George Reisman — Piketty’s Capital

George Reisman. Piketty’s Capital: Wrong Theory, Destructive Program (TJS Books, 2014).

Reisman’s critique of Piketty, from beginning to end, is nothing but pronouncements of a priori Austrian dogma from Böhm-Bawerk and Mises, with no direct contact with reality outside the pages of their work at any point in the process. He makes dogmatic pronouncements about the role of capital investment in productivity without reference to actual technological history, about the effect of government spending on capital investment while having apparently paid no attention to the actual role of government in corporate state capitalism, and about the heroic role of corporate management with obviously zero awareness of how information flow and distributed knowledge work within corporate hierarchies.

Reisman’s Mistaken Views on Technology

Reisman, like most of the Austrians, equates increased productivity to capital accumulation and capital intensiveness. Piketty, Reisman says, “advocates his program on the basis of ignorance of the essential role of capital in production, which is to raise the productivity of labor, real wages, and the general standard of living.” But Reisman’s criticism, in turn, is based on ignorance of actual technological history, or of anything else outside the dogmas of Austrian economics.

As people have learned that the economic system is not indestructible, they have turned in anger and resentment against “economic inequality,” as though it were the surviving wealth of others that was the cause of their poverty, rather than the fact that, thanks to the government, others do not have sufficient capital to supply and employ them in the manner they would like.

* * *

Now into the midst both of the assault on the capital supply of the American economic system and its ability to produce, and the unfounded resentment against economic inequality that has been stirred up by the impoverishment caused by that assault, has stepped one Thomas Piketty.

The truth, Reisman declares contra Piketty, is that “a rise in the productivity of labor and concomitant economic progress almost always requires an increase in the supply of physical capital goods relative to the supply of labor.”

What this means, for example, is that from time to time such things as the increasing quantities of iron and steel available per worker be accompanied by steam shovels made of iron and steel replacing conventional shovels made of iron and steel. While equipping a worker with 1,000 or 10,000 conventional shovels would not increase his output beyond what he can produce using just a single shovel, the same quantity of iron and steel as is in that many shovels being instead in the form of a steam shovel, can very dramatically increase his output. Such technological progress is essential to the continuing increase in the supply of capital goods.

The result of this accumulation of large-scale physical capital “is a steady rise in the productivity of labor, which continually increases the supply of goods produced relative to the number of workers producing them.”

Reisman’s imagery is straight out of the mid-20th century mass production era. The irony is that his aesthetic is almost identical to those of Rachel Maddow and Joseph Stalin. As far apart as they may be in some aspects of economic theory, Reisman’s heart beats in unison with those of the producers of 1930s Soviet propaganda films on the First Five-Year Plan and contemporary Maddow PSAs showing a gargantuan hydroelectric dam.

This ignores virtually the entire trend of technological history—especially over the past thirty years, but to a considerable extent since the late 19th century.

The internal logic of the changes in production technology made possible by the invention of the electric motor, as explained by Pyotr Kropotkin in Fields, Factories and Workshops, was to shift things toward small scale and decentralization.

In the days of steam power, the large factory was justified by the need to make maximum use of the power generated by a prime mover, so you crowded as many big machines as possible into a single building, all running off belts from drive shafts powered by a single giant steam engine. Electrical power, by making it possible to build a prime mover into each machine scaled to its size and power needs, ended this imperative. Instead, individual machines could be scaled to production flow, the scale of production flow matched to immediate demand, and the production process sited near the point of consumption. So instead of large factories distributing their wares over enormous market areas, you might instead have small shops with electrical machinery serving community markets.

The ideal use of electrical power, based on its innate advantages, was to integrate general-purpose electrically powered machinery into craft production serving the local market on a lean, demand-pull basis, with the shops frequently shifting from one product line to another in the face of demand.

Instead we got the 20th century mass production model, which was almost entirely a creation of the state. That model entailed large factories full of extremely expensive, product-specific machinery and dies that took a lot of time and effort to change. To minimize unit costs from these enormous capital outlays, it was necessary to run the machines at full capacity producing single product lines for long periods of time, and retooling as seldom as possible. This meant that production was undertaken without regard to current demand, and instead the entire society had to be reengineered to guarantee demand for the product after the fact.

