Saturday, February 14, 2009

A libertarian critique of corporate power

Often times libertarians are seen as defenders of big business, because of big business's contrast with government. It's true that the relationship between a government and a corporation is different, because a corporation does not have the legal protection to coerce its customers, at least directly. Still, I'll argue here that intellectual defense of corporations is bad for libertarianism, and actually contradictory to advocacy for a free market.

I don't criticize concentrations of private wealth as unjustified power, but it is a problem that very wealthy entities can buy off political power, creating de jure or de facto barriers to entry, and thus circumventing the free market through government protection. It's a popular left-wing myth that big business is a product of the free market. Big business is actually an enemy of the free market.

I started thinking about this a few months ago from an excellent essay by Roderick Long. Long makes his points better than I can about the subject, but I'll offer my thoughts, after having his ideas brew in my head for a while. As I see it, big business isn't bad intrinsically because of an accumulation of wealth. It's a left-wing fallacy that trade is zero-sum, and that concentrations of wealth are illegitimate because that wealth is being withheld from "the people" out of greed and selfishness. Accumulation of wealth is often be a sign that economic institutions are functioning properly, that people are secure in their property rights. If any entity really attains wealth in a free market, there is nothing objectionable. Corporations today though, haven't achieved their wealth in a free market.

It's important to understand the institutions that produce this regrettable situation. Which came first, the chicken or the egg? Did government grant illegitimate legal protections to businesses, or did big businesses grow by themselves and buy off political power to protect themselves from market forces? It's definitely both, but one body, to my mind, gets the blame. It's the body that operates by violence, the government. If the government actually limited itself to protecting property rights, and didn't involve itself in arbitrarily and unfairly violating property rights and interfering in market transactions, then no corporate entity would be capable of the abuses that we some coming from these monstrosities today. Furthermore, if you're the CEO of one of these corporations, and popular opinion, indeed both inside and outside of government, holds that a legitimate function of government is to reallocate property and institute legal protections from the big scary market, you'd be a fool not to take advantage of such laws, especially when competitors would be doing so. These corporations, with governmental approval, steal land and resources, pollute with impunity, and prevent good companies from challenging them by legitimate competition. These problems can't be resolved if the body that's supposed to keep such abuses in check, the government, goes along with the corporate plan, granting legal protection. Often politicians get flat-out bribes, or they're simply misguided, when offered higher tax revenues from the productive activities of a local business. So the interest in these two bodies should not align, but they often do. Private-public partnerships are totally unaccountable. This is tyranny.

Some have made the case to me that big businesses are more efficient, which I don't accept. It's true that large businesses might be able to bargain collectively to get especially cheap capital and labor, but this is actually inefficient, for the very same same reasons that cartels are. A competitive market is actually more efficient, but it's more fair. Collective bargaining for cheap prices is not more efficient; it's more coercive. This dynamic is a step closer to exploitation than the dynamic that a free market would produce, because a large business can bargain collectively. In foreign labor markets, large corporations are monopsonies. With their market power in the labor market, they can trade producer surplus for consumer surplus.

This does not mean that I'm an opponent of Wal-Mart because they "exploit" foreign workers. Actually I'm glad that there are lots sweatshops abroad, but I also recognize that these workers aren't getting as much as they should be getting for their labor, what they would get in a more competitive market. Notice that my position is not left-wing. Left-wingers advocate that wages should be set higher by government, because they think that corporations are maliciously withholding wages. Of course, those left-wingers also don't really understand the political institutions that create wealth, and assume that if not for greedy companies, we could just distribute wealth more evenly to people who are poorer. This is nonsense. Such policy is not compatible with sustainable wealth. Alas, I've digressed.

So, I hope I've already made a convincing case that getting cheap goods isn't from the efficiency of big business. There's another reason, which I touched on before, on why big business is actually more inefficient than when operating in a market. As I explained before, big businesses can buy off political power specifically so that they don't have to be efficient in the market. They can afford to produce worse products and charge an inappropriately high price, with impunity, when not subject to market discipline. So the Left advocates for government intervention to correct for these inefficiencies. The position of the Right is just reactionary, arguing that government will produce worse outcomes than what a market would. This is true, but those on the Right miss the fact that corporate monstrosities aren't operating in a free market. Naomi Klein and Noam Chomsky actually seem to understand this, but much to my irritation they still do not recognize the superiority of truly free markets. This is typical inconsistency and unreason from the Left. Klein and Chomsky aside, most of those on the Left miss the point entirely, since they're totally ignorant of the fact that a free market wouldn't produce the objectionable inefficiencies from large institutions for which they want to correct. It is idiotic to institute legal protections that produce big business and then call for regulation when these problems ensue. The problems of inefficiency arising from the massive market power of big businesses are intrinsic to the structural political arrangement.

This idiotic cycle happens because politicians, and most people for that matter, only think in the short term. Psychology informs us as to just how irrational we humans are. Such irrationality is much more problematic when there's political power behind decisions. Is it any surprise that we get disastrous policies like bailouts?

I've conflated corporations and big business in my discussion here, but I can offer an excellent critique specifically about limited liability. I find the reasoning in the article persuasive. This is an important point, describing the actual mechanism of illegitimate growth of businesses. A corollary to this point is that bankruptcy laws are at least highly questionable, and at most, totally illegitimate.

So, in short, a free market would not produce the kind of unaccountable big businesses that we see today. That's a good thing, and libertarians should embrace this fact.


Media Mentions said...

Here's a new article (published today) that you may also be interested in:


Dee W said...

Two (not so quick) points:

1. Large businesses are more efficient because they can take advantage of economies of scale, not just because they have more bargaining power.

More bargaining power can be coercive but it doesn't have to be. A supplier of some raw material would probably give a lower price to a bigger company than a smaller one, not because the bigger company can coerce it into doing so but simply because the bigger company will need more of the raw material--meaning more guaranteed sales and less money lost to finding buyers and transaction costs.

Other examples of economies of scale include specialization within the firm and standardization. (Before microsoft's domination of the computing platform market, each computer hardware manufacturer had their own software/OS requirements and you couldn't mix and match.)

2. I've skimmed through the limited liability article and it brings up a number of interesting points. Namely that there were large firms before limited liability took off, although nowhere near as large as today. I'm not sure what the market situation looked like back then or whether there were any other government protections for businesses against creditors (in addition to bankruptcy).

However, Rozeff makes an argument that because corporations buy liability insurance, it must mean the value of the corporation is more important than the limited liability protection. I'm taking this to mean that in the absence of limited liability, we would still have our large corporations (at least the ones that take on reasonable risks).

This misses the point. Sure, several highly publicized class action suits have threatened corporations. But that's not the main source of business risk. The main source of risk is that your business is not going to do well and you can't pay your debts. Corporations don't buy insurance for this type of risk.

Rozeff also states that limited liability doesn't add to market values of firms because it increases interest rates of debt to offset the decrease in cost of capital. I'm not even sure that the increase exactly offsets the decrease, but leaving that argument aside, this ignores start-ups. For many new companies, the venture is so risky that instead of raising interest rates on debt, lenders simply won't lend to them, so the only way to get money is through raising capital. And with limited liability, capital is more expensive. Does the mean that many start-up companies today are too risky and we're better off without them in an unlimited liability world? I'm more inclined to say no, but then again, I don't know what level of risk in a start up is optimal.