Robust Political Economy

Mark Pennington. Robust Political Economy: Classical Liberalism and the Future of Public Policy (Cheltenham, UK and Northampton, Mass: Edward Elgar, 2011).

Where Pennington is at his best is in making the proper comparison between the market and the actual state, rather than the market and an ideal state. He does an outstanding job in articulating and challenging the tacit assumptions of “market failure” theory. Advocates of state intervention typically assume that, when it comes to state action to remedy market failures, the intention is tantamount to the deed. I.e., the state itself is not prone to the same cognitive limitations or agency problems as private actors. This analytical shortcoming is analogous to the neoclassical view of the firm as a unitary actor, “black box” or production function, without the necessary insights of institutional economics as to its actual functioning. The state, likewise, is a unitary actor or collection of Platonic guardians, with perfect knowledge of the situation and of the effects of their remedies.

The alternative to such ‘imperfection’ is not ‘perfect competition’ but attempts to set prices and to regulate entry by government licensing boards or equivalents. From a Hayekian perspective the latter stifle the evolutionary processes which enable people to discover the lowest-cost methods of production and those actors in the best position to deliver them. A system of central regulation cannot simulate or replicate such a discovery because the results cannot be known in the absence of actual competition…

These critiques of the ‘given’ knowledge assumption also challenge the Pigovian-inspired view that government action can easily ‘correct’ for market imperfections that flow from externalities and collective goods problems.

Such goo-gooism also assumes — a massively unwarranted assumption — that the state means well and that its actual motivation will be to resolve such imperfections in the interest of the majority of the citizenry. Communitarian theory explicitly uses phrases like “other-regarding,” “common bonds” and “ethic of care” in regard to the state’s ostensible motivations. Anyone familiar with the tendency of regultory and regulated to coalesce into institutional complexes (like the Military-Industrial Complex), or with the tendency of the petty despots in administrative bureaucracies to pursue personal vendettas against citizens caught up in their rabbit warrens, will know just how laughable this is. Suffice it to say that the state’s functionaries are as prone to self-interest and abuse of power as any market actor, and to seriously posit voting and participation in the system as remedies ranks with Santa Claus and the Easter Bunny as irrational belief systems.

In fact, I would argue, in the tradition of New Left theorists like Gabriel Kolko and James O’Connor, that the state’s primary function is to create externalities and market imperfections in the interest of the corporate capitalists that collect rents from them.

There’s a fundamental asymmetry in their view of human nature in the market and in the political system, respectively. Problems of market failure, lock-in, information asymmetry, imperfect competition, and so forth are objective phenomena to be dealt with in a realistic manner. On the other hand problems of rational ignorance or regulatory capture in the political system are to be overcome by sheer public-spiritedness and wishing: “if only everyone would participate,” or “if only everyone would vote….”

But in both cases it’s the very same human nature, the same general rules of institutional behavior, that stand in the way of ideal functioning. And the people who say anarchism is founded on a “utopian view of human nature” (“Where has anarchism ever actually worked in the real world?”) are the very same ones who say the state would work just fine if only, for the first time ever in human history, people actually behaved like the ideal “good citizens” in a Civics text.

Political failure is at least as inevitable as market failure. Rational ignorance is entirely rational. Simply put, a state is not amenable to majority control. The average citizen will always devote the majority of her energy and attention to affairs closest to her daily life: family, work, church, friends and neighbors, and perhaps — at most — devote what’s left over to paying a modest degree of attention to the mainstream news and voting every four years. In the meantime, for those on the inside of the government and the plutocratic minorities that are closely connected to the state apparatus, policy is a matter of daily life: it coincides directly with their careers and with a large portion of their social circles. So it is about as inevitable as any social phenomenon can be that those on the inside of the state apparatus and their ruling class allies will always have an advantage in time, energy, interest, attention, information and agenda control over those on the outside whose nominal agents they are.

