I believe Tucker has fallen victim to a trap that many libertarians fall into when trying to defend freed markets. Tucker is espousing “vulgar libertarianism.” The term, coined by anarchist author, Kevin Carson, refers to times when a libertarian condemns the existing state power (which, of course, Tucker always adamantly does), but at the same time, defends those who benefit most from the state power. And who are the biggest beneficiaries of state violence and theft? The rich. This is not an uncontroversial opinion.

The large sums of wealth that rich people currently enjoy are not the products of entrepreneurship, or productive genius, or voluntary market exchanges. In fact, those things are great and I wish we lived in a world with more of them. Rather, these gigantic personal estates and corporations are a result of state intervention. In Let the Free Market Eat the Rich, Jeremy Weiland points out some of the ways in which the government socializes the costs of being rich leading to a system where the average Joe is subsidizing Bill Gates. He writes,

The biggest subsidy enjoyed by the wealthy lies in government regulation of finance… [Average Joes like you and I] don’t pay for this “service” in proportion to our deposits. Instead, we help subsidize the regulation and maintenance of the financial system from which the elite depositors benefit disproportionately.

This subsidization extends to the realm of property protection as well. Weiland continues, “Police patrols of moneyed neighborhoods provide an example of socialized security, where defense and sentry costs are not paid directly by the beneficiaries.” Since the rich tend to own more property and are more likely targets of theft, they disproportionately benefit from state protective services.

Kevin Carson points out,

The dominant feature of the American polity is welfare for big business and the rich. This welfare consists of a wide array of government interventions into the market to enforce artificial scarcities and artificial property rights.

In fact, corporate welfare is rampant in the US economy. According to a study done by Good Jobs First, for state and local government, “at least 75 percent of cumulative disclosed subsidy dollars have gone to just 965 large corporations.” According to a Cato study, on the federal level, “corporate welfare in the federal budget costs taxpayers almost $100 billion a year.” That’s a $100 billion wealth transfer from the Average Joe to giant corporations.

Plus when we take the US Empire into account, Kevin Carson argues,

Adding up the so-called “defense” budget, two unfunded wars, “national security” spending on DHS, CIA, DOE and NASA, and interest on debt from past wars, the bulk of the federal government’s budget goes to welfare for the Military-Industrial Complex.

In other words, more giveaways to the rich.

These are only direct transfers to large corporations. There are also a myriad of ways in which government regulation games the system, tilting the market in favor of already established, large, hierarchical businesses headed by the rich.

State policies such as urban renewal projects, price and wage controls, licensing and safety requirements, limited liability, costly regulation, capitalization requirements, quantitative easing, financial regulation, zoning requirements, protectionist trade policy, intellectual property laws, and various other barriers to entry all promote centralization and cartelization at the expense of the voluntary transactions and private ingenuity that Tucker, as well as myself, loves so much.

These policies not only created the large disparities in income we see today, they embolden them. When large corporations face little to no competition because they have a stranglehold on the market, the middle rungs of the economic ladder are cut off. We are left at the mercy of the corporations and their special ability to channel state violence for exploitative and anti-competitive purposes.

With the advent of more and more corporatist policies, the distinction between state (“public”) and corporate (“private”) is blurred. As Rothbard argued in Confiscation and the Homestead Principle,

Government, he pointed out, is after all not a mystical entity but a group of individuals, “private” individuals if you will, acting in the manner of an organized criminal gang. But this means that there may also be “private” criminals as well as people directly affiliated with the government. What we libertarians object to, then, is not government per se but crime, what we object to is unjust or criminal property titles; what we are for is not “private” property per se but just, innocent, non-criminal private property. It is justice vs. injustice, innocence vs. criminality that must be our major libertarian focus.

A government by the rich and for the rich is nothing new, though. The status of the rich in the Gilded Age, which Tucker seems to refer to with reverence, was no more honest or virtuous than it is today, which, is to mean not honest or virtuous at all. In State Socialism and Anarchism, Benjamin Tucker identified the four (state created) monopolies of his day: the money monopoly, the land monopoly, the tariff monopoly, and the patent monopoly.” Far from being an era of laissez-faire, the late 19^th century was dominated by a class of rich parasites, just like the modern economy.

The freed market, without all these distortions and giveaways, is truly an equalizing force. Weiland went on to conclude,

A truly free market without subsidized security, regulation, and arbitration imposes costs on large scale aggregations of assets that quickly deplete them… It may be that libertarianism, taken to its logical conclusion, is far more egalitarian and redistributionist than we ever dreamed – not as a function of any central State, but rather due to its lack.

Jeffrey Tucker writes,

None of us will be truly safe until the rich again walk the streets with pride, live in huge houses in full view of the hoi polloi, and dress proper to their station in life.

On the contrary, we will only know safety (from the iron fist of state capitalism) when today’s rich walk the street with woe because their friend, the state, is gone. When the rich live in shacks in full view of ghettos because their friend, the state, is gone. When the rich dress in dirty, torn clothes, because their friend, the state, is gone.

Tucker continues,

After all, a world that is not safe for the rich is not safe for the rest of us either.

I believe a firm understanding of the relationship between the rich, their fortunes, and state power leads us to conclude the exact opposite conclusion. A world that is safe for today’s rich will never be safe for the rest of us. Not until the rich’s massive fortunes, and the state power propagating them, is destroyed will we be safe. Smashing the state and eating the rich are two sides of the same coin.

For his part, Chomsky has repeatedly stated that Chávez ushered a revolutionary break with Venezuela’s political past, especially regarding the social policies of the state toward the poor, echoing the foundational Chavista discourse of “Bolivarian revolution.”

In an interview with Spanish newspaper Diagonal in March 2006, Chomsky declared that “for the first time, the country is using … energy resources for its development … in construction, health …” Likewise, in a 2005 op-ed for Mexico’s La Jornada, he wrote “it is only now with President Chávez … [that] medicine has become something real for a majority of the poor.”

Last month, speaking to Venezuelan economist Miguel Ángel Santos, Chomsky repeated his point: “For many years Venezuela was dominated by elites that … harvested all the benefits from the oil bonanzas while marginalizing the poor … Chávez came up against that …”

Regrettably, Chomsky ignores basic facts of Venezuelan contemporary history. There is nothing revolutionary about the Chavista welfare state.

In Revolution as Spectacle, Rafael Uzcátegui, co-editor of Venezuelan anarchist newspaper El Libertario, presents reams of data showing that up until the early 80’s, when oil prices started a sustained decline that drained the Venezuelan state’s capacity to sustain the massive subsidies that appeased the masses since 1958 and ultimately led to the Caracazo (a wave of riots in 1989 where thousands were killed by the military under the second administration of Carlos Andrés Pérez) welfare policies were as ubiquitous, and at times more effective, than those of Chávez’s reign.

Let’s limit our look to the two areas mentioned by Chomsky, housing and health care (Uzcátegui applies a similar analysis to a wide range of welfare policies).

According to national census data, the state’s housing projects reduced shanty-town dwellings as a percentage of total housing from 37.18% in 1961 to 12.56% in 1990. Penetration of the electricity grid was 58.16% in 1961 and 76.59% in 1981. Access to running water increased from 46.7% in 1961 to 68.74% in 1981.

The Chávez administration built an average of of 26,000 households per year between 1999 and 2008. The average for the 90s decade was a much higher 64,000 per year.

The Popular Clinics and Hospitals of the People created by the famous Barrio Adentro Mission, a program widely publicized as having secured hitherto unparalleled access to basic health care for the poor, are today unable to provide treatment for any ailment more complex than a broken bone.

For critical treatments, the people must rely on the old hospital network built during the Fourth Republic, which in 1980 reached one of the widest coverages of the region with 2.7 beds per thousand habitants, but today is basically in shambles.

This translated, among other tragedies, into poor women in Venezuela giving birth under inhuman conditions during the period 1998-2008, and a 16% rate of maternal deaths due to clandestine abortions for 2010.

The flip side of Chomsky’s argument, that Venezuela before Chávez was dominated by elites harvesting most of the oil bonanza, is true, but irrelevant: Today’s Venezuela is still dominated by brave new elites, the so called boliborgoise, wealthy and powerful thanks to their connections to, or direct participation in, the all-powerful Bolivarian state.

Actually, the Chavista elite is much more corrupt, authoritarian and inept than their Fourth Republic predecessors. If the monopoly on the use of force and administration of justice is the defining feature of the state, Venezuela today can easily be described as a failed one: The country’s epidemic of violence netted almost 25,000 murders in 2013, more than 90% unsolved.

