The Golden Age of Political Entrepreneurship is Here

(Cross-posted at Heritage)

As Joel Kotkin detailed in the Washington Post this weekend, the Wall Street Bailout and Trillion Dollar Deficit Plan being pushed through Congress this month mark the transfer of power from commercial cities like Chicago, New York, and San Francisco, to Washington DC.

In the business world, campaign contributions and lobbying efforts have replaced cost cutting as the way to maximize profit. Going to Washington with hands outstretched can prevent bankruptcy, and can provide a stimulus to the bottom line. Competing without such government aid is becoming more and more difficult, and rebels who shun such tactics are a dying breed.

This “political entrepreneurship,” or use of political power in place of competition, is not new. In fact, as far back as the “robber baron” age, some businesses preferred to use the power and purse of Congress, rather than have to do the hard work of cost cutting and innovation necessary to be a successful market entrepreneur. The true “robber barons” were not businessmen competing freely in the market, but those businessmen who gained monopoly advantage by lobbying Congress and buying market power.

Today, we still have some “robber barons,” protected by government and producing shoddy products, but we also have endless more miles of red tape on regular business, an incomprehensible tax code with favors for special interests, and subsidies and “pork” for every conceivable interest group request. It. Yet with all this spending and protection, we’re told we need more “stimulus,” and we need to “protect” more jobs.

In the academic world, two developments are driving the movement from economics to politics. The all-round analysis of economics, which can take into account all interactions and effects of various policies, has been abandoned for narrow subtopics and mathematical abstractions. Meanwhile the economists themselves have taken political views and ignored economics in their policy recommendations (for example, Paul Krugman).

But, the movement away from rational and realistic economics – the realization that there are limited resources and limited time, and that we cannot at once waste time digging holes and filling them up again, and also be productive and create prosperity – and toward politics – the art of deception, favoritism and trading favors – will necessarily bankrupt the country.

What Socialists Mean by Capitalism

I'm currently reading Le Grand and Estrin's book Market Socialism.

I have often complained that socialists misunderstand the market. Sometimes they do. Sometimes they understand it better than most conventional economists. Sometimes the most hard core Marxist will come so close to understanding the libertarian view - like Bukharin for instance.

Le Grand and Estrin did seem to understand markets in the introduction - at least as well as many "mainstream" economists.

Then an amazing passage occurred.

In this passage, these proponents of Market Socialism revealed that they distinguished "capitalism" from "liberalism" -- their use of "capitalism" was not synonymous with markets, but was distinguished from laissez-faire free market libertarianism. They still preferred market socialism to liberalism, but the complaints against capitalism are not complaints against free markets per se, but against a certain form of market system, which they call capitalism, but which arguably is really corporatism or crony capitalism.

Capitalism places the economic power in the hands of capital and its owners. Traditional socialism gives power exclusively to labour: the dictatorship of the proletariat, preferably exercised through a centralized authority. And the "New Right"--actually better characterized as traditional liberalism-- claims to locate power in the hands of the individual--particularly the individual citizen and consumer.

This is very interesting. Of course, I have argued this and heard whiff of this in socialist literature before, when they argue that the "ideal" of free markets is not possible, that concentration is delivering power into a few hands (a la Bukharin & Lenin, based on Marx), and so on, implying that it would be different if free markets did exist. Similarly, Lange's market socialist model was based on the use of state power to create a perfect market-- implying that if markets were less monopolized then they would be OK. But this is still a unique passage. Given this characterization,

In the following, replace "capitalism" with "corporatism" in your mind. It continues a bit below:

Full blooded capitalism is unattractive because it exploits labour through its monopoly of employment and because it exploits consumers through monopolizing goods markets. Traditional socialism expropriates capital and subordinates the interests of consumers to the interests of the workers. Indeed, with its penchant for centralization, it is far from clear that even the workers are properly taken care of. Liberalism puts people's livelihoods and their savings at the mercy of consumer taste and fashion; its emphasis on the narrow rights of individuals jeopardizes the collective activities of the community and hence the community itself.

What is needed is a model of society where power is more evenly distributed between these groups; where the interests of owners of capital, of workers, and of consumers are all taken into account with none taking automatic priority.

This struck me as fascinating. Now, I don't personally see how the group which liberalism represents - everyone - needs to be supplemented with the groups favored in corporatism and in socialism, which are partial. Nor that the interests of some "community" of individuals must be represented. In a free market (liberalism) such a group can form and defend itself, since all the individuals are protected by the system. But, the authors seem to believe that protection of each person, without protection of groups, leads to a loss of community-ness. Perhaps.

The fact that socialists have directed their main fight against corporatism this whole time and not against the free market is a critical point that we would do well to remember - and to make clear the distinction as often as possible. We have hardly tasted true liberalism, and socialists have tended not to start with models. In general, they, being people sympathetic to socialism and hence a softer sort of person, saw injustices in the world and began there. Seeing injustices, and seeing the market used by those with power and money, they blamed capitalists and they blamed the market. They did analyze different kinds of market societies, but they threaded them together in a dialectical historical account.