It’s what Robert Michels called the Iron Law of Oligarchy: the ascendancy of the delegate over the delegator, and of the agent over the principle. It’s the process by which, despite the formal democratic centralism of the Bolshevik Party, the apparatus of Stalin’s Secretariat came to rule the Party.

Why on earth would anyone trust the state as a reliable mechanism for protecting the interests of the weak against those of the strong, when the state itself is a center of power?

In this environment, the power of exit is a very real power of voice over the conditions of one’s own life. The communitarian argument for the virtues of political participation reflects a largely unspoken assumption that the state is the only practical means for addressing many problems. This approach ignores the extent to which circumventing the law and building counter-institutions are not only feasible methods for building the kind of society we want to live in in our daily life, but are far more cost-effective than trying to influence policy through participation.

For example, I have a lot of respect for what groups like the Electronic Frontier Foundation do in fighting Copyright Nazism through the legislative and adminstrative process. But in the end, trying to outcompete the big money players of the movie and record industries in a process rigged to serve their interests is a fool’s errand. For a miniscule fraction of the money and hours spent “getting a seat at the table” to move a semi-colon here and there in ACTA, we can take measures to make ACTA unenforceable: strong encryption, Web proxies and other anonymizers, moving websites to hosts in Free World countries outside the DRM Curtain, and using circumvention tools like DeSopa and MAFIAAFire to access sites via their numeric IP addresses rather than the domain names shut down by ICANN.

Such actions are far more efficient because, among other reasons, they enable the individual to take the most effective action immediately based on her own judgment, without having to obtain majority support for taking action. That’s why networked organizations like Al Qaeda and the file-sharing movement, which are based on a platform-module architecture, are able to run circles around administratively-coordinated hierarchies like the TSA and the record companies.

Pennington also does an excellent job of pointing out the largely static assumptions of market failure theory, and reminding us of the extent to which the market is a discovery mechanism in an environment of imperfect information. Those who are best at reading the tea leaves of market data will get temporary entrepreneurial profits as a reward — and then see those profits vanish as others take advantage of their discovery service and move resources where they’re needed or copy a useful innovation. It’s only in a rigged market, where the state protects incumbents through legal monopolies and other entry barriers, that this temporary entrepreneurial profit turns into a permanent rent from imperfect information.

In this regard, the market failure theorists remind me of the “Library of Babel” arguments of network culture critics like Jaron Lanier and Andrew Keen: they ignore the extent to which there are strong market incentives to produce a better “card catalog.”

State intervention to correct market failures in the real world commonly results, not in a more competitive and lower-cost environment, but in just the opposite: a number of regulatory cartels made up of firms operating on the basis of cost-plus markup and administered pricing. “Regulated monopolies” tend toward the organizational model of the Permanent War Economy, as described by Seymour Melman: cost-maximizing incentives resulting from guaranteed profit as a percentage of total costs. That’s the incentive structure that gave us the Pentagon’s $600 toilet seat.

Without a market in which there is the potential for entry and where more efficient firms can drive competitors out of business, then the actual extent of ‘natural monopoly’ effects may not be revealed…. [U]nder public ownership… new entry from those seeking to challenge natural monopolists is often prohibited….

Public ownership, it should be emphasized, may also stifle technological innovations that undermine natural monopolies.

Although “path dependency” or “lock-in” is one of the forms of market failure state intervention is supposed to correct, in the real world the state acts far more frequently to enforce lock-in than to correct it. Consider the main direction of the effects of state economic policy in today’s world: ever-stronger and more draconian IP law to protect the proprietary content industries (MPAA, RIAA, Microsoft) from the need to adopt new business models; subsidies to archaic industrial agribusiness models and protections against localized, soil-intensive forms of production; the use of patents to protect legacy manufacturers against vigorous innovation; the use of local zoning laws and “health” and “safety” codes to protect brick-and-mortar businesses on Main Street from home-based microenterprises; the use of cab medallions to criminalize jitney services; the use of contractor-written building codes to criminalize cheap, innovative construction methods…