Hugo Chávez was no revolutionary. He simply took the petro-statist social democratic model prevailing in Venezuela since 1958 to a whole new level. As Uzcátegui argues in his book, he masterfully executed the art of the demagogic spectacle like no one before him — spectacle that utterly mesmerized Noam Chomsky, despite his analytical and intellectual prowess.

Translations for this article:

• Spanish, Noam Chomsky, Deslumbrado por el Espectáculo Bolivariano.
• Portuguese, Noam Chomsky: fascinado pelo espetáculo bolivariano.

The proper course of action, she argues, is to take one for the team. “… [I]t seems to me that if every single parent sent every single child to public school, public schools would improve. This would not happen immediately. It could take generations. Your children and grandchildren might get mediocre educations in the meantime, but it will be worth it, for the eventual common good.”

Besides, she says, even if your local public school is pretty crappy, your kids probably won’t suffer too badly. After all, if you’re the kind of parent who’s selective and involved enough to send your kid to a private school in the first place, you’re probably providing the kind of support system your kid needs to do OK despite going to a crappy school.

Benedikt brings in her own bad self to clinch the deal. She went to a mediocre school, never learned a lot of that fancy college-prep stuff, and consequently didn’t learn much in college, either. But still, she turned out “perfectly fine.” And even if she never read Walt Whitman in high school, she got the benefit of socializing with all sorts of kids — e.g., “getting drunk before basketball games with kids who lived at the trailer park.”

Here’s the thing: The very fact Benedikt could write something so utterly devoid of critical thought is proof that she did not turn out “perfectly fine.” If she takes such a conventional, uncritical view of the functional role of social institutions, then she’s exactly the kind of product the schools are designed to churn out. If “one of our nation’s most essential institutions” means “essential for the interests of the people running the nation,” she’s exactly right.

The public schools are, as they were originally set up to be in the 19th century, human resource processing factories. Their purpose is to supply the state with compliant subjects and employers with compliant workers. The ideal products are functionaries smart enough to perform their assigned tasks, but not smart enough to critically analyze the system or their roles in it.

The purpose of modern public education is fundamentally evil: To inculcate a view of a society organized around giant corporations, centralized government agencies and other authoritarian hierarchies as natural and inevitable — “just the way things are” — and an acceptance of one’s own role in that society as a reflection of merit.

Think I’m exaggerating? The first statewide public school systems were organized in New England around the time textile mills needed people conditioned to line up on command, eat or urinate at the sound of a bell, and cheerfully comply with orders from someone behind a desk. Take a look at the public educationist literature from the turn of the 20th century, quoted at great length in the work of critics like John Taylor Gatto and Joel Spring, on the purpose of the system. The public educationist literature of that period is explicit on the role of the schools in shaping a human product perfectly socialized to be satisfied with its role as cog in a machine managed by other people.

And those kids from the trailer park she talks about being socialized with? The system is set up to process kids like that (in the terminology of Huxley’s Brave New World) into obedient Gammas, managed by uncritical, cheerleading Betas like her.

What’s more, the idea that everyone should voluntarily herd themselves into the same crappy authoritarian institution, so that all will have some incentive to make that institution somewhat better, is utterly perverse. The beauty of networked communications technology and the free replication of digital information is that it’s no longer necessary to get everybody on the same page, and coordinate their efforts through some common institution, in order for anyone to do anything.  The public schools are built on a mass-production industrial model of moving humans to a central location to be processed with a limited, uniform menu of information. But a near-infinite amount of education can now be moved around instantly at almost zero cost.

It’s like saying “if everybody gave up the Internet and forced themselves to rely on CBS, NBC and ABC News, they’d work harder to see the Fairness Doctrine enforced.” If we all just force ourselves to rely on an archaic industrial-age dinosaur and it’s one-size-fits-all product, we’ll have an incentive to make sure the homogenized product isn’t too crappy.

If we were just means to the end of the public schools’ flourishing, it would be a good argument. But we’re not.

Translations for this article:

• Spanish, Cómo Argumentar Involuntariamente Contra el Sistema de Educación Pública.

For this reason the Austrian dogma of von Mises, that the only way to raise real wages is to increase the amount of capital invested, is shown to rely on a false assumption: the assumption that there is some necessary link between productivity and the sheer quantity of capital invested. George Reisman displays this tendency at its most vulgar:

The truth, which real economists, from Adam Smith to Mises, have elaborated, is that in a market economy, the wealth of the rich—of the capitalists—is overwhelmingly invested in means of production, that is, in factories, machinery and equipment, farms, mines, stores, and the like. This wealth, this capital, produces the goods which the average person buys, and as more of it is accumulated and raises the productivity of labor higher and higher, brings about a progressively larger and ever more improved supply of goods for the average person to buy.

But this view has been at the heart of most twentieth century assumptions about economy of scale, and an unquestioned assumption behind the work of liberal managerialists like Chandler and Galbraith (see Chapter One of my book Organization Theory, “Chapter One: A Critical Survey of Orthodox Views on Economy of Scale“).

As demonstrated first by the shift of manufacturing from the old mass-production core to the job-shops of Shenzhen and Emilia-Romagna, and now by the rise of networked garage manufacturers like 100kGarages,  initial capital outlay requirements for physical production are imploding in exactly the same way that Rushkoff described for the information industries — which means that venture capital will lose most of its outlets in manufacturing as well.

For the same reason that the Austrian fixation on the quantity of capital investment as a source of productivity is obsolete, Marxist theories of the “Social Structure of Accumulation,” with long-wave investment in some new capital-intensive infrastructure as an engine of growth, are likewise obsolete. Technical innovation, in such theories, provides the basis for a new long-wave of investment to soak up surplus capital. The creation of some sort of new infrastructure is both a long-term sink for capital, and the foundation for new levels of productivity.

Gopal Balakrishnan, in New Left Review, correctly observes capitalism’s inability, this time around, to gain a new lease on life through a new Kondratieff long-wave cycle: i.e., “a new socio-technical infrastructure, to supersede the existing fixed-capital grid.” But he mistakenly sees it as the result either of an inability to bear the expense (as if productivity growth required an enormous capital outlay), or of technological stagnation.

Balakrishan’s claim of “technological stagnation,” frankly, is utterly astonishing. He equates the outsourced production in job-shops, on the flexible manufacturing model that prevails in various forms in Shenzhen, Emilia-Romagna, and assorted corporate supplier networks, with a lower level of technological advancement. But the shift of production from the old expensive, capital-intensive, product-specific infrastructure of mass-production industry to job-shops is in fact the result of an amazing level of technological advance: namely, the rise of cheap CNC machine tools scaled to small shops that are more productive than the old mass-production machinery.

By technological stagnation, apparently, Balakrishnan simply means that less money is being invested in new generations of capital; but the crisis of capitalism results precisely from the fact that new forms of technology permit unprecedented levels of productivity with physical capital costs an order of magnitude lower.

Two opposing themes in the Social Structure of Accumulation theory, mentioned by Balakrishnan, are at odds with each other. The first is the rising set of costs, and the need to reduce them to restore the rate of profit. But lowering costs and increasing profit directly creates an internal contradiction: a surplus of investment capital without a productive outlet.

The SSA paradigm, in many ways, is obsolete: its focus on new engines of accumulation, as sponges for enormous quantities of investment capital, is no longer relevant.

Both the Austrians and the neo-Marxists, in their equation of progress and productivity with the sheer quantitative mass of capital invested, are stuck in the paleotechnic age.

Gracias a un amigo de Twitter, acabo de encontrarme con unos comentarios del año 2005 de Lee Scott, CEO de Walmart, pidiéndole al congreso que aprobara un aumento del sueldo mínimo:

“El sueldo mínimo de 5,15 dólares en los Estados Unidos no ha subido en casi una década y creemos que está fuera de sintonía con los tiempos que vivimos. En Wal-Mart podemos ver directamente como muchos de nuestros clientes tienen dificultades para llegar a fin de mes. Nuestros clientes simplemente no tienen el dinero para comprar artículos de primera necesidad”.

A primera vista estos comentarios parecen sumamente extraños, pues la fuente es el máximo ejecutivo de una empresa que, tal como usted sabrá si ha seguido las noticias durante el Viernes Negro, se caracteriza por mantener los sueldos de sus trabajadores tan bajos como sea humanamente posible.

Pero si lo piensa bien, en realidad no existe contradicción alguna. Existe un fundamental dilema del priosionero en el corazón mismo del capitalismo. A las grandes corporaciones les interesa garantizar colectivamente un nivel suficientemente alto de poder adquisitivo que permita que los camiones se sigan moviendo y que los inventarios sigan rotando.

