Score One for the Free Market Left

In his blog at The Economist (“Inequality and Plutocracy: This Ain’t No Banana Republic,” Democracy in America, Nov. 19), Will Wilkinson takes issue with Nicolas Kristof’s characterization of America’s income inequality as “rapacious,” and his characterization of the richest Americans as “plutocrats.”

After making the valid point that wealth as such does not necessarily result from rapacity, Wilkinson goes on to argue that most great wealth in America does not in fact do so, and that America is not a plutocracy. In the process, he makes the non sequiturs that Meg Whitman’s loss in California, and the fact that she had to run for office at all, somehow demonstrate that this is not a plutocracy.

The unstated premise is that “plutocracy” translates, in the crudest and most Boss Hoggish sense, to “banana republic.” For Wilkinson, “plutocracy” refers to conditions in places like Latin America, where a large part of wealth does indeed have rapacious origins.

But a country can be a plutocracy without being a Latin American-style banana republic. In fact a country characterized by what neocons call “rule of law,” with lots and lots of Weberian rationality and professionalism, can be a far more efficient plutocracy than the Latin American kind.

Paul Goodman, describing the centralized meritocratic ethos almost fifty years ago in “People or Personnel,” anticipated the neocon idea of “rule of law” as a system in which those managed by centralized organizations have specificed due process rights within those organizations — as opposed to independence from them. I thnk the Georgists have captured something of the distinction in calling, not for equal justice under the law, but for equal laws.

Wilkinson neglects the possibility that plutocracy, rather than being a function of the patron’s personal relations with the death squads and generals, can be built into the rules themselves. And the more apparently “neutral” the rules and the expertise of the technocrats administering them, the more efficient the plutocracy at fleecing its victims without any unseemly bleating.

Wilkinson goes on, in fact, to describe the mechanisms which he considers responsible for the increased levels of inequality in America in recent decades. They include increased premiums from skills, more “winner takes all” and “superstar” markets, and changes in corporate governance. In other words, fundamental changes to the rules over the past thirty years have drastically increased inequality.

It’s at least a possibility worth considering that the rules themselves are plutocratic. The levels of inequality and concentration of wealth that existed even thirty years ago reflected over a century’s corporatist collusion between the state and big business. What happened then, arguably, was that plutocratic elites decided the system still wasn’t plutocratic enough, and changed the rules to produce better outcomes.

Wilkinson acknowledges some concern that the American polity makes it possible for financial elites to “hoover up money” by political means, but proceeds to argue that most American billionaires got where they are by “making useful stuff, or making or selling useful stuff more efficiently” — i.e., innovation.

Now, I would concede that they do this to some extent, just as the Soviet economy produced goods with some use value and innovated to some extent. But I would argue that the billionaires achieved their wealth mainly through restrictions on the conditions under which they competed in the market to produce useful stuff. They got enormously wealthy from innovation precisely because of the possibility of capitalizing innovation through state-conferred rents.

At Cafe Hayek, Don Boudreaux takes Wilkinson’s ball and runs with it — in a much less nuanced manner. His title — “Bill Gates Has As Much Control Over My Life As I Have Over His” (Nov. 21) — says it all.

Boudreaux entusiastically endorsed Wilkinson’s argument, which he characterized this way: “Rich Americans… overwhelmingly are business people who serve the middle-classes and not political, military, or ecclesiastic predators who steal from peasants.”

Admittedly, Boudreaux tipped his hat to the possibility that some of the great fortunes were acquired by the political rather than the economic means:

“Except insofar as rich Americans succeed at getting government to protect their wealth with special privileges, such as tariffs, wealth is not “controlled.” Wealth is created only by serving consumers – that is, by making others wealthier – and it flees from those who stop serving consumers.”

But the reference to Bill Gates (of all people) in his title and to Apple and Southwest Airlines in the body of the article — not to mention the overwhelmingly apologetic tone of the piece of the whole — make it pretty clear that these “exceptions” are to be regarded as marginally important deviations, and that he regards the great bulk of wealth as legitimately acquired in what is a basically market-based economy.

True, I can choose to buy MIcrosoft Windows from Bill Gates, or not buy it — just as I can choose to buy first class mail service from the USPS or not. If I choose to buy a cheaper duplicate version of Windows from someone who lacks Gates’ state-conferred copyright monopoly on it, or even a competing OS that uses different code to perform functions to which Mr. Gates holds the software patents, I’m in big trouble with the state — just as I’m in big trouble with the state for purchasing private first class mail service in competition with the USPS.

The state doesn’t compel me to walk into any store and purchase a product from Microsoft. But it does forcibly restrict the terms on which other software vendors can compete with Bill Gates. And Copyright Nazis like Bill Gates and the charming folks at the MPAA and RIAA are the main influence behind stuff like the DMCA, ACTA, the Uruguay Round TRIPS accord, and all the rest of it. Gates et al are as dependent on “intellectual property” [sic] protectionism as U.S. Steel used to be on tariff protectionism.

So Bill Gates may “serve the middle class” by providing use value of sorts, in the same way that the old Soviet economy did. But Gates makes most of his money by controlling the terms on which his competitors are allowed to provide use value.

Boudreaux completely neglects the extent to which the great fortunes result from rents on artificial property rights and artificial scarcity — on state restriction of access to natural opportunities, and controls over the terms on which it is permitted to compete with incumbents.

In the face of a lot of negative comments, largely under Boudreaux’s piece, Wilkinson and Boudreaux — to their credit — walked it back a bit.

