A good article detailing why corporations are not a product of the free market. Definitely worth reading if you believe that they are.

Cato Unbound Blog Archive Corporations versus the Market; or, Whip Conflation Now

Defenders of the free market are often accused of being apologists for big business and shills for the corporate elite. Is this a fair charge?

No and yes. Emphatically no—because corporate power and the free market are actually antithetical; genuine competition is big business’s worst nightmare. But also, in all too many cases, yes —because although liberty and plutocracy cannot coexist, simultaneous advocacy of both is all too possible.

First, the no. Corporations tend to fear competition, because competition exerts downward pressure on prices and upward pressure on salaries; moreover, success on the market comes with no guarantee of permanency, depending as it does on outdoing other firms at correctly figuring out how best to satisfy forever-changing consumer preferences, and that kind of vulnerability to loss is no picnic. It is no surprise, then, that throughout U.S. history corporations have been overwhelmingly hostile to the free market. Indeed, most of the existing regulatory apparatus—including those regulations widely misperceived as restraints on corporate power—were vigorously supported, lobbied for, and in some cases even drafted by the corporate elite.[1]

Corporate power depends crucially on government intervention in the marketplace.[2] This is obvious enough in the case of the more overt forms of government favoritism such as subsidies, bailouts,[3] and other forms of corporate welfare; protectionist tariffs; explicit grants of monopoly privilege; and the seizing of private property for corporate use via eminent domain (as in Kelo v. New London). But these direct forms of pro-business intervention are supplemented by a swarm of indirect forms whose impact is arguably greater still.

As I have written elsewhere:

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.[4]

Nor does the list end there. Tax breaks to favored corporations represent yet another non-obvious form of government intervention. There is of course nothing anti-market about tax breaks per se; quite the contrary. But when a firm is exempted from taxes to which its competitors are subject, it becomes the beneficiary of state coercion directed against others, and to that extent owes its success to government intervention rather than market forces.

Intellectual property laws also function to bolster the power of big business. Even those who accept the intellectual property as a legitimate form of private property[5] can agree that the ever-expanding temporal horizon of copyright protection, along with disproportionately steep fines for violations (measures for which publishers, recording firms, software companies, and film studios have lobbied so effectively), are excessive from an incentival point of view, stand in tension with the express intent of the Constitution’s patents-and-copyrights clause, and have more to do with maximizing corporate profits than with securing a fair return to the original creators.

Government favoritism also underwrites environmental irresponsibility on the part of big business. Polluters often enjoy protection against lawsuits, for example, despite the pollution’s status as a violation of private property rights.[6] When timber companies engage in logging on public lands, the access roads are generally tax-funded, thus reducing the cost of logging below its market rate; moreover, since the loggers do not own the forests they have little incentive to log sustainably.[7]

In addition, inflationary monetary policies on the part of central banks also tend to benefit those businesses that receive the inflated money first in the form of loans and investments, when they are still facing the old, lower prices, while those to whom the new money trickles down later, only after they have already begun facing higher prices, systematically lose out.

And of course corporations have been frequent beneficiaries of U.S. military interventions abroad, from the United Fruit Company in 1950s Guatemala to Halliburton in Iraq today.

Vast corporate empires like Wal-Mart are often either hailed or condemned (depending on the speaker’s perspective) as products of the free market. But not only is Wal-Mart a direct beneficiary of (usually local) government intervention in the form of such measures as eminent domain and tax breaks, but it also reaps less obvious benefits from policies of wider application. The funding of public highways through tax revenues, for example, constitutes a de facto transportation subsidy, allowing Wal-Mart and similar chains to socialize the costs of shipping and so enabling them to compete more successfully against local businesses; the low prices we enjoy at Wal-Mart in our capacity as consumers are thus made possible in part by our having already indirectly subsidized Wal-Mart’s operating costs in our capacity as taxpayers.