Dicho de otra manera, el interés de un empleador individual es pagar solo lo necesario para mantener a los empleados en un nivel de subsistencia mientras trabajan, sin excedente suficiente para cubrir perídos de enfermedad o desempleo. Pero el interés colectivo de todos los empleadores es que se pague lo suficiente a los trabajadores para cubrir el costo de reproducción de la fuerza de trabajo.

El propósito fundamental del estado capitalista es resolver estos dilemas del prisionero. Cuando el estado impone un sueldo mínimo suficienemente alto para facilitar la reproducción de la fuerza de trabajo (aunque este no sea el objetivo explícito fuera del modelo socialdemócrata europeo), los costos recaen igualitariamente sobre todos los empleadores de una industria determinada. Y al contrario del caso de un cártel privado y voluntario, ningún empleador puede violar el acuerdo con sus competidores para obtener una ventaja cortoplacista. De esta manera, el financiamento del costo de reproducción de la fuerza de trabajo deja de ser un motivo de competencia de costos entre empleadores; se conveirte en un costo colectivo de la industria entera que puede ser pasado completamente a los consumidores como un recargo vía precios administrados.

Marx tuvo mucho que decir sobre este fenómeno, ilustrado por el Acta de las Diez Horas de Trabajo en Gran Bretaña (El Capital, vol. 1, cap. 10).

“Estas actas limitan la pasión del capital por un drenaje ilimitado de la fuerza de trabajo, limitando forzosamente la duración del día de trabajo a travez de regulaciones estatales, hechas por un estado regido por capitalista y latifundista. … La limitación impuesta sobre la mano de obra de las fábricas se debió a la misma necesidad que exparció el guano sobre los campos ingleses. El mismo entusiasmo ciego por el saqueo que en un caso drenó los suelos, en el otro arrancó de raíz la fuerza vital de la nación”.

Marx argumentaba que este interés común en prevenir “el drenaje de los suelos” era lo que explicaba el apoyo que muchos capitalistas (como por ejemplo el empleador Josiah Wedgwood) dieron al Acta de las Diez Horas.

El estado funciona de manera polifacética como el comité ejecutivo de la clase económica regente, llevando a cabo muchas funciones que a sus miembros no les interesa llevar a cabo individualmente.

Los salarios mínimos, la negociación colectiva y los esquemas de cobertura médica universal pueden ser percibidas individualmente por los capitalistas como restricciones o imposiciones. Pero en general son apoyadas por los capitalistas más iluminados, especialmente por aquellos en las industrias que más se benefician de estas medidas. Considérese, por ejemplo, el rol de Gerard Swope, CEO de General Electric, en la coalición empresarial que respaldó al New Deal.

El salario mínimo aumenta el poder adquisitivo agregado de la clase trabajadora, y ayuda a los empleadores a asegurarse una fuente confiable de fuerza de trabajo de manera sostenible. El estado del bienestar impide que el desempleo, el hambre y la damnificación lleguen a niveles políticamente desestabilizadores que derrumbarían al capitalismo desde abajo. La cobertura médica universal bajo el modelo británico o el canadiense externaliza los costos laborales que de otro modo serían sufragados por los empleadores (como se hace en países como Estados Unidos), que proveen seguro de salud como beneficio a sus empleados.

Cada vez que usted oiga retórica de ama de casa acerca de “nuestras familias trabajadoras”, o declaraciones auto-congratulatorias como “a los demócratas le importa”, trate de ir más allá de lo que dice la voz y échele un vistazo a lo que hacen las manos. En un mercado liberado (sin el estado para velar por los intereses de los capitalistas) el capitalismo corporativo se marchitaría como un caracol de jardín al que se le echa sal en la espalda. El estado trabaja para los capitalistas. No trabaja para usted.

Artículo oroginal publicado por Kevin Carson, el 26 de noviembre 2012.

Traducido del inglés por Alan Furth.

“The U.S. minimum wage of $5.15 an hour has not been raised in nearly a decade and we believe it is out of date with the times. We can see first-hand at Wal-Mart how many of our customers are struggling to get by. Our customers simply don’t have the money to buy basic necessities between pay checks.”

At first glance this seems decidedly odd, coming as it does from the CEO of a company which — as you know if you’ve been following the Black Friday news — is notorious for keeping its workers’ pay as low as humanly possible.

But if you think about it, there’s really no contradiction at all. There’s a fundamental prisoner’s dilemma at the heart of capitalism. It’s in the interest of large corporations collectively to guarantee sufficient purchasing power to keep the trucks moving and the inventories turning over. But it’s in the interest of individual large corporations to keep labor costs as low as possible.

Likewise, it’s in individual employers’ interests to pay only enough to maintain employees in subsistence while they’re actually working, without enough of a surplus to save against periods of sickness or unemployment. But it’s in the collective interest of employers to pay enough to cover the minimum reproduction cost of labor power.

Overcoming such prisoners’ dilemmas is the main purpose of the capitalists’ state. When the state mandates a minimum wage sufficient to facilitate the reproduction of the workforce (of course it doesn’t in practice, outside the European “social democratic” model of capitalism), the cost falls on all employers in a given industry equally. And unlike the case of a private, voluntary cartel, individual employers are unable to defect for the sake of a short-term advantage from double-crossing their competitors. So funding the minimum reproduction cost of labor-power is no longer an issue of cost competition among employers; it’s a collective cost of an entire industry that can be passed on to consumers as a cost-plus markup, via administered pricing.

Marx had a lot to say about this phenomenon, as illustrated by the Ten-Hours Act in Britain (Capital, vol. 1 ch. 10).

“These acts curb the passion of capital for a limitless draining of labour-power, by forcibly limiting the working-day by state regulations, made by a state that is ruled by capitalist-and landlord. … [T]he limiting of factory labour was dictated by the same necessity which spread guano over the English fields. The same blind eagerness for plunder that in the one case exhausted the soil, had, in the other, torn up by the roots the living force of the nation.”

This common interest in preventing “exhaustion of the soil,” Marx argued, explained the counterintuitive support of many capitalists — as exemplified by employer Josiah Wedgwood — for the Ten-Hours Bill.

The state, in many ways, functions as an executive committee of the economic ruling class, carrying out for them in common many necessary functions it’s not in their interest to carry out individually. The state, in short, cleans up the capitalists’ messes for them.

Things like the minimum wage, collective bargaining, and universal healthcare may be perceived by individual capitalists as a restraint or an imposition. But they’re supported by the smarter capitalists — especially those in the industries that benefit most from them. Just consider the role of General Electric CEO Gerard Swope in the business coalition behind the New Deal.

The minimum wage increases aggregate purchasing power among the working class at large, and helps secure employers a reliable pool of labor power on a sustainable basis. The welfare state keeps unemployment, hunger and homelessness from reaching politically destabilizing levels that — without the state cleaning up the capitalists’ mess at taxpayer expense — might result in capitalism being torn down from below. Universal healthcare, whether on the British or Canadian model, externalizes labor costs on the taxpayer which would otherwise be (and are, in countries like the U.S.) borne by employers who provide health insurance as a benefit.

Any time you hear soccer mom rhetoric about “our working families,” or self-congratulatory platitudes to the effect that “Democrats care,” look behind the voice and take a look at what the hands are actually doing. In a freed market — without the state to do the capitalists’ bidding — corporate capitalism would wither like a garden slug with salt on its back. The state works for the capitalists, not for you.

Translations for this article:

• Spanish, La Función Fundamental del Estado del Bienestar es el Bienestar Corporativo.
• Dutch, De Hoofdfunctie van de Verzorgingsstaat is het Verzorgen van Grote Bedrijven.

The views expressed in this publication are those of its author, and not necessarily those of the Libertarian Alliance, its Committee, Advisory Council or subscribers.

At the 2006 Libertarian Alliance/Libertarian International annual conference I received a buff coloured folder, when I finally got around to reading the contents of the folder (on the train going home) I found, amongst other things, a pamphlet by Mr Kevin Carson, Contract Feudalism: A Critique of Employer Power over Employees (Economic Notes No. 105, Libertarian Alliance, London, 2006), the following is what I thought of it.

On the front cover of the pamphlet were the words “Liberty, Equality, Cooperation” and a symbol the letter “A” is a circle. The symbol is, historically, the sign of compulsory communal anarchists, the people who want to rename the state “the people” or “the community” but still want a collective power to order individuals about. As for the words “cooperation” and “equality”, liberty allows people to cooperate or not as they so choose (they must accept the consequences of their choice).

If people choose to cooperate by some people accepting wages from other people that is one way to cooperate, it in no way violates the nonaggression principle. And if people choose to cooperate by being members of a cooperative (such as the John Lewis Partnership) that is another way to cooperate which also in no way violates the nonaggression principle.