Market socialists are able to distinguish corporatism from liberalism. Starting there, the arguments are much easier to defeat. As above, sometimes it just boils down to "with liberalism, you lose the sense of community." There are some good books on how that isn't the case - that the opposite is true. When the state encroaches, as through welfare programs, it replaces community. In fact, the authors themselves cite "protection from the family" as a key feature of the welfare state (p. 21).

I'll post more on this book, maybe later today even.

update: I forgot to mention: Marxists describe the "crises" of centralizing capitalism, the movement from more to less competition, and consolidation into fewer hands. If capitalism is seen as rent-seeking driven corporatism, this makes sense. As rent-seeking drives policy, it necessarily does concentrate power into fewer hands, and also creates recurring crises (business cycles). As an example, consider how fixhousingfirst.com is calling for new increased low-income housing policies for its constituency, despite the fact that it was likely these policies which drove the housing bubble and caused the current crisis.

Update 2: I will also post more on this another time-- I would like to consider Marx and Bukharin's arguments in particular against "capitalism" as they may be estimated from a public choice perspective, as against corporatism (or mercantilism). It is possible that some Austrians have already done this - as it seems many Austrians see that Marx was really arguing against crony capitalism and not free markets - but probably not enough.

Then this can be tied together with the later market socialism literature and analysis. Marx was wrong with his labor theory of value, but perhaps right with his concentration, crises and ultimate end in planning (if he was studying the rent-seeking society); market socialists like Lange were wrong with their perfect competition models, but right in some of their understandings of the benefit of prices and competition. Very recent market socialists (like those above, and like Stiglitz) have greater understanding of many of the Austrian points than conventional economists. Perhaps bringing together all the good understandings of these various socialists could be useful in contributing to new, better models, and to a greater understanding of interventionism.

The new New Deal

Cross Posted at Heritage

Could the current crisis usher in a new “New Deal”, with a new brand of corporatism to replace the free market system? Certainly European leaders are arguing that case. The current economic “crisis,” may itself have been caused by bad policy. Yet, is provides a great pretext for an expansion of government.

During the 1930s, as part of the New Deal, Franklin D. Roosevelt nationalized banks, set prices, wages and work hours, and promoted public works programs to employ the unemployed. The New Deal, or the National Industrial Recovery Act (NIRA) to be precise, was supported by many industrial leaders, some of whom had helped draft the legislation. Cartels, inflated prices and subsidies were great perks for established business, especially those that would have trouble staying ahead in a free market.

Businesses then, as now, cried to Congress about their need for a bailout, and the disaster which would be wrought by their bankruptcy. NIRA was eventually declared unconstitutional. The decision made the important point that “extraordinary conditions do not create or enlarge constitutional powers.”

Until then these laws were widely supported and considered critical to recovery from the economic crisis of the time. Yet intervention did more to cause and prolong the crisis than to aid recovery.

Although these measures were defended as being necessary during an emergency, and only temporary, many still exist today. For example the emergency farm supports created with the Agricultural Adjustment Act (AAA) have morphed into the current Farm Bill, which still pays farmers not grow food.

Like the New Deal period, we are seeing waves of nationalization, bailouts of unrelated industry, and expansion of central bank power. The nationalization of banks during the New Deal was actually smaller than what we are doing today – as a percentage of GDP it was the equivalent to about $500 billion. Today the state took shares in the largest nine banks and bailouts total well over a trillion dollars.

As John Goldberg points out, the stake that government now holds in these banks is actually greater than the stake it held in Fannie Mae and Freddie Mac, and it is quite likely that this temporary measure might too become the regular state of affairs.

If Obama is the next president, he would like to see a return to union domination and government mediation in wages and hours. Obama also favors public works programs to employ those out of work. He has already proposed at least two kinds of programs like this: his “transitional jobs” program which hires the unemployed, and his National Infrastructure Reinvestment Bank. With the excuse of an ongoing recession, he could easily roll these into New Deal sized public works projects.

But, prior to the New Deal we had small government. Prior to this new “New Deal” we already have enormous government and massive debt. The Deal we sign today would be for European style socialism, with European style unemployment and stagnation.

Bailouts Making the Crisis Worse?

Economic policies often have unintended consequences. While the decentralized actions of individuals in the market can effectively coordinate the supply of goods – Adam Smith’s invisible hand – centralized government actions cannot. So, when market crises come about, it is important to ask certain questions before looking to government to correct the failure.

First, was it a failure of decentralized actors? Was a market failure, or irrational speculation, at the root of the problem, or was it government intervention that caused it? The financial markets have not been free of regulation, and they have been bailed out before. Those companies most regulated were the ones that led the crisis. Similarly, in countries with even more regulated and state owned financial sectors, the crisis has taken down those nationalized firms.

If it was intervention that caused the problem, then there may be no need to tie the hands of the market to prevent future crises. Instead we could roll back the interventionist policies we’ve been using, potentially allowing firms more flexibility to solve market failures on their own. Even the most benign regulation might prevent the market from innovating, adapting and spurring growth. Literally throwing money at the problem, and then seizing companies at will, cannot solve the underlying problems.

