Art of the Possible Essays

by Roderick T. Long

[The following six essays were written for the now-defunct Art of the Possible website, a forum devoted to liberal/libertarian dialogue. Thanks to James Tuttle for helping me recover them, as well as for salvaging a couple of posts from Kevin Carson in the comments section.]



Poison As Food, Poison As Antidote

[28 August 2008]

Those who see government power and corporate power as being in conflict, and those who seem them as being in cahoots, each have a point. The alliance between government and the corporate elite is like the partnership between church and state in the Middle Ages: each one wants to be the dominant partner, so theres naturally some pushing and shoving from time to time; but on the other hand the two parties have a common interest in holding down the rest of us, and so the conflict rarely goes too far. The main difference between left-wing and right-wing versions of statism, as I see it, is that the former generally seek to shift the balance a bit farther in favour of the state (i.e., toward state-socialism) while the latter generally seek to shift the balance a bit farther in favour of corporatism and plutocracy. (In the U.S., the reigning versions of liberalism and conservatism are arguably both more corporatist than state-socialist; but the liberals are still a few notches farther toward state-socialism than the conservatives are.)

But whether the special interests who are the primary beneficiaries of state power are mainly within the state apparatus or mainly outside it, the actual application of state power remains much the same. Hence it is a mistake to suppose that the corporatist-plutocratic version of statism is in any interesting sense less statist than the state-socialist version.

But it is an all-too-common mistake  and this tendency to underestimate the chasm between free markets and corporatism is enormously beneficial to the state, enabling a slick bait-and-switch. When free markets and government grants of privilege to business are conflated, those who are attracted to free markets are easily duped into supporting plutocracy, thus swelling the ranks of statisms right wing  while those who are turned off by plutocracy are likewise easily duped into opposing free markets, thereby swelling the ranks of statisms left wing. (These are the two tendencies that Kevin Carson calls vulgar libertarianism and vulgar liberalism, respectively.)

As one of the villains in The Fountainhead explains in a moment of frankness, talking about the choice Europe was then facing between communism and fascism:

If youre sick of one version, we push you in the other. Weve fixed the coin. Heads  collectivism. Tails  collectivism. Give up your soul to a council  or give it up to a leader. But give it up, give it up, give it up. Offer poison as food and poison as antidote. Go fancy on the trimmings, but hang on to the main objective.

The largely (though not completely) illusory conflict between state-oriented Palpatine and corporate-oriented Dooku in the Star Wars prequels is a nice dramatisation of the same principle.

This dynamic applies in particular to the debate over health care policy. The contrast between, say, the Canadian and American approaches is frequently described  by both sides  as a contrast between a governmental or socialised system on the one hand, and a market-based or free enterprise system on the other. But the American health care system bears little resemblance to a free market; instead it represents massive government intervention on behalf of private special interests, from insurance companies to the medical establishment. The choice between the American and Canadian models is simply a choice between different two different flavours of statism  each with somewhat different vices, its true (e.g., do you prefer higher prices or longer waits?), but ultimately coming down to a matter of the percentage to which control of your healthcare is exercised by people sitting in government offices as opposed to being exercised by people sitting in governmentally-privileged private offices  but in either case by ambitious, avaricious apparatchiks who arent you.

So what would a libertarian approach to health care policy look like? At a minimum it would have to include:

1. Repealing laws that have the effect of cartelising the medical industry (e.g., the licensure monopoly granted to the A.M.A.), thus artificially boosting the cost of medical care. 2. Repealing laws that have the effect of rendering the labour market oligopsonistic, thus artificially lowering peoples ability to pay for (and collectively negotiate for) medical care. 3. Repealing laws that shift healthcare funds from the 25%-devoured-by-overhead voluntary sector to the 75%-devoured-by-overhead coercive sector, thus decreasing the amount of healthcare that gets to needy recipients. 4. Repealing laws that transfer the power to make medical decisions for individuals from those individuals to centralised bodies, thus increasing the impact and scope of fatally bad decisions and suppressing the competitive signals that allow the identification of better and worse policies. 5. Repealing laws that wiped out the old mutual-insurance systems (basically HMOs run by the patients instead of by corporations) and empowered insurance companies at the expense of patients. 6. Repealing laws that suppress innovation and distribution in the pharmaceutical industry in the name of intellectual property.

Until the unlikely day when the Republican Party embraces this program, lets hear no more of their favouring a free-market approach to health care.

Chomskys Augustinian Anarchism

[4 September 2008]

Noam Chomsky is perhaps the United States best-known anarchist. Theres a certain irony to this, however; for just as St. Augustine once prayed, Grant me chastity and continence, but not yet, Chomskys aim is in effect anarchy, but not yet.

Chomskys reason for the not yet is that a powerful central government is currently necessary as a bulwark against the power of the corporate elite; thus it will not be safe to abolish or even scale back the state until we first use the state to break the power of the corporate elite:

In the long term, I think the centralized political power ought to be eliminated and dissolved and turned down ultimately to the local level, finally, with federalism and associations and so on. On the other hand, right now, Id like to strengthen the federal government. The reason is, we live in this world, not some other world. And in this world there happen to be huge concentrations of private power that are as close to tyranny and as close to totalitarian as anything humans have devised. Theres only one way of defending rights that have been attained, or of extending their scope in the face of these private powers, and thats to maintain the one form of illegitimate power that happens to be somewhat responsible to the public and which the public can indeed influence.

(You Say You Want a Devolution)

Now Chomskys notion of the state as a crucial bulwark against concentrations of private power might initially seem puzzling, given that  as Chomskys own research has confirmed time and again  the state has historically been the chief enabler of such concentrations. But what Chomsky seems to mean is not so much that it generally acts as a bulwark now, but rather that it can be made to do so; if youre facing a much stronger opponent (private power) who also has a sword (government power), youre better off trying to grab the sword and use it against him than you would be simply destroying the sword.