Whether employer-employee firms or cooperatives prosper more will be decided by the market – i.e. by the prices and quality of goods that they offer and the choices of customers (the choices of customers are all the term “market forces” actually means).

As for the word “equality” this can mean equality under the law (the real law—the non aggression principle) in which case a person who is starving to death is the equal of a billionaire, or it may mean material equality—i.e. equality of income or wealth.

If “equality” means equality of income or wealth this may mean either mean people voluntarily choosing to join an egalitarian community (whether religious, as with monks and nuns, or secular) in which case we can expect at most about 5% of the population in such communities (the percentage of the Jewish population of Israel in various forms of communal communities at the height of these highly subsidized and favoured communities), or it may mean some form of compulsion—as the symbol of the letter “A” in a circle would suggest. It is this compulsion (the desire to loot the property of the owners of the means of production and prevent by violence individuals owning the means of production in future) which is the reason why the symbol of a letter “A” in a circle should not appear on a Libertarian Alliance publication—it has historically been a symbol of evil. True anarchists (i.e. people who do not wish to rename the State “the people” or whatever, but wish to get rid of it altogether) have, as far as I know, no symbol.

As for the contents of the pamphlet: The word “feudalism” is used a lot, but it is not clearly defined anywhere. Normally when people talk of “feudalism” they do not mean the feudal system of government (a system that, for example, existed on the island of Sark until this year—when the mega rich Barclay twins and their friends in the British government and the European powers-that-be insisted that democracy and “human rights” be introduced), they mean serfdom.

Serfdom, keeping people from birth to the land or other place of employment by the threat of violence goes back (at least—actually it occurred in many societies before this) to the Roman Empire. The Emperor Diocletian (a man of peasant origins himself) ordered (to make the collection of tax less difficult) that all peasants remain on the land that they were born on, and he and later Emperors ordered that most people in the towns keep to the occupations of their fathers—both orders (like Diocletian’s price controls) were backed by threats of violence.

Although the Roman Empire collapsed the idea of serfdom did not die with it. Some have claimed that after the Norman Conquest as many as 1 in 3 English people (or even more) were reduced to the level of serfdom, although this institution went into decline after the Black Death. As for compelling people, by the threat of violence, to undertake the occupations of their fathers—there were statutes past in England as late as the time of Elizabeth the First (although “Good Queen Bess” had no great administrative structure to enforce her statutes).

What all of this has got to do with agreeing to work for a someone in return for wages Mr Carson does not explain. I suppose that if a factory worker or household servant (or whatever) signed a contract to work for a certain amount of time and then did not turn up for work they could be sued for breach of contract—but, in practice, employers tend to take not turning up for work as simply a de facto resignation.

It is when a lot of money has been paid in advance for work that has either not been done or has been done very badly that be sue. For example, if someone paid to have a diamond cut and it was not cut (or was cut wrong) they might sue, but if someone said “come and work in my factory for X amount of money” and the person did not turn up or came for a while and then stopped coming the employer would take that as a de facto resignation (although a rude one—as the person had not bothered to say that he had resigned).

Of course some governments do not allow an employer to hire a new worker to replace someone who has decided not to turn up for work (this is a matter of the concept of a “strike”) and many governments do not allow an employer to clear people who are obstructing the entrance to their place of business (the military term “picket” is used in relation to this). But I do not see how these weird regulations are the fault of the employer.

The regulations are created by people who are under the delusion that there is or should be something called a “balance of power” between the buyer and seller of a good or service, and that if there is not a contract is “unfair”. Some (by no means all) of the Schoolmen of the Middle Ages held that a “just” price or wage might be somehow different from a free one, because of such “unfairness” (see the first volume of Rothbard’s history of economic thought for the many Schoolmen who did NOT fall into this error). “But Mr X will starve to death unless Mr Y employs him”—first of all Mr X will NOT starve to death, and secondly it would make no difference, in economic principle, if he was going to starve to death – there would still be no economic case for a regulation (not that Mr Carson supports government regulations—he has other ideas in mind).

Overall I am led to conclude that Mr Carson’s use of the term “contract feudalism” does not mean anything—he is just using the word “feudalism” as a “boo word” and trying to transfer the dislike people have for the word “feudalism” with serfdom (although in some feudal lands there was no serfdom) to a dislike of the practice of some people paying other people money to work for them—either on their farms, or factories or homes, or whatever.

However, Mr Carson does make other claims. For example, he claims that governments sometimes subsidise business enterprises either directly or indirectly (for example building roads is a subsidy for auto companies like G.M.)—this is true, but in no way relevant. Say company X gets a million Dollars from the taxpayer, very wicked, but this in no way gives the employees of company X any rights over the company—all it gives them is the duty (like that of all other citizens) to demand that the subsidy to company X be stopped (even if it means lower wages or unemployment for them).

On page 6 of his pamphlet Mr Carson “land and capital” are “artificially scarce”. This was my first real indication of what he “was on about”. Neither land nor capital are “artificially scarce”—they are just scarce (period). There are billions of people and only a certain amount of land and machinery. True, industrial capital can be increased over time, and it is even possible that the amount of land will be increased (say by the use of the seas, of by the settlement of outer space), but the idea that land and capital are only scarce compared to the billions of people on the Earth because of either wicked governments or wicked employers (or both) is false.

Also on page 6 of pamphlet Mr Carson quotes Benjamin Tucker as saying that if the government allowed anyone to set up a bank, interest rates would fall to “less than three fourths of one per cent” (this is somehow connected with the “labour cost”).

In reality interest rates are determined by time preference i.e. the price that people will charge to lend out some of their income (rather than spend it or hoard it)—the price they will charge for not having this money for a certain period of time (and the risk, in the case of default, that they will never get it back).

Other people borrow the money, either for consumption or for investment. And depending on how long they want the money for and what the chances are they will pay it back they pay various rates of interest.

Banks (and other financial institutions) are middle men in these transactions. Of course banks and other such do try and lend out more money than really exists (via fractional reserve games) and governments support them in this (seeking the old dream of investment being greater than real savings—i.e. the dream of “lower interest rates”), but this just leads to the boom-bust cycle which is not exactly good for the economy (see Murray Rothbard’s The Panic of 1819 [PDF] and America’s Great Depression [PDF], or Ludwig Von Mises’ Theory of Money and Credit or Human Action—along with many other works by these and other writers).

The idea that if only one did not need a license to lend out money interest rates would fall to some very low level is false. In fact “false” is to mild a word, it is (to use a word supported by the Yale university philosopher Harry Frankfurt) “bullshit”.

Of course, as a libertarian, I support people being allowed to use as money anything they choose to use (and support contracts being honoured). If people choose gold (of a certain purity) fine, ditto silver or any other commodity—even bits of paper with designs on. If that is what people agree to use in a particular contract (as in “I agree to give you X number of pairs of shoes of a certain type in return for Y number of bits of paper with certain designs printed on them”) that is fine. But none of this alters the fact that (silly, and eventually destructive, games aside) interest rates are a matter of the time preference of savers and borrowers (no more to do with “three fourths of one per cent” or “labour cost” than they are to do with the tooth fairy).

On page 4 of his pamphlet Mr Carson quotes from Albert Nock. Mr Nock does not mention any real industrialists (at least not in the quote given) there is no mention of (say) Mr Wedgewood or Mr Arkwright, instead Mr Nock mentions Mr Bounderby, Mr Gradgrind and Mr Plugson—all of whom were characters from Dickens (not real people). I suppose this is done to generate hatred of factory owners and their “starvation wages” (which were, in fact, higher than general wages had ever before been in history and saved the rising population from real starvation—even almost 60 years ago this was known, see T.S. Ashton’s The Industrial Revolution (1948)).

Mr Nock also mentions that the land in England was stolen from the peasants. This may be true (although the story is a bit more complicated than that as even in Anglo Saxon England a lot of land belonged to big landowners rather than peasants), but it does rather miss the point.

Take the example of Norway—a nation of several million people, just over the North Sea from England. In Norway the land was never stolen from the peasants nor were they ever reduced to serfdom. This did not alter the fact that over time (and with an expanding population) most people became employees of industrial and service enterprises (and, of course, there had always been farm labourers, domestic servants and many other employees). Indeed wages in 19th century Norway were lower than those in England or the United States.

I think that the centre of Mr Carson’s pamphlet is to be found on page 5, where he quotes Claire Wolfe.

