In his contribution to the Bleeding Heart Libertarians seminar on left-libertarianism (“Query for Left-Libertarians,” November 11), Daniel Shapiro confessed to puzzlement over our prediction that there would be less bossism in a freed market. First of all, he argues, if workers were free to sell their shares in a cooperative, it’s unlikely that most workers would keep all their investments in the firm they worked for. They would likely sell some of their shares in the cooperative, to reduce the risk of having all their eggs in one basket. And retiring workers will cash out their shares. And aside from the creeping tendency toward absentee ownership and demutualization in cooperatives, Shapiro raises the further question of the firms that aren’t cooperative to begin with — even if they’re a smaller share of the economy than at present. What’s to stop either demutualized cooperatives or conventional business firms — both of which are presumably motivated primarily by maximizing shareholder value — from adopting significant levels of hierarchy and managerialism? Even if hierarchy carries certain inefficiency costs, economies of scale mean that bossism and hierarchy may be the least inefficient form of organization, given sufficient firm size for maximum efficiencies.
First of all, to start with Shapiro’s argument on the alienation of shares in a cooperative: As a matter of purely technical nitpicking, a worker cooperative can be set up with bylaws that prohibit demutualization, and simply require worker buyins as a condition of membership without creating marketable shares.
But second, Shapiro seems to be assuming without warrant that a very high proportion of the characteristics of our reality under state capitalism would be conserved in a freed market, aside from the narrowest consideration of the specific changes he wants to address. It reminds me of Ralph Kramden’s boast to Norton, in anticipating the outcome of one of his get-rich-quick schemes: “Norton, when I’m a rich man, I’ll have a telephone installed out here on the fire escape, so I can discuss my big business deals when I have to sleep out here in the summer.” Ralph was imagining his reality as it would be with the one specific change he was considering, in isolation from everything else and neglecting the likelihood of other associated changes or ripple effects. And that’s what Shapiro’s doing.
Shapiro seems to assume an economic model in which ownership is expressed through marketable shares, the economy tends to be organized around large market areas with mostly anonymous economic transactions occurring mainly through the cash nexus, etc.
And he explicitly assumes (point three) that current firm size and market structure represents economies of scale that are inherent in production technology.
All the secondary assumptions he makes about the kinds of specialized knowledge a boss must have about consumer demand and the marketplace, it seems, reflect the primary assumptions above about the continuity of the hypothetical economy with the conditions of the one we live in.
None of these assumptions are warranted, in my opinion.
First of all, economies of scale would probably be achieved at a fairly modest size. Given advances in small-scale manufacturing technology like desktop machine tools, permaculture, and the like, and given the economies of localized, lean, demand-pull distribution systems over the old supply-push mass production model, it seems likely a large share of present consumption needs would be met by garage factories serving small town or urban neighborhood-sized markets. In this case the typical production unit would not be something even as large and formal as the Northwestern plywood cooperatives, but rather small artisan shops.
In this case it seems a major share of production would take place in family-owned firms or small partnerships. And in a left-libertarian version of the free market, there’s no inherent reason even larger worker-owned firms would organized along the lines of what we consider the conventional shareholder model. They might well be incorporated under bylaws with inalienable residual claimancy (with prorated pension rights on retirement) vested in the current workforce. There’s no obvious reason a libertarian law code, based on the precedents of free juries of a vicinage, would not recognize this as the basis of ownership. This is especially true, given the larger emphasis given to occupancy as the basis of property under both mutualistic and radical Lockean variants of left-libertarianism.
Under these conditions, most of the skills associated with marketing under the present model of capitalism would probably be obsolete. In most cases, the artisan machinists in a small town or neighborhood factory would have the same first-hand knowledge of the markets they serve as artisans did before the rise of the factory system.
And the incentives to what we think of as conventional marketing rules would be far weaker under this model. Most of them currently stem from the nature of mass-production technology and the enormous capital outlays it requires for machinery. Because of these huge capital outlays, it’s necessary to maximize capacity utilization to minimize unit costs — and therefore to find ways of creating demand to guarantee the wheels keep turning. The history of 20th century mass-production capitalism was one of finding expedients to guarantee absorption of output — if necessary, by the state either destroying it or buying it up via the permanent war economy and the automobile-highway complex.
But in an economy where production machinery is cheap and general purpose, and can quickly switch between short batches of a variety of products in response to shifts in demand, these pressures do not exist. When capital outlays and overhead costs are low, the minimum revenue stream required to avoid going further in the hole is much smaller. And at the same time, the distinctions between “winners” and “losers,” between being “in business” and “out of business,” are also much lower.
