The American economy after the Civil War became increasingly dominated by large organizations. I’ve written in The Freeman before about the role of the government in the growth of the centralized corporate economy: the railroad land grants and subsidies, which tipped the balance toward large manufacturing firms serving a national market (“The Distorting Effects of Transportation Subsidies,” November 2010), and the patent system, which was a primary tool of consolidation and cartelization in a number of industries (“How ‘Intellectual Property’ Impedes Competition,” October 2009, tinyurl.com/lqzehv)

These giant corporations were followed by large government agencies whose mission was to support and stabilize the corporate economy, and then by large bureaucratic universities, centralized school systems, and assorted “helping professionals” to process the “human resources” the corporations and State fed on. These interlocking bureaucracies required a large managerial class to administer them.

According to Rakesh Khurana of the Harvard Business School (in From Higher Aims to Hired Hands), the first corporation managers came from an industrial engineering background and saw their job as doing for the entire organization what they’d previously done for production on the shop floor. The managerial revolution in the large corporation, Khurana writes, was in essence an attempt to apply the engineer’s approach (standardizing and rationalizing tools, processes, and systems) to the organization as a system.

And according to Yehouda Shenhav (Manufacturing Rationality: The Engineering Foundations of the Managerial Revolution), Progressivism was the ideology of the managers and engineers who administered the large organizations; political action was a matter of applying the same principles they used to rationalize their organizations to society as a whole. Shenhav writes (quoting Robert Wiebe):

Since the difference between the physical, social, and human realms was blurred by acts of translation, society itself was conceptualized and treated as a technical system. As such, society and organizations could, and should, be engineered as machines that are constantly being perfected. Hence, the management of organizations (and society at large) was seen to fall within the province of engineers. Social, cultural, and political issues . . . could be framed and analyzed as “systems” and “subsystems” to be solved by technical means. . .

During this period, “only the professional administrator, the doctor, the social worker, the architect, the economist, could show the way.” In turn, professional control became more elaborate. It involved measurement and prediction and the development of professional techniques for guiding events to predictable outcomes. The experts “devised rudimentary government budgets; introduced central, audited purchasing; and rationalized the structure of offices.” This type of control was not only characteristic of professionals in large corporate systems. It characterized social movements,the management of schools, roads, towns, and political systems.

The managerialist ethos reflected in Progressivism emphasized transcending class and ideological divisions through the application of disinterested expertise. Christopher Lasch (The New Radicalism in America) wrote:

For the new radicals, conflict itself, rather than injustice or inequality, was the evil to be eradicated. Accordingly, they proposed to reform society . . . by means of social engineering on the part of disinterested experts who could see the problem whole and who could see it essentially as a problem of resources . . . the proper application and conservation of which were the work of enlightened administration.

In Shenhav’s account this apolitical ethos grew out of engineers’ self-perception: “American management theory was presented as a scientific technique administered for the good of society as a whole without relation to politics.” Frederick Taylor, whose managerial approach was a microcosm of Progressivism, saw bureaucracy as “a solution to ideological cleavages, as an engineering remedy to the war between the classes.” Both Progressives and industrial engineers “were horrified at the possibility of ‘class warfare’” and saw “efficiency” as a means to “social harmony, making each workman’s interest the same as that of his employers.”

The implications, as James Scott put it in Seeing Like a State (about which much more below), were quite authoritarian. Only a select class of technocrats with “the scientific knowledge to discern and create this superior social order” were qualified to make decisions. In all aspects of life, policy was to be a matter of expertise, with the goal of removing as many questions as possible from the realm of public political debate to that of administration by properly qualified authorities. Politics, Scott writes, “can only frustrate the social solutions devised with scientific tools adequate to their analysis.” As a New Republic editorial put it, “the business of politics has become too complex to be left to the pretentious misunderstandings of the benevolent amateur.”

It’s true that Progressivism shaded into the anti-capitalist left and included some genuinely anti-business rhetoric on its left-wing fringe. But the mainstream of Progressivism saw the triumph of the great trusts over competitive enterprise as a victory for economic rationalization and efficiency—and the guarantee of stable, reasonable profits to the trusts through the use of political power as a good thing.

In the end the more utopian or socialistic Progressives found they’d become “useful idiots.” Their desire to regiment and manage was given free rein mainly when it coincided with the needs of the corporatist economy created by Rockefeller and Morgan. These needs were for what Gabriel Kolko (The Triumph of Conservatism) called “political capitalism,” the guiding theme of Progressive-era legislation. Political capitalism aimed to give corporate leadership “the ability, on the basis of politically stabilized and secured means, to plan future economic action on the basis of fairly calculable expectations” and to obtain “the organization of the economy and the larger political and social spheres in a manner that will allow corporations to function in a predictable and secure environment permitting reasonable profits over the long run.”

Mainstream Progressivism, far from embracing a left-wing vision of class struggle, saw class conflict as a form of irrationality that could be transcended by expertise. To quote Shenhav again:

Labor unrest and other political disagreements of the period were treated by mechanical engineers as simply a particular case of machine uncertainty to be dealt with in much the same manner as they had so successfully dealt with technical uncertainty. Whatever disrupted the smooth running of the organizational machine was viewed and constructed as a problem of uncertainty.