First we are told that the Luddites who smashed machines “may not have understood why they needed to do what they did”. Of course they did not “need to do it”, hand loom weavers had benefited from a bottle neck when spinning got mechanized and weaving was not (before that they were poor) when weaving got mechanized most of the hand loom weavers got out competed (apart from a few who carried on specialised trades—mostly for wealthy customers). This was not a plot by nasty industrialists (anymore than the mechanization of spinning had been)—cheaper prices attracted the customers (most of whom were poor) so the handloom weavers lost out. Should the poor have forced to carry on paying higher prices just to benefit the hand loom weavers?

As for workers in general smashing up machines, the only way this might lead to an increase in wages is if so many attackers are (quite rightly) killed by people defending their property that a labour shortage results. More likely the smashing is going to lead to a fall in wages (due to the damage done to the economy) over what they otherwise would have been.

Overall wages over the long term can not be increased by smashing machines, any more than they can be “strikes” (with employers being prevented from hiring other people), “pickets” (obstruction) or minimum wage statutes or other regulations. Such actions can only make overall wages and conditions lower than they otherwise would have been – as well as increasing unemployment (over what it would have been). This is basic economics which is taught by such works as Ludwig Von Mises’ Human Action, Murray Rothbard’s Man, Economy and State or even works such as Henry Hazlitt’s Economics in One Lesson (although the The Strike-Threat System by that old enemy of the colour bar in South Africa, W.H. Hutt, is well worth a look).

Claire Wolfe goes on to say (with Mr Carson’s clear support in the rest of his pamphlet) that “Jobs suck. Corporate employment sucks. A life crammed into 9-to5 boxes sucks”.

Well yes. I would be the last one to dispute that it “sucks”—life “sucks”. It “sucks” even for those “noble savages” the hunter-gather bands that Prince Charles goes to see and praises to the skies (before heading back to his Palace). It even “sucks” for Prince Charles and other people of great inherited wealth—they still age (in body and mind) and go through all the pain and humiliation that this means. And if they live long enough they get to see all their closest friends (as well as their parents and other relatives—sometimes even there own children) die.

As for people who are born without wealth and can think of no way of making a lot of money, their lives tend to be even worse than the lives of people who are either born with a lot of money or who think of way of earning a lot. This is all true—and in no way relevant.

There is no hope in life and, if the atheists are correct no hope after it either. This is true (but yet again) in no way relevant. So life is shit—so what? Unless the claim is that if only it was not for the nasty owners of the means of production life would be less shit—but this claim is false, indeed action against the owners of the means of production will make life even more shit than it is now.

If Mr Carson wants a life that “sucks” less, well he could think of a way to earn a lot of money, or marry a rich person (or whatever). Or, of course, he could kill himself. (The great way out for those who do not wish to tolerate the shitness of life anymore —as long as they can find the courage for the misnamed “cowards way out”.) As long as he does not violate the nonaggression principle I wish Mr Carson luck in his efforts to make his and other people’s lives “suck” less. However, I believe him to be operating under a basic error.

This error is that life is “naturally good” (or words to that effect) and that if it “sucks” it must be someone’s fault. Perhaps those nasty owners of the means of production who keep us (say) as “wage slaves” or in a state of “contract feudalism”.

The trouble with this is that it is nonsense. Life is not naturally good, it is naturally shit. Nasty, brutish and short (to quote Hobbes, although I oppose Thomas Hobbes on most matters), and if one manages to survive for a few decades one has the experience of physical and mental decay. Some people decay quicker than others, but all people (even the richest) decay and undergo (if they live long enough) all the other pains and humiliations that make up “life”. Certainly life is not all bad—but the idea that the bad in it can be reduced by some plot against the owners of the means of production is false.

Indeed (as argued above) “false” is much too mild a word for the ideas expressed in Mr Carson’s pamphlet. The whole work is part of that legion of works that offer false hope to suffering people. “Hit these people [in this case the owners of the means of
production] and you and your loved ones will suffer less”, “follow my cunning scheme and interest rates will be virtually nothing and both land and capital will no longer be scarce”, “life is naturally good – and it is only because of the evil them than it sucks, hit them and all will be well”.

Let us say that, for example, in 1874 government in Britain had been abolished. Let us also assume that the claims of anarchists (real anarchists—not compulsory communal anarchists who wish to rename the state not get rid of it) that chaos would not have resulted are correct.

What would have happened? Well people would have been a bit better off —but not much (as government only amounted to a few per cent of output in 1874 and there were few nonaggression principle violating regulations).

Most people were poor in 1874 not because of some wickedness of employers, or even because of big government—they were poor because that was the level of economic development (no great “artificial scarcity”). And this was also true in the United States—in spite of the dreams of Tucker, and (rather later) Nock.

Today getting rid of government (as long as it did not result in chaos) would improve matters much more (as government is much bigger now than it was in 1874—so the gap between what our lives are and what they could be is much bigger), indeed even radically reducing government would greatly improve life (because government is now vast and its taxes, spending and regulations extend into almost every aspect of civil society). However, life would still be imperfect—it would still “suck”.

It might be bearable for some of us (I suspect that I would have a job I could live with—rather than not have one, which is my present situation). But I am sure that Mr Carson would still be able to find things to complain about.

“To buy my own space ship, I have to work on this bloody base on Mars for a whole year—and it sucks”.

This is not really an argument about economics. Mr Carson is a man who compares life as it is to what he would like it to be in an ideal utopia—real life does not measure up, so some group of people must be to blame. Like many people before him Mr Carson has chosen employers.

“Some employers even demand that their employees do not express opinions that they do not like—otherwise they fire you and you have to go and work for less money”. Err yes, and Mr Carson’s point is?

What you say, how you dress and so on are part of the “conditions of employment”. Some employers offer you better conditions (for example they do not care what you say outside work), but less money—and some employers offer a lot of money, but want you to be a “credit to the enterprise” and not (for example) go around calling black people “niggers” (even when you are not at work).

Some people are lucky and find employers who offer them a lot of money and do not care how they dress or what they say (at least when they are not at work). Or they manage to be self employed.

However, self employment is a hard life for many people (it depends on what sort of people they are, and many other factors—for example your customers may demand that you do not call people niggers, or they may demand that you do). And even if there were no government taxes and regulations that hit self employed folk hard (and I admit there are many) it would still be a hard life – a life that most people would not choose.

Good luck to Mr Carson if he seeks to be fully self-employed (in any enterprise that does not violate the non aggression principle) and good luck to him in opposing any taxes and regulations that make it harder for people to be self employed.

But please do not let him think that it is just these taxes and regulations that lead to most people working for wages.

The fears of Star Wars fans — probably a majority — that Disney will kiddify Star Wars and turn Leia into Snow White are also predictable. What’s interesting, though — the dog-bites-man story — is the number of fans who are optimistic. Whatever corporate copyright lockdown Disney puts the franchise under couldn’t possibly be worse than what George Lucas has done. The Disney acquisition actually offers to breathe new life into the Star Wars universe. The fan community is awash with excited speculation about what might be in store for the third (Episodes VII-IX) trilogy, and whether the Grand Admiral Thrawn novels — an authorized part of the Lucas empire, but never yet authorized for film — might be translated into film. Heady stuff, if you’re a Star Wars fan.

The thing is, corporate mergers and acquisitions shouldn’t be necessary for this kind of stuff to happen. There’s already a huge fanfic community — operating on the barest edge of legality if at all — of Star Wars fans writing more creative stuff than Lucas ever dreamed of. In a free market, any big film company (or small indy film producer) that wanted to turn this stuff into a movie would be free to do so, without asking Lucas’s permission or paying him a single penny. If it weren’t for the dead hand of copyright wielded by George Lucas, there would probably already be Thrawn films in existence, along with every other permutation of the Star Wars fictional universe imaginable.

Historically, literature was governed by the same folk ethos as travelling blues singers playing juke joints and riffing off each other’s material. Can you imagine what the Shakespeare corpus would look like if he’d had to buy out the copyrights of Petrarch and all the other writers he mined for story ideas? Disney — a company which is now at the forefront of attempting to destroying the very idea of the public domain — was itself built on reworking (usually not for the better) public domain material originating with the Brothers Grimm, A. A. Milne, Rudyard Kipling and Hans Christian Andersen.

So the actual situation is that mergers between giant corporations, wielding totalitarian information control, are — unfortunately — necessary to artificially recreate the situation that would naturally exist without the state-enforced totalitarian “intellectual property” monopolies.  Of course it would be far better to eliminate copyrights and patents altogether. But that’s going to happen with or without this particular corporate acquisition. As Cory Doctorow said, the desktop computer is a machine for copying bits instantaneously and at zero marginal cost. Any industry whose business model is based on preventing bits from being copied is too stupid to survive.

