Center for a Stateless Society
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Cowboy Capitalism and the State

Doug French, in an article for the website — a site named for conservative Austrian economist Ludwig von Mises, whose politics tend to fall on what’s conventionally regarded as the Right — makes some points about the current trend toward mergers and acquisitions that sound an awful lot like what the Marxists at Monthly Review have been saying for a long time. They’re both right.

In “Merger Monday and the Destruction of Wealth” (Feb. 15),  French argues that the uptick in mergers and acquisitions is occurring because corporations are loaded down with cash burning holes in their balance sheets, with no productive outlet to invest it in.

That’s pretty much what the Monthly Review folks have been saying since the 1970s. Corporate capitalism, as we know it, tends to generate a surplus. It generates more investment funds than it knows what to do with. A significant part of existing industrial capacity goes idle for want of sufficient demand, which means that for the most part investing in expanded production is not an option. So naturally all that excess investment capital goes into the FIRE (Finance, Insurance, and Real Estate) economy. And a major part of that investment goes into lending corporations the money to buy up their competition.

The tendency to generate a surplus for which there are insufficient investment outlets is, in the main, a result of the state capitalist economic model. Government enforcement of artificial scarcity and artificial property rights generates rents, shifting income from workers and consumers to the owners of such artificial property rights. That means a shift of income from the classes with a higher propensity to consume to classes with a higher propensity to invest, and a resulting chronic tendency toward underconsumption and overaccumulation.

In addition, the tendency toward oligopoly cartels with administered pricing leads toward excess industrial capacity and the inability of the corporate economy to dispose of its full output at cartel prices. Joseph Stromberg, writing from an Austrian perspective, pointed out the parallels between left-wing theories of overproduction and imperialism and the Austrian theory of regulatory cartelization (“The Role of State Monopoly Capitalism in the American Empire”, Journal of Libertarian Studies, Vol. 15 No. 3).

In addition, French argues, firms are more prone to borrow for mergers and acquisitions because the money’s cheap. By that he means interest rates are low, but the money’s also cheap in other ways.

For one thing, the tax structure artificially increases the profitability of mergers and acquisitions compared to other investments. When interest on corporate debt is exempted from the corporate income tax and share transactions involved in mergers and acquisitions are exempted from capital gains, that’s a differential benefit to one kind of investment. And targeted tax breaks for debt mean for mergers and acquisitions specifically, since that’s the main thing debt is incurred for. Retained earnings are more than sufficient for whatever investment in actual new productive capacity takes place.

The money’s also cheap in that the folks in the C-suite — like the manager “playing entrepreneur” in Mises’ critique of the Oskar Lange model of “market socialism” — have no skin in the game. The money they risk is not the fruit of their own past abstention. The incentive structure, as under Lange’s market socialism, is such that when they win they get a huge bonus and when they lose … they just don’t get a bonus that year. All the money lost is other people’s money. There’s every incentive to gamble big.

So what we’ve got is an economy dominated by large, state-affiliated organizations, insulated to a large extent from market incentives, and run by a class of unaccountable, privileged bureaucratic apparatchiks.

Say, where have we heard that before? Seems we have another parallel: The parallel between a nominally “socialist” and a nominally “market” system of power, both of them run by pretty much the same kind of people. In one system, the privileged bureaucrats live high on the hog in the name of “building full communism for the working class.” In the other, they do it in the name of “creating shareholder value.” As Orwell might have put it, it’s hard to tell the men from the pigs.

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