The government is far from benign  thats true. On the other hand, its at least partially accountable, and it can become as benign as we make it. Whats not benign (whats extremely harmful, in fact) is something you didnt mention  business power, which is highly concentrated and, by now, largely transnational. Business power is very far from benign and its completely unaccountable. Its a totalitarian system that has an enormous effect on our lives. Its also the main reason why the government isnt benign.

(On Gun Control)

There are two assumptions here with which I want to take issue.

First, Chomsky assumes that the influence of private business on government is the main reason why the government isnt benign. Why on earth does he believe this? Monopoly power tends to invite abuse, whether those who direct that power are mostly within or mostly outside the state apparatus. If Chomsky thinks government would be so harmless without evil capitalists pulling the strings, why does he want to abolish it even in the long run?

Second, Chomsky assumes that state power is partially accountable while business power is completely unaccountable. Now to begin with, Im not sure whether the accountability of state power is here being contrasted with that of actually existing, state-enabled business power or instead with the accountability of business power as it would be without governmental support. But if its the former, then the contrast, even if correct, would provide no grounds for resisting the states abolition; the fact that X + Y is more dangerous than X by itself is not a good reason to defend X. The contrast is relevant to a defense of the state only if business, without state support, would still be less accountable than the state. And here it seems obvious that the state  even a democratic state  is far less accountable than genuinely private business.

After all, a business can get your labour and/or possessions only if you agree to hand them over, while a government can extract these by force. Of course you can try to vote your current representatives out of office, but only at multiple-year intervals, and only if you convince 51 % of your neighbours to do likewise; whereas you can terminate your relationship with a business at any time, and without getting others to go along. Moreover, each candidate offers a package-deal of policies, whereas with private enterprise I can choose, say, Grocery As vegetables and Grocery Bs meats.

David Friedman illuminates the contrast:

When a consumer buys a product on the market, he can compare alternative brands. ... When you elect a politician, you buy nothing but promises. ... You can compare 1968 Fords, Chryslers, and Volkswagens, but nobody will ever be able to compare the Nixon administration of 1968 with the Humphrey and Wallace administrations of the same year. It is as if we had only Fords from 1920 to 1928, Chryslers from 1928 to 1936, and then had to decide what firm would make a better car for the next four years.... Not only does a consumer have better information than a voter, it is of more use to him. If I investigate alternative brands of cars .... decide which is best for me, and buy it, I get it. If I investigate alternative politicians and vote accordingly, I get what the majority votes for. ... Imagine buying cars the way we buy governments. Ten thousand people would get together and agree to vote, each for the car he preferred. Whichever car won, each of the ten thousand would have to buy it. It would not pay any of us to make any serious effort to find out which car was best; whatever I decide, my car is being picked for me by the other members of the group. ... This is how I must buy products on the political marketplace. I not only cannot compare the alternative products, it would not be worth my while to do so even if I could.

(The Machinery of Freedom)

The accountability provided by democratic government seems laughable by comparison with the accountability provided by the market. The chief function of the ballot, it would seem, is to make the populace more tractable by convincing them theyre somehow in charge.

None of this should be news to Chomsky, who after all has himself pointed out:

As things now stand, the electoral process is a matter of the population being permitted every once in a while to choose among virtually identical representatives of business power. Thats better than having a dictator, but its a very limited form of democracy. Most of the population realizes that and doesnt even participate. ... And of course elections are almost completely purchased. In the last congressional elections, 95 percent of the victors in the election outspent their opponents, and campaigns were overwhelmingly funded by corporations.

(Chomskys Other Revolution)

Well, yes, exactly. So what is the basis of Chomskys faith in the democratic state?

Chomsky might object that my defense of market accountability ignores the fact that such accountability involves voting with dollars, so that the wealthy have more votes than the poor  whereas in a democratic state everyone has an equal vote. But even if we leave aside the causal dependence of existing disparities of wealth on systematic state intervention  as well as the fact that government, by controlling the direction of resources it does not own, magnifies the power of the wealthy  it still remains the case that however few dollars one may have, when one votes with those dollars one gets something back, whereas when one votes with ballots one gets back nothing one was aiming for unless one happens to be voting with the majority. Which is less democratic  a system in which the effectiveness of ones vote varies with ones resources, or one in which 49% of the population has no effective vote at all?

Chomsky is hardly unaware that what he calls business power depends crucially on government intervention  since he has done as much as anyone to document this relationship. As he notes:

Any form of concentrated power, whatever it is, is not going to want to be subjected to popular democratic control or, for that matter, to market discipline. Powerful sectors, including corporate wealth, are naturally opposed to functioning democracy, just as theyre opposed to functioning markets, for themselves, at least.

(Reflections on Democracy; emphasis added)

So if the corporate elite are so terrified of the free market, why is Chomsky so reluctant to hurl them into it?

Perhaps Chomskys view is that although government is needed to create these concentrations of private power, its not needed to maintain them, so just suppressing the state at this point in the game would leave business power intact. Thats not a crazy view, but it needs argument. After all, systematic government intervention on behalf of big business isnt just something that happened back in the Gilded Age or the Progressive Era or the New Deal; it continues, massively and unceasingly. I wouldnt claim (indeed Ive denied) that private power depends solely and uniquely on state support; but its hard to believe that all that state support is simply superfluous, as it must be if removing such state support wouldnt appreciably weaken businesss power.

Chomsky has said (in Answers to Eight Questions on Anarchism) that although he finds himself in substantial agreement with people who consider themselves anarcho-capitalists on a whole range of issues, and also admire[s] their commitment to rationality, he nevertheless regards the free-market version of anarchism as a doctrinal system which, if ever implemented, would lead to forms of tyranny and oppression that have few counterparts in human history. Why? Because the idea of free contract between the potentate and his starving subject is a sick joke.

