Whip Conflation Now!

by Will Wilkinson on November 10, 2008

Roderick Long’s essay on the differences between free-markets and corporatists markets in this month’s Cato Unbound should be required reading for: leftists and liberals who think libertarians are corporate shills; conservatives with Adam Smith ties who love corporations; libertarians who love Wal-Mart a little too much. 

I’m surely in the latter category. Let me say that I totally agree with Rod about the fact that Wal-Mart and its consumers enjoy a lot of direct and indirect subsidies, which I am against. However, when the primary subsidy is the national and local automobile-centric transportation infrastucture, I can’t really see the point in picking on a company that makes consumers better off by making the most of the tax-funded infrastructure everyone uses. They would not be a more beneficial and admirable firm if they used dirigibles instead of trucks, or were less expert at insterstate logistics. 

But this hints at a thicket of trickier issues. We want a system in which profit-seeking behavior creates the greatest net positive externalities (like continuously increasing the consumer’s share of the cooperative surplus from mundane purchases). But positive spillover maximization within the constraints of a sub-optimal overall system is really desirable, despite the less-than-best incentive structure. Those who do this well deserve admiration and praise. Maybe the American state university system is sub-optimal. But I feel fine about having taken a scholarship at the University of Northern Iowa, since that’s the best I could have done for myself given my actual constraints. If I go on to cure cancer or something (rather likely, actually), I don’t think the advance in human welfare will have been tainted by the fact that taxpayers subsidized my education. But, at the same time, I don’t want to let a corporation of the hook for its rent-seeking, even if that’s the economically rational thing to do, and it had nothing to do with creating the incentives it faces. I don’t yet have a principled way of articulating the difference between OK maximizing (e.g., Wal-Mart using publicly-financed roads) and not-OK maximizing (e.g., attempts at regulatory capture) within suboptimal institutions. But if we want to do something more relevant than libertarian ideal theory, which I do, we ought to be able to say more about the difference.

And here’s a nit. I’m a bit skeptical of Rod’s implicit claims about optimal firm size. He thinks that a genuinely free market will involve a larger number of smaller firms. Maybe, but I think he’s overselling it. I agree that, at a certain scale, the lack of internal prices can create inefficiencies greater than the efficiencies of bringing tasks inside the firm. But the point at which you hit diseconomies of scale depends on what kind of business it is. To go back to Wal-Mart, once it’s basic structure is in place, it’s hard to see how the marginal outlet significantly increases internal transactions costs. “Bigger” in this sense doesn’t do much to add complexity for the managers of the core firm. But it does create efficiencies. The larger the market Wal-Mart constitutes, the harder a bargain it can drive with suppliers, allowing it to offer consumers lower prices, etc. It seems to me there is market pressure toward larger scale in this kind of retail, whether or not the state subsidizes roads. And it’s worth noting that the innovative efficiencies of Wal-Mart in part explains why localities offer subsidies to attract their stores. Wal-Mart is a stable, reliable source of jobs and tax revenue because it is a highly-successful business because it offers lower prices than competitors in part because of its economies of scale. Big business can be beautiful.

Viewing 29 Comments

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    "Big business can be beautiful."

    Prepare to be taken out of context!

    I can't WAIT to see what Yglesias/DemBot5234 is going to say.
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    Well, expectations weren't high for the Dembot and he didn't disappoint in that respect.

    What a terrible reaction. Totally off the mark from the lead essay. Just a collection of weak observations that don't interconnect or have much to do with the lead topic.

    At least it was short.
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    At what point does the conserve the sum of transaction costs + administrative inefficiencies theory of the optimal size of the firm justify the state. Maybe the transaction costs of highway-army-legal system-medium of exchange provision through contract are just higher than doing it through territorially defined nation states. That might explain why there are so many of the latter and so few anarcho-capitalist communes.
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    "I don’t yet have a principled way of articulating the difference between OK maximizing (e.g., Wal-Mart using publicly-financed roads) and not-OK maximizing (e.g., attempts at regulatory capture) within suboptimal institutions."

    Is the difference between the two kinds of "selfishness" that the former advances general welfare whereas the latter (foreseeably) leads to net harm?
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    Richard, Yeah... Something like that. I'm thinking that it has something to do with the difference between acting rationally within the rules and acting rationally to rewrite the rules. We want people/firms to act rationally within rules that ensure an overall structure of mutual advantage--that bring individual and collective rationality together. But in order for that to happen, the rules have to have a certain impartiality and generality. The meta-game of changing the rules tends leads straight to the kinds of zero-sum conflicts good rules are designed to avoid.
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    Oh, no, it's even worse then that...

