state apparatus. It boggles the mind how liberals don’t seem to get this (except, again, for Chomsky, who then goes on and suggests more regulations for some reason…), despite it being a primary aspect of the “progressive era.”

In the words of Rothbard, describing public-private partnerships:

“We often fail to realize that the point of Big Government is precisely to set up such ‘partnerships,’ for the benefit of both government and business, or rather, of certain business firms and groups that happen to be in political favor.”

The left tends to think that somehow big business and big government are at odds. But throughout history, every expansion in government is funded and supported by some segment of big business. This is because larger, established firms always have an interest in crushing smaller, upstart competitors. Under a free market system, market share is never secure. But regulations create barriers to entry, which reduces that competition and leads to an increase in the size and relative power of the large, entrenched interests. Sure, they need to pay the costs that come with the regulations, but they can afford to do so much more easily than smaller competitors – and as yet nonexistent potential competitors. Bastiat’s “unseen,” for those who know what I’m talking about.

You can see this at every level of government. The most obvious contemporary example at a local level is how taxi cartels are desperately trying to hold on to market share by lobbying their cities to ban Uber. Similarly, professional licensing requirements turn certain professions practically into guilds; the restricted supply of doctors significantly increases the cost of health care, for instance, but vastly increases their salaries. There are a gazillion more examples I could provide.

But it is also (and especially) true at the highest levels of government and industry. Take the pharmaceutical industry, for example. The FDA regulates which drugs are allowed to be sold in the US, and requires expensive testing and a lengthy, multi-year process before a drug can go to market. Existing pharmaceutical companies, while they don’t like to pay for these tests, can certainly afford to do so. But smaller firms generally can’t take the risk. They may need to invest hundreds of thousands of dollars and several years’ effort, and still get their drug rejected. Most won’t even try. (I’ve recently written about a related subject: pharmaceutical companies lobbying for more regulations on dietary supplements.) That’s how you end up with Big Pharma.

Competition is the bane of big business. Laws such as the Federal Trade Commission Act’s “unfair competition” provisions made illegal things like “predatory pricing,” price wars, and “dumping.” Normally, it is difficult for oligopolies to form, because there is a strong incentive to cheat and undercut your competitors, seizing more market share. But this law prohibited selling goods for less than production costs, and thus made it possible for more stable oligopolies to form.

The incentives are clearly there for big business to use the state to enforce monopoly or oligopoly upon their industry and extract unwarranted profits. But there are a couple of further problems with the big business-big government relationship.

Regulatory capture, when the powerful business interests whom the government is supposed to be regulating end up seizing control of these regulations, is ridiculously common. How does this work?

“The basic logic behind the capture theory of regulation is that while the general public is largely ignorant of the regulator’s activities, those in the regulated industries are well-informed, and pressure regulators for favorable regulation. Furthermore, information about regulated industries is largely under the control of those in the industry, and personal connections between regulators and the regulated also influence regulatory outcomes. The result is that regulatory agencies act as agents for those they regulate, not the general public.”

Since this is just an overview, I will not delve into the details and the many, many, MANY examples of this. The most blatant recent example was brought to our attention by whistleblower Carmen Segarra, who secretly recorded tapes showing that Goldman Sachs got to ignore the regulations that they were supposed to abide by. And you can be sure that smaller companies would never have gotten away with this kind of thing.

Obamacare

 

 

And then there is the revolving door between big business and government. Again, I cannot possibly give this subject the treatment that it deserves here. But put simply, those who work in government, often in regulatory agencies, hope to one day make significantly more money working in private industry. As such, they will do a lax job with their regulations because of this. Conversely, some big companies will pay out large bonuses to their executives to take positions in government. It’s not hard to guess why. Here you can see a series of Venn diagrams demonstrating the revolving door between top member of government and various industries. Ken Silverstein at The Intercept has a great take on this, and a perfect example:

“After he went to prison for bribing public officials, lobbyist Jack Abramoff claimed in his memoir, Capitol Punishment, that he controlled around 100 members of Congress. In addition to offering them and their staff free meals at his high-end restaurant, Signatures, Abramoff handed out luxury box tickets to sporting events and junkets to the world’s most exclusive golf destinations. But his most effective tactic was simply to float the suggestion to congressional staffers that he’d hire them when they left the Hill. Abramoff would then effectively “own” the staffer, who would perhaps even unconsciously start making decisions that benefited his future employer. “His paycheck may have been signed by the Congress, but he was already working for me, influencing his office for my clients’ best interests,” Abramoff wrote. “It was a perfect–and perfectly corrupt–arrangement.”