But this argument is blatantly question-begging. Chomsky is assuming the very point thats in dispute  namely that without government intervention on behalf of the rich, the economy would be divided into potentates and starving subjects. Now its true that market anarchists (for reasons explained elsewhere, I prefer to avoid the term anarcho-capitalist) themselves have sometimes  mistakenly, in my view  described their ideal economy as looking very much like the distribution of wealth and labour roles in our present economy, only minus the state. But why should Chomsky take their word for it? If the state really is intervening massively and systematically on behalf of the potentate and against the starving subject  as Chomsky must admit that it is, since his research explicitly demonstrates just this  why on earth would he expect that power imbalance to remain unchanged once that intervention ceases?

Not only does Chomsky underestimate the resources of anarchy, but he also appears to overestimate the serviceability of the state. He writes as if, even though the state is doing lots of bad stuff now, this could all be changed if more people would vote correctly. Now its true enough that people voting differently can make a difference to just how bad the government is. (If enough Germans had voted differently in 1932, they could have gotten a less awful regime.) Still, at the end of the day, whats wrong with a coercive monopoly is not that the wrong people are running it, but rather that  leaving aside its inherent injustice  such a monopoly brings with it incentival and informational perversities which there is no way to avoid (except by removing the source of the problem, the monopoly, in which case what you have is no longer a state).

The Real Meaning of 9/11

[11 September 2008]

I first began blogging on the first anniversary of 9/11, and over the succeeding years Ive blogged a fair bit about 9/11  how it shows both the power and the impotence of the state; how it feeds the Higgs cycle of ratcheting intervention; how the pre-9/11 mindset is the only realistic one; how it illustrates Aristotles superiority to both Seneca and D. H. Lawrence; and how both the 9/11 conspiracy theorists and their critics are confused.

On this latest anniversary I want to talk about how the state breeds war  both in the sense of provoking attacks like 9/11, and in the sense of generating its own misguided responses, like the Iraq war.

Governments engage in war so frequently that people forget to be puzzled at the phenomenon. Yet, given reputation effects, the choice of violence over cooperation tends to be a costly one, as even so pessimistic a thinker as Hobbes acknowledges:

He therefore that breaketh his covenant, and consequently declareth that he thinks he may with reason do so, cannot be received into any society, that unite themselves for peace and defence, but by the error of them that receive him; nor when he is received, be retained in it, without seeing the danger of their error; which errors a man cannot reasonably reckon upon as the means of his security: and therefore if he be left, or cast out of society, he perisheth; and if he live in society, it is by the errors of other men, which he could not foresee, nor reckon upon; and consequently against the reason of his preservation; and so, as all men that contribute not to his destruction, forbear him only out of ignorance of what is good for themselves.

If cooperation tends to be a stable equilibrium, why is interstate conflict so frequent? The answer, I suggest, is that the nature of the state ordinarily allows it to reap the benefits of warfare while socialising the costs. Since the state acquires its war revenues by compulsion (via taxation), and its soldiers too (via indentured-servitude contracts at best and conscription at worst), while the electoral means for providing negative feedback are too occasional and indiscriminate to be terribly effective, the state is able to shift the costs of war onto its own populace. (Thus Bentham well described war as a crime committed by the ruling few in the conquering nation, on the subject many in both nations.)

Wars are expensive, both in blood and in treasure; if the taxpayers who provide the treasure were free to choose which governmental functions to fund (as the customers of other service providers are, and as taxpayers have been in stateless or semi-stateless societies)  and if the soldiers who provide the blood had the same freedom to quit their jobs as other employees do  such socialisation of costs would be much harder to pull off; but as things stand, those who bears the costs have no right of exit.

The benefits of war to the state, on the other hand, are usually enormous, even if it doesnt win (so long as it is not actually conquered), inasmuch as wars and other national emergencies give it an excuse to expand its powers  expansions that, ratchet-like, rarely fall back to their original levels after the crisis has passed. Not for nothing did Randolph Bourne declare war the health of the state. Moreover, given its access to the means of education and propaganda, the state can convince its populace that they too benefit from the war; witness the widespread belief in the U.S. that World War II helped the economy, despite all evidence to the contrary.

This isnt to say that nonstate actors never choose violent conflict; of course they do. Particularly in societies with macho mores, cultural factors that push toward violence can often prevail against the economic incentives that push toward peace. In stateless and semi-stateless societies, however, at least the economic incentives push away from war (whether they prevail or not), rather than toward it as they do under states; and in time such incentives can actually overcome the macho mores. As evidence, consider medieval Iceland and pre-Norman England, societies that began in cultural conditions that one might expect to be maximally uncongenial to peace, given the strong social support for a code of honour that included the obligation to participate in bloodfeud; yet the institution of composition or wergild (requiring the payment of hefty compensation to the victims family) succeeded in undermining those mores, as the high monetary cost of restitution deterred homicide, while the tempting financial bonanza of accepting the restitution rather than pursuing vendetta gradually wore away the honour-based incentives that had sustained the bloodfeud. More recently, Somalia during its stateless period has achieved a lower level of violence than either its (economically and culturally comparable) state-ridden neighbours or its former state-ridden self.

Theres a great scene in the Young Indiana Jones Chronicles when an African chief, hearing about the death toll of World War I, asks Indy how the European powers can possibly afford such a war  how can they afford to pay the massive restitution for all the thousands killed? Indy is shocked at the notion of restitution: is this chief so primitive that he actually puts a monetary price on human life? Indys mentor (implausibly, Albert Schweitzer) responds that its better than not valuing it at all.

The 9/11 attacks were a textbook example of the warfare state in operation. As with Pearl Harbor six decades earlier, the U.S. governments arrogant interventions around the world had made such an attack a virtual inevitability. (For every jihadi who joins the fight against the U.S. because they hate our freedom, a hundred join because they hate our bombs.) And of course the primary victims of the blowback from such interventions are the innocent victims of terrorist reprisals. (9/11 was relatively unusual in that the state establishment got hit as well; yet even so, the political class as a whole clearly benefited on balance through its expanded powers.)