Second, it is important to ask both what would happen without bailouts and what is likely to happen with them. Many commentators simply consider the first, and have a doomsday scenario, but they have not considered carefully how the bailing out itself might cause both short term, and of course long term, damage. In the short term some say that the bailouts “are actually making it harder for financial firms to raise the money they need to muddle through the credit crunch.”

Further intervention is likely to make it worse if intervention caused the crisis in the first place. In the long run you have serious moral hazard problems – this is well known. Trying to dodge some of these problems, the Fed is being inconsistent in its bail out policy. Playing favorites is a well loved perk of discretionary policy making because it allows for rent-seeking by firms and politicians. With bail outs and subsidies, bad firms and bad investments are propped up like petty dictators, serving themselves but not the people. All this waste is laid at the foot of the tax-payer.

Finally, if we create a crisis through use of intervention and then respond to the crisis with more intervention, which in turn makes the crisis worse, and then respond to that crisis with yet more intervention – when will it ever stop?

As CNN reports, “This is the federal government's most far-reaching intervention in the financial markets since the Great Depression of the 1930s.” It will cost hundreds of billions now, and much more later, if it causes more crises down the road. So, it is critical that we ask: do we need these bail outs, and what are we setting ourselves up for?

Mortgage Socialization

Cross-posted at Heritage.

Fannie Mae and Freddie Mac were created during the New Deal by the Roosevelt administration in order increase home ownership. With government backing and price controls, the supply of housing was artificially increased, with the funds coming from the taxpayer.

Even when Fannie and Freddie were made into government sponsored enterprises (GSEs) in the 1960s, they were still provided the financial support of the Federal Government. Because of their implicit government guarantees, these policy-based suppliers came to dominate the housing market.

As GSEs, Fannie and Freddie purchased 44% of subprime mortgage securities and were the biggest buyer of Countrywide loans. They became an industry duopoly, owning or guaranteeing about half the $12 trillion mortgage market. Risk was socialized, spread across all taxpayers through government guarantee, while profit was concentrated and private. This is a prototype case of government thriving on “concentrated benefits and dispersed costs.”

The ability to do this is what drives government expansion, taking from the masses and channeling the money to a minority – or special – interest. With these special interests, campaigns were launched, politicians entrenched and bureaucracy expanded. Hence Fannie and Freddie represent a massive rent seeking operation, to funnel money into the hands of officials at the expense of the taxpayer.

And yet none of this was sustainable, because it wasn’t profitable. Inevitably there would be collapse. Fannie and Freddie engaged in Enron-style accounting, and mafia-like corporatist tactics. It was their privileged status that led to the corruption, and that distorted the housing market and helped to inflate the housing bubble (also made possible by loose monetary policy).

The government takeover only makes all of these things worse. In the short run there is relief that a market collapse won’t occur imminently, but like the Soviet Union during perestroika, the fear of pain during reform can only lead to the delay of collapse and a more painful landing. Further concentration can only cause further waste, as competition, profit guidance and valuable price signals give way to bureaucracy, rent-seeking, inflation and misdirected investment.

As nationalized firms, Fannie and Freddie are government agencies, relying entirely on public funding. They have no reason to keep costs low, and every reason to allow short-term political objectives to guide their choices instead. Indeed, the Treasury has made it very clear that they will specifically move away from profit guidance. Treasury secretary Paulson said on Sunday that the entities “will no longer be managed with a strategy to maximize common shareholder returns.”

Paulson has promised that the fees they charge banks for loan securitization services will be examined “with an eye toward mortgage affordability,” even as they are neck deep in bankruptcy. This reminds me, again, of the logic of perestroika – instead of freeing prices up and allowing some market adjustment, so that the economy could finally get on track, a compromise was made. Prices would be “based on social costs,” companies were allowed to “take into consideration cost-effectiveness” but “speculative price increases aimed at excessive profit” were forbidden.

The logic of the expanding U.S. government is becoming just as warped. The socialization of risk caused the housing crisis, and the response is to nationalize. Risky lending driven by policy not profit caused the collapse and the “reforms” will reduce fees and shun profitability. If we keep moving in this direction, we’ll pass through our own reverse perestroika, and end up a socialist state.

Rent-Seeking and The Housing Crisis

Recently, a scandal has broken out that provides great insight into the housing crisis. Countrywide Mortgage brokers have been treating Congress to VIP lending rates. Accepting donations of $100 or more is illegal for these politicians, but scandals like this are not uncommon. The deeper question is why a profit-seeking business like Countrywide would want to offer discount rates to government officials in the first place. It is, of course, because they expect something in return.

If government could not offer these businesses any preferential legislation, exemptions from taxes or relief from anti-business regulations, there would be no incentive to buy them off.

Economists call this kind of activity rent-seeking. When firms spend money – or decrease their profit – in order to ensure favorable treatment by government it is not efficient. They produce no more output, and instead the resources are wasted. The favorable treatment gives them a monopoly position or an advantage over their competitors and the consumer suffers.

It also encourages government officials to pass more kinds of regulations that strangle business so that there are more chances to offer relief in exchange for pay-offs from the businesses. So, it creates a feedback loop leading to more regulations, more bribes and then even more regulation.