Contrary to Reisman, this was only “more productive” (if at all) at the actual point of production. As pointed out by Ralph Borsodi in the 20s and 30s (especially in The Distribution Age), the unit cost of production for small-scale production near the point of consumption was a final cost, with distribution costs being virtually nil. The unit cost of production in a large factory, on the other hand—no matter how low it was—was only the first cost. In addition there was the bureaucratic overhead of not only the large factory but the multi-unit corporation, the enormous costs of work-in-process inventory, warehouses full of product awaiting distribution, long distance distribution chains full of goods in transit, mass advertising and high-pressure marketing.

On top of this state capitalism, by enforcing monopolies and artificial property rights from which the large property-owning classes derived rents, tended to shift income from those who produced and had a high propensity to spend, to those who lived off rentier incomes and had a high propensity to save and invest. That meant that there was a chronic tendency for the propertied classes to have more investment capital than they could find profitable investment opportunities for, and for them to invest in more productive capacity than there was sufficient demand to purchase the output of at full capacity. So the state was forced to step in to remedy these chronic tendencies by investing in public works, creating new (and unnecessary infrastructures), creating large military establishments, etc. All these incidental costs of mass production, in society at large, were far more than sufficient to outweigh the illusory efficiencies at the point of production.

(Note: I am not saying, with Keynes and some other under-consumptionists, that chronic tendencies toward over-accumulation and idle capacity are endemic to the market as such. Rather, I am saying that the intervention of the state to enforce special privileges on behalf of propertied classes, under capitalism, creates these tendencies by shifting wealth from those who create it to those who collect tribute with the government’s help. This was essentially the argument of J.A. Hobson in Imperialism.)

More recently, the unsustainability of mid-20th century mass production capitalism and a new spate of rapid technological innovation, taken together, have given new life to the decentralized, small-scale industrial model envisioned by Kropotkin. The main technological trend has been ephemeralization: lower and lower capital inputs required for production, in terms both of sheer material mass and price, compared to labor.

The first comparatively cheap, small-scale CNC (computer numeric controlled) machine tools in the 70s led to the proliferation of job-shop production. A major share of production for large corporations today is undertaken on a contract basis by independent job shops in Shenzhen province in China, and job shops in Emilia-Romagna province in Italy engage in networked independent production.

And more recently, hardware hackers have produced open-source tabletop CNC machinery that costs two orders of magnitude less than earlier commercial counterparts: CNC cutting tables, routers, 3-D printers, etc., for $500-$1500. That means that garage factories with ten or twenty thousand dollars’ worth of tabletop machinery can produce the kinds of goods that once required a million-dollar factory.

Reisman’s Mistaken View of the State’s Role

Reisman’s mistaken view of the significance of capital investment in the contemporary economy, described above, means he’s also flat-out clueless about the role of government spending under corporate capitalism. Like many economists on the Right, he views government spending and debt as crowding out private capital investment that would otherwise “create jobs.”

Over the course of several generations, the US government has taxed away trillions upon trillions of dollars that otherwise would have been saved and invested and thereby added to the capital of the American economy.

* * *

The massive loss of capital resulting from all this, is reflected not only in the recent recession/depression, but in the much larger-scale wiping out of much of the industrial base of the United States and its replacement with the “rustbelt.” As a consequence of this devastation, the populations of once great American cities, such as Detroit, St. Louis, Cleveland, and Pittsburgh have been decimated. Much of Detroit is now on the verge of reverting to farmland.

* * *

The government’s massive assault on the supply of capital has begun to transform the American economic system from one of continuous economic progress and generally rising living standards into one of stagnation and outright decline.

This is nonsense. The actual crisis tendency of corporate capitalism is its growing mass of surplus investment capital without a profitable outlet, and overbuilt industry with idle capacity resulting from inadequate demand. Capitalists aren’t investing the capital they already have.