Wal-Mart also keeps its costs low by paying low salaries; but what makes those low salaries possible is the absence of more lucrative alternatives for its employees—and that fact in turn owes much to government intervention. The existence of regulations, fees, licensure requirements, et cetera does not affect all market participants equally; it’s much easier for wealthy, well-established companies to jump through these hoops than it is for new firms just starting up. Hence such regulations both decrease the number of employers bidding for employees’ services (thus keeping salaries low) and make it harder for the less affluent to start enterprises of their own.[8] Legal restrictions on labor organizing also make it harder for such workers to organize collectively on their own behalf.[9]

I don’t mean to suggest that Wal-Mart and similar firms owe their success solely to governmental privilege; genuine entrepreneurial talent has doubtless been involved as well. But given the enormous governmental contribution to that success, it’s doubtful that in the absence of government intervention such firms would be in anything like the position they are today.

In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles. Small wonder that big business, despite often paying lip service to free market ideals, tends to systematically oppose them in practice.

So where does this idea come from that advocates of free-market libertarianism must be carrying water for big business interests? Whence the pervasive conflation of corporatist plutocracy with libertarian laissez-faire? Who is responsible for promoting this confusion?

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(cont.)

There are three different groups that must shoulder their share of the blame. (Note: in speaking of “blame” I am not necessarily saying that the “culprits” have deliberately promulgated what they knew to be a confusion; in most cases the failing is rather one of negligence, of inadequate attention to inconsistencies in their worldview. And as we’ll see, these three groups have systematically reinforced one another’s confusions.)

Culprit #1: the left. Across the spectrum from the squishiest mainstream liberal to the bomb-throwingest radical leftist, there is widespread (though not, it should be noted, universal)[10] agreement that laissez-faire and corporate plutocracy are virtually synonymous. David Korten, for example, describes advocates of unrestricted markets, private property, and individual rights as “corporate libertarians” who champion a “globalized free market that leaves resource allocation decisions in the hands of giant corporations”[11]—as though these giant corporations were creatures of the free market rather than of the state—while Noam Chomsky, though savvy enough to recognize that the corporate elite are terrified of genuine free markets, yet in the same breath will turn around and say that we must at all costs avoid free markets lest we unduly empower the corporate elite.[12]

Culprit #2: the right. If libertarians’ left-wing opponents have conflated free markets with pro-business intervention, libertarians’ right-wing opponents have done all they can to foster precisely this confusion; for there is a widespread (though again not universal) tendency for conservatives to cloak corporatist policies in free-market rhetoric. This is how conservative politicians in their presumptuous Adam Smith neckties have managed to get themselves perceived—perhaps have even managed to perceive themselves—as proponents of tax cuts, spending cuts, and unhampered competition despite endlessly raising taxes, raising spending, and promoting “government-business partnerships.”

Consider the conservative virtue-term “privatization,” which has two distinct, indeed opposed, meanings. On the one hand, it can mean returning some service or industry from the monopolistic government sector to the competitive private sector—getting government out of it; this would be the libertarian meaning. On the other hand, it can mean “contracting out,” i.e., granting to some private firm a monopoly privilege in the provision some service previously provided by government directly. There is nothing free-market about privatization in this latter sense, since the monopoly power is merely transferred from one set of hands to another; this is corporatism, or pro-business intervention, not laissez-faire. (To be sure, there may be competition in the bidding for such monopoly contracts, but competition to establish a legal monopoly is no more genuine market competition than voting—one last time—to establish a dictator is genuine democracy.)

Of these two meanings, the corporatist meaning may actually be older, dating back to fascist economic policies in Nazi Germany;[13] but it was the libertarian meaning that was primarily intended when the term (coined independently, as the reverse of “nationalization”) first achieved widespread usage in recent decades. Yet conservatives have largely co-opted the term, turning it once again toward the corporatist sense.