The only way to end the cycle is to limit the scope of government with a clear line preventing government from offering any kind of preferential treatment to firms.

But rather than moving toward a smaller scope of government, we are currently headed in the opposite direction. The new housing bill is set to bail out firms on a preferential basis – often by helping those, like Countrywide, who made the most risky sub-prime loans. In the future, these businesses will remember the compassion of Congress and will take these risks again.

Local governments will benefit too – with $3.9 billion in community development block grants. These grants are provided so that local governments can purchase, renovate and resell foreclosed homes. The proceeds can then be used to do this again next time that government subsidies followed by government bailouts lead to a new round of foreclosures. In this way, government can cause a crisis, solve it, and cause a new one, little by little expanding its scope in the process.

Have we not learned the lessons of the National Recovery Administration, when subsidies and bailouts, public works programs, and stringent regulations led us to a consolidation of government and big business that strangled private initiative and threatened the liberties we hold dear? Apparently we have not – a recent Time Magazine poll showed that 82% favor public works projects and 70% say more government programs are needed for those struggling.

The more that we allow government to solve our economic woes, the more that it expands its scope and creates new woes, just to have something more to solve. This is the rent-seeking power of government at its most frightening.

Cross-posted at the Heritage blog.

Note that the Center for American Progress was very enthusiastic about the community development block grants - HT Econlog for that.

In Soviet America

The American soviet government will take firm possession of the commanding heights of your business system: the banks, the key industries and the transportation and communication systems. It will then give the farmers, the small tradespeople and businessmen a good long time to think things over and see how well the nationalized section of industry is working.

The commanding heights - the corporatist controls of the reigns - leading the United States, step my step toward socialism. Circa 1934, under the New Deal.

The most daring proposals of the Hoover commission on standardization and rationalization will seem childish compared to the new possibilities let loose by American communism.

Writing in 1934, Trotsky spoke of the "Hoover commission on standardization and rationalization" but this is not the official Hoover Commission, which was not enacted until 1947. He was writing during Roosevelt. I'm not sure what he was referring to but Hoover did talk about standardization and rationalization of the economy by business; he was influenced by Tugwell (who, by the way, is very interesting - I am reading him right now - and I will post on him soon).

Trotsky imagined much more than we had in terms of planning, but he saw the potential within the New Deal. Indeed, as a step along the way:

In the United States, through the science of publicity and advertising, you have means for winning the support of your middle class that were beyond the reach of the soviets of backward Russia with its vast majority of pauperized and illiterate peasants. ... Even the intensity and devotion of religious sentiment in America will not prove an obstacle to the revolution. If one assumes the perspective of soviets in America, none of the psychological brakes will prove firm enough to retard the pressure of the social crisis. This has been demonstrated more than once in history. Besides, it should not be forgotten that the Gospels themselves contain some pretty explosive aphorisms.

As I have argued! Or anyway, that religion is not so far from communist Utopian dreaming... one could say the same about a Utopian dream of anarchy too, of course. Of course, Trotsky argued that the NRA was not in place in order to deliver communism (I would not argue that it had those conscious intentions either, for the most part) but that it would contain the seeds of its own crawl toward communism-- as it corrected itself with further intervention.

The NRA aims not to destroy but to strengthen the foundations of American capitalism by overcoming your business difficulties. Not the Blue Eagle but the difficulties that the Blue Eagle is powerless to overcome will bring about communism in America.

He then speaks about the public mind:

The “radical” professors of your Brain Trust are not revolutionists: they are only frightened conservatives. Your president abhors “systems” and “generalities.” But a soviet government is the greatest of all possible systems, a gigantic generality in action.

The average man doesn’t like systems or generalities either. It is the task of your communist statesmen to make the system deliver the concrete goods that the average man desires: his food, cigars, amusements, his freedom to choose his own neckties, his own house and his own automobile. It will be easy to give him these comforts in Soviet America.

I'm not sure that we abhor generalities; but certainly people respond to these materialist incentives. Choosing one's own necktie is not the first thing I think of when I think of "Soviet America" though; nor one's own house and automobile.

And then he describes the role of the monetary system, which once communism emerges, will not be initially used to control the economy - at that point, it should be stable:

Your almighty dollar will play a principal part in making your new soviet system work. It is a great mistake to try to mix a “planned economy” with a “managed currency.” Your money must act as regulator with which to measure the success or failure of your planning.

Your “radical” professors are dead wrong in their devotion to “managed money.” It is an academic idea that could easily wreck your entire system of distribution and production. That is the great lesson to be derived from the Soviet Union, where bitter necessity has been converted into official virtue in the monetary realm.

There the lack of a stable gold ruble is one of the main causes of our many economic troubles and catastrophes. It is impossible to regulate wages, prices and quality of goods without a firm monetary system. An unstable ruble in a Soviet system is like having variable molds in a conveyor-belt factory. It won’t work.

Only when socialism succeeds in substituting administrative control for money will it be possible to abandon a stable gold currency. Then money will become ordinary paper slips, like trolley or theater tickets. As socialism advances, these slips will also disappear, and control over individual consumption – whether by money or administration – will no longer be necessary when there is more than enough of everything for everybody!