As Hilaire Belloc said (The Servile State) of its Fabian counterparts in Britain, the mainline of the Progressive movement quickly accommodated itself to the impossibility of expropriating big business or the plutocratic fortunes and found that it could be quite comfortable as a junior partner to the plutocracy, directing its lust for regimentation against the working class:

Let laws exist which make the proper housing, feeding, clothing, and recreation of the proletarian mass be incumbent upon the possessing class, and the observance of such rules be imposed, by inspection and punishment, upon those whom he [the Fabian] pretends to benefit, and all that he really cares for will be achieved.

As Scott put it, the managerial classes’ virtually unbounded planning instincts were directed mostly downward:

Every nook and cranny of the social order might be improved upon: personal hygiene, diet, child rearing, housing, posture, recreation, family structure, and, most infamously, the genetic inheritance of the population. The working poor were often the first subjects of scientific social planning. . . . Subpopulations found wanting in ways that were potentially threatening—such as indigents, vagabonds, the mentally ill, and criminals—might be made the objects of the most intensive social engineering.

Progressivism was a branch of what Scott called the “high modernist” ideology, which “envisioned a sweeping, rational engineering of all aspects of social life in order to improve the human condition.” High modernism carries with it an aesthetic sensibility in which the rationally organized community, farm, or factory was one that “looked regimented and orderly in a geometrical sense,” along with an affinity for gigantism and centralization reflected in “huge dams, centralized communication and transportation hubs, large factories and farms, and grid cities. . . .” If you’ve read H. G. Wells’s “Utopias” or looked at Albert Speer’s architecture, you get the idea.

High modernism was scientistic, not scientific, based on, writes Scott, a “muscle-bound . . . version of the beliefs in scientific and technological progress” of the Enlightenment, centering on “a supreme self-confidence about continued linear progress . . . , the expansion of knowledge, the expansion of production, the rational design of social order, the growing satisfaction of human needs, and, not least, an increasing control over nature (including human nature) commensurate with scientific understanding of natural laws.” The high priesthood of this ideology was precisely the same as Progressivism’s social base: “planners, engineers, architects, scientists, and technicians [high modernism] celebrated as the designers of the new order.”

One aspect of Scott’s analysis of high modernism, his use of the concept of metis, is especially relevant to us here. Scott’s book, more than any other I can think of, should be read as a companion to Hayek’s discussion of what’s variously called distributed, tacit, or idiosyncratic knowledge in “The Use of Knowledge in Society.” (As Hayek put it, this is the knowledge of circumstances necessary to make a decision that exists “solely as the dispersed bits of incomplete . . . knowledge which all the separate individuals possess.”)

Scott distinguished metis from techne, which is a body of universal knowledge deducible from first principles. Metis, in contrast, is (largely irreducible) knowledge acquired from practical experience, concerning the particular, the variable, and the local, and involving a “feel” for the unique aspects of situations obtained over a prolonged period.

High modernism tended to see metis as an enemy and sought to supplant it by central schemes of planning and control, whether at the level of society as a whole through State social engineering or at the level of the firm by Taylorist managers.

High modernism, Scott writes, placed remarkably “little confidence . . . in the skills, intelligence, and experience of ordinary people.” The dispersed, local knowledge of the general population was, at best, to be patronized as prescientific and purified of its partial or local character by codifying it into a set of universal rules that could in turn be reduced to a verbal formula and transmitted as knowledge by the priesthood.

What we know as Taylorism is one facet of the larger high modernist project in this regard. One feature of high modernism, Scott notes, was “a narrow and materialist ‘productivism’ [which] treated human labor as a mechanical system which could be decomposed into energy transfers, motion, and the physics of work,” so that work could be simplified into “isolated problems of mechanical efficiencies” and brought under scientific control. Taylorism, in particular, attempted a “minute decomposition of factory labor into isolable, precise, repetitive motions.” Taylor’s goal, in his own words, was for management to “assume . . . the burden of gathering together all of the traditional knowledge which in the past has been possessed by the workmen and then of classifying, tabulating, and reducing this knowledge to rules, laws, formulae. . . . Thus all of the planning which under the old system was done by the workmen, must . . . be done by management in accordance with the law of science.”

The idea was that understanding and decision-making should be divorced from the performance of tasks. The managerial caste determines “best practices” and breaks tasks down into the most efficient possible set of simple sub-processes, and workers perform the tasks as instructed without the intervention of critical thought.

But by its nature, Scott says, high modernism is reductionist or “schematic” and “always ignores essential features of any real, functioning social order.” Progressivism, as a high modernist ideology, makes no allowances for hidden knowledge.

In the case of Taylorism, this means that the suppression of metis sacrifices the distributed, job-related knowledge possessed by workers whose consideration is indispensable to any adequate governance of the production process. Taylorist management can no more render the production process amenable to central control without the dispersed knowledge of its workers than a central planning office can render a national economy transparent to its understanding and control.

According to David Noble (Forces of Production), large-scale computer numeric-controlled (CNC) machine tools were introduced in mass-production industry (first and most heavily in the military-industrial complex, mind you) as a way of supplanting metis with centralized control by managers and engineers, and of overcoming the knowledge rents inherent in distributed knowledge. The CNC tools were intended to shift the balance of power upward by putting production under the control of engineers and deskilling master machinists on the shop floor.

Unfortunately for this design, CNC machinery did not eliminate the need for metis. As Noble pointed out, management quickly found out that the only thing the machines could produce “automatically,” without ongoing worker intervention and concrete judgment, was scrap. When workers withheld their metis on a “work-to-rule” strategy, scrap rates went through the roof.