The main drawback of Pennington’s analysis is that he seems to take at face value the “state vs. market” framing shared by both the statist Left and the libertarian Right. The very framing of the existing problems of corporate capitalism as “market failures” defies logic, given that the corporate economy as we know it was built by massive state intervention from the mid-19th century on and has since been maintained by massive collusion between big government and big business. But Pennington mostly responds to statist critiques of market failure, not by questioning whether such phenomena really represent imperfections in the market, but simply by asking whether the state could do any better. He seems to take at face value liberal claims that the concentration of economic power and the Depression of the 1930s undermined the assumption that markets are self-correcting.

For example, one of the points commonly emphasized by liberal market failure theory is the “free rider” problem, in which market actors can impose negative externalities on other and the market therefore generates perverse price signals. But these liberal theorists — and to a large extent Pennington as well — ignore the extent to which externalities are created by state action on behalf of such actors.

The assumptions Pennington seems to share with the statist Left include the following: 1) that the “neoliberal” or “Washington Consensus” model conventionally referred to as the “free market” by politicians and the mainstream press really entails a move toward freer markets; 2) that a more “market-oriented” economy would essentially be the present model of corporate capitalism, but more so; and 3) that inequality is the natural outcome of the market and that the only way to reduce present levels of inequality is through increased state intervention in the market.

Regarding the first assumption, at the outset of the book Pennington explicitly equates “neoliberalism” to “classical liberalism.” So it is unclear what his benchmark is, in compariing state failure to market failure — an ideal free market, or the present system that cable talking heads and neoliberal politicians refer to as “our free market system.”

The existing capitalist economy, arguably, is not a set of genuine market institutions moderately hampered by state intervention, so much as it defined by a state-backed structural framework of privilege within whose interstices the market price mechanism is permitted to operate to a limited extent. I side with those like Christopher Hill, Immanuel Wallerstein and Arno Mayer who emphasize the structural continuities between the Medieval and capitalist political economies.

He acknowledges the criticism that no economy “adheres completely to ‘free-market’ principles,'” but at the same time accepts the vanilla-flavored neoliberal prescription as the basic metric of market liberalization: “what matters about the East Asian experience overall is that when ranked against a basket of comparative indices the East Asian countries are among the most economically liberal in the world….”

The problem is that these indices share the underlying assumptions of neoliberalism — and that even the idealized model of neoliberalism is as statist, in a different way, as the Social Democratic or New Deal model. I consider a steep reduction in tariffs in combination with the adoption of WIPO’s draconian copyright standards, overall, as a drastic net increase in statism. But most of the metrics from organizations like Heritage would regard such a case as a significant step toward economic liberalization. In short, these metrics are designed to obscure the forms of statism at the heart of corporate power. The problem is not that countries only half-heartedly pursue true liberalization, but that the standard definition of liberalization is itself Orwellian.

In his analysis of communitarianism, Pennington seems to share their assumption that the shift from organic social institutions to the anonymity of the large-scale cash nexus is a natural or inevitable process in the development of the market economy. But I would argue that the prevailing scale of human relationships is heavily influenced by state action. The overall tendency of state policy is to artificially increase the size of markets, the size of firms and other institutions, and the prevalence of hierarchy. The larger the share of economic activity that’s carried out within a diversified local economy, the larger the share of individual economic activities will be governed by the face-to-face ethos the communitarians favor. So the more the state shifts the economy away from this pattern, the greater the atomizing influence of state policy on organic social institutions.

I would argue, further (as I did in Chapter One of The Homebrew Industrial Revolution: A Low-Overhead Manifesto, that the state fundamentally distorted the pattern of the Second Industrial Revolution (the integration of electrical power into manufacturing). The electric motor removed the central imperative behind the Dark Satanic Mills: the need to economize on power from prime movers like steam or water by powering as many machines as possible via belts from a single drive-shaft. Electricity meant each machine could have its own built-in prime mover, and therefore could be situated close to the point of consumption and scaled to produce on the same scale as demand. Instead, via such things as railroad subsidies and patent cartels, the state instead integrated the new wine of electrical power into the old bottles of paleotechnic industry.