Since the currently prevailing firm size and model of production and distribution is a suboptimal way of doing things, subsidized and protected by the state, it follows that bossism is — in the words of Peter Drucker — a way of doing as efficiently as possible something that ought not to be done at all. We start out with the structural assumptions of an economy in which wealth was concentrated in the hands of a small plutocratic class of investors through a long series of robberies (aka “primitive accumulation“), and the state’s economic policy was aimed at guaranteeing the profits of this investor-robber class and enabling it to extract maximum rents from the productive elements of society.
Given the fact of an economy organized into a relatively small number of large, hierarchical firms, authoritarianism may well be the most efficient means for overcoming the inefficiencies of a system that was authoritarian to start with. In like manner, Soviet economic reformers under Brezhnev sought the most efficient way of running an economy organized around industrial ministries and central planning by Gosplan.
Adam Smith, in The Wealth of Nations, detailed a long series of models for land tenure, in which landlords allowed peasants various shares of their total product in order to maximize production — and hence the rents they were able to extract from that production. But all these forms of tenure were limited by one overriding concern: the need of the landed classes to extract rents. Absent these considerations, the most efficient expedient would have been simply to vest full ownership of all land in the people working it and abolish manorial land titles and rents altogether. No doubt a slave cotton plantation in the Old South would have had drastically increased output had the land been given to the cultivators and had they been given full rights to their product. But from the perspective of a plantation owner, the only form of production less efficient than slavery is having to do an honest day’s work himself.
Corporate capitalism is organized around the imperatives, not of maximizing efficiency, but of maximizing the extraction of rents. When maximum extraction of rents requires artificial imposition of inefficiency, the capitalists’ state is ready and willing.
If we start from the assumption of a system organized around absentee investors and self-aggrandizing managers, the most efficient model for organizing production may be very inefficient indeed for extracting rent from those who produce value. The divorce of ownership and control from both effort and situational knowledge creates enormous knowledge and incentive problems, in which those doing the work and who know best how to do the job have no rational interest in maximizing their own output. Whatever human capital they contribute to increased productivity will simply be expropriated in the form of management salary increases, bonuses and stock options. Under these conditions, a hierarchy is necessary to extract effort from those whose rational interest lies in minimizing effort and hoarding private knowledge.
Shapiro makes the unwarranted assumption — essentially the legitimizing ideology of the Michael Jensen model of capitalism — that shareholder value is the chief motivator in conventional corporate capitalism. It’s more likely in my opinion that this is nothing but a legitimizing myth to justify the power of management — the real interest being served in managerial capitalism. Management under corporate capitalism justifies its power in the name of the shareholder, in the same way that management under Soviet state socialism justified its power in the name of the people or the working class. In both cases, the reality was a self-perpetuating oligarchy in control of a large mass of theoretically absentee-owned — but de facto owned by them — capital, and maximizing their own interests while claiming to serve some mythical outside constituency.
Shareholder capitalism is, pure and simple, a fairy tale. The “market for corporate control” was a reality for a relatively brief time after the introduction of junk bonds, but corporate management — with its insider control of the rules — quickly gamed corporate bylaws to avert the threat of hostile takeover. Since then corporate takeovers have in fact been friendly takeovers, acts of collusion between managements of the acquiring and acquired firms.
Corporate management’s maximization of quarterly earnings figures — what it calls “shareholder value” — is real. But it’s motivated entirely by corporate management’s desire to game its own bonuses, not by external pressure. And it actually involves the long-term destruction of shareholder value to achieve illusory short-term returns — much like eating seed corn, or burning every stick of furniture in your house in order to minimizing this month’s heating bill. And management uses the legitimizing myth of shareholder ownership as a way of protecting itself against genuine stakeholder ownership, which would maximize output for everyone.
There’s a wide body of literature (see especially the work of Sanford, Hart and Grossman) arguing that efficiency and output are maximized when ownership rights in the firm are vested in those who create its value. In an age of declining costs of means of production and increasingly skilled labor, an ever-growing share of the book value of the firm reflects not the investment of capital by absentee owners, but the human capital — tacit, job-related, distributed knowledge of the kind Hayek wrote about. But workers will not contribute this knowledge, or contribute to productivity, under the Cowboy-CEO model of capitalism, because they know that any contribution will be expropriated by management in the form of downsizings, speedups and bonuses. So a class of parasitic managerial bureaucrats operates corporations with the short-term mentality of an Ottoman tax farmer, in order to maximize its short-term interests, but justifies it in terms of “shareholder value.” Shareholder ownership — the myth that they work for the shareholders rather than being de facto residual claimants themselves — is the legitimizing ideology that corporate management uses as a defense against more efficient distribution of control rights among stakeholders within the firm.
Under a genuinely freed market in which the ownership of land and capital reflected rules of just acquisition and the cost of inefficiency were not subsidized, most bosses would find themselves faced with the imperative of doing a productive days’ work.