This was already true of industrial capitalism in the early 20th century, with the resulting boom-bust cycle almost destroying capitalism in the 1930s, but World War II postponed the crisis for a generation by destroying most industrial plant and equipment outside the United States and creating a huge permanent war economy as an additional sink for surplus capital. But the crisis resumed around 1970, when the Western European and Pacific Rim economies had rebuilt their industry, and has worsened ever since. Capitalism has depended, from 1980 on, mainly on speculative bubbles in finance, high tech and real estate to absorb surplus capital. And the technological trend towards ephemeralization has made things still worse.

As Douglas Rushkoff argued, the crisis of California’s tech industry results from the fact that it takes far less capital than it used to to do anything.

The fact is, most Internet businesses don’t require venture capital. The beauty of these technologies is that they decentralize value creation. Anyone with a PC and bandwidth can program the next Twitter or Facebook plug-in, the next iPhone app, or even the next social network. While a few thousand dollars might be nice, the hundreds of millions that venture capitalists want to—need to—invest, simply aren’t required….

The banking crisis began with the industry, because here was a business sector that did not require massive investments of capital in order to grow. (I spent an entire night on the phone with one young entrepreneur who secured $20 million of capital from a venture firm, trying to figure out how to possibly spend it. We could only come up with $2 million of possible expenditures.) What’s a bank to do when its money is no longer needed?

Ephemeralization and downscaling of physical production capacity is doing the same thing to the money which previously went into large-scale industrial capital. I wrote the following comments in a review of Cory Doctorow’s Makers, but it applies almost as much to the era we’re living in.

The story begins with a press conference by Landon Kettlewell, frontman and CEO for the newly-formed Kodacell (a merger of Kodak and Duracell). He begins by summing up the current changes in physical production: “Capitalism is eating itself…. The days of companies with names like General Electric and General Mills and General Motors are over.” There are, in other words, no longer any surviving forms of capital-intensive, large-batch production sufficient to gobble up enormous amounts of investment capital.

Later in the story, Kettlewell splurges with travel on the seven Kodacell corporate jets with something of an “apres moi, le deluge” air. He mentions that the company can’t even unload them at fire sale prices, because there just aren’t any companies out there willing to spend money on jets any more. Not even Saudi princes. And an accountant says “In ten years, if we do our jobs, there won’t be five companies on earth that can afford this kind of thing — it’ll be like building a cathedral after the Protestant Reformation.”

Kodacell’s new business model, in that environment, is to ruthlessly liquidate most of its surplus manufacturing capability, and use its cash on hand as something like a Grameen bank for hardware hackers, to fund thousands of micromanufacturing startups. “The money on the table is like krill: a billion little entrepreneurial opportunities that can be discovered and exploited by smart, creative people.”

….The dying Fortune 500 companies at the outset of Makers are in the process of liquidating what’s left of their old mass-production facilities, and using their remaining liquid assets to fund as many micromanufacturing startups as they could find. Almost before Kettlewell’s press conference is finished, this becomes the dominant investment model for dozens and dozens of corporations that were finding 90% of their plant and equipment was superfluous with no idea what they could spend their capital on. Before long Westinghouse had shut down its appliances division and started its own multi-billion dollar microcredit operation, looking for garage startups to fund. By the end of Part One, the list of organizations with their own New Work microfinance organizations include not only a major part of the Fortune 500, but the investment arms of the AFL-CIO and major industrial unions….