I don’t think Pennington goes far enough in contesting the communitarian equation of the “free market” to the “cash nexus.” For us left-wing market anarchists, a “free market society” is simply one in which all personal interactions are voluntary and all all social functions are based on voluntary association; the cash nexus is one social institution among many. Gift economies, mutual aid, self-provisioning in the informal and household sector, and production within primary social units like extended family compounds, neighborhood cohousing projects and urban communes, might well increase significantly at the expense of the cash nexus as it currently exists. State-imposed solidaristic institutions and the cash nexus are not our only alternatives.

And even a large share of purely monetary exchanges might shift, in a free market, from anonymous national markets and corporate bureaucracies to localized face-to-face transactions governed by a significantly communitarian and solidaristic ethos.

Pennington might modify his second assumption in the face of some very good neo-Marxist and New Left analysis that distinguishes sharply between the present model of corporate capitalism and the “market process.” In this analysis, the state carries out educational and health functions in service to capital’s interest in externalizing the cost of reproducing labor power on the public.

Under the heading of the third assumption, Pennington explicitly states that

Greater equality between rich and poor goes hand in hand with greater inequality between the people at large and a limited number of ‘representatives’ who may wield more power over resource allocation than had previously been exercised by anybody.

Once again, Pennington buys into the assumption shared by both statist liberals and fake “free market” conservatives: that corporate power and economic inequality are spontaneous and inevitable outcomes of the market, and that only state action can prevent them. The only thing the two sides differ in is whether state action to that purpose would be a good thing or a bad thing. Most inequalities result from “the differential success of people who persuade others to purchase goods in the market….”

But there’s an alternative view outside this paradigm: the net effect of existing government intervention is, in fact, to increase inequality from rents on artificial scarcity, artificial property rights, regulatory cartels, and entry barriers. Most inequalities, in this view, result from restricting alternatives and closing off access to natural opportunities. This is the left-wing market anarchist view of thinkers from Thomas Hodgskin to Franz Oppenheimer: the primary function of government is to exploit labor and shift income from producers to rentiers. The likely effect of abolishing such monopolies and allowing unfettered competition to operate, would be to destroy these rents and break up existing concentrations of economic power.

In regard to the rules of land appropriation and ownership, in particular, Pennington neglects the extent to which existing laws of acquisition and transfer depart from any principled basis. He defends “first possession” as the best way to guarantee an actor can appropriate the full value created by her improvements, but ignores the fact that our existing law is a major departure from any principled basis for first possession. The Lockeans and the mutualists differ on the proper rules for governing the transfer and abandonment of existing claims. But both unequivocally condemn the existing legal system’s rules for initial acquisition. According not only to Locke — who is commonly treated as the ideological basis for our system of property law — but also to the usufructory doctrines of J.K. Ingalls and Benjamin Tucker, the only legitimate means of initial appropriation is through actual occupancy and modification (in Locke’s terminology, “mixing one’s labor with the soil”). But a major portion of existing land titles, under the utilitarian form of bastardized Lockeanism that governs American land law, trace their origins to large-scale state engrossment of vacant and undeveloped land that was parcelled out to state-favored land barons and speculators. According to any principled theory of land ownership, a parcel of vacant and unimproved land is rightfully to be considered unowned, and to become the property of the first person to occupy it and put it to use. Any absentee title to vacant and unimproved land, by which an absentee owner can collect tribute from the rightful first appropriator, or by which the absentee landlord and her heirs and assigns can continue to collect rents from the heirs and assigns of the rightful appropriator, should be treated as null and void.