Even leaving aside both moral considerations and the risk of blowback, the U.S. governments interventions all around the world are bloody expensive; if you saw such costs itemised in a monthly bill, youd quickly cancel the premium service and stick with the basic. If taxpayers had a choice about whether to fund military interventions, with the decision to go to war impacting the pocketbooks of the decisionmakers, those interventions wouldnt happen  and so blowback like 9/11 would be prevented as well. And when the state responds to such attacks with a vaguely related war in Iraq, one that lasts far longer than the taxpayers enthusiasm for it, that too is made possible by effective lack of exit (as is its avoidance of mass customer defections in the wake of the phantom-WMD scandal).

As for the Iraqi civil war that the U.S. invasion sparked off, we can thank the institution of the state for that one too, since the chief factor that drives such conflict is the expectation that there will arise, or will continue to be, a state apparatus, and the corresponding fear that someone elses gang will end up in charge of it.

Getting better candidates into power instead of worse ones isnt completely hopeless as a strategy for furthering peace; but its a band-aid at best. Its a bit like kicking out James II and putting in William of Orange  it focuses on changing the personnel when what really needs changing is the system.

As long as our political institutions have a captive customer base and can acquire resources and labour by compulsion, they will be able to socialise the costs of going to war while reaping the benefits; and so long as this is so, the choice to engage in violence will be less costly to them than it would be to an honest enterprise  and when the states costs of violence are lowered, the state will sooner or later buy more violence, be its president an Obama or a McCain.

Those Who Control the Past Control the Future

[18 September 2008]

Theres a popular historical legend that goes like this: Once upon a time (for this is how stories of this kind should begin), back in the 19th century, the United States economy was almost completely unregulated and laissez-faire. But then there arose a movement to subject business to regulatory restraint in the interests of workers and consumers, a movement that culminated in the presidencies of Wilson and the two Roosevelts.

This story comes in both left-wing and right-wing versions, depending on whether the government is seen as heroically rescuing the poor and weak from the rapacious clutches of unrestrained corporate power, or as unfairly imposing burdensome socialistic fetters on peaceful and productive enterprise. But both versions agree on the central narrative: a century of laissez-faire, followed by a flurry of anti-business legislation.

Every part of this story is false. To begin with, there never was anything remotely like a period of laissez-faire in American history (at least not if laissez-faire means let the market operate freely as opposed to let the rich and powerful help themselves to other peoples property). The regulatory state was deeply involved from the start, particularly in the banking and currency industries and in the assignment of property titles to land. (Even such land as was not stolen from the natives was seldom appropriated in accordance with any sort of Lockean homesteading principle; instead, vast tracts of unimproved land were simply declared property by barbed wire or legislative fiat.)

The early republics two major political factions  to oversimplify a bit, call them the Jeffersonians (as represented by the Democrats) and the Hamiltonians (as represented successively by the Federalists, Whigs, and Republicans)  disagreed primarily about which forms of governmental interference to emphasise. To be sure, both side paid lip service (and sometimes more than lip service) to the Principles of 76, i.e., the libertarian ideals enshrined in the Declaration of Independence; but each side quickly deviated from those principles when doing so served its economic interest. The Hamiltonians, whose chief base of support was in the urban financial centers of the northeast, called for mercantilist interventions such as subsidies, protectionist tariffs, and central banks; the Jeffersonians, whose chief base of support was rural, including the plantations and the frontier, called for state assistance in extracting labour from slaves and land from Native Americans. In each case the state ran roughshod over laissez-faire in the interests of a privileged elite.

To be sure, the Hamiltonians sometimes offered up good libertarian-sounding defenses of the rights of blacks and Indians, while the Jeffersonians offered up equally libertarian-sounding condemnations of mercantile privilege; but its relatively costless to take a stand against those violations of liberty of which your political opponents, rather than yourselves, are the primary beneficiaries.

But while 19th-century America was no free market, it was still too free-market for the corporate elite, who accordingly campaigned for government relief against cut-throat competition. As Adam Smith famously pointed out, People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices; hence the perpetual mercantile quest for monopoly privilege.

One especially useful service that the state can render the corporate elite is cartel enforcement. Price-fixing agreements are unstable on a free market, since while all parties to the agreement have a collective interest in seeing the agreement generally hold, each has an individual interest in breaking the agreement by underselling the other parties in order to win away their customers; and even if the cartel manages to maintain discipline over its own membership, the oligopolistic prices tend to attract new competitors into the market. Hence the advantage to business of state-enforced cartelisation. Often this is done directly, but there are indirect ways too, such as imposing uniform quality standards that relieve firms from having to compete in quality. (And when the quality standards are high, lower-quality but cheaper competitors are priced out of the market.)

The ability of colossal firms to exploit economies of scale is also limited in a free market, since beyond a certain point the benefits of size (e.g., reduced transaction costs) get outweighed by diseconomies of scale (e.g., calculational chaos stemming from absence of price feedback)  unless the state enables them to socialise these costs by immunising them from competition  e.g., by imposing fees, licensure requirements, capitalisation requirements, and other regulatory burdens that disproportionately impact newer, poorer entrants as opposed to richer, more established firms.

The vast regulatory apparatus that emerged in the late 19th and early 20th centuries was thus specifically campaigned for by the business community. (This is documented for the Progressive era by James Weinsteins Corporate Ideal in the Liberal State, Gabriel Kolkos Railroads and Regulation and Triumph of Conservatism, and Murray Rothbard and Ronald Radoshs New History of Leviathan; their findings are usefully summarised in Roy Childs article Big Business and the Rise of American Statism. Butler Shaffers In Restraint of Trade extends the analysis through the New Deal.) The supposedly pro-labour legislation that emerged from this area was also mostly bogus, a matter of co-opting labour leaders into a junior partnership with government and business in exchange for not rocking the boat.