Frankly, I’m not that concerned about the merger. It’s only significant to the extent that it’s a cartel for pooling copyrights. And copyright is in the process of becoming completely and utterly unenforceable anyway — taking corporate dinosaurs like Lucasfilm and Disney into the ashheap of history along with it.

In the meantime, maybe we can expect some great films.

Friedrich von Blowhard writes:

Dear Blowhards,

Almost a year ago I wrote a post, Risk, Reward & The New Class, in which I asked the question: “What permits the New Class to float above the risk-reward curve that the rest of us are tied to?”

For those of you who haven’t read that immortal screed, the New Middle Class or, for brevity, the New Class, consists of financiers, senior corporate and government bureaucrats, and professionals (doctors, lawyers, accountants, etc.), all of whom collect high incomes without being required to put their own money at risk. These people make up most of the people in the top 10% of the income distribution, and a very high percentage indeed of people in the top 1% of the income distribution. (Another, much smaller chunk, of the people in the top 10% and the top 1% are entrepreneurs, who are assuredly not members of the New Class; they are economic experimenters and risk takers, as their high bankruptcy rate demonstrates.)

Now, as any economics textbook will remind you, the risk-reward curve represents the definitional relationship of a capitalist society—that is, if you want big returns you’ve generally got to take big risks with your capital. No upside without a possible downside. Contrawise, if you refuse to put your capital at risk, you are likely not going to end up rolling in dough. And yet we find that there is this unusual group, the New Class, which mysteriously doesn’t live by the same rules as the blue-collar worker or the entrepreneur. Hence, my question above: what gives? If we live in a capitalist society, as our editorial pages and our elected leaders and our economics professors assure us daily that we do, why is it that so much of the economic pie ends up in the mouths of people who are neither capitalists nor laborers, exactly?

This question is rarely asked in this fashion (which might possibly have something to do with the fact that people who tend to ask questions like these, otherwise known as economists, are themselves charter members of the New Class.) However, lots of people ask a closely related question: why is the top 10% of the income distribution (as we have seen, heavily populated by the New Class) doing so well relative to the rest of the population?

To take one example out of a myriad, in “Income Cap is Widening“ of March 29, 2007 David Cay Johnson of the New York Times sets the stage by reporting that:

Income inequality grew significantly in 2005 [the last year for which data is available], with the top 1 percent of Americans…receiving their largest share of national income since 1928, analysis of newly released data shows. The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since the Depression…average income for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172 or 0.6 percent.

Mr. Johnston then inquires on why that might be of Brookly McLaughlin, the Chief Treasury Department spokeswoman, who passes along a theory from her boss:

Treasury Secretary Henry M. Paulson, she noted, has acknowledged that income disparities have increased, but, along with a “solid consensus” of experts, attributed that shift largely to “the rapid pace of technological change [that] has been a major driver in the decades-long widening of the income gap in the United States.”

With all due respect to our Treasury Secretary, who as a former Chairman of Goldman Sachs is one of the leading lights of the New Class and who has, according to this Wikipedia article a personal fortune of some $700 million to prove it, I would suggest a different or possibly supplementary explanation for this phenomenon: the tight nexus between the New Class on the one hand and the government on the other.

To support my no-doubt-outlandish claim, I thought I’d look at the financial services industry as a microcosm of the New Class and its impact on the rest of society.

I thought I’d begin with a brief overview of how the financial sector is doing in contemporary America. The financial blogger Hellasious from Sudden Debt pointed out in a post from December 5 2007 the extent to which the financial sector in recent years has successfully captured the strategic heights of the American economy in the past quarter-century:

After-tax corporate profits as a percentage of GDP have now grown to an all-time high (see chart below)…But that’s not the whole story, because it wasn’t the entire corporate sector that made such record profits. Rather, it was the financial industry that made out like bandits…whereas non-financials only recently managed to recoup amid the general rise in profitability. In the past 25 years profits of the financial sector went from 25% of total corporate profits to 50% (see chart below), a condition frequently called the “financialization of America”. Lending and shuffling money around has become by far the biggest business in America…[emphasis added]

Granted, some portions of this industry have been taking their lumps over the past few months (much more on that later), but you might notice that mostly the industry hasn’t found any difficulty in raising additional capital for itself despite this temporary little bump in the road. And, of course, you might note that the current problems in the financial services sector and some of its more ill-advised investments are having a tremendous impact on the economy — which just illustrates how “financialized” America has become. Today, when Wall Street chokes on subprime mortgages, all of America gets a stomach ache.

Of course, much of the financial sector’s activities are conducted through public corporations. Maybe the worker-bees have been laboring in the salt mines all these years and just shipping all their vast profits off to their shareholders and investors? Well, not exactly.

According to Gwen Robinson of the Financial Times on January 15, 2008 [site requires a cookie], a very big — indeed, astoundingly big — chunk of the profits (er, ‘net revenues’) of Wall Street are actually reserved for the staff:

Morgan Stanley, for example, reported a huge Q4 loss and raised $5bn in new equity from a Chinese state investment fund, but paid out $16.6bn in compensation last year — an 18 per cent increase. This pushed the ratio of compensation to revenues — a closely watched measure of cost discipline — to 59 per cent for the year. Most investment banks aim for a ratio below 50 per cent. Morgan Stanley is unlikely to be alone. Citigroup and Merrill Lynch…face a similar dilemma…Merrill’s compensation ratio — pay and benefits as a percentage of net revenues — is expected to rise to more than 70 per cent as it seeks to cushion key staff from feeling the pain of the bank’s losses. Some observers believe it could exceed 100 per cent if the bank reveals fresh losses on subprime securities.

The remarkably favorable position of Wall Street technocrats vis-a-vis their risk-taking ownership — I’m referring to the shareholders that actually suffered those multi-billion dollar write-offs — is something I’ll just point out right now, but we’ll be getting back to that later.

Anyway, if you got the impression that Wall Street employees are highly rewarded, you’re right, at least according to September 1, 2007 story in the New York Times by the aforementioned Mr. Johnson:

Top money managers earn such huge incomes that even when their compensation is mixed with the much lower pay of clerks, secretaries and others, the average pay in investment banking is 10 times that of all private sector jobs, new government data shows. [emphasis added]

And it’s not like investment bankers are even the cream of the crop as far as compensation goes. As Steve Rosenbush of Business Week pointed out in January 2007:

…senior executives at private equity firms and hedge funds can earn even more than investment bankers. “Investment management is the most lucrative profession in the world. There’s nothing like it. Investment banking is a poor cousin to hedge fund investing,” said one senior executive at a financial-services firm, who declined to be identified. He said the founder and CEO of a large hedge fund, such as Steven Cohen of SAC Capital Advisors, can earn hundreds of millions of dollars a year.

In fact, people who study income inequality have postulated that the New Class members atop the financial services sector are a bigger reason for the rise in income inequality than their much-abused New Class brothers, corporate CEOs:

In their study, Steven Kaplan and Joshua Rauh, who teach at the University of Chicago’s graduate business school, set out to identify who is represented in the richest of the rich. Surprisingly, they conclude CEOs have only marginally increased their representation. Looking at just the top 0.01% of earners, executives of non-financial companies comprised 4% in 1994 and 5% in 2004. Who accounts for the rest? They surmise a sizable portion is “Wall Street”: executives of financial companies, employees of investment banks, hedge fund managers, venture capitalists and private equity investors. This group, they conclude, has significantly increased its presence among the richest of the rich…Fees to hedge fund investors [i.e., managers], for example, have grown seven times in real (inflation-adjusted) terms to $25.4 billion since [1994]. Fees to private equity firms have risen four times to $18.4 billion, and fees to venture capital firms have risen seven times to $10.9 billion. Profits earned by partners at the top 100 law firms rose 2.6 times to $18.1 billion.

Financial Sector Donations and Lobbying

Okay, we’ve established that financial managers and technocrats are doing well as individuals—far better on average than ever before. But, you ask, what is this sinister-sounding ‘tight nexus with the government’ that I keep yammering about?

Well, it’s pretty simple, really. From 1998-2006 (the only years in which I have data, although I’m confident the pattern has held good for far longer than that), the finance industry, including commercial and investment banks, savings & loans, private equity firms and insurers (other than health insurers) has held the the Numero Uno spot in the political influence game. The sector made $933 million in campaign contributions and spent $2,077 million on lobbying, giving them a grand total of $2,941 million. This puts them to the very top of the list of industry donations and lobbying that I presented in my previous post, Auctionocracy.