Through stable money will socialism slip into pure communism. Some intriguing ideas in Trotsky. I forgot how much I enjoy him. More Trotsky to come!

Government Mediation and Wage Setting - in 2008

A lesser known provision of the Employee Free Choice Act, described beautifully here, would allow government to mediate contract disputes between labor and management if they don't come to agreement fast enough - 90 days. And if another 30 days of mediation doesn't produce, government can go ahead and fix wages as it sees fit.

If you think unions wouldn't welcome this, you haven't thought hard enough about their corporatist tendencies. And when companies complain? Subsidies to shut them up. Of course they would come with price controls, but that's OK. Then we just have full blown corporatism.

Here is the relevant section of the bill, with my emphasis:

(2) If after the expiration of the 90-day period beginning on the date on which bargaining is commenced, or such additional period as the parties may agree upon, the parties have failed to reach an agreement, either party may notify the Federal Mediation and Conciliation Service of the existence of a dispute and request mediation. Whenever such a request is received, it shall be the duty of the Service promptly to put itself in communication with the parties and to use its best efforts, by mediation and conciliation, to bring them to agreement.

(3) If after the expiration of the 30-day period beginning on the date on which the request for mediation is made under paragraph (2), or such additional period as the parties may agree upon, the Service is not able to bring the parties to agreement by conciliation, the Service shall refer the dispute to an arbitration board established in accordance with such regulations as may be prescribed by the Service. The arbitration panel shall render a decision settling the dispute and such decision shall be binding upon the parties for a period of 2 years, unless amended during such period by written consent of the parties.

Lets sum up: if after 90 days the union doesn't want to give in to the company, the union may call in the government in the form of a Federal Mediation and Conciliation Service. They may then filibuster for another 30 days until that Service sets the wages, benefits, hours and so forth for them. The government shall render a decision binding upon the parties. It is binding initially for two years, at which point the process can begin again.

This effectively removes any market mechanism from any industry in which unions are able to entrench themselves. If unions gain power in a given industry (and they will find it easier without the secret ballot) they will be able to leverage government for their purpose. At that point, it will be simple to obtain compensation far exceeding the workers' worth; this will threaten to bankrupt firms so they will complain to government; government, wanting to please everybody, will offer subsidies and price controls; and we will have corporatism.

Note that once a union has taken hold at a firm, even if the union doesn't want mediation, the firm may, and so the firm can be the one to filibuster. Some firms, especially inefficient ones which are having a hard time competing, will decide that it would be better to have government step in - especially if they have a friend in congress. They may then set unrealistic demands and hold out for arbitration. This could provide an easy way to introduce new subsidies and regulations for corporations currently missing out.

Why the gloomy outlook? Perhaps government will simply arbitrate effectively between two parties, such that wages will reflect worth and no subsidies or controls will be necessary!

This might be possible if there were no rent-seeking by unions or firms or if politicians didn't or couldn't reward it. However, such behavior will be rewarded if reality is any guide.

So efficient firms with low cost and potentially low paid (perhaps unskilled) workers, if unionized, will be at the mercy of the union which can choose to filibuster until government steps in on its behalf; and inefficient firms can make wild demands of labor until government steps in, at which point it can wield its big corporate power and lobbying influence to extract subsidies from the taxpayer. If you don't think this would be a big step toward corporatism, you haven't been reading this blog enough!

Corporatism & Money

What is the role of monetary policy and the gold standard, with regard to government levers on the economy, and corporatism? There is certainly a grand role for it. I will post more on this later, but a few words (p.105) from Garet Garrett on inflationary money policy (speaking of a law of 1933):

The law reads: "That every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment in gold, or a particular kind of coin or currency, or in an amount of money of the United States measured thereby, is declared to be against public policy; and no such provision shall be contained in or made with respect to any obligation hereinafter incurred."

It follows, literally, that it is now unlawful in this country for a borrower, be it the Government, a corporation or a private person, to promise that the value of what is to be paid back shall equal the value of what was borrowed. The ostensible reason for this amazing prohibition is that the Government shall be free by fiat to fix the dollar at any value it may deem expedient; that it shall have the power to say of a 50-cent dollar, a 25-cent dollar or a 5-cent dollar , as it has already said of a 60-cent dollar, "This is the standard dollar and full legal tender in settlement of all obligations." It follows again, literally, that no one knows today what the value of the dollar will be tomorrow, or a month hence, or a year from now. The Government itself does not know. And that is now the state of the currency.

What a perspective. Do we know? We think we know because we think we know inflation, and we think we accurately predict it. But, as anyone who has looked into the CPI much knows, we don't really. Not even close.

Mises on Unions

From NRA Economic Planning (1937), Roos quotes the November 1934 issue of American Federationist which reads:

If you are a union member, your union can watch every increase in production and every technical improvement which reduces cost. Your officers will know when to drive for restoration of the 1929 wage level, and you need not stop with the 1929 level. Since you are now producing 7 per cent more than you produced in 1929, your wages should eventually be above 1929 by a proportionate amount.