That this should be so is not terribly surprising; wealthy, concentrated interests are inevitably going to have a greater impact on the political process than poorer and more dispersed ones. (Contrary to popular wisdom, which has the contrast going the other way, it is only on the market, where the price system aggregates the preferences of the poorer and more dispersed, that the latter can systematically trounce the influence of business power.) What is more surprising is that such blatantly and thoroughgoingly pro-business legislation should have been perceived as anti-business.

But in the end this is not really all that surprising either. Of course these pro-business reforms had to be packaged as anti-business in order for the politicians and their corporate cronies to get away with them. Moreover, many of the instigators appear to have sincerely believed, on ideological grounds, that control of the economy by a government-business partnership was in the best interests of the general populace; and thanks to such partnerships disproportionate control of the means of information (media and public education), the rest of society could be brought to take a similar view. In addition, because business and government each always want to be the dominant partner, there was inevitably some grumbling in the business community about the precise way in which, for example, FDR advanced their shared corporatist agenda, and this likewise contributed to the misperception of fundamental antagonism. But the historical research cited above indicates that big business has been the chief architect and cheerleader for the regulations that are supposedly designed to restrain its power. Liberals who advocate further such regulations in order to combat plutocracy, and libertarians who leap to the defense of the poor embattled corporation, are equally misguided.

History of an Idea

Or, How An Argument Against the Workability of Authoritarian Socialism

Became An Argument Against the Workability of Authoritarian Capitalism

[2 October 2008]

In 1920, Ludwig von Mises published an argument against the workability of socialism (by which he meant state ownership of the means of production), an argument subsequently elaborated by himself and his student Friedrich Hayek.

The idea in a nutshell: the value of a producers good depends on the value of the consumers goods to which it contributes. Hence in deciding among alternative production methods, the most efficient choice is the one that economises on those producers goods that are needed for the most highly valued consumers goods.

But theres a difference between technical efficiency and economic efficiency. (The following way of explaining the difference is indebted to David Ramsay Steeles From Marx to Mises.)

Suppose were comparing two ways of making widgets; method A uses three grams of rubber per widget produced while method B uses four grams of rubber per widget produced (with everything else being the same). In that case method A is clearly more efficient than method B; thats a case of technical efficiency, because we can figure out which is more efficient just by looking at quantities expended without concerning ourselves with any economic concepts like demand.

But now compare method C, which uses three grams of rubber and four grams of steel per widget, with method D, which uses four grams of rubber and three of steel (with all else remaining the same). In this case neither C nor D is more technically efficient than the other. To figure out which is more economically efficient, we have to figure out the comparative value of rubber vs. steel  i.e., which forgoes a more highly demanded alternative use, a gram of steel or a gram of rubber? As per Mises and Hayek, thats something theres no clear way to figure out except through market competition and a price system, whereby consumer valuations of first-order goods get translated, by means of prices, into varying demand for their factors of production (as reflected in, say, a higher price for steel than for rubber, thus prompting producers to economise on steel). State ownership of the means of production means no market in, and thus no prices for, producers goods, and so no way to transmit this information.

But why couldnt a state-socialist central planner have access to this information? Well, first, most of the relevant information about preferences is local, inarticulate, and constantly changing; it can be expressed through the actual consumer choices that embody it, but theres no easy way to collect it otherwise. (This is the aspect of the problem stressed by Hayek  who also included other kinds of local, inarticulate, and constantly changing information  besides that concerning preferences  in his focus.) Second, even if you could get this information, it would all be in the form of ordinal rankings, and without translation into cardinal prices theres no way to combine the ordinal rankings of different people. (This is the aspect of the problem stressed by Mises.) Finally, even if you could get the information into cardinal form, in order to use it to plan the economy youd have to solve millions of simultaneous equations at rapid speed. (Critics of Mises and Hayek often write as though this third problem is supposed to be the main problem  and thus have supposed, for example, that fast enough computers could substitute for the price system  but from the Mises-Hayek perspective its a relatively minor afterthought.)

If central planning is as hopeless an endeavour as the calculation argument claims, then why havent state-socialist regimes like the Soviet Union been even less successful than their actual record (which, while lousy, was not as completely chaotic as one might expect the Mises-Hayek argument to imply)? The reply is that the Soviet state, like similar regimes, was never completely insulated from the price system, since it had access to international prices (to say nothing of its own internal black market). Hence the information transmission mechanism, while seriously hampered, was able to function to some extent. (Most forms of governmental intervention merely distort the price system rather than suppressing it entirely. Of course the effects of these distortions can be serious enough  as when, per the Austrian theory of the business cycle, state manipulation of the money supply artificially lowers interest rates, sending investors the signal that consumers are more willing to defer consumption than they actually are, thereby directing resources into longer-term projects (boom!) that prove unsustainable (bust!), as in 1929  or 2008. But the application of Austrian price theory to the current financial crisis is a story for my next post.)

The Mises-Hayek account of the limits of state centralisation was subsequently extended, by Misess student Murray Rothbard, to cover the limits of private cartelisation as well. In his 1962 work Man, Economy, and State (see especially here and here):

In order to calculate the profits and losses of each branch, a firm must be able to refer its internal operations to external markets for each of the various factors and intermediate products. When any of these external markets disappears, because all are absorbed within the province of a single firm, calculability disappears, and there is no way for the firm rationally to allocate factors to that specific area. The more these limits are encroached upon, the greater and greater will be the sphere of irrationality, and the more difficult it will be to avoid losses. ... [I]f there were no market for a product, and all of its exchanges were internal, there would be no way for a firm or for anyone else to determine a price for the good. A firm can estimate an implicit price when an external market exists; but when a market is absent, the good can have no price, whether implicit or explicit. Any figure could be only an arbitrary symbol. Not being able to calculate a price, the firm could not rationally allocate factors and resources from one stage to another. ... For every capital good, there must be a definite market in which firms buy and sell that good. It is obvious that this economic law sets a definite maximum to the relative size of any particular firm on the free market. Because of this law, firms cannot merge or cartelize for complete vertical integration of stages or products. Because of this law, there can never be One Big Cartel over the whole economy or mergers until One Big Firm owns all the productive assets in the economy. The force of this law multiplies as the area of the economy increases and as islands of noncalculable chaos swell to the proportions of masses and continents. As the area of incalculability increases, the degrees of irrationality, misallocation, loss, impoverishment, etc., become greater. Under one owner or one cartel for the whole productive system, there would be no possible areas of calculation at all, and therefore complete economic chaos would prevail.