    For instance: what about the whole project of lobbying in self defense against harmful laws? I don't think that's obviously illegitimate even when done by large powerful corporations. But then suppose they're in an industry that we can't afford not to regulate in some way, so the point is to make sure the laws are written in the right way. Doesn't the line get even more blurred then between defensive lobbying and attempts at regulatory capture? More to the point, doesn't it get more difficult to find someone to arbitrate those claims (particularly when all or most of the experts have a personal stake in the outcome)?

    Banking is a great example (leaving aside the question of whether the strong regulator is necessary -- assume it hypothetically for the sake of argument). Paulson seemed like a great choice as Treasury secretary, with his practical expertise, until he had to make decisions that amounted to either a giveaway to or destruction of his own bank.
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    Well, Benquo

    Legitimate self-defense against harmful laws is superseded in Will's post by that very idea of true impartiality. We don't have that...hence the need to lobby to protect oneself.

    To put it theatrically:

    The Ring must cast into Mt. Doom. So long as it exists, there power to coveted and used against others...unfairly and not impartially.
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    Is that different from saying that the only truly just world is one in which no one was ever born? If so, how?

    In other words, we have laws for a reason, and they must consequently be partial to something, however just you might think that particular partiality. How are we to avoid a regime which is partial, and yet go on with the business of living?
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    Benquo, Exactly. it's this sort of thing that makes me admit that I have "no principled way of articulating the difference...."
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    Yes. Practically speaking it is hard or impossible (often the latter) to accurately predict the welfare implications of a given system of regulation. And harder still given that "welfare" doesn't have some precise metric or commonly-accepted meaning.

    However, "what's the best decision if you can't predict the consequences of each choice?" just is a really hard question. Let's not beat ourselves up too much for not having a clear answer.

    We can make some progress by making "welfare" a little bit better defined. Practically speaking, a metric like GDP could be OK, or a more comprehensive quality of life measure could also work. In different situations we may choose to use different metrics. In practice, metric-selection will be part of the democratic haggling process.

    I think at a "meta-level" we can probably eliminate entire categories of stupid metrics. (Like, the metric that says "farmer prosperity is the only thing that matters".). As part of the process of governance and decision-making, we should have an ongoing "meta-conversation" about which metrics are appropriate for a particular realm. I believe (maybe wishful thinking) that if we could establish this as a standard practice of governance, it would undermine the rationales for a lot of rent-seeking, which only shows up as good under stupid metrics.

    Obviously the metrics game can be rigged (partisan think tanks play something like this role right now) but I think at least it forces reasoning to be more explicit.
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    BTW, I think all these kinds of arguments are best made in terms of "how shall we arbitrate these disputes?" a la the Hobbesian tradition rather than the laws of justice, as the latter kind of argument makes it much to easy to do nothing but construct rationalizations for your priors, i.e. supporting whatever system leads to the "correct" outcome which just happens to serve your private interest.
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    Good stuff! So how do we create a market system that doesn't lead to (welfare-reducing) regulatory capture, when laws change all the time and corporations have big bags of money that lawmakers want?

    A few options present themselves:

    1) We do have a set of "meta-rules" in our society -- it's called the constitution. Maybe a clause disallowing corporate favoritism should be in there. Why not? Sounds pretty fundamental to me. If James Madison were around today he'd probably be worried about regulatory capture too. I think that sounds like a pretty good option.

    2) The more icky and pragmatic alternative: countervailing forces of regulatory capture; e.g. unions. Let people band together and practice regulatory capture for workers. An equilibrium will be reached as the two forces push against each other. It's not pretty and there's plenty of corruption to go around, but the system may not get totally out of wack (unless (a) the two forces find areas where they can collaborate on mutually beneficial regulatory capture, an interesting scenario which might come up, e.g. for automobile tariffs; or (b) each of the two groups wants special treatment that doesn't happen to make the other side mad. Then there is no countervailing force.).


    There are probably new options we can think about in our modern era with information technology allowing greater transparency and mass voter mobilization. If there were a third party articulating a message of no corporate favoritism, it might find a constituency in democratic politics. (Though democratic politics of course has its own systematic shortcomings, and "regulatory impartiality or death!!" may not be the first battle cry you'll hear from political activists and voters -- "no special treatment" could be a winner though)


    But overall-- echoing what you said -- we can't just "get mad" at a corporation for following its interests to pursue regulatory capture. We have to design the right system so that private incentives are aligned with the common good.


    (A last nitpick: "Positive externalities" only encompass gains to people other than the main parties in a transaction. We want to maximize aggregate utility or common welfare, not "positive externalities." )
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    A third option: drown the regulatory apparatus in the bathtub until there is nothing left to capture.
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    > He thinks that a genuinely free market will involve a larger number of smaller firms.

    If the effective economy is larger, and it might be because of less wealth having to pass through the hands of rent-seekers (lobbyists, corporate lawyers, politicians), you would expect a larger number of smaller firms.