The key to why the failure of the New Work boom is the contradiction inherent in Kettlewell’s investment strategy, and that of the other big corporate venture capital funds. There was a fallacy of composition implicit in his “straining a billion bits of krill” investment model. Those hundreds of thousands and even millions of ventures, cumulatively, weren’t enough to soak up even a large fraction of all the capital lying around waiting to be invested. What he described was an excellent model for a single small venture capitalist with several thousand dollars to invest. And that’s just how it worked, at the level of the individual product: he put fifty grand into bankrolling one of Perry’s and Lester’s product lines, and got seventy grand out three months later. But despite those astronomical ROIs, the absolute quantities of capital required for such startups was quite small. A corporation with fifty billion can’t repeat the same process a million times — especially when the entire Fortune 100 is doing the same thing, looking for opportunities to unload all their idle cash on whatever terms are available. As Kettlewell later complained,

“Our business units have an industry-high return on investment, but there’s not enough of them. We’ve only signed a thousand teams and we wanted ten thousand, so ninety percent of the money we had to spend is sitting in the bank at garbage interest rates. We need to soak up that money with big projects — the Hoover Dam, Hong Kong Disneyland, the Big Dig. All we’ve got are little projects.”

So the overwhelming majority of available capital still sat idle without any productive outlet.

We’ve essentially reached, and gone past, the point of both Peak Capital and Peak Jobs.

So throwing all the money currently soaked up by taxation and the capital soaked up by federal debt back into the private economy would just make the crisis of surplus capital even worse. The main interest served by deficit spending and government debt is that of capitalists, as evidenced by the role of corporate leaders like GE’s Gerard Swope in the New Deal. The federal debt absorbs trillions of dollars worth of capital that otherwise would have no outlet, and provides a guaranteed if small rate of profit on it. It’s basically a price support program for capital, directly analogous to the USDA program that pays farmers rent on land they hold out of use.

Reisman is also about as wrong as it is possible for a human being to get on the actual purpose of the regulatory state. The purpose of government rules and regulations (including, “of course, …those that compel dealing with labor unions”) is “forcing business firms to do what is unprofitable or prevent them from doing what is profitable”—resulting, among other things, in unnecessarily high production costs.

But in fact the main purpose of regulations–especially when they raise costs–is to erect entry barriers against market entry by newer, smaller firms using newer, more efficient technologies. They also restrict price or quality competition, so the handful of oligopoly firms that dominate an industry can agree to slow down the introduction of new technology, and collude in using administered pricing to pass the costs of inefficiency onto the consumer. The state, to paraphrase Marx, is an executive committee of the corporate ruling class, for managing its common affairs. In many cases its regulations are things in the common interest of capital, but–owing to prisoner’s dilemma incentives to defect–in the several interest of firms not to do. The regulatory state serves the same purpose as a private cartel, with the added advantage of stability resulting from the inability of individual firms to defect.

Reisman’s Managerialism

Reisman takes a heroic, Galtian view of corporate management and, in so doing, virtually repudiates insights by Friedrich Hayek and James Scott into the nature of distributed knowledge.

These CEOs are responsible for directing the labor of tens of thousands of workers and the use of tens of billions of dollars of capital. They decide what these workers produce and how they produce it. Thus, their decisions have enormous consequences. It is reasonable that they be remunerated on a scale commensurate with the scale of their decisions. A $50 million dollar income for a CEO is just 1 percent of $5 billion of capital or $5 billion of sales revenue, and the capitals and sales revenues they are actually responsible for are much greater. Money managers routinely earn a higher percentage of the capital they manage. Real estate brokers typically earn 6 percent of the price of the houses they sell. At a rate of remuneration of just 1 percent, indeed, less than that, to the extent that the amounts of capital and sales revenues actually involved are more than $5 billion, these CEOs are arguably underpaid.

Most important, it is essential that the decision-making power of CEOs be guided by their having a major ownership stake in the firms they direct. To function properly, they need to be motivated not only by the desire to make profits but also by the desire to avoid losses. To experience that desire, as it needs to be experienced, they need to have a major ownership stake in the firms they run. The high incomes they are paid are the means of their acquiring that stake. Typically, much or most of their income is paid to them in the form either of company stock or options to buy company stock.

Ironically, in CEOs and other key executives earning extremely high incomes, capitalism operates to accomplish something that the alleged champions of workers’ rights and “social justice” might be thought to favor. Namely, it accomplishes a transfer of a significant part of the ownership of the means of production from more or less passive capitalists to the workers who are doing the actual job of running the firms, i.e., those workers who are providing the overall, guiding, directing intelligence in the firms’ operations, and who, in just payment, now become substantial capitalists. Of course, as the result of the powerful ownership incentives given to those running the firms, the passive capitalists can expect to do better than they would have done otherwise.