Heck, even nouveau, if tres riche, players in financial services are eager to pour money into politics. As Landon Thomas Jr. reported in the New York Times a year ago:

Hedge fund money, which now exceeds $1 trillion, has emerged in the last several years as a potentially powerful force in politics, as underscored by the significant role it is playing in the presidential aspirations of Mrs. Clinton and Mr. Giuliani.

Somewhat surprisingly, from the point of view of the standard left-right dichotomy that is supposed to define American politics, Wall Street, the heart of modern American capitalism, has proved willing to do business with, er, the guys on the ‘socialist’ side of the street. In fact, Wall Street is apparently throwing more money at the Democrats than at the Republicans, according to this International Herald Tribune story from October:

Obama, for example, has raised $4 million from the financial services industry, more than all other candidates, according to data provided by the Center for Responsive Politics, a research group in Washington that tracks political donations. And among other Democrats, Hillary Rodham Clinton, as a New York senator, and Christopher Dodd, as chairman of the Senate Banking Committee, also have deep ties to the industry.

In short, if you plan on voting Democratic in order to drive the traders from the temple of American life, I’d think a little longer.

Well, that leads us to an interesting topic: just what does the financial industry get back from the government in return for all that dough?

What Has the Government Done for the Financial Sector?

Martin Wolf, chief economics columnist of the Financial Times gave some thought to this very question in a column from November 27, 2007. He begins by observing:

Perhaps the most striking characteristic of the banking sector is its profitability. Between 1997 and 2006, for example, the median nominal return on equity of UK banks was 20 per cent…In the US they were a little over 12 per cent. Returns in Germany, France and Italy seem to have been close to US levels…[in contrast,] long-run real returns on equity in the US have been a little below 7 per cent. Another study estimated the global real return on equity in the 20th century at close to 6 per cent. A starting assumption for a competitive economy is that returns on equity should be much the same across industries…

Golly, I have to jump in here because that is a darn interesting observation. Just how is it that one sector of the economy (and a ‘secondary’ sector, theoretically dependent on the primary, or ‘real’ economy) somehow got itself into a position to make such a radically outsized share of the loot? Why was it that Citigroup, making approximately 20% return on equity in 2006, was widely criticized for being a stumblebum, a laggard? How did Goldman Sachs make almost double that return (39.6%) on equity in the same year? How is it that Wall Street accounts for half of all corporate profits (and an even larger percentage still in, say, 2003 — see chart above), while representing only a tiny fraction of total employment? Is it because, pace Hank Paulson, only investment bankers are smart enough to use computers or understand spreadsheets? Or is something else, something big and powerful, perhaps, at work here? To continue with Mr. Wolf, who is explicity describing the situation in the U.K. but might as well be talking about the U.S.:

[B]anks are also thinly capitalised: the core “tier 1” capital of big UK banks is a mere 4 per cent of liabilities…these high returns on equity suggest that banks are taking substantial risks on a slender equity base…How do banks get away with holding so little capital that they make the most debt-laden of private equity deals in other industries look well-capitalised? It can hardly be because they are intrinsically safe. The volatility of earnings, the history of failure and the strong government regulation all suggest that this is not the case. The chief answer to the question is that banks benefit from sundry explicit and implicit guarantees: lender-of-last-resort facilities from central banks; formal deposit insurance; informal deposit insurance (of the kind just extracted from the UK Treasury by the crisis at Northern Rock); and, frequently, informal insurance of all debt liabilities and even of shareholders’ funds in institutions deemed too big or too politically sensitive to fail.

Gee, you don’t think that all those government guarantees and safeguards might possibly be worth something in terms of cold hard cash, do you? Certainly all that would make your customers willing to keep their money on deposit with you no matter how iffy your investment portfolio of loans and asset-backed securities might be, no?

After all, the government bears down so oppressively on this sector that it enables, er, forces it to operate with ultra-conservative debt-to-equity ratios of, um, 2400%. (The more banks can fund loans with cheap debt rather than their own expensive equity, the more profitable they are, both in absolute terms and of course in terms of the profit they earn per dollar of equity invested.) I seem to remember Alan Greenspan actually remarking with a certain droll understatement that “Central bank provision of a mechanism for converting highly illiquid portfolios into liquid ones in extraordinary circumstances has led to a greater degree of leverage in banking than market forces alone would support.” (emphasis added.) It would, of course, be perfectly accurate to rewrite this passage to read: Central bank provision of a mechanism for converting highly illiquid portfolios into liquid ones in extraordinary circumstances has led to a greater degree of profit in banking than market forces alone would support.

One example of the kind of government guarantees referred to above by Mr. Wolf got its very own and rather catchy slogan way back in the 1984. That’s when the Comptroller of the Currency, C. Todd Conover, testified before Congress regarding the multibillion dollar Federal bailout of Continental Illinois Bank of that year. The Comptroller let slip that the government did not intend to allow any of a series of very large financial institutions to fail, and would intervene to prevent this from happening, because of the systemic risk such a default would pose to the entire financial system. (Oddly, or perhaps not so oddly, the obvious and simple remedy for such a problem—breaking up financial institutions that were “too big” so as to make Federal intervention to prop them up unnecessary—was never raised.) The congressional committee chairman conducting the hearings memorably dubbed this policy “Too Big to Fail” and it has never been repudiated by U.S. banking regulators. Nor have those same banking regulators prevented U.S. banks or other financial institutions from continuing to grow, often by mergers and acquisitions, despite the systemic risk that such growth entails; today’s large banks are many times the size of the biggest institutions of the 1980s.

The long term consequences of this policy were discussed in 2005 by Donald P. Morgan and Kevin J. Siroh of the Federal Reserve Bank of New York in their paper, “Too Big To Fail After All These Years”[PDF]:

Whatever the benefits of the [1984] Continental bailout (in terms of averted crises), the cost of the TBTF [“Too Big To Fail”] mentality it engendered is obvious: weaker market discipline. Insuring bond holders of very large banks turns them into yet another class of risk-indifferent claimants (like insured depositors) with little incentive to monitor and penalize (via higher spreads) risk taking by banks perceived as TBTF…Avery et al. (1988) found that bank bond spreads were barely related to ratings, and unrelated to accounting or bank balance sheet risk measures. Market discipline of banks, they concluded, is weak.

And, of course, Mr. Wolfe’s account of favors done above has only begins to scratch the surface of the things the government has done that turn out, by a remarkable coincidence, to be highly lucrative for the financial services industry. To take one example almost at random, let’s look at favorable tax treatment of capital gains, something that certainly motivates people to pursue passive investing opportunities such as stocks and bonds. Deborah Kobes and Leonard E. Berman of the Tax Policy Center lay out the recent history of such taxation:

…capital gains tax rates fell from a maximum of 39.875 percent including an add-on minimum tax, which was widely applicable in 1978, to 20 percent in 1982. The tax rate differential was eliminated by the Tax Reform Act of 1986 (TRA86) at the same time that top ordinary income tax rates were slashed to 28 percent. When tax rates on ordinary income increased in 1991, the top capital gains tax rate was held fixed at 28 percent. It was subsequently cut to 20 percent in 1997 and to 15 percent in 2003. In comparison, the top tax rate on ordinary income is now 35 percent.

In other words, the advantages of passive investing (or economic activity that can be made to look passive) are now at an all-time high relative to regular earned income. In a related move, of course, the same 2003 legislation that reduced capital gains tax rates also reduced the taxation of dividends to 15%. Hey, not bad for business if you’re a stock broker, huh?

And the wonderful advantages of capital gains aren’t just limited to providing incentives to average Americans to hand their savings over to Wall Street money managers. No, in some instances, those money managers get to tax their own income at those very favorable capital gains rates.

Both hedge funds and private equity funds are structured as limited partnerships in which the investment managers of the funds are the general partners and the investors (sometimes wealthy individuals but more commonly pension funds or other institutional players) are the limited partners. The general partners are paid in two ways: first by a fee, typically 2% annually of all invested money and taxed as ordinary income; second by receiving a share, typically 20%, of all investment profits (but not, of course, losses). This latter arrangement (known as a “carried interest”) looks an awful lot to the objective observer like an incentive payment for performance, something usually taxed as ordinary income. However, as a result of a certain amount of legal mumbo-jumbo in which the manager is declared to be the part-owner of the invested money, presumably after sacrificing a cock to the Olympian gods of good fortune, the carried interest is taxed as – you guessed it – a capital gain for the manager. This is of course despite the fact that the general partners typically have no skin in the game and nothing at risk if things go south. Hey presto! Thank God we live in a free-market capitalist system!