In this environment it’s misleading to use the term “revolving door,” because that falsely suggests that there are sharp lines separating corporate America, government and the influence peddling complex.”

For more on the history of the cozy relationship between big business and the state in terms of regulations, see this and this.

 

Corporate Subsidies

Finally, we come to the most direct and obvious way that the state is used to plunder the people for the benefit of large corporations: corporate subsidies. The US Federal government spends $100 billion per year on direct corporate subsidies. This is one where where I think, thankfully, libertarians and progressives can agree that the state should be rolled back. Since there are so many ways in which subsidies are snuck into government budgets, I can only provide a handful of examples here.

  • Much of the military-industrial complex amounts to a corporate subsidy. Never mind the fact that the industry itself would be just a fraction of its current size if it weren’t for the state in general. There are specific aspects that count as corporate subsidy: namely, foreign military aid. Every year, the US gives billions of dollars to foreign countries so that they can use that money in order to buy weapons from US manufacturers.
  • The massive government bailouts in 2008 were a corporate subsidy (and unfortunately, one that the left tended to support, based on the fallacious idea of “creating jobs”). This includes hundreds of billions of dollars going to giant entities such as Bear Stearns, AIG, Fannie Mae, and Freddie Mac. And then the TARP bailed out all of Wall Street, and later General Motors and Chrysler. I can assure you, the little guy will never be “too big to fail.”
  • Federal land is often leased out to billionaires and large corporations, who have no incentive to treat the land responsibly due to a lack of private property rights. This includes things like leasing land for grazing, logging, and drilling for oil. These companies need not be concerned for the environment, because their contracts run out within a couple years – might as well suck the land dry of as many profitable resources as possible! A far better solution for the environment would be for conservation organizations to buy up swaths of land that they want to protect and then not sell it to these corporations. Duh.
  • Big Agriculture is the recipient of massive corporate subsidies in the Farm Bill that gets passed every couple years. The largest part of these bills is generally food assistance, and particularly the SNAP (food stamps) portion, which one could easily argue is just another corporate subsidy. What do you think these food stamps are spent on? (Note that my argument here isn’t “poor people should stop buying food,” but rather that centralized farming and food processing operations are primary beneficiaries of the program.)
  • The Export-Import Bank provides loans to foreign countries so that they can purchase American-made goods. This is a major corporate subsidy, but the primary benefactor is a single giant corporation: Boeing. The Ex-Im Bank spent $20.5 billion dollars of taxpayer money in fiscal year 2014, 40% of which ended up going back to Boeing. And in a typical case of regulatory capture, the Ex-Im Bank reached out to Boeing to seek their approval on regulatory rules they were writing.

Need I go on?

 

Conclusion

libertarian word

The above is just an overview of the many ways in which corporations and the wealthy elite are made even more rich through the state apparatus. There are a million more assorted ways the state protects unnaturally big business, such as creating a student loan bubble that forces many into debt slavery, and military interventions abroad at the behest of major corporations (such as United Fruit Company in 1950s Guatemala and Halliburton in Iraq).

The fact is, without the enforcement arm of the state, the economic structure of production would be wildly different, perhaps even unrecognizable. Progressives tend to conflate the libertarian defense of free markets with a defense of the status quo, but nothing could be further from the truth. Unfortunately, some of the responsibility for this fallacy does lie within libertarians ourselves; our temporary alliance with the “right” has likely rubbed off on us in certain ways, and we do not present ourselves as honestly as we should. And then there are the beltway libertarians, who really are more like conservatives. Nevertheless, the libertarian tradition is fundamentally radical – 19th century individualist-anarchist Benjamin Tucker even called himself a socialist and belonged to the First International! Perhaps it is time we libertarians get back to our more radical roots.

I believe that there are many on the left who fundamentally want something similar to what we libertarians want: an immediate end to the privilege and entitlement of elite members of society at the expense of the rest of us.

Trackbacks

  1. […] is about mass production. You’ll find no argument from me against the idea that the system of state capitalism concentrates wealth in the hands of the few – and that this is the system that was prevalent both then and now – but the products […]

  2. […] they need to pay the costs of this themselves (note that this is true with freed markets, but not the current “crony-capitalist” system we live under today). In addition, wars tend to help politicians accumulate power and silence […]

  3. […] doubt, the institutional structure that we live under today, with giant corporations protected by big government, has led to significant environmental distress. Nevertheless, the effect of capitalism and […]

Speak Your Mind

*