In serving to make possible the acquisition of a substantial ownership stake in their firms, the high incomes of CEOs and other key executives solve another problem long lamented by the left. Namely, the alleged separation of ownership and control, a problem cited as far back as 1932 by Berle and Means. To the extent that this problem is real (and confiscatory income and inheritance taxes operate to make it real), it is solved by the high incomes of the executives. For their resulting ownership stakes mean that ownership is being given to those who have control.

Well actually, no. Misesians tend to minimize the Hayekian problems of aggregating distributed information, as well as what Herbert Simon called “bounded rationality,” in favor of a near-magical faith in the potential of double-entry bookkeeping. For Misesians, the ability of capitalists to punish firms by withdrawing capital, the use of senior management stock options and bonuses to reward good corporate performance, and the use of double-entry bookkeeping to monitor the performance of internal divisions of a corporation, make the corporation for all intents and purposes a miniature Gosplan functioning to meet the expectations of the most enthusiastic Soviet advocate of central planning.

Unfortunately this is nothing more than a long string of myths from beginning to end. First of all, outside investor leverage over the corporation is minimal. Mature corporations raise virtually none of their operating funds from sales of new shares, and in fact there has been a large-scale trend toward stock buy-backs. Hostile takeovers from outside, funded by junk bonds, were a short-lived phenomenon in the 80s which corporate management inevitably thwarted through their inside control over governance rules. The great majority of genuine investment—i.e. on new plant and equipment—is financed internally by retained earnings.

In any case the profit and loss figures of large corporations are meaningless to outside investors, as a gauge of management skill. Any given industry tends to be an oligopoly, dominated by a few firms protected from competition by assorted cartelizing regulations, sharing the same pathological internal culture (inside directors and senior managers, who absorbed the same B-school culture, constantly shuffling from one firm to the other), with major inputs heavily subsidized by the government, and able to pass the costs of mismanagement on to the consumer through administered pricing. So it’s entirely possible for all the major firms in an industry to be horribly mismanaged, but remain profitable.

Second, the incentive packages of corporate management—profit-based bonuses and stock options—amount to the same Lange-Taylor model of market socialism that Mises contemptuously dismissed as “playing at market.” Management gets huge bonuses in a profitable year, but pays nothing in the event of losses. Management is generally able to rig the rules to create high short-term profits by starving the company of basic maintenance and gutting human capital, at the expense of long-term capital. This means they’re basically gambling other people’s money and stand only to gain if they do well, but have nothing to lose if they do badly—exactly the features of Lange’s market socialism that caused Mises to deem it mere playing at market. And since both inside directors and the compensation committees they appoint generally owe their positions to incumbent management, they’re likely to engage in mutual logrolling with management in setting salaries and bonuses.

And third, double-entry bookkeeping is nowhere near the magic bullet Mises made it out to be. According to Mises, in Human Action, such accounting “relieves the entrepreneur of involvement in too much detail.”  The only thing necessary to transform every single employee of a corporation, from CEO on down, into a perfect instrument of the entrepreneur’s will was the ability to monitor the balance sheet of any division or office and fire the functionary responsible for red ink. Mises continues:

It is the system of double-entry bookkeeping that makes the functioning of the managerial system possible. Thanks to it, the entrepreneur is in a position to separate the calculation of each part of his total enterprise in such a way that he can determine the role it plays within his whole enterprise…. Within this system of business calculation each section of a firm represents an integral entity, a hypothetical independent business, as it were. It is assumed that this section “owns” a definite part of the whole capital employed in the enterprise, that it buys from other sections and sells to them, that it has its own expenses and its own revenues, that its dealings result either in a profit or in a loss which is imputed to its own conduct of affairs as distinguished from the result of the other sections. Thus the entrepreneur can assign to each section’s management a great deal of independence. The only directive he gives to a man whom he entrusts with the management of a circumscribed job is to make as much profit as possible. An examination of the accounts shows how successful or unsuccessful the managers were in executing this directive. Every manager and submanager is responsible for the working of his section or subsection…. His own interests impel him toward the utmost care and exertion in the conduct of his section’s affairs. If he incurs losses, he will be replaced by a man whom the entrepreneur expects to be more successful, or the whole section will be discontinued.