Some of you may have noticed that there was an effort to address this gaping tax loophole ongoing during most of the last year. It culminated in legislation by Charles Rangel which attempted to tax carried interest at ordinary income levels as part of a deal to lower the taxes that Uncle Sam collects from middle-class individuals via the alternative minimum tax. You may also recall the fate of this legislation just last month after the financial services industry flexed its legislative muscles:

House Ways and Means Committee Chairman Charles Rangel agreed to drop a proposed tax increase on “carried interest,” a measure bitterly opposed by the private equity and hedge fund industries, from hotly disputed tax legislation. “Score one for the barbarians,” The New York Post wrote, noting the intense lobbying from the largest buyout firms that helped defeat the measure, at least for now.

Don’t grumble about that as you prepare to fork over your AMT taxes; after all, lower capital gains rates hardly exhausts the tax and other benefits the government has bestowed on Wall Street money managers. For example, just think of how average Americans have been prodded by Uncle Sam to hand over their retirement money to Wall Street. It’s easy to forget how recent the trend of widespread stock ownership, usually as a vehicle for retirement savings, really is. According to “A Financial History of the United States” by Jerry W. Markham:

Only 4.2% of the population in the United States owned stocks in 1949. Eighty-two percent of families had life insurance. Twenty-one percent had annuities and pensions and almost 42 percent held United States savings bonds. At that time, 69 percent of American families with income over $3,000 opposed investments in common stocks. [emphasis added]

According to the Investment Company Institute (the mutual fund trade group), a full 31 years later—in 1980—only 6% of American households owned mutual funds—not that big a change from 1949. But the number that had risen to 37% in 1996, and today over half of American households own stock.

What caused this, um, remarkable change in attitudes? No doubt, as our Treasury Secretary would suggest, it had something to do with brilliant people on Wall Street and their burgeoning technological skills, right? Maybe not. The U.S. Congress Joint Economic Committee back in 2000 looked into this issue and concluded in a study that:

The rise in stock ownership over the past twenty years can be mainly attributed to three factors, all of which made stock ownership more attractive relative to consumption or other methods of saving. First, the increasing use of mutual funds as an investment vehicle allowed small investors to diversify and receive professional management at a fraction of its previous cost. Second, the creation and proliferation of the Individual Retirement Arrangement (IRA) and the 401(k) plan led to a general reduction in the multiple taxation on saving and investment, increasing its after-tax return. Finally, the emphasis of the Federal Reserve on price stability has lowered inflation, brought interest rates down…

Of course, if you read the entire report, you see that the first factor in the paragraph above is a tad misleading. Mutual funds had been around for decades before they started getting genuinely popular in the 1970s. It was our governmentally-induced bout of very high inflation during that decade along with then-current regulations that put a legal ceiling on the interest rate that could be paid out in savings accounts (hey, remember savings accounts?) that pushed households into money markets and stock ownership. The second factor listed above of course refers to the creation of tax-advantaged retirement savings plans during the 1970s by the U.S. government. The third factor refers to an interesting long term trend that we’ll encounter again in later installments of this post: the active policy of the U.S. government to reduce interest rates, thus essentially subsidizing borrowers, penalizing savers and rewarding the middlemen. But in any case, all three factors fall squarely in the realm of U.S. government action. Hmmm, another remarkable windfall for the financial services industry having, er, nothing whatever to do with the superior technical skills of bankers, excepting of course as lobbyists and campaign donors.

(By the way, looking at Hellasious’ graph above, you might also note how the increasing use of stockmarket investing as the vehicle for retirement savings correlates with the increasing profitability of the financial sector. Pretty neat, huh? Although, sorry to be tiresome, I don’t see a whole lot of technical wizardry in that correlation.)

That last point about U.S. policies which encourage low interest rates moves us back from our tour through the equity markets and back into the world of debt (or fixed-income investing, as it is often called.) Here I would point out just one more obvious source of the government-Wall Street nexus: the crucial role of government borrowing in U.S. debt markets. How many of us history buffs remember that the New York Stock Exchange actually began way back in 1792 as a bond exchange for the trading of government debt?

And things haven’t changed all that much, according to the November edition of the Research Quarterly of the Securities Industry & Financial Markets Association. The figures listed therein show that as of September 30, 2007, the U.S. public sector (the U.S. Treasury, federal agencies, municipalities and government-sponsored entities like Freddie Mac, Ginnie Mae, etc.) was responsible for at least half of the product in the $29.2 trillion U.S. debt markets. In comparison, the entire corporate world accounts for a mere 20% of the product in the U.S. fixed-income (debt) markets. Uncle Sam is a very large and immensely lucrative customer of this particular corner of the private sector, and has a lot at stake in keeping it healthy and happy. Indeed, Wall Street and Washington have a good deal invested in each other.

In fact, some people might even think that the government has a bit too much invested in the financial sector for, well, the financial sector’s own good. (For the effects of too much lovin’ on the financial sector, check out the current stock market.)

But if market discipline of the financial services industry in our capitalist system is weak, as demonstrated by Mssrs. Morgan and Siroh from the NY Fed above in connection with “Too Big to Fail” (and clearly visible in the subprime lending and mortgage-backed securities market over the last few years), it’s presumably because government policy-makers and their campaign donors want it that way. This was slyly highlighted by that great kidder himself, Alan Greenspan in his testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, on February 24, 2004:

However, the existence, or even the perception, of government backing undermines the effectiveness of market discipline.

Well, the originator of the Greenspan put should know, shouldn’t he? The topic of sloppy market discipline in a governmentally-driven sector like finance, often referred to as moral hazard, will be the topic of the next part of this series.

Cheers,

Friedrich

The original New Deal, after all, was tailored to the terminal crises of mass-production capitalism. It presupposed an economy of gargantuan, enormously expensive, capital-intensive production facilities, requiring an authoritarian distribution system to guarantee they could dispose of their output at full speed. For me, that’s about the least libertarian form of economic organization imaginable — like something out of Terry Gilliam’s “Brazil.”

Like the first New Deal, Stein’s Green New Deal is essentially Hamiltonian, aimed at preventing deflation. Not only does she propose solving the problem of underutilized mass-production facilities with Michael Moore’s expedient of retooling underutilized GM factories to produce high-speed trains, but she calls for an official “full employment” policy based on direct government creation of jobs on a counter-cyclical basis. At present that would mean government creating 25 million public sector jobs, with hiring administered through local employment centers, to guarantee full employment at a living wage.

This Hamiltonian approach is just the kind of thing genuine greens used to object to. It works on exactly the same principles as planned obsolescence and the permanent war economy — that is, it generates enough waste production to guarantee the existing stock of labor and capital will be fully utilized at a target price.

Such proposals are just a greenwashed version of mid-20th century, mass-production capitalism.

Capitalism’s chronic tendency toward underutilized capital and underemployment has been made far worse in recent years by technologies of ephemeralization that reduce the amount of labor and capital required to produce a given standard of living. But that’s a problem of capitalism — a system based on imposing artificial scarcity and inefficiency, and erecting barriers against competition from more effficient alternatives, in order to extract rents — itself.

The proper approach is not to generate waste production or to make production inefficient enough to soak up all the labor and capital you’ve got lying around. It’s to reduce the average work week to reflect the amount of labor it takes to produce our current standard of living, and to make sure all the productivity gains from new technology are passed on to workers and consumers rather than enclosed as a source of rent.

As for those high-speed bullet trains, the way to deal with the age of Peak Oil is not to assume existing scales of production and market areas, and replace less efficient with more efficient forms of long-distance shipping. It’s not to assume the existing model of suburban monoculture and sprawl, and sell everyone electric cars. The proper approach, rather, is to reduce reliance on transportation inputs altogether.

High-speed bullet passenger trains may be a more economical way of doing what the airlines presently do in the case of travel for pleasure (the family that visits relatives across the country every year, or goes to Disneyland every few years). But for the vast majority of long-distance travel, the real solution is to replace the movement of people with the movement of information (e.g. video teleconferencing instead of business travel).

General Motors symbolizes everything most bureaucratic and pathological about the mid-20th century model of industrial capitalism. The Green Party, increasingly, seems to be adopting Michael Moore’s nostalgic vision in which it’s good for half the economy to be owned by GM — so long as everyone belongs to a UAW local.

Instead of a Rube Goldberg economy where the government hires enough people to run in hamster wheels or dig holes and fill them back in to keep everyone employed forty hours a week, how about eliminating the part of the price of goods and services that reflects embedded rents and waste (planned obsolescence, patents and copyrights, inefficient overly-centralized production methods, etc.) so that the average person can enjoy her current standard of living with a 15-hour week?

Instead of perpetuating the job culture and relying on inefficiency to keep us all employed, how about moving to a competitive market economy where all of us — instead of just a few rentier capitalists — share the gains from efficiency?