(Ironically, today we’re in the early stages of the shift of a great deal of manufacturing capability from mass-production industry to small job-shops—with small-scale CNC tools, in the latter, operated by skilled craftsmen.)

So it seems metis or distributed knowledge, in the end, is one of those stubborn traits of human action that outlasts all attempts to supersede it.

I know which farm I’d rather live on. But I’d rather not be livestock at all.

I confess that my first reaction upon seeing author Thomas Geoghegan, a labor lawyer, on the talking-head circuit, was that I’d rather live under the European social democratic model he describes—with its six-week vacations and job security and all—than under what Tom DeLay and Dick Armey call “free enterprise” (that is, selling the country to Halliburton and remaking it in the image of the Marianas Islands). If I have to choose between two forms of corporate statism, I’ll take the one that weighs less heavily on my neck.

But what an impoverished set of alternatives!

What kept screaming out at me as I read this book was that social democracy treats privilege as normal and leaves it intact—then regulates it to make it bearable to the subordinate classes without altering its fundamental nature as privilege. But most of the positive aspects of the European model simply duplicate what could be achieved by dismantling privilege altogether.

Rather than using progressive taxation and social benefits to redistribute part of the artificial scarcity rents accruing to the privileged classes, we could achieve Geoghegan’s reduced inequality by ceasing to enforce artificial scarcity—that is, titles to vacant and unimproved land, barriers to competition in the supply of credit, “intellectual property,” and assorted licensing regimes.

The second thing that struck me is that European social democracy, like American establishment liberalism, is very Schumpeterian. That is, it has a strong affinity for large bureaucratic organizations as the building blocks of a “progressive” society. According to Joseph Schumpeter and his “de facto disciple” J. K. Galbraith, the market power of the large organization enables it to finance innovation by pricing above marginal cost. To establishment liberals, the ideal economy is that of the postwar “Golden Age” idealized by Michael Moore: an economy of giant, capital-intensive manufacturing firms that can engage in administered pricing and prevent “destructive competition” so they not only can be guaranteed reasonable profits but also can afford to provide good wages with job security.

In every case the European model deals with the destabilizing effects of abundance from the demand side. The idea is to use artificial scarcity to prop up the price of everything in order to guarantee that capital can find a profitable outlet, then prop up demand with planned obsolescence so labor can be fully employed.

Geoghegan particularly celebrates the enormous embedded unit costs of the German economy: the capital-intensiveness, the bigness, the licensing and educational barriers to entering just about any field of self-employment. You can’t just drop out and start a microenterprise on a shoestring: “[T]he Germans don’t let just anyone make jewelry. . . . Sorry, girl, you have to go get a degree.”

The basic principle of the European model is to socialize living costs and provide security through guaranteed hours and wage levels. A great many basic goods are cheap or free for most people—obtained from the State independently of wage labor. But the same results could be accomplished by eliminating artificial scarcities, allowing competition to deflate the costs of basic goods, and providing security through reduced dependence on a job.

The German model’s greater leisure time could be obtained in a free market by eliminating the hours we work to pay rents on privilege and artificial scarcity, and to pay the markups on subsidized waste and overhead.

Increased labor empowerment could be achieved by taking advantage of the imploding cost of the means of production and eliminating the “intellectual property” that enables corporations to retain control of outsourced production. When productive property was widely distributed a couple centuries ago, the resulting bargaining power of labor led to a practice (“St. Monday”) that anticipated modern German four-day weekends. Today the desktop revolution in the immaterial realm, and the availability of cheap CNC machine tools in the physical realm, are reversing the previous technological shift that led to factory production and the wage system: from expensive machinery back to affordable, general-purpose artisan tools.

The alternative Geoghegan celebrates is to socialize unit costs and guarantee workers sufficient hours digging holes and filling them back in at a good enough wage to pay the 300 percent markup on everything, so it doesn’t matter. Welcome to Brazil.

For the first time in 16 years the U.S. economy was reclassified from “totally free” to “mostly free.” But wait: The United States was totally free economically until 2010? That’s enough to suggest that the Index focuses on quite a narrow range of “economic freedom” criteria, rather than looking critically at the forms of State intervention most structurally important to the survival of big business and corporate power.

For example, by any valid measure of economic freedom, the passage of the WIPO Copyright Treaty, the Uruguay Round TRIPS (Trade-Related Aspects of Intellectual Property Rights) Accord, and the Digital Millennium Copyright Act would have been considered an upward surge in statism and protectionism unequaled since (at least) the Smoot-Hawley Tariff. “Intellectual property” is every bit as much a form of protectionism as are tariffs. Patents and copyrights serve exactly the same protectionist function for transnational corporations that tariffs did for the old national industrial corporations; in both cases they restrict who is permitted to compete in offering a given good to a given population.

But among the inside-the-Beltway “free market community,” Heritage is one of the staunchest advocates of global “intellectual property” enforcement expansion. Indeed, two lines out of six in its summary concerning its metric for “Property Rights” in the United States are taken up by this: “A well-developed licensing system protects patents, trademarks, and copyrights, and laws protecting intellectual property rights are strictly enforced.”