Similar concerns apply to that other conservative virtue-term, “deregulation.” From a libertarian standpoint, deregulating should mean the removal of governmental directives and interventions from the sphere of voluntary exchange. But when a private entity is granted special governmental privileges, “deregulating” it amounts instead to an increase, not a decrease, in governmental intrusion into the economy. To take an example not exactly at random, if assurances of a tax-funded bailout lead banks to make riskier loans than they otherwise would, then the banks are being made freer to take risks with the money of unconsenting taxpayers. When conservatives advocate this kind of deregulation they are wrapping redistribution and privilege in the language of economic freedom. When conservatives market their plutocratic schemes as free-market policies, can we really blame liberals and leftists for conflating the two? (Well, okay, yes we can. Still, it is a mitigating factor.)

Culprit #3: libertarians themselves. Alas, libertarians are not innocent here—which is why the answer to my opening question (as to whether it’s fair to charge libertarians with being apologists for big business) was no and yes rather than a simple no. If libertarians are accused of carrying water for corporate interests, that may be at least in part because, well, they so often sound like that’s just what they’re doing (though here, as above, there are plenty of honorable exceptions to this tendency). Consider libertarian icon Ayn Rand’s description of big business as a “persecuted minority,”[14] or the way libertarians defend “our free-market health-care system” against the alternative of socialized medicine, as though the health care system that prevails in the United States were the product of free competition rather than of systematic government intervention on behalf of insurance companies and the medical establishment at the expense of ordinary people.[15] Or again, note the alacrity with which so many libertarians rush to defend Wal-Mart and the like as heroic exemplars of the free market. Among such libertarians, criticisms of corporate power are routinely dismissed as anti-market ideology. (Of course such dismissiveness gets reinforced by the fact that many critics of corporate power are in the grip of anti-market ideology.) Thus when left-wing analysts complain about “corporate libertarians” they are not merely confused; they’re responding to a genuine tendency even if they’ve to some extent misunderstood it.

Kevin Carson has coined the term “vulgar libertarianism” for the tendency to treat the case for the free market as though it justified various unlovely features of actually existing corporatist society.[16] (I find it preferable to talk of vulgar libertarianism rather than of vulgar libertarians, because very few libertarians are consistently vulgar; vulgar libertarianism is a tendency that can show up to varying degrees in thinkers who have many strong anti-corporatist tendencies also.) Likewise, “vulgar liberalism” is Carson’s term for the corresponding tendency to treat the undesirability of those features of actually existing corporatist society as though they constituted an objection to the free market.[17] Both tendencies conflate free markets with corporatism, but draw opposite morals; as Murray Rothbard notes, “Both left and right have been persistently misled by the notion that intervention by the government is ipso facto leftish and antibusiness.”[18] And if many leftists tend to see dubious corporate advocacy in libertarian pronouncements even when it’s not there, so likewise many libertarians tend not to see dubious corporate advocacy in libertarian pronouncements even when it is there.

There is an obvious tendency for vulgar libertarianism and vulgar liberalism to reinforce each other, as each takes at face value the conflation of plutocracy with free markets assumed by the other. This conflation in turn tends to bolster the power of the political establishment by rendering genuine libertarianism invisible: Those who are attracted to free markets are lured into supporting plutocracy, thus helping to prop up statism’s right or corporatist wing; those who are repelled by plutocracy are lured into opposing free markets, thus helping to prop up statism’s left or social-democratic wing. But as these two wings have more in common than not, the political establishment wins either way.[19] The perception that libertarians are shills for big business thus has two bad effects: First, it tends to make it harder to attract converts to libertarianism, and so hinders its success; second, those converts its does attract may end up reinforcing corporate power through their advocacy of a muddled version of the doctrine.

In the nineteenth century, it was far more common than it is today for libertarians to see themselves as opponents of big business.[20] The long 20th-century alliance of libertarians with conservatives against the common enemy of state-socialism probably had much to do with reorienting libertarian thought toward the right; and the brief rapprochement between libertarians and the left during the 1960s foundered when the New Left imploded.[21] As a result, libertarians have been ill-placed to combat left-wing and right-wing conflation of markets with privilege, because they have not been entirely free of the conflation themselves.