Steve Horwitz (“On the Edge of Utopianism,” Nov. 12), after some kind words for the left-libertarian project and stating his areas of commonality with us, continues:
The problem I often see in left-libertarian writing is the sense that the world of freed markets would look dramatically different from what we have. For example, would large corporations like Walmart exist in a freed market? Left-libertarians are quick to argue no, pointing to the various ways in which the state explicitly and implicitly subsidizes them (e.g., eminent domain, tax breaks, an interstate highway system, and others). They are correct in pointing to those subsidies, and I certainly agree with them that the state should not be favoring particular firms or types of firms. However, to use that as evidence that the overall size of firms in a freed market would be smaller seems to be quite a leap. There are still substantial economies of scale in play here and even if firms had to bear the full costs of, say, finding a new location or transporting goods, I am skeptical that it would significantly dent those advantages. It often feels that desire to make common cause with leftist criticisms of large corporations, leads left-libertarians to say “oh yes, freed markets are the path to eliminating those guys.” Again, I am not so sure. The gains from operating at that scale, especially with consumer basics, are quite real, as are the benefits to consumers.
Even as I agree with them that we should end the subsidies, I wish left-libertarians would more often acknowledge that firms like Walmart and others have improved the lives of poor Americans in significant ways and lifted hundreds of thousands out of poverty in some of the poorest parts of the world. Those accomplishments seem very much in tune with the left-libertarian project. To argue with such confidence that firms in a freed market would be unable to take advantage of these economies of scale might be cold comfort to the very folks who left-libertarians are rightly concerned about.
Horwitz states his overall difference in emphasis from left-libertarians thusly:
Eliminating every last grain of statism does not magically transform everything we might not like about really existing markets into a form that will match the goals of the traditional left. One grain of statism doesn’t mean that the really existing world won’t essentially look like it does when markets are freed. My own conviction is that the underlying market processes carry more weight than the distorting effects of the state along more margins than the left-libertarians believe. I might well be wrong, but I worry that the promise of more transformation than a left-libertarian world can deliver repeats the very same utopianism that has plagued the left historically.
My impression of the economy we have is just the opposite. Any single monopoly or privilege, considered in isolation, has such huge centralizing effects that it’s difficult to imagine just how libertarian and decentralized things would have been without it. Just consider market economies as they would have developed without the cumulative effects of land expropriation in late medieval and early modern times, land expropriations and preemption of vacant land around the world, and ongoing enforcement of absentee title to unimproved land. Or imagine labor relations if the Industrial Revolution had developed without the Combination Laws, the internal passport system of the Laws of Settlement combined with parish workhouse slave markets, and all the other totalitarian social controls on free association from the 1790s through the 1820s. Or the role of “intellectual property” in promoting market cartelization, oligopoly, planned obsolescence, and what our economy would look like absent those cumulative effects. Or the railroad land grants, civil aviation system and Interstate Highway System. Or Cleveland’s intervention in the Pullman Strike, assorted state declarations of martial law in the Copper Wars, and Taft-Hartley. And now consider the synergies that result from all of them put together.
I think it’s more accurate to say our state capitalist economy possesses enormous continuities from the feudal-manorial system, and that it differs from a freed market to almost the same extent the Soviet economy did. Whatever market elements there are exist only within the interstices defined almost entirely by structural privilege, artificial scarcity, and artificial property rights.
To take Walmart in particular, consider all the structural presuppositions behind it. First, it presupposes the creation of a continental-scale corporate economy, largely through the efforts of the state (like the railroad land grants, the use of patents as a tool for market cartelization, etc.). Second, it presupposes the use of patents and trademarks by corporate headquarters to control outsourced production by sweatshops around the world. The Walmart model is only relevant when the main model of production is sweatshops on the other side of the world exporting their output to the U.S. via container ship, and “warehouses on wheels” distributing that output via a nationwide wholesale model that presupposes a high-volume national highway system.
Imagine a counter-example: An economy in which neighborhood garage shops — organized on essentially the same micromanufacturing model as the job shops in Shenzhen — are able to produce identical industrial goods, or generic spare parts, free from corporate “intellectual property” restrictions, for sale in retail outlets on Main Street in the same town. Just about everything Horwitz presupposes in his statement about the benefits of Walmart would be completely irrelevant. John Womack, one of the early celebrants of lean production, argued that trans-oceanic supply chains were incompatible with the lean model. The same is true of “warehouses on wheels.” These distribution models simply shift mass production’s enormous warehouses full of inventory to the supply and distributino chains. Walmart is, essentially, the leanest possible way of organizing distribution in an economy that is organized on completely contrary principles.
So I think left-libertarians’ fundamental area of disagreement with Shapiro and Horwitz is that our model of freed markets isn’t a slightly tweaked, somewhat more leftish variant on the existing model of corporate capitalism. It implies a revolution in the basic structure of our economy.
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