One-Sided Index

There are other suggestions of the one-sided nature of the Index, as well. For example, under “Labor Freedom” it simply states that “dismissing an employee is not burdensome.” Never mind for the moment that, from the standpoint of an employee, a bit of contractual security might be a good thing. (I doubt if the people at Heritage would generalize this disdain for contracts to all their other commercial dealings.) What’s important is what the article doesn’t say: “Quitting without notice is not burdensome.” In fact it is not burdensome; workers in most states are at-will employees unless a union contract specifies otherwise. But Heritage doesn’t consider the contractual burden on the worker or lack thereof a sufficiently important issue even to bear commenting on—and this in a section titled, mind you, Labor Freedom, not Employer Freedom.

The problem is that an index, ostensibly put forward as a general survey of economic freedom as such, is really a survey of economic freedom primarily as it affects the minority of the population that owns considerable amounts of capital and employs others. The idea that being employed is an economic activity, and that those who are employed have economic interests as much as those who do the employing, doesn’t even appear on the radar.

Yet another example of the Index’s bias is its “concerns” regarding bailouts of automakers over “expropriation and violation of the contractual rights of shareholders and bondholders.” Bill Beach, director of the Heritage Foundation’s Center for Data Analysis, laments that “the rule of law declined when the Obama administration declared some contracts to be null and void. For example, bondholders in the auto industry were forced to the back of the creditor line during bankruptcy.”

But note the glaring lack of concern for contractual rights guaranteed under GM’s contracts with the UAW. This one-sided concern with impairment of the obligation of contracts is fairly widespread on the “free market” right. The same people who protested the loudest about bailout “blackmail” in interfering with CEO salaries and benefits, oddly enough, were by and large also the source of the most strenuous calls for using Washington bailout money as a hammer to “impose discipline” on auto workers. So apparently, for a certain breed of “free market” advocate, the differential between a GM and Toyota assembly line worker is problematic—but the differential between a GM and Toyota CEO isn’t. What’s that thing I was saying before? Contractual security is a good thing—for everybody but workers.

This shortcoming is compounded by Heritage’s endorsement of Bush Treasury Secretary Henry Paulson’s original TARP program. Stuart Butler and Edwin Meese, in a 2008 article titled “The Bailout Package: Vital and Acceptable,” did express concerns lest the bailout take the form of a blank check—to the government, that is.

So they favored TARP, as such—a Hamiltonian program of using taxpayer money to prop up the bubble-inflated value of financial assets and preventing them from being marked down to market value. They just objected to any conditions on how the free money could be spent once the banksters got hold of it. I wonder how they feel about workfare. I understand that it was probably different people composing the different passages in question, but still it would be nice if the right hand knew what the further-right hand was doing.

Ignoring Primary Interventions

The Index fails to distinguish between the primary, structural forms of government intervention that prop up corporate power and the secondary, ameliorative forms of intervention that attempt to moderate its side effects. The State enforces a whole host of artificial property rights and artificial scarcities that serve as sources of economic rent to privileged firms, and maintains all sorts of regulatory cartels. The cumulative effect of these privileges, artificial scarcities, and cartels is to sustain corporate power on a global scale and create vast disparities in wealth.

These forms of intervention, these primary grants of privilege, don’t show up very prominently on the Index of Economic Freedom. What does show up is mainly the kinds of fiscal and welfare-state interventions that serve to limit the exercise of State-granted privileges and make corporate power less galling to average people. Is it only “statism” when it benefits someone besides the rich?

In fairness, while Heritage supports many of the legal privileges that serve as entry barriers at the national level, the Index does at least acknowledge barriers to small business formation at the state and local levels, comparing them favorably to other places: “The overall freedom to start, operate, and close a business, regulated primarily at the state level, is still strongly protected [in the United States]. Starting a business takes six days, compared to the world average of 35 days. Obtaining a business license takes less than the world average of 218 days. . . .”

The same critique applies to other indices of “economic freedom,” as well. For example, like Heritage, the Economic Freedom of the World Index (Fraser and Cato institutes) treats voting for anything called a “free trade agreement” as a proxy for supporting free trade. [Editor's note: See comments for correction.] Economist Dean Baker ridicules mainstream journalists for taking the “free trade” label at face value when the primary purpose of such agreements is to boost “intellectual property” protectionism rather than to reduce tariff protectionism. In the introduction to The Conservative Nanny State, Baker writes:

[N]ews reports routinely refer to bilateral trade agreements, such as NAFTA or CAFTA, as “free trade” agreements. This is in spite of the fact that one of the main purposes of these agreements is to increase patent protection in developing countries, effectively increasing the length and force of government-imposed monopolies. Whether or not increasing patent protection is desirable policy, it clearly is not “free trade.”

It is clever policy for proponents of these agreements to label them as “free trade” agreements (everyone likes freedom), but that is not an excuse for neutral commentators to accept this definition.

Nicholas Hildyard had a pretty good handle on what’s actually entailed in the neoliberal “free market” agenda promoted by these indices. The effect of the agenda “has not, in most cases, been to diminish either the state’s institutional power or its spending. Instead, it has redirected them elsewhere. It has also strengthened the power of many Northern nations to intervene in the economic affairs of other countries. . . .”