Everyone knows about economies of scale; after all, thats why we have firms in the first place. What Rothbards analysis shows is that there are also diseconomies of scale, and that these grow more severe as vertical integration increases.

What happens when a firm grows so large, its internal operations so insulated from the price system, that the diseconomies of scale begin to outweigh the economies? Well, that depends on the institutional context. In a free market, if the firm doesnt catch wise and start scaling back, it will grow increasingly inefficient and so will lose customers to competitors; markets thus serve as an automatic check on the size of the firm.

But what if friendly politicians rig the game so that favoured companies can reap the benefits associated with economies of scale while socialising the costs associated with diseconomies of scale? Then we might just possibly end up with an economy dominated by those bloated, bureaucratic, hierarchical corporate behemoths we all know and love. (For some of the ways that state intervention contributes to the Dilbertesque nature of todays business world, see Kevin Carsons article Economic Calculation in the Corporate Commonwealth  and for more detail, his online books Studies in Mutualist Political Economy and the still-in-progress [as of that writing] Studies in the Anarchist Theory of Organizational Behavior.)

The good news, then, is that the unlovely features of the economy that often get blamed on the free market (or on something called capitalism, which means either the free market, or plutocracy, or somehow magically both) are in fact the product of government intervention. We can embrace the free market without embracing big business.

But its not just opponents of the free market that get markets and business interests mixed up. All too many libertarians still rush to defend giant corporations like Microsoft and Wal-Mart (two firms whose whole business model in fact depends heavily on government intervention  via, e.g., IP protectionism for Microsoft, eminent domain plus socialised transportation costs for Wal-Mart, and general suppression of competition from the less affluent for both) as though such a defense were part and parcel of a commitment to markets. As libertarians we can hardly complain when were accused of being apologists for corporate plutocracy, so long as were actually contributing to that perception ourselves by allowing ourselves to lose track of the basic facts about the price system that we of all people should remember.

So long as the confusion between free markets and plutocracy persists  so long as libertarians allow their laudable attraction to free markets to fool them into defending plutocracy, and so long as those on the left allow their laudable opposition to plutocracy to fool them into opposing free markets  neither libertarians nor the left will achieve their goals, and the state-corporate partnership will continue to dominate the political scene.

Thats why we need a left-libertarian alliance.

Next time: how government caused the current financial crisis and why government cannot cure it.

Comment from Kevin Carson, 3 October 2008, 12:49 a.m. Brilliant again, Roderick! And thanks for the links. As I argue in the article you link, I think Rothbards application of the calculation argument to the corporation was extremely conservative. For one thing, he seemed to assume that, even under state capitalism, getting too big and integrated to have access to outside market data for ones inputs was  if not an entirely theoretical possibility  at most a problem for a few outlying firms. I think he neglected the question of how many intermediate goods involved in creating complex manufactured goods are product-specific, and thus have no reference to an outside market for pricing. Back in the 50s, an article on transfer pricing (whose author Im too lazy to look up) presented data that the vast majority of intermediate goods in the auto industry were product-specific rather than generic, and that transfer prices were estimated on a cost-plus basis from the lowest-order component goods for which a price existed in the outside market. If the link to outside prices were too tenuous, some advocates of market-based management propose simply setting transfer prices by trial and error, and then adjusting them in response to experience  IOW, exactly what Lange proposed and Mises scoffed at. If Rothbards stated standard is applied, then most large manufacturing corporations are islands of calculational chaos, or have at best extremely indirect recourse to market data for most of their intermediate goods. In addition, Rothbard believed it didnt matter that much whether the outside market prices reflected spot conditions of supply and demand different from those prevailing inside the firm. The fact that prices existed at all was sufficient; they didnt have to be very thick in the information they conveyed. But this situation is directly analogous to the state socialist expedient Mises discussed, of recourse to the market prices in some other country. If GM can operate just fine based on imperfectly relevant outside prices, then the USSR ought to have operated just fine based on American prices. But somehow I dont think Mises would have been willing to concede that such far-removed prices were good enough. Comment from Kevin Carson, 3 October 2008, 1:21 a.m. P.S. Your observation about government insulating corporations from the competitive ill effects of diseconomies of scale suggests the answer to Stephan Kinsellas earlier question  i.e., how large corporations are able to function, if they are de facto branches of the state, without being crippled by calculational chaos. The answer, of source, is that being crippled is relative. The old economy of the USSR was able to function, in the sense that it created use-value. State industry manufactured refrigerators, tractors, etc., and people bought them (or at least a considerable portion of them) because they were, after all, better than nothing. They cooled food, or hauled farm machinery, after a fashion. The problem is that nobody knew if they were the best possible use of the inputs that were consumed creating them, or even if they were a net loss of value compared to the resources used up to make them. The large corporation, similarly, allocates capital to different more or less productive activities, and designed products that are consumed because theyre better than nothing. But the corporation has little idea whether the allocation of capital was to its most efficient use, or whether the product design was the best use of available resources. The prices of its production inputs are heavily distorted by subsidies, and likewise the prices of its products, its internal pricing system is at best tangentially related to any outside market, the skimming off of capital to support management self-dealing and consumption on the job is a feature of corporate life shared by all the major firms in the industry and therefore carries no competitive penalty, and the ability to enter the market and offer competing products is severely constrained. In short, like the Soviet economy (if to a lesser degree), the American corporate economy works better than nothing, but we have no way of knowing just how badly it functions compared to a free market.