Wilkinson, in a follow-up (“Patterns versus rules: A caveat,” Democracy in America, Nov. 23), expressed some reservations about Boudreaux’s summary of his argument:

“I’m increasingly sceptical that the fortunes of the richest Americans are overwhelmingly the result of their having created new wealth rather than an effect of the way the institutional rules of the game determine winners and losers. Now, the organisation of our basic economic, political, and legal institutions have impossibly complicated distributive consequences, and this makes it impossibly tricky to tease out how much of an individual’s holdings derive from the creation of real economic value, and how much derive from subsidies implicit in a market order that is anything but perfectly competitive in the blackboard sense.”

For instance, regarding Apple Wilkinson says, “the entire computer industry exists and operates inside a structure of intellectual property law that is nothing if not a system of government-granted and government-protected monopoly.” As for Southwestern Airlines, Wilkinson argues that they compete within a larger framework defined by government regulations and subsidies to transportation.

So the dominant corporate players may compete against each other — but only on a very narrow front, competing in terms of a business model defined by government-imposed competitive restraints that benefit mainly incumbent players.

Wilkinson concludes by attempting to clarify the intent of his original piece:

“When I complain about hand-wringing over America’s level of income inequality, I do not mean to deny that American institutions produce ‘political, military, or ecclesiastic predators who steal from peasants’, or to assert that American patterns of income and wealth reflect procedurally ideal rules of the game. I’m sure Mr Boudreaux does not mean any of that, either.”

Faced with this last implicit challenge, Boudreaux also stepped back a bit from the absolutism of his earlier remarks. In a follow-up of his own (“Production vs. Predation,” Cafe Hayek, Nov. 23), and stated his agreement “with much of Will Wilkinson’s response.” How much of wealth results from “market production to satisfy consumer demand,” and how much from special privilege, is “an empirical question.”

But he didn’t walk it back by much. His “sense” of the answer to that empirical question is that “the overwhelming amount of personal wealth in the U.S. is indeed still the result of creative, entrepreurial, risking-taking industry played out in competitive markets…”

And even as he tipped his hat to the importance of privilege, he managed to throw this in: “the proportion of personal wealth that is today the result of unjustified government-granted privileges is a great deal higher than it was before the 1930s….” in so doing, he reiterated a common theme on the libertarian Right, that comparatively speaking at least the period before the New Deal was some sort of laissez-faire golden age. Ironically, this position is mirror-imaged by many of the more historically illiterate commenters at Kos and HuffPo, who portray the New Deal period as a laissez-faire dystopia.

It’s hard to decide even where to begin in response to a thing like this. There’s the kind of large-scale engrossment of vacant land carried out by colonial land barons (not to mention the giant land companies in which many of our illustrious Founding Fathers held stock). There’s the role of slavery and indentured servitude in controlling labor well into the nineteenth century, and Jim Crow as a tool of labor exploitation. The railroad land grants, which probably tipped the balance between an economy of hundreds of local industrial districts and the centralized mass-production economy that actually developed. Tariffs, which were traditionally regarded as the “mother of cartels.” And don’t forget patents (patent control and the exchange and pooling of patents were the primary means by which many industries were cartelized). On top of all that, there’s the Progressive Era regulatory regime whose main purpose was to make the economy safe for stable oligopolies (e.g. the FTC and Clayton Act restrictions on “unfair competition” like selling below cost).

In short, the institutional framework of American mass-production capitalism, as it existed on the eve of the Great Depression, was almost as much a state construct as the First Five-Year Plan of its Soviet contemporaries. The New Deal was just an intervention to stabilize a system that was unstable because it was already state capitalist to its core.

As modest as Wilkinson’s and Boudreaux’s concessions may seem, I’m convinced that nothing of the sort would have happened ten or fifteen years ago. Back then, such commentary would have passed completely unremarked on in the conventional libertarian press. The fact that the two articles were subjected to such critical scrutiny, and the authors felt the need to restate their positions, reflects a couple of developments:

First, the rise of the networked, hyperlinked culture of the Worldwide Web. Because of this, it’s possible for anyone with a few hundred bucks to own their own printing press, and to publish critical responses to articles by high-profile authors. And in the process of doing so, it’s possible to link not only to the original article but to all evidence used in rebuttal–what used to be called “Fisking,” although that’s not a word in much use any more. This means that libertarian commentary is no longer restricted to highly capitalized libertarian publishing concerns, foundations and think tanks, or dependent on wealthy donors.

Second, the rise of a fairly self-conscious and cohesive free market Left. This community has coalesced in movements like the Alliance of the Libertarian Left, and the present community of writers at Center for a Stateless Society. We don’t just tip our hats to the distinction between “pro-market” and “pro-business”; we make it a central focus of our analysis.

As Professor Roderick Long, director of the C4SS’s parent body the Molinari Institute, put it, traditional libertarianism had a sort of figure-ground problem. Traditional libertarians, who tended to have a cultural affinity with the Old Right and the GOP rooted in decades of anti-communist and anti-New Deal alliance, looked at the existing corporate economy and saw the statism in it as amounting largely to friction in an essentially market-based system.

We on the free market Left, on the other hand, look at the corporate economy and see it as defined by statism. We see it as our task to defend free markets and human freedom as such — not to defend the legitimacy of most existing large business enterprises and existing concentrations of wealth.

And we’re having an increasing influence on the way the debate is framed.