By this standard, all title to vacant and unimproved land should be nullified. By this standard, any title by which the heirs of the first appropriator of vacant land are paying rent to the heirs of a state land grantee should be nullified (for example, landlord titles or mortgages in Southern California that can be traced back to railroad land grants). And in the Third World, feudal property forms like the hacienda system by which peasants pay rent on land which is rightfully theirs by cultivation — or are excluded from land held out of use by the local patron — should be nullified. The free market supports the Guatemalan peasants against United Fruit company. This kind of free market reform, alone, would put a stop to an enormous existing upward income redistribution to landlords.

The abolition of patents and copyrights, more than any other single monopoly, would act as dynamite at the foundations of corporate power. “Intellectual property” is the central monopoly on which the transnational corporate economy rests. It serves exactly the same protectionist function — regulating which producers are allowed to compete in a given market — that tariffs did in the old national industrial economies. The most profitable sectors in the global corporate economy are all heavily dependent on “intellectual property” as their main source of profit: software, entertainment, biotech, pharma, agribusiness, electronics…

Pennington also cites, as a straightforward doctrine of classical liberalism (“classical liberalism insists…”), that there’s a trade-off between economic growth and social equity.

Unless, of course, the present level of inequality is greater than natural market levels as the result of existing state intervention. In that case, present levels of inequality would reflect externalization of costs and benefits and, it follows, would result in suboptimal efficiencies from distorted incentives. It further follows that reducing the state interventions that produce inequality would result both in more social equity and greater efficiencies. If the present diversion of income from producers to rentiers is the result of state intervention, then the greater income equality resulting from a reversal of this shift would also result in greater productivity.

This is a case in which Pennington makes a pronouncement, based not on any inherent implications of classical liberalism, but on right-wing talking points.

Likewise, in his discussion of development economics, Pennington seems to accept the framing of the issue as whether the state should intervene to benefit Third World countries who are suffering under the present reign of “free trade.” But in fact the global corporate economy is an overwhelmingly statist construct. It reflects centuries of primitive accumulation, on the same pattern as the Enclosures and other land expropriations in the UK, by which peasants were dispossessed from their land and Western-owned extractive industries got privileged access to mineral resources and oil. It reflects the role of IP law in enforcing the corporate model of outsourcing production to local job shops while retaining corporate control of IP and marketing. And it reflects the fact of massive aid from the World Bank and national governments, the overwhelming majority of which goes to subsidizing the road and utility infrastructure necessary to make offshored production profitable. The solution to Third World poverty and underdevelopment is not further state intervention, but an end to the existing intervention by which the state promotes the corporate extraction of wealth.

Although the apologetic tone of Pennington’s practical analysis of “actually existing corporate capitalism” detracts somewhat from the theoretical excellence of his critique of liberal and communitarian theories of market failure, it is still of immense value.

I believe Pennington and the left-libertarian community would receive mutual benefit from an exchange of ideas.

In particular, his insights are of enormous potential value to us on the free market Left, for developing in a left-libertarian direction.

For example, I see very strong parallels between his analysis of government failure and my own critique of internal corporate governance in the middle part of my book Organization Theory (in “Economic Calculation in the Corporate Commonwealth,” I applied the Austrian calculation argument to the internal planned economy of the corporation).  To the extent that the internal environment of the corporation bears more resemblance to a planned economy than to a market, it is prone to exactly the same cognitive and incentive problems that limit state interventions to correct market failures. The Fortune 500 corporation is large, hierarchical, and internally authoritarian to a far, far greater degree than would hold true in a free market — largely as the result of state intervention to subsidize its operating costs and insulate it from the competitive ill effects of its internal cultural pathologies.

In a cartelized oligopoly market — in which a handful of firms share the same toxic organizational cultures and business models, pass their inefficiency costs and high overhead onto consumers through administered pricing, and shuffle the same vice presidents and directors back and forth between them — the shortcomings of the political process as described by Pennington hold equally true of the corporation. Corporate management is prone to all the problems of one-way information flow and cognitive bias that R.A. Wilson and Kenneth Boulding described, and to all the incentive problems that result from not being subject to the consequences of its own stupidity and venality.

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The Anatomy of Escape
Organization Theory