Of the kind of “privatization” that prevailed, for example, under Chile’s Pinochet and has since been promoted by assorted “structural adjustment” programs, Hildyard wrote:

While the privatisation of state industries and assets has certainly cut down the direct involvement of the state in the production and distribution of many goods and services, the process has been accompanied by new state regulations, subsidies and institutions aimed at introducing and entrenching a “favourable environment” for the newly-privatised industries. [“The Myth of the Minimalist State,” The Corner House, March 1998]

In practice, such “privatization” involves, first of all, spending taxpayer money on upgrades of State property to entice corporate buyers to take it off their hands—with the new outlays to make the property salable frequently exceeding the purchase price. The bidding process itself for State-owned industries and utilities has usually been governed by what Joseph Stromberg calls “funny auctions, that amounted to new expropriations by domestic and foreign investors” (“Experimental Economics, Indeed,” Mises.org, Jan. 7, 2004). The first order of business, subsequently, is massive asset stripping by the new corporate owners. And as Hildyard suggested, the newly “privatized” functions are carried out within a web of special regulations and protections to make sure the “private” firms are insulated from anything resembling genuine market competition.

A genuinely libertarian privatization policy, as recommended by Murray Rothbard in “Confiscation and the Homestead Principle” (Libertarian Forum, June 15, 1969), would treat State-owned utilities as the homesteads of those working them.

The same is true of so-called “deregulation,” which (as Hildyard pointed out) can more accurately be called reregulation. The nature of most so-called utility deregulation can be illustrated by the mid-1990s electrical “deregulation” in Texas, home of “free market” champions like Dick Armey and Tom DeLay. Writing at Mises.org, Tim Swanson stated:

[I]n the mid-90s, regulators, consumers and energy producers began to rearrange the market for “deregulation” in Texas. Incumbent providers such as TXU and Reliant were restructured in the name of free markets, but when the dust cleared, the only winners were members of the political class and corporations that had been State-sanctioned monopolies prior to the “deregulation.”

TXU was separated into two companies, Oncor and TXU Energy. Oncor was given the monopoly on all services including meter reading, energy delivery, etc. Additionally they own all of the poles and wires and are protected by law from competition. TXU Energy became a billing company (and owner of power plants), merely forwarding all of the customer service questions and problems to Oncor, and therefore providing no services themselves.

This is akin to the following: splitting AT&T into two separate companies, one (Nexis) that owns all of the cables, wires, PBXs, switching stations, call centers, etc. and provides all of the services, repairs, installations, etc., and the other company (Willy) whom [sic] simply sends you a bill at the end of the month, providing no value-added service.

Not only is it not deregulation (the same players exist with State protection) but more overhead is created through the creation of another billing company. [“Texas Sized Tomfoolery,” Sept. 9, 2003]

When the mainstream press and mainstream politics identify the narrow analysis associated with the indices as “economic freedom,” it’s no wonder that most people are wary of “free markets.” If I didn’t know better—if I didn’t know that real free markets were like kryptonite to corporate power—I’d hate them myself.

But this is precisely backward. Existing problems of excess energy consumption, pollution, big-box stores, the car culture, and suburban sprawl result from the “massive political pressure” that has already been applied, over the past several decades, to “redesign our cities, our farming, and our lives.” The root of all the problems Monbiot finds so objectionable is State intervention in the marketplace.

In particular, subsidies to transportation have probably done more than any other factor (with the possible exception of intellectual property law) to determine the present shape of the American corporate economy. Currently predominating firm sizes and market areas are the result of government subsidies to transportation.

Adam Smith argued over 200 years ago that the fairest way of funding transportation infrastructure was user fees rather than general revenues: “When the carriages which pass over a highway or a bridge, and the lighters which sail upon a navigable canal, pay toll in proportion to their weight or their tonnage, they pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them.”

This is not, however, how things were actually done. Powerful business interests have used their political influence since the beginning of American history to secure government funding for “internal improvements.” The real turning point was the government’s role in creating the railroad system from the mid-nineteenth century on. The national railroad system as we know it was almost entirely a creature of the State.

The federal railroad land grants included not only the rights-of-way for the actual railroads, but extended 15-mile tracts on both sides. As the lines were completed, this adjoining land became prime real estate and skyrocketed in value. As new communities sprang up along the routes, every house and business in town was built on land acquired from the railroads. The tracts also frequently included valuable timberland. The railroads, according to Matthew Josephson (The Robber Barons), were “land companies” whose directors “did a rushing land business in farm lands and town sites at rising prices.” For example, under the terms of the Pacific Railroad bill, the Union Pacific (which built from the Mississippi westward) was granted 12 million acres of land and $27 million worth of 30-year government bonds. The Central Pacific (built from the West Coast eastward) received nine million acres and $24 million worth of bonds. The total land grants to the railroads amounted to about six times the area of France.

Theodore Judah, chief engineer for what became the Central Pacific, assured potential investors “that it could be done—if government aid were obtained. For the cost would be terrible.” Collis Huntington, the leading promoter for the project, engaged in a sordid combination of strategically placed bribes and appeals to communities’ fears of being bypassed in order to extort grants of “rights of way, terminal and harbor sites, and . . . stock or bond subscriptions ranging from $150,000 to $1,000,000” from a long string of local governments that included San Francisco, Stockton, and Sacramento.

Government also revised tort and contract law to ease the carriers’ way—for example, by exempting common carriers from liability for many kinds of physical damage caused by their operation.

Had railroad ventures been forced to bear their own initial capital outlays—securing rights of way, preparing roadbeds, and laying track, without land grants and government purchases of their bonds—the railroads would likely have developed instead along the initial lines on which Lewis Mumford speculated in The City in History: many local rail networks linking communities into local industrial economies. The regional and national interlinkages of local networks, when they did occur, would have been far fewer and far smaller in capacity. The comparative costs of local and national distribution, accordingly, would have been quite different. In a nation of hundreds of local industrial economies, with long-distance rail transport much more costly than at present, the natural pattern of industrialization would have been to integrate small-scale power machinery into flexible manufacturing for local markets.