But the assumption that labor should reap the full reward of higher productivity – producing 7 per cent more – and should demand it through collective bargaining is a mistake. As Mises eloquently explained, in Human Action (1949):

Present-day labor-union doctrine operates with a concept of productivity of labor that is designedly constructed to provide an alleged ethical justification for syndicalistic ventures. It defines productivity either as the total market value in terms of money that is added to the products by the … divided by the number of workers employed … they call the …[the] "increase in productivity of labor," and they pretend that it by rights belongs entirely to the workers…

One thousand men working with the traditional old-fashioned tools in small artisan shops somewhere in the backward countries of Asia produce over the same period of time, even when working much longer than forty hours weekly, many fewer than m pairs. Between the United States and Asia the difference in productivity computed according to the methods of the union doctrine is enormous … The superiority of the American plant is entirely caused by the superiority of its equipment and the prudence of its entrepreneurial conduct …

On the eve of the "Industrial Revolution," conditions in the West did not differ much from what they are today in the East. The radical change of conditions that bestowed on the masses of the West the present average standard of living (a high standard indeed when compared with precapitalistic or with Soviet conditions) was the effect of capital accumulation by saving and the wise investment of it by farsighted entrepreneurship. No technological improvement would have been possible if the additional capital goods required for the practical utilization of new inventions had not previously been made available by saving.

While the workers in their capacity as workers did not, and do not, contribute to the improvement of the apparatus of production, they are (in a market economy which is not sabotaged by government or union violence), both in their capacity as workers and in their capacity as consumers, the foremost beneficiaries of the ensuing betterment of conditions.

Mises wasn't being anti-labor, he was just laying out the facts. Roos explained the effect that this had on the economy and on standard of living for the average American:

Because of resulting higher costs of construction, the workers in other industries muse pay scandalously high prices for even the most modest homes. Similarly, in the almost completely unionized anthracite coal industry, the wage scales of 1934 were so high that price was prohibitive; the industry was prostrate and thousands of miners were on public relief.

Though, of course he would not need it, Mises had plenty of evidence to work with, and though we may forget our history, he was speaking of America at that time. We should not forget, especially as we inch back toward some of the more corporatist roots, as we expand union power once again.

Corporatism in America Part V

(this post is new)

To follow up on the earlier posts which were based on the Cato article and Fools Gold (see below), I will now add some thoughts from NRA Economic Planning. I hope to follow up with lots more from that excellent book later.

"...industrial planning implies the standardization of production,employment and prices; the standardization of materials, products and methods, and the substitution of concerted action and forethought for unco-ordinated and predatory competition either in a single industry or over the entire area of industry. It means the shaping of individual and corporate industrial activities into a co-ordinated whole...Industrial planning is the conscious guidance of our industrial life by collective methods"

Who said this?

George B. Galloway, chief of the planning division of the NRA. He went on to admit the areas of freedom which might be lost under his collective planning:

"To be sure, the execution of group plans involves some limitations upon the economic decisions of individuals or corporations whose activities must be adjusted to the policies adopted for the industry as a whole. The decisions subject to limitation include those pertaining to production, prices, hours, wages, savings, investment, trade practices and the use of property."

Oh, is that all? Just production, prices, hours, wages, savings, investment, trade practices and the use of property? That's not too bad then.

One interesting are of research is the effect of rent-seeking by labor unions and corporations, using the powerful levers of the NRA's more discretionary rulings, or the laws for which they can offer exemptions to industry. It is well known that in countries with more bureaucracy and less free markets, corruption and political wrangling replace market entrepreneurship. In the case of the NRA laws, overtime pay was suggested as a replacement for maximum hours; but interest groups and corporations could battle for exemptions to maximum hours instead. Labor unions did so because they wanted monopolistic control over wage setting; firms, meanwhile, wanted exemptions rather than having to incur overtime pay costs.

Hence, while a rule of overtime pay applied equally to all industry would have been simpler and would have given firms more flexibility, it was never enacted and instead dozens of codes for dozens of industries (many completely unenforceable) were supplemented with dozens of exceptions each.

And, the evidence suggests that this somehow did not help relieve unemployment. Go figure.

Corporatism in America Part IV

Some thoughts
-------------------

Most of what I've posted up to here was from that Cato article. The bit about North Dakota and maybe a snippet here or there was from the book I mentioned, Fool's Gold. These thoughts and quotes are mostly from the latter.

1. FDR ran on a platform promising to cut government spending by 25%

...Franklin D. Roosevelt was elected as a Democrat on a platform that declared for sound money, a balanced budget, a reduction in the expenses of federal government, and the abolition of the many useless boards and bureaus...
...The direct pledge was made by the Democratic candidate that the cost of conducting federal government would be reduced by twenty-five per cent. That had a nationwide appeal. The direct pledge was also made that a system of sound money would be maintained, by which the people believed he meant the retention of the gold standard. That also had nationwide appeal.

a) Wow - who even suggests that these days? Doesn't that show where the America public was at that time.
b) How could he get away with doing not just the opposite, but actually growing government more than 3-fold -- from 3% of GNP to 10% of GNP. Obviously the crisis of the onset of the depression was the excuse, but what an incredible 180, what a wildly dishonest turnaround. And yet he is so fondly remembered(!?)