Happily, the left/libertarian coalition is now beginning to re-emerge;[22] and with it is emerging a new emphasis on the distinction between free markets and prevailing corporatism. In addition, many libertarians are beginning to rethink the way they present their views, and in particular their use of terminology. Take, for example, the word “capitalism,” which libertarians during the past century have tended to apply to the system they favor. As I’ve argued elsewhere, this term is somewhat problematic; some use it to mean free markets, others to mean corporate privilege, and still others (perhaps the majority) to mean some confused amalgamation of the two:

By “capitalism” most people mean neither the free market simpliciter nor the prevailing neomercantilist system simpliciter. Rather, what most people mean by “capitalism” is this free-market system that currently prevails in the western world. In short, the term “capitalism” as generally used conceals an assumption that the prevailing system is a free market. And since the prevailing system is in fact one of government favoritism toward business, the ordinary use of the term carries with it the assumption that the free market is government favoritism toward business.[23]

Hence clinging to the term “capitalism” may be one of the factors reinforcing the conflation of libertarianism with corporatist advocacy.[24] In any case, if libertarianism advocacy is not to be misperceived—or worse yet, correctly perceived! —as pro-corporate apologetics, the antithetical relationship between free markets and corporate power must be continually highlighted.

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Thanks! Like a good self-help book, it's stuff that one should, and perhaps even does, know, but needs to be pulled from the subconscious to conscious mind.

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Today's forecast: Government corruption.

Tomorrow's forecast: 100% chance of more 'politics as usual'

Maybe it's finally time to vote Libertarian

Wow! This is a lot of reading to do! I'll have to read it in bits as I don't really have the time to read it in one sitting! Thanks for the information though!

Excellent article. It's a shame it doesn't lend itself to sloganeering or sound bites. The author nails exactly the point I've been trying to make for the last twenty years. If I could somehow persuade my conservative and liberal friends to listen to one libertarian issue, this would be it. Then maybe we could get Congress to read it.

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"Political tags — such as royalist, communist, democrat, populist, fascist, liberal, conservative, and so forth — are never basic criteria. The human race divides politically into those who want people to be controlled and those who have no such desire."
— Robert A. Heinlein

Another example of people confusing free markets with unregulated ones.

A free market is a technical economic term used to analyze how markets will react and perform to changes in the environment. Economists then change the assumptions of a free market conditions to allow understanding of how a more realistic non free market.

A free market assumes several conditions, large numbers of buyers and sellers all acting on perfect information, buying an undifferentiated product, no barriers to entry or exit from the market no single player large enough to have an effect on market conditions etc.

The closest thing to a free market is the stock market. Everyone should have the same information and no one should act on insider information. The stock is the same no matter who you buy it from. There are some large players but they do not have that much effect individually. It is also a highly regulated market to have these conditions in place.

No corporation wants to be in a true free market. They use advertizing to differentiate their products or themselves from the competition; they never give full information to the consumer and want the consumer to be unknowledgeable about the market. There are natural barriers to entry and exit to the market to build stores to get advantages of economics of scale.

Corporations do want to be in an unregulated market as it allows them to violate the conditions of the free market by restricting information flow etc.

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I always find it strange that only reasonable people agree with me.

Conflation of the two is common indeed. The usual confusion is in mixing up regulation that extends common concepts of fairness - the stuff that prevents companies from lying, cheating, stealing, etc... - with the kind of "standards setting" regulation that is the bread and butter of corporate dominance. The basic fairness regulation is required for a free market. But the second sort is antithetical to it and is, all-too-often, the kind embraced by reformers, unwittingly empowering the very corporations they seek to "reign in". We're doing it right now with health insurance "reform". We have to be smarter about the kind of regulation we legislate and recognize that much of it has unintended consequences.

exactly

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"Political tags — such as royalist, communist, democrat, populist, fascist, liberal, conservative, and so forth — are never basic criteria. The human race divides politically into those who want people to be controlled and those who have no such desire."
— Robert A. Heinlein