Regulation: The Cause, Not the Cure, of the Financial Crisis

[9 October 2008]

In my previous post I explained how Austrian price theory renders both state-socialist central planning and free-market plutocracy unworkable; in the present post, I explain how Austrian price theory applies to boom-bust cycles in general and the present financial crisis in particular, and why those who blame the crisis on the free market have things precisely backward.

Recall that market prices are the mechanism that allows consumer rankings of consumption goods to determine choices among production goods; if consumers rank goods made from steel higher than goods made from rubber, steel prices will rise relative to those of rubber, thus encouraging economising of existing steel and increased production of new steel. (This is incidentally why anti-gouging laws are such a bad idea; they prolong the very shortages whose effects theyre trying to mitigate, by suppressing the price signals that function to end the shortage. When prices are legally prevented from rising during a shortage, thats like sending out a signal into the market saying hey everybody, no shortage here, no reason to economise on this item, no reason to increase production of this item, feel free to focus your investment elsewhere  which is obviously the worst possible message to send.)

Interest rates are a kind of price also; they signal the extent to which consumers are willing and able to defer present satisfactions for the sake of greater future satisfactions. To take the standard example, if Crusoe makes a net hell be able to catch far more fish than he can with his hands, but time making the net takes away from time catching fish; if Crusoe can afford to defer some present fish-catching in order to make the net, then its rational for him to make it, but if instead hes on the edge of starvation and might not be able to survive on reduced rations long enough to finish the net, hed better stick to catching fish with his hands for the moment and save the net project for another day. Whether it makes sense for him to divert time and effort from fish-catching to net-making thus depends on how urgently he needs fish now  in short, on his time-preference.

In a free market, low interest rates signal low time-preference and high interest rates, high time-preference. If your time-preference (i.e. the urgency of your preference for present over future satisfactions) is low, then I would only have to offer you slightly more than X a year from now in order to induce you to part with X today; if it is high, then I would have to offer you a lot more than X a year from now in exchange for X today. The prevailing interest rate thus guides investors in their choice between short-term, less productive projects and those that are more productive but whose benefits will take longer to achieve.

But when central banks, through their manipulation of the money supply, artificially lower the interest rate, then the signals get distorted; investors are led to act as though consumers have a lower time-preference than they actually do. Thus investors are led to invest in longer-term projects that are unsustainable, since the deferred consumption on which such projects depend is not actually going to get deferred, so that the goods that the investors are counting on in order to complete their long-term projects are not all going to be there when the investors need them. Such unsustainable investment is the boom or bubble; the bust comes when the unsustainability is recognised and a costly process of liquidation ensues.

The Austrian theory of the business cycle is sometimes called an over-investment theory, but thats misleading. The problem is not that investors over-invest across the board, but that they over-invest in higher-yield longer-term projects and under-invest in lower-yield shorter-term. Thats why Austrians talk about malinvestment rather than over-investment. The prevailing mainstream tendency to treat capital as homogeneous ignores the difference between higher and lower levels of production goods and thus fails to appreciate the costs of having to switch from the high to the low when the bubble bursts.

In additional to the general misallocation of investment between lower-order and higher-order inputs, monetary inflation produces further imbalances. When the central bank creates money, the new money doesnt propagate throughout the economy instantaneously; some sectors get the new money first, while theyre still facing the old, lower prices, while other sectors get the new money last, after theyve already begun facing the higher prices. The result of such Cantillon effects is not only a systematic redistribution of wealth from those less to those more favoured by the banking-government complex, but an artificial stimulation of certain sectors of the economy, making them look more inherently profitable than they are and so directing economically unjustified levels of investment toward them.

Does the Austrian account, as is often claimed, underestimate the ability of investors and entrepreneurs to recognise the effects of government policies and compensate for them? No. Even if you know that a given price represents some mix of genuine market signals and governmental distortion, you may not know how much of the price represents which factor, so how can you compensate for the distorting factor? (Likewise, if you know there are magnetic anomalies in the area that are throwing off your compass, thats not terribly helpful information unless you know exactly where the anomalies are and how strong they are compared with earths magnetic field; otherwise you have no way to correct for them. And given that the direction of your compasss needle is at least partly responsive to true north, youre better off trusting it, despite its distortions, than simply abandoning your compass and proceeding by coin-flip.)

On the Austrian understanding, governmental inflation of the money supply, thereby artificially lowering interest rates, was the chief cause of the Great Depression. (Mainstream economists dispute this, holding that the Feds policy could not have been genuinely inflationary, since prices were relatively stable during the period leading up to the crash. But for Austrians the crucial question is not whether prices were higher than they had previously been, but whether they were higher than they would have been in the absence of monetary inflation.) Likewise, for Austrians the housing bubble that precipitated the current crisis was the product of the Federal Reserves low-interest policies of recent years. (An aside to address a frequent misunderstanding: on the Austrian view there is nothing wrong with low interest rates per se; indeed, low interest rates are a symptom of a healthy economy, since the more prosperous people are, the likelier they are to be willing to defer present consumption. But one cannot make an economy healthy by artificially inducing symptoms of health in the absence of their underlying cause. By the same principle, absence of scabbing on ones skin is a sign of physical health, but if there is scabbing, one does not promote health by ripping the scabs away; advocates of minimum wage laws, take note.)

In the 1920s, while mainstream economists were claiming that stock prices had reached a permanently high plateau, Mises and Hayek were predicting a crash (as incidentally was my grandfather Charles Roderick McKay, who as Deputy Governor of the Federal Reserve Bank of Chicago protested against the Feds policy of artificially lowered interest rates, kept the Chicago branch out of the easy-money policy until centrally overridden, foresaw the likely results, and got the hell out of the stock market well before the crash); likewise, in recent years Austrians kept warning of a housing bubble while folks like Greenspan and Bernanke blithely insisted that the housing market was sound.