But in fact the standard model of corporate management accounting in use in the United States and elsewhere has built-in biases quite similar in some ways to the accounting metrics used by Soviet central planners. Under the accounting model pioneered by Donaldson Brown, who was Alfred Sloan’s man at DuPont and General Motors, labor is treated as the main direct, variable cost. Management salaries and capital outlays, on the other hand, are both treated as general overhead, and (through the magic of “overhead absorption”) incorporated into the transfer prices of goods “sold” to inventory even if there’s no buyer awaiting them.

Thus the standard corporate accounting system—like GDP accounting and like the Soviet central planning accounting system—treats the consumption of resource inputs, as such, as the creation of value. The more bloated administrative overhead and irrational misallocation of capital spending, the higher the book value of the goods in inventory. On the other hand, the treatment of labor as a variable cost leads to management focusing entirely on labor hours when it’s in a mood for “cost-cutting”—resulting in the total evisceration of distributed knowledge and other human capital within the corporation.

So for all intents and purposes, contrary to Mises’s dogma, corporate management is a self-perpetuating oligarchy with de facto ownership of a large mass of capital they did not contribute through their own savings, and using “shareholder ownership” as a legitimizing ideology to justify its own power. In that it’s much like the Soviet elite—a self-perpetuating managerial oligarchy lining its own pockets while ruling in the name of the working class or the people.

Finally, consistent with the scale of their activities, from time to time CEOs find that the services of thousands of the workers their firms employ are no longer necessary. This is the case, for example, when advances in technology and capital equipment make it possible to achieve the same results with less labor. The saving of this much labor is an enormous productive contribution not only from the point of view of the firms the CEOs work for, and for the stockholders of these firms, but also from the point view of the economic system as a whole, and the average member of the economic system, because the workers no longer needed by these firms are now available for achieving an overall expansion in production in the economic system, as and when they become employed elsewhere. Along with this, the funds no longer required to pay their wages are available to pay wages elsewhere in the economic system.

This ignores the enormous scale of the actual moral hazard built into corporate management decisions. Because of the legitimizing myth of shareholder ownership, management is able to expropriate, in the form of bonuses and increased stock prices, the productivity gains resulting from the distributed knowledge and other human capital of its workforce. Of course this results in reduced productivity from employees minimizing their contributions to productivity and doing the bare minimum necessary to avoid getting fired, because they know any contribution them make to productivity will result in the bosses getting bonuses while they themselves get downsized. The most efficient and productive organization for a firm is cooperative ownership, or at least high degrees of job security, self-management and profit-sharing. But this is not “efficient” from the standpoint of management, whose interest is rather to grab a slice that’s larger in absolute terms even if the size of the pie itself is smaller.

Finally, Mises dons cape and cigarette holder and goes into full heroic Randian mode:

The average person is not capable of making great innovations and building new industries or revolutionizing existing ones. But if he lives in a society in which private property is secure, he gets their benefit all the same. All he needs to obtain their benefit, is to have enough intelligence and knowledge to understand that his economic well-being depends on those who are more capable than him having the freedom peaceably to exercise their greater abilities. He needs to understand that he has no right to any of the property of those who supply and employ him, that seizing their property in the name of “social justice” and the “redistribution of wealth and income” is anything but just—that it is theft and can do no more good than a mob looting a store.

* * *

A manual worker uses his arms to produce his product. What makes him a producer is not the fact that he uses his arms, but that his mind directs the use of his arms to achieve the goal of producing the product. His mind provides guiding and directing intelligence to his arms and to whatever tools, implements, or machines he may use in the production of his product.