Alfred Chandler, in The Visible Hand, argued that the creation of the national railroad system made possible, first, national wholesale and retail markets, and then large manufacturing firms serving the national market. The existence of unified national markets served by large-scale manufacturers depended on a reliable, high-volume distribution system operating on a national level. The railroad and telegraph, “so essential to high-volume production and distribution,” were in Chandler’s view what made possible this steady flow of goods through the distribution pipeline: “The revolution in the processes of distribution and production rested in large part on the new transportation and communications infrastructure. Modern mass production and mass distribution depend on the speed, volume, and regularity in the movement of goods and messages made possible by the coming of the railroad, telegraph and steamship.”

The Tipping Point

The creation of a single national market, unified by a high-volume distribution system, was probably the tipping point between two possible industrial systems. As Mumford argued in Technics and Civilization, the main economic reason for large-scale production in the factory system was the need to economize on power from prime movers. Factories were filled with long rows of machines, all connected by belts to drive shafts from a single steam engine. The invention of the electric motor changed all this: A prime mover, appropriately scaled, could be built into each individual machine. As a result, it was possible to scale machinery to the flow of production and situate it close to the point of consumption.

With the introduction of electrical power, as described by Charles Sabel and Michael Piore in The Second Industrial Divide, there were two alternative possibilities for organizing production around the new electrical machinery: decentralized production for local markets, integrating general-purpose machinery into craft production and governed on a demand-pull basis with short production runs and frequent shifts between product lines; or centralized production using expensive, product-specific machinery in large batches on a supply-push basis. The first alternative was the one most naturally suited to the new possibilities offered by electrical power. But in fact what was chosen was the second alternative. The role of the State in creating a single national market, with artificially low distribution costs, was almost certainly what tipped the balance between them.

The railroads, themselves largely creatures of the State, in turn actively promoted the concentration of industry through their rate policies. Sabel and Piore argue that “the railroads’ policy of favoring their largest customers, through rebates” was a central factor in the rise of the large corporation. Once in place, the railroads—being a high fixed-cost industry—had “a tremendous incentive to use their capacity in a continuous, stable way. This incentive meant, in turn, that they had an interest in stabilizing the output of their principal customers—an interest that extended to protecting their customers from competitors who were served by other railroads. It is therefore not surprising that the railroads promoted merger schemes that had this effect, nor that they favored the resulting corporations or trusts with rebates.”

Reprising the Role

As new forms of transportation emerged, the government reprised its role, subsidizing both the national highway and civil aviation systems.

From its beginning the American automotive industry formed a “complex” with the petroleum industry and government highway projects. The “most powerful pressure group in Washington” (as a PBS documentary called it) began in June 1932, when GM president Alfred P. Sloan created the National Highway Users Conference, inviting oil and rubber firms to help GM bankroll a propaganda and lobbying effort that continues to this day.

Whatever the political motivation behind it, the economic effect of the interstate system should hardly be controversial. Virtually 100 percent of roadbed damage to highways is caused by heavy trucks. After repeated liberalization of maximum weight restrictions, far beyond the heaviest conceivable weight the interstate roadbeds were originally designed to support, fuel taxes fail miserably at capturing from big-rig operators the cost of pavement damage caused by higher axle loads. And truckers have been successful at scrapping weight-distance user charges in all but a few western states, where the push for repeal continues. So only about half the revenue of the highway trust fund comes from fees or fuel taxes on the trucking industry, and the rest is externalized on private automobiles.

This doesn’t even count the 20 percent of highway funding that’s still subsidized by general revenues, or the role of eminent domain in lowering the transaction costs involved in building new highways or expanding existing ones.

As for the civil aviation system, from the beginning it was a creature of the State. Its original physical infrastructure was built entirely with federal grants and tax-free municipal bonds. Professor Stephen Paul Dempsey of the University of Denver in 1992 estimated the replacement value of this infrastructure at $1 trillion. The federal government didn’t even start collecting user fees from airline passengers and freight shippers until 1971. Even with such user fees paid into the Airport and Airways Trust Fund, the system still required taxpayer subsidies of $3 billion to maintain the Federal Aviation Administration’s network of control towers, air traffic control centers, and tens of thousands of air traffic controllers.

Eminent domain also remains central to the building of new airports and expansion of existing airports, as it does with highways.

Subsidies to airport and air traffic control infrastructure are only part of the picture. Equally important was the direct role of the State in creating the heavy aircraft industry, whose jumbo jets revolutionized civil aviation after World War II. In Harry Truman and the War Scare of 1948, Frank Kofsky described the aircraft industry as spiraling into red ink after the end of the war and on the verge of bankruptcy when it was rescued by the Cold War (and more specifically Truman’s heavy bomber program). David Noble, in America by Design, made a convincing case that civilian jumbo jets were only profitable thanks to the government’s heavy bomber contracts; the production runs for the civilian market alone were too small to pay for the complex and expensive machinery. The 747 is essentially a spinoff of military production. The civil aviation system is, many times over, a creature of the State.