    Also, a Wal-Mart could exist, in a slightly smaller form, still provide all the same benefits due to increased productivity, with plenty left over to pay for a thousand small firms (pretending the economy buys small firms with a fixed percentage of its size).

    I wouldn't imagine that there would be any fewer of the very largest firms, and there wouldn't need to be, for many more smaller firms to flourish.
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    I agree with you, Will. I've seen Long and Carson make this "vulgar" argument before and it just doesn't go very far with me. I'm not a "right libertarian". I'm just a libertarian though my sensibilities are more left...like Long describes when talking about 19th century liberalism...ala Bastiat but they do tend to leave me perplexed with some of these criticisms. What can we really do about some of these things they cite??

    Sure, one can look at matters of special privilege on tax breaks and eminent domain and hold that against Wal-Mart and others like it up to a certain point. I agree that it is "unfair" and the state regulatory apparatus is more favorable to "big guys" than to small entrepreneurs. I've always been with them there. However, when Long goes into use of the public transportation system, I think he's being a tad too stringent. Public systems of roads are what they are. They are tax payer funded for use by everyone for everything.

    I'm not a vulgar libertarian and I do think Wal-Mart is partially empowered by the state to make better use of advantages that are actually afforded to everyone. What are we supposed to do then? Make Wal-Mart pay a tax for use of the highways to "balance things out"? Can't do that.

    Of course, Long and Carson have more of an anarcho-capitalist streak in them so any state influence is seemingly rejected out of hand. I'm open to their ideas of no corporations or "corporate personhood". It's worth exploring (not that such a measure would come about) but to cry foul for making use of public infrastructure that it helps pay for? A bit too picky for me.
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    Again,

    that last part is very important. Most (or at least a big chunk of) funding for highways is paid by gas taxes. It's a user-based tax. Spends quite a bit on gas with its trucks running all over the country. And then they pay a lot in corporate taxes. Again, I'm not that "corporate apologist" that Long warns liberals not to confuse with libertarians and I'm not that libertarian that blurs the line between free-markets and corporatist markets, but there's really not much to complain about on this idea of enjoying the benefits of public infrastructure and "socializing" them. The same can be said of consumers as well as small businesses that compete locally for business with Wal-Mart. They fact that Wal-Mart makes exponentially more use of it is not really a slight on Wal-Mart.

    His arguments are stronger elsewhere on the rules/rule-writing side of the matter and rent-seeking.
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    Long and Carson do not consider themselves anarcho-capitalists. Carson especially is not fond of the term "Capitalism", seeing it historically as a term to designate the merger of state and corporate power. Carson is a Mutualist, and Long a 'Market Anarchist', though Carson would probably be fine with that term too.
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    And here’s a nit. I’m a bit skeptical of Rod’s implicit claims about optimal firm size. He thinks that a genuinely free market will involve a larger number of smaller firms. Maybe, but I think he’s overselling it.

    I agree. Regulations tend to help incumbents. But in plenty of situations, state and local regulations protect smaller incumbent local firms against larger outside firms. I gave him the example of car dealerships, where state laws prevent company-owned dealership networks, but he dismissed the argument.
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    "I don’t yet have a principled way of articulating the difference between OK maximizing (e.g., Wal-Mart using publicly-financed roads) and not-OK maximizing (e.g., attempts at regulatory capture) within suboptimal institutions."

    --The first doesn't involve the maximizer coercing people in any way, at most it sees him benefit from coercion that has already been completed which he cannot reverse, affect or alter in any way. The second sees the maximizer using the power of the state to coerce people to pay, support or use her services.
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    In regard to what the size of forms would be in a free market, Schumpeter's the person to read on that. He's the one who got economists and the public to realize big is not necessarily bad, especially if one is thinking over a long time horizon.
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    That should be "what size firms would be in a free market"

    Drat.
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    It seems clear to me that the "larger number of smaller firms" claim is correct. Not necessarily in every sector, but certainly in the economy as a whole. Removing occupational licensing laws alone would unleash such a flood of tiny enterprises -- many of them one-man or one-woman shows, sometimes run part-time -- that I doubt the effects of laissez faire in the other direction would offset it.
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    I'm sure there are economists who have studied this question. Anyone out there know anything about this?
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    It might overall, I'll concede. But I don't particularly care either way. The reason I feel a small frisson of disquiet at his formulation is that I think it's a conflation of his own.

    Non-libertarians frequently have a view of "I like X, so government ought to compel X." Doesn't respect freedom very much, but it's logical as far as it goes. There's a host of libertarians with similar sort of results-oriented viewpoints who apparently have the syllogism, "I like X, so if government weren't involved X would naturally happen." The problem with this syllogism is that it assumes that most people share your same preferences. Libertarians should know better than most that this isn't in general true; most people aren't libertarians, for one thing. It could be that without government coercion, the mass of people will freely choose something that you aesthetically don't like.
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    I largely agree with everything here, but I have one (small) nit of my own. You say:

    "I don’t yet have a principled way of articulating the difference between OK maximizing (e.g., Wal-Mart using publicly-financed roads) and not-OK maximizing (e.g., attempts at regulatory capture) within suboptimal institutions."