Now everyone these days is saying, quite sensibly, that in the present crisis we need to avoid the mistakes that lengthened the Great Depression; the problem is that this advice is useless without an accurate understanding of what those mistakes were. By Austrian standards, the current plan to inject more liquidity into the economy is simply treating the disease with more of the poison that originally caused it. Attempting to cure an illness by artificially simulating symptoms of health is, literally, voodoo economics.

Of course the Federal Reserve is not solely to blame; there are still further government policies that encouraged riskier loans. Theres been some media attention paid to Clinton-era changes in the Community Reinvestment Act, for example, that encouraged laxer lending standards in order to attract minority borrowers. The claim that this explanation is racist is confusing the reason why a given loan is risky with the reason why the loan, despite its riskiness, gets made; all the same, focusing on this narrow example misses the wider picture, which is that when the federal government sponsors massive credit corporations like Freddie Mac and Fannie Mae, it creates an expectation (whether codified in law or not) that the government is guaranteeing their solvency. Just as with the S&L crisis of the 80s, the expectation of reimbursement in the case of failure encourages riskier loans because the risk is socialised. (And beyond this are the still deeper factors that stifle affluence for the vast majority and so make it necessary for them to borrow money to buy a home in the first place; taking that necessity for granted requires justification.)

Even George Bush, in his speech on the crisis, recognised (or read words written by people who recognised) that the expectation that a bailout would be forthcoming if needed had helped to encourage riskier loans  though he seemed to miss the further implication that by going on to urge a bailout he was confirming and reinforcing the very expectations that had helped fuel the crisis  thus setting the economy up for a repeat of the crisis in the future.

The grain of truth in the otherwise ludicrous statist mantra that the financial crisis was caused by lack of regulation is that when you pass regulation A granting a private or semi-private firm the right to play with other peoples money, but then repeal or fail to enact regulation B restricting the firms ability to take excessive risks with that money, the ensuing crisis is in a sense to be attributed in part to the absence of regulation B. But the fatal factor is not the absence of regulation B per se but the absence of B when combined with the presence of A; the absence of B would cause no problem if A were absent as well. So, sure, there was insufficient regulation, if by insufficient regulation you mean a failure on governments part to rein in, via further regulations, the problems created by its initial regulations.

So if the problem is caused by A without B, it might be objected, why must we adopt the libertarian solution of getting rid of A? Cant we solve the problem just as well by keeping A but adding regulation B alongside it? The answer is no, because central planning doesnt work; when one responds to bad regulations by adding new regs to counteract the old ones, rather than simply repealing the old ones, one adds more and more layers between decisions and the market, increasingly muffling price-system feedback and courting calculational chaos.

But, the objector may continue, what if were in a situation where we have regulation A but no regulation B, and where, further, repealing A is not politically possible but adding regulation B is  in that case, shouldnt we push to add B? In some circumstances, depending on the details, maybe so; but the more important question, to my mind, is to which should we devote more of our time and energy  tweaking the details of a fundamentally unsound system within the parameters of what is currently considered politically possible, or working to shift those parameters themselves? In Hayeks words: Those who have concerned themselves exclusively with what seemed practicable in the existing state of opinion have constantly found that even this had rapidly become politically impossible as the result of changes in a public opinion which they have done nothing to guide.

Okay, some will say, maybe it was government, not laissez-faire, that got us into the mess; but now that were in it, dont we need government to get us out? My answer is that government doesnt have the ability to get us out. Theres just not much the government can do that will help (apart from repealing the laws, regulations, and subsidies that first created and then perpetuate the mess  but that would be less a doing than a ceasing-to-do, and anyway given the incentives acting on government decision-makers theres no realistic chance of that happening). The bailout is just diverting resources from the productive poor and middle-class to the failed rich, which doesnt seem like a very good idea on either ethical or economic grounds. The only good effect such a bailout could possibly have (at least if you prefer costly boondoggles without piles of dead bodies to costly boondoggles with them) is if it convinced the warmongers that they just cant afford a global war on terror right now  but theres no sign that theyre being convinced of anything of the sort.

If the price system were allowed to function fully, the crisis would right itself  not instantly or painlessly, to be sure, but far more quickly and with less dislocation than any government could manage. What the government should do is, in the final analysis, nothing.

But such a response would be politically impossible? Quite true; but what makes it politically impossible? Is it some corporatist bias on the part of the American people? Did Congress pass the bailout because the voters were clamouring for it? On the contrary, most of the voters seem to have been decidedly against it. The bailout passed because Congress is primarily accountable, not to the electorate, but to big business. And thats a source of political impossibility that stems not from shiftable ideology but from the inherent nature of representative government. A government that was genuinely responsible to the people would hardly be a paradise (since the people are hardly free from ignorance and bias, and majority rule is all too often simply a mechanism for externalising the costs of majority preferences onto minorities)  but debating the merits of a government genuinely responsible to the people is purely academic, because such a government, whatever its merits or demerits, is impossible; you cannot make a monopoly responsive to the people. Other than the market itself, no political system has ever been devised or discovered that will subordinate the influence of concentrated interests to that of dispersed interests. Monopoly cannot be reformed; it has to be abolished.

Now that is of course not to say that some governments cant be less unresponsive than others, just as some forms of slavery can be less awful than others. One of the striking features of slavery in the antebellum American south, for example, is how much worse it was, on average, than most other historical forms of slavery; and if the abolitionists, despairing of the prospects of actually freeing the slaves, had focused their efforts on reforming American slavery to make it more like ancient Greco-Roman slavery or mediæval Scandinavian slavery, Im not going to say that wouldnt have been worth doing or wouldnt have made a lot of peoples lives significantly better  but isnt it setting on ones political sights a tad low?

Further reading on Austrian business cycle theory and/or the current financial crisis :

Times Are Hard: On the Causes of the Business Cycle by Gene Callahan

The Economics of Housing Bubbles by Mark Thornton

Open Letter to My Friends on the Left by Steve Horwitz

Paulsons Scheme by George Bragues

A Crisis of Political Economy by Chris Sciabarra

The Bailout Reader (a further collection of links from the Mises Institute)