The State and the Corporation

It’s hard to avoid the conclusion that the dominant business model in the American economy, and the size of the prevailing corporate business unit, are direct results of such policies. A subsidy to any factor of production amounts to a subsidy of those firms whose business models rely most heavily on that factor, at the expense of those who depend on it the least. Subsidies to transportation, by keeping the cost of distribution artificially low, tend to lengthen supply and distribution chains. They make large corporations operating over wide market areas artificially competitive against smaller firms producing for local markets—not to mention big-box retailers with their warehouses-on-wheels distribution model.

Some consequentialists treat this as a justification for transportation subsidies: Subsidies are good because they make possible mass-production industry and large-scale distribution, which are (it is claimed) inherently more efficient (because of those magically unlimited “economies of scale,” of course).

Tibor Machan argued just the opposite in the February 1999 Freeman:

Some people will say that stringent protection of rights [against eminent domain] would lead to small airports, at best, and many constraints on construction. Of course—but what’s so wrong with that?

Perhaps the worst thing about modern industrial life has been the power of political authorities to grant special privileges to some enterprises to violate the rights of third parties whose permission would be too expensive to obtain. The need to obtain that permission would indeed seriously impede what most environmentalists see as rampant—indeed reckless—industrialization.

The system of private property rights . . . is the greatest moderator of human aspirations. . . . In short, people may reach goals they aren’t able to reach with their own resources only by convincing others, through arguments and fair exchanges, to cooperate.

In any case, the “efficiencies” resulting from subsidized centralization are entirely spurious. If the efficiencies of large-scale production were sufficient to compensate for increased distribution costs, it would not be necessary to shift a major portion of the latter to taxpayers to make the former profitable. If an economic activity is only profitable when a portion of the cost side of the ledger is concealed, and will not be undertaken when all costs are fully internalized by an economic actor, then it’s not really efficient. And when total distribution costs (including those currently shifted to the taxpayer) exceed mass-production industry’s ostensible savings in unit cost of production, the “efficiencies” of large-scale production are illusory.

Ostrom also denied that there was anything inherently unstable about commons and argued that they were actually well governed by traditional regulations that specified individual grazing rights. (Garrett Hardin himself later expressed regret that he had not titled his famous essay “The Tragedy of the Unmanaged Commons” and repudiated much of the use that had been made of it.)

As economist Joseph Stiglitz put it, “Conservatives used the tragedy of the commons to argue for property rights, and efficiency was achieved as people were thrown off the commons. But the effects of throwing a lot of people out of their livelihood were enormous. What Ostrom has demonstrated is the existence of social control mechanisms that regulate the use of commons without having to resort to property rights.”

But in fact–a fact ignored by those on both the left and right who equate “private property” to individual property and contrast “property” with the commons–the commons were a form of property rights. And the eviction of peasants from the commons was not simply an efficiency loss; it was a case of the State expropriating property rights.

Libertarian scholar Roderick Long of Auburn University has argued that public (as opposed
to government) property is entirely legitimate:

Consider a village near a lake. It is common for the villagers to walk down to the lake to go fishing. In the early days of the community it’s hard to get to the lake because of all the bushes and fallen branches in the way. But over time, the way is cleared and a path forms–not through any centrally coordinated effort, but simply as a result of all the individuals walking that way day after day.

The cleared path is the product of labor–not any individual’s labor, but all of them together. If one villager decided to take advantage of the now-created path by setting up a gate and charging tolls, he would be violating the collective property right that the villagers together have earned.

Ostrom’s contributions, and Stiglitz’s attempted summary of them, point to an unfortunate tendency among many libertarians: the tendency to conflate the individual-commons distinction with the private-State distinction, and to equate common property to State property.

A good example of this tendency is the received version of the early settlement of Plymouth Plantation, as recounted by Governor Bradford. In the received version the Puritans, motivated by a misguided idealism, initially set out to restore the primitive Christian communism of the Book of Acts, “holding all things in common.” When the obvious incentive problems entailed in this practice led to starvation, the settlers accommodated themselves to reality and divided up the land and worked it individually. Output skyrocketed, starvation was averted, and everybody was happy.

Unfortunately, in the words of a recurring feature in this magazine, the received version “just ain’t so”–or at least it’s incomplete.

Richard Curl’s recent history of cooperatives in America, For All the People, fills in some missing details that change the meaning of the story entirely. Curl supplements Bradford’s history with material from J. A. Doyle’s English Colonies. According to Doyle, the agreement between the Pilgrim Separatists and the Merchant Adventurers corporation provided that

[a]ll settlers . . . were to receive their necessaries out of the common stock. For seven years there was to be no individual property or trade, but the labor of the colony was to be organized according to the different capacities of the settlers. At the end of the seven years the company was to be dissolved and the whole stock divided.

Two reservations were inserted, one entitling the settlers to separate plots of land about their houses, and the other allowing them two days in the week for cultivation of such holdings. The London partners, however, refused to grant these concessions, and the agents of the emigrants withdrew them rather than give up the scheme.

In the conventional narrative the apostolic zeal of the Pilgrims, who desire to recreate the communism of the early Church, is confronted by hard reality. But according to Curl, relations between the Puritan settlers and the Merchant Adventurers make more sense in light of an entirely different subtext–the English peasantry’s relations with the landed classes in the Old Country: “The colonists, most of them tenant farmers in the open fields of an old manorial hunting park in Nottinghamshire, considered that the investors’ demand essentially reduced them to serfdom. The settlers were asking for no more than was normal under England’s manorial system in effect since the Middle Ages. Peasants worked in the lord’s fields but also had time to work with individual plots for their household needs.”