2. In a letter from the Comintern to the communist and socialist parties (who were all pro-Soviet and from whose ranks many in government later came) in the US in 1921, urging communists to take part in all elections including the general election from within one or the other of the two major parties (and also to continue their good work in infiltrating trade unions and other organizations, and schools and so forth) it was said:

The Communist party must remember that it is not its purpose to reform the capitalist state. The purpose of the Communist is, on the contrary, to cure the working masses of their illusions, through bitter experiences. Demands upon the state for immediate concessions ... to the workers are formulated, not to be 'reasonable' from the point of view of capitalism, but to be reasonable from the point of view of the struggling workers, regardless of the state's power to grant them without weakening itself. Thus, for instance, a demand for payment out of the Government treasury, of full union standard wages for millions of unemployed workers is highly reasonable from the point of view of the unemployed workers but damaging from the point of view of the capitalist state.

And some strange decisions were made.

...farmers could not find sufficient help to enable them properly to harvest their crops. Thousands of idle men loafed around the towns and villages but disdained to work because the dole they received from the government was as much, or nearly as much, as the farmers could afford to pay them in wages.

Originally it had been argued to give relief money to the Red Cross-- but that would not allow the money to funnel properly through government and into the right pockets:

Officious bureaucrats and designing individuals...have used the money to build gigantic political machines...
...The thing, however, that has caused an uproar--and rightfully--is the established fact that relief agencies in many cities appear to be dominated largely by communists, and that the communists are using the public money they thus secure to carry on their battle to destroy our form of government and our system of economics. General Hugh S. Johnson, sent to New York by the Roosevelt administration to "put men to work," found it necessary to establish a special department to ferret out the large number of communists who "chiseled in" on public funds. He expressed himself rather forcefully on the subject when he left his job. His successor, Victor Ridder, however, according to the press, immediately disbanded the special committee.

3. Some other things you might not know about the policies enacted at that time:

Fined and imprisoned for competitive pricing: A little tailer in New Jersey was fined and sent to jail because NIRA asked him to charge forty cents for pressing a pair of pants and he charged thirty-five. Sent to jail for violation of government set prices -- in the United States. Wait, can that still happen if it is housing or some other area where government controls prices?

NIRA labor laws were really enforced: Some employees of Harriman Hosiery Mills Company went on strike, others did not. The company was told by NIRA to discharge loyal employees and take back the strikers, it refused. General Johnson, head of administration of NIRA in charge withdrew their Blue Eagle and set up a government boycott to prevent products of the mill from being sold. The company was forced to close, with great financial loss.

Farmers told how much and which crop to plant: The Potato Control bill reads like Soviet agriculture, with farmers being told not to plant certain crops and how many acres of another crop he must plant.

Corporatism in America Part III

The Decline and Fall of American Corporatism
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WWII may have been the height of Corporatism, but the end of the war did not signal a drop back to pre-NRA levels. In fact, it took many years to unravel the regulations and restrictions put in place during the corporate years.

Libertarians often argue that in fact we may be becoming less free and more state run today. I don't think this is the case. Over the 50 years following the union-peak (34% unionized, still a far cry from Sweden's 80-90%) there was a matching fall in regulation. Corporatist restraints slowly uncoiled.

Regulatory timeline:

1940s: After NIRA is overturned, antitrust law and policy becomes "pro-competitive" and for low-price rather than fair-price.

1945: End of major price controls, output controls, nationalization and other firm controls. Some nationalization left in place, along with regulation and some price controls.

1947: Taft-Hartley reinstated the right to not join a union, the right to fire unionized workers and some other basic rights in the labor market.

Korean War: A return to price controlling and regulation during wartime.

1961: JFK still used his powers to force the hand of the steel industry, on the wage front explicitly and on the price front through threats. No corporation felt safe firing unionized workers for fear of this kind of government intervention.

1970s controls: Nixon and Carter impose price controls, Nixon as part of ending gold-backing of Bretton Woods and then "due to the oil crisis"; Carter as part of trying to keep gas cheap for consumers. These were the last national-level price controls to be explicitly enacted. There are some calls for healthcare-related price controlling but there is no longer unanimous support for such things.

1970s deregulation: Ford proposes deregulating the airline industry, becomes law under Carter (ADA); Deregulation in utilities (PURA and NGPA); ICC ended with MCA; Deregulation (and breakup) of AT&T.

1981: Reagan signals to firms that they can fire unionized workers by himself firing the striking government airline workers.

1992: Caterpillar hires replacements for (fires) UAW members after a 5 month strike.