Now a capitalist supplies goals and provides guiding and directing intelligence not merely to his own arms and whatever tools or implements he may personally use, but to an organization of men, whose material means of production he has provided. A capitalist is a producer by means of the organization he controls and directs. What is produced by means of it, is his product.

Of course, he does not produce his product alone. His plans and projects may require the labor of hundreds, thousands, even tens of thousands of other workers in order to be accomplished. Those workers are appropriately called “the help”—in producing his products.

Thus, the products of Standard Oil are primarily the products of Rockefeller, not of the oil field and refinery workers, who are his helpers. It is Rockefeller who assembles these workers and provides their equipment and in determining what kind of equipment, tells them what to produce and by what means to produce it.

I hasten to point out that the standard of attribution I have just used, is the standard usually employed, at least in fields outside of economic activity. Thus history books tell us that Columbus discovered America and that Napoleon won the battle of Austerlitz. What is the standard by which such outcomes are attributed to just one man? It is by the standard of that one man being the party supplying the goal and the guiding and directing intelligence at the highest level in the achievement of that goal.

This echoes Reisman’s even more elitist language in his review of my first book, Studies in Mutualist Political Economy [PDF].

Carson is simply unaware that innovation is the product of exceptional, dedicated individuals who must overcome the uncomprehending dullness of most of their fellows, and often their hostility as well.

Well, not quite. If Reisman accuses Piketty of having never read Böhm-Bawerk or Mises, he is apparently equally guilty of having never read Hayek’s “The Uses of Knowledge in Society”—let alone James Scott’s defense of metis (situation-specific skills and knowledge) against high modernist central planning in Seeing Like a State. Most actual innovation comes from the knowledge of workers themselves—knowledge that has been referred to variously a distributed, job-specific or situation-specific, or tacit. And the most innovative and agile organizations are self-organized, stigmergic networks where the producers themselves can freely cooperate without the interference of clueless managerial hierarchies. American pointy-haired bosses, like their Soviet managerial counterparts, are heavily dependent on the ability of production workers to treat irrational management interference as damage and route around it.

Mises’s view of the omniscience and genius of the superior manager is, in a very real way, subversive to the basic principles of genuine free market thought. The Misesian, as opposed to Hayekian, view of the rational calculation problem treats the sheer volume of information, the difficulty of aggregating it, and the internal information problems of hierarchies as beside the point. The only real source of calculation difficulties lies in the need for market pricing of factor inputs. With that solved, a managerial genius equipped with double-entry accounting can run a giant corporation as a perfect centrally-planned economy, with all trains running on time.

Matthew Yglesias explains just why the cult of the cowboy CEO is so asinine, in Hayekian terms:

. . . it’s noteworthy that the business class, as a set, has a curious and somewhat incoherent view of capitalism and why it’s a good thing. Indeed, it’s in most respects a backwards view that strongly contrasts with the economic or political science take on why markets work.

The basic business outlook is very focused on the key role of the executive. Good, profitable, growing firms are run by brilliant executives. And the ability of the firm to grow and be profitable is evidence of its executives’ brilliance. And profit ultimately stems from executive brilliance. This is part of the reason that CEO salaries need to keep escalating—recruiting the best is integral to success. The leaders of large firms become revered figures . . . .

The thing about this is that if this were generally true—if the CEOs of the Fortune 500 were brilliant economic seers—then it would really make a lot of sense to implement socialism. Real socialism. Not progressive taxation to finance a mildly redistributive welfare state. But “let’s let Vikram Pandit and Jeff Immelt centrally plan the economy— after all, they’re really brilliant!”

But in the real world, the point of markets isn’t that executives are clever and bureaucrats are dimwitted. The point is that nobody is all that brilliant.

As Chris Dillow (a British Marxist who hates managerialism) argues, “Insofar as the private sector does increase efficiency, it is to a large extent because market forces drive out inefficient producers, and not because good management raises the performance of existing ones.”


By way of conclusion, to adapt an old saying: George Reisman is entitled to a priori axioms. He is not entitled to a priori facts.

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