Soviet Parallel

The Plymouth story is sometimes treated in parallel with that of agriculture in the last days of the Soviet Union, where the majority of food consumed came from private family plots–essentially kitchen gardens with some small livestock thrown in. Had the entire Soviet population been forced to subsist on the output of the State and collective farms alone, the result would have been mass starvation–exactly like that of the Plymouth settlers. This parallel is entirely accurate. What the received version of the Plymouth story leaves out, however, is that the role of the “collective farm” in the little drama is played not by the naive Puritan zealots seeking to “hold all things in common” but by a private corporation.

As Curl describes it, the system of private plots adopted after the rebellion against the Merchant Adventurers wasn’t much like modern fee simple ideas of “private property.” It sounds a bit like the open-field system, which we already saw the settlers had experienced in Nottinghamshire: The family plots were ad hoc and not subject to inheritance. And the open-field system as it existed in Europe had had significant elements of private family possession: Individuals worked plots individually (although doing some work in common, like plowing, that was impracticable on one narrow strip of land at a time) and harvested the full crop produced by a year’s labor, but redivided the plots as changes in population made it necessary.

“Privatizing” by Expropriation

Until a few centuries ago the village commune persisted in most areas in a form much like before the rise of the State, but with a parasitic apparatus of State bureaucrats and feudal landlords superimposed on it.

And historically most attempts to “privatize” the common lands have in fact been expropriations by privileged landed classes. Common lands were simply handed over to nobles and everyone else was locked out. The conflict between the plebeians, with their demands for traditional rights of access to the public lands, and the patricians who had taken advantage of their control of the State to “privatize” those lands in violation of the peasantry’s legitimate property rights, is the main theme of Livy’s history of the early Roman Republic. The central focus of every popular movement in the Republic was a demand to “tear down the enclosures” and open up vacant land to be worked by land-poor peasants. That’s essentially what happened with the enclosure of the open-field system and the Parliamentary Enclosures of commons in England. In India under British rule, village headmen were transformed into land-owning “gentlemen” on the European pattern, and the villagers from common owners into tenants, so the headmen could be made responsible for collecting rents on behalf of the British authorities. We see it today with corrupt village leaders in China acting in collusion with the central government and foreign corporations to transform village common property into industrial parks.

The reflexive tendency on much of the right to equate all de jure individual property with “private property,” without regard to questions of just acquisition, and to view communal property as something tainted or unnatural and to be grudgingly tolerated at best, is quite dangerous. To see why, we need only compare the rhetoric used to defend the “efficiency” of enclosures with that used today to defend eminent domain in cases like Kelo vs. New London.

The Trouble With Muddy Waters

Unmuddying the waters with regard to the tendency to confuse the individual-communal distinction with the private-State distinction may also add clarity to some other questions. This is especially true in the field of organization theory. Genuine collective or communal property, in which the governance system ties reward to effort and knowledge, may be better at addressing Hayekian issues of tacit knowledge than the kinds of “private” property in which corporate hierarchies divorce effort from responsibility.

Take, for example, the shareholder model of corporate ownership. Despite their theoretical status as “owners” of the corporation, shareholders have little genuine control over management. In fact, management’s responsibility to shareholders is a legitimizing myth comparable to the claim of the State industrial bureaucracy in the old Soviet Union to represent “the people” or “the workers.” The management of most large corporations is actually a self-perpetuating oligarchy in control of a mass of unowned capital. But their claimed status as representatives of the shareholders, as little basis as it has in fact, serves a useful purpose in insulating management from internal political challenges–especially from internal stakeholders.

As organization theorist Luigi Zingales has pointed out, the main source of corporate book value is shifting increasingly from physical capital to human capital. That means that an increasing share of profit and equity results from the contributions of the workforce–specifically, their tacit, job-specific knowledge and skills. Whether workers are willing fully to invest these skills and knowledge in the firm depends, to a large extent, on whether the governance system recognizes their stakeholder status and rewards them for their contribution to the bottom line. Without contractually defined stakeholder claims to the revenue stream that reflect their contribution to value, workers know it’s quite likely that in a mixed economy with State impediments to free competition, management will expropriate whatever productivity gains result from their special situational knowledge and skills via management bonuses, downsizing, or both. Consequently they are likely to keep to themselves any knowledge that might increase efficiency.

On the other hand, the typical worker cooperative requires about a quarter of the front-line supervisors as a traditional hierarchical firm. The reason is that the workers do not exist in a zero-sum relationship with management and they are confident that their contributions to productivity will be internalized in their own personal bottom lines.

A worker at a plywood cooperative in the Pacific Northwest illustrated this when he told Edward Greenberg:

If the people grading off the end of the dryer do not use reasonable prudence and they start mixing the grades too much, I get hold of somebody and I say, now look, this came over to me as face stock and it wouldn’t even make decent back. What the hell’s goin’ on here?

[Interviewer: That wouldn't happen if it were a regular mill?]

That wouldn’t happen. [In a regular mill] . . . he has absolutely no money invested in the product that’s being manufactured. Any knowledge he has on the side, he is not committed or he is not required to share that.

So ironically, management’s professed status as representatives of shareholders, by blocking the creation of corporate governance systems that reflect the real sources of value added, actually