Theory and public opinion (summarized from the Cato article):
1. Competitive pricing is understood, above-competition prices cause unemployment. This comes with changes to anti-trust, the neoclassical wave in economics etc.
2. Union political power is recognized as having its own problems. Hayek and Friedman and others weigh in.
3. Public choice economics takes this to the next stage, on the economic side: unions do not create offsetting productivity to pay for higher wages but just collect rents; on the political side: rent-seeking means consolidation of power and garnering of public funds for private use. The main beneficiaries of regulation turn out to be the regulated companies (which explains why they were always the ones fighting for it!).
4. The old assumptions about competition leading to conglomeration fail to emerge.
5. Unions are only useful with the rest of corporatism in place-- when prices are controlled to allow for union wages, for example. Unions remain interesting only to public employees.


What about intra-corporate questions:
Unocal v. Mesa Petroleum (see also "Revlon v. McAndrews & Forbes Holdings, Inc.") -- can a director of a corporation reject a takeover because the takeover would be bad for workers, even if it is good for shareholders (or what about, just because he feels like it)? Isn't that intra-firm and should be left to the private actors to battle it out? Cato represents this case as anti-corporatist because the director must do what is in the interests of shareholders, of the firm, rather than the firm being subjected to labor control. I'm not buying it.

Corporatism in America Part II

American Experiments in Socialism
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1. The Non-Partisan League built socialism in North Dakota, circa 1917. With near complete control of the legislature they took control of the mills and grain elevators, put controls on all banks and established a state bank, created dozens of new state offices and worked toward the "general socialization of all industry."

The Non-Partisan League (NPL) was not the brain-child of one man (Townley), it was discussed in socialist publications for years ahead of time and advertisements for organizers for the new league to organize in many Midwestern states appeared in a Kansas socialist weekly in 1916.

The policies failed and the farmers - the voters - turned against the NPL. The NPL then threatened to destroy their crops by fire or other sabotage if farmers did not employ strictly IWW members - to ensure socialist keeping of power. IWW then formed wage committees to plan the wages and hours of North Dakota farmers. Their plans were laid out in their publication Solidarity in 1917.

Many of the socialists who founded the NPL and were involved in the North Dakota experiment went on to become part of the Roosevelt administration.


2. NIRA and NRA

Under NIRA, firms could group as cartels, set "fair" prices and those prices once accepted by the NRA would be enforced by law on the industry; labor unions gained political power and government promised to intervene if wages were not "fair".

The passage of NIRA ushered in a unique experiment in U.S. economic history—the NIRA sanctioned, supported, and in some cases, enforced an alliance of industries. Antitrust laws were suspended, and companies were required to write industry-wide "codes of fair competition" that effectively fixed prices and wages, established production quotas, and imposed restrictions on entry of other companies into the alliances.

NIRA was a failure due to competitive cheating and was also declared unconstitutional, However the NLRA left unions in an even more powerful position, making it mandatory to join or pay dues and making it illegal for employers to fire workers for striking. Thankfully, this was overturned in 1947 with Taft-Hartley, and today NIRA is better known for its rodeo, and NRA for their guns.


3. Corporatism got its second wind when during WWII industries became directed more than just regulated by the Interstate Commerce Comission, the Civil Aeronautics Board, the Federal Power Commission and others. These boards set prices for the industry and regulated entry and exit. And Roosevelt intervened during any dispute between labor and management and nationalized (by executive order) any firms which would not obey his command. Between 1941 and 1945 more than 1/3 of the top 100 American corporations were seized either in whole or in part. Among those seized were railroads, mines and even the Montgomery Ward department store. In 1944 Roosevelt, angry at union strikes which were still going on, supported a National Service Act which would require Americans to either work or fight. The latter did not pass, and most of the price controls and much of the regulation and nationalization was dismantled after the war. This experiment went better than the others though it is hard to say how well and also how much of the success was due to short-term war-induced nationalism, mobilization, war industry and of course massive debt.

Corporatism in America

(this series originally posted on Facebook some months ago)

An excellent article in Regulation magazine (a Cato publication) describes the rise and decline of unions in America and the relationship of union legal power to "corporatism" in America. Corporatism is explained - it is in fact a regulated economy that depends on both corporations and unions having price control power in the market, so that corporations are promised a "fair" price and unions are promised a "fair" wage. It is a kind of soft planning.

The history of corporatism in America is fascinating, the period when it reigned can easily be seen as an experimental step toward socialism (or fascism) which indeed is what corporatism is -- a socialism-lite that lends government power to both firms and workers but stops short of directing output or completely owning the profits and losses.

As I have learned from the book Fool's Gold, many in the administration at the time of the NLRA and NRA were in fact socialists and wanted to take the next step after corporatism, toward a fully planned economy. Whether you believe that this was widespread, whether you would favor it or not, it is interesting when comparing the economic systems to consider how corporatism would indeed have been an appropriate and necessary step toward a fully planned economy.

While corporatism is a regulated economy, with regulated prices in the major industries and regulated wages, a fully planned economy - socialist or fascist - would also involve regulated output and regulated profit - with "excess" profit from one industry offsetting "planned losses" in another.

Under fascism, the firms would still be nominally owned by private individuals but those individuals would have power within the government; under socialism they would be described as "public" and those in charge would be government officials -- the names would change but the structure would be the same. The government would be setting the profit, prices and wages, determining who is to thrive and who to starve and what the economy is to produce.

(to be continued)