    I don't feel that this is the most useful distinction. Rent seeking, in a society where over 40% of the GDP is spent by the government every year and where every aspect of our lives is regulated, is not only rational, but can be considered a certainty under the laws of human action. It is unrealistic and futile to attempt to assign blame for it.

    What I believe we should instead be concerned about is not so much rent-seeking as rent-GIVING. Just because a business or industry puts its hands out does not mean that we are compelled to give benefits to them. We must be careful about assigning blame; in such a system as ours, -not- lobbying politicians could lead to an unfair competitive disadvantage for the company in question!

    I believe that it is fair to that we now live in a patronage society. It is not the fault of the individual companies and corporations that the game is rigged, and I do not believe that we can blame them for attempting to survive - or even win - under crooked rules. We can scarcely blame them even for lobbying for more crooked rules that tilt towards them, when they can see how other companies and industries have done this very thing.

    The culprit here is you and me - to the extent that we tolerate and even elect governments who shamelessly deal in patronage, using our tax money as a slush fund from which they can reward their backers. Deregulation is fine, but only if we also replace the principle of "Too Big to Fail" with market discipline.

    In other words, let's not blame the corporations for asking. Let us blame ourselves for acceding to these requests.

    This may all seem like very fine hairs to split - but it does answer the Wal-Mart conundrum. There is no meaningful way to limit the use of public roads to one company or another - so that is not what we should concentrate on correcting. But there is a meaningful way to prevent Wal-Mart from taking local homes and storefronts in order to build mega-complexes; we must eliminate the inappropriate use of Eminent Domain. It bothers me less that Wal-Mart would ask for these takings than that our elected representatives would ever give it to them.
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    This is a pretty fair point.

    The entire system of capitalism is unavoidably geared towards maximum profits. We can brand certain instances of profit-seeking "undesirable," but if we call them "immoral" it's worth asking how much we can reasonably expect of a profit-maximizing company.

    Is our goal really a more responsible corporate America that doesn't seek rents? Or is the goal a better system which does not reward rent-seeking?

    I think we can do "all of the above" -- give companies a hard time for seeking rents, give politicians a hard time for doling out rents, and petitioning legislators for fundamental reforms which outlaw undesirable rent-seeking.

    The reason why we should give companies a hard time is that they really are responsive (to some degree) to the moral norms of the surrounding environment. At the extreme, you can't do something everybody hates because you'll get boycotted, and that's not profit maximization.

    So, all of these techniques are fine; but we should pay attention to which techniques are effective. Do we really realistically expect that corporate America will become more "responsible" because we get loudly and collectively mad at them? Maybe, maybe not.

    The most likely avenue of change may be a new set of meta-regulations (ideally like a constitutional amendment) outlawing favoritism. It's not perfect, and there's lots else to do in the meantime, but this may be a reasonable option.
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    This is the kind of problem for which Experimental Philosophy was created. We know there's no difference between pushing the fat man in front of the speeding train to save five people and flipping the switch to save the five by killing the one, and yet we feel the difference.

    Morally, we've got to bite the bullet here. Either everything is okay, or nothing is. Walmart didn't ask for the interstate highway system, they just figured out a way to take advantage of it. We feel like there's something wrong with trying to write the laws in your favor, but what if, as Benquo says, a law is going to be written, whether you like it or not? Blame politicians? But they didn't ask to be part of a system where the path to success lies not in creating "fair" laws, but rather in appealing to special interest groups. They're just playing the game. It's the fault of you and me, for allowing the government to have so much power? Well, they've got the guns, and plus, we've got to earn a living; we can't spend all our time thinking about what the best form of government is (even if we did, the returns would be very, very small).

    And none of us asked to be born in the first place.

    When you excuse someone who was "just following the rules," it seems to invalidate the moral basis of Libertarianism. How do you circumscribe "the rules"? Using the highways vs. lobbying for public subsidies seems to be, morally, just a case of pushing the fat man vs. flipping the switch.
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    As to the question of smaller or larger firms: Who cares? Without artificial barriers to entry, and without special patronage or protection for older firms, there is no reason why the market should not decide on the optimal size of firms in a given industry. In fact, I am not even concerned about private monopolies, so long as these two conditions hold. Unfortunately, in our current patronage economy, neither condition generally holds.
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    Without state artificial boundaries on business power there will be business driven artificial boundaries. Cartels will form, anti-competition trusts, local monopolies, and industry monopolies will set the rules. I would rather have the rules set by an organization with at least some democratic oversight and the chance to work for the public good than organizations that have no interest in anything other than maximizing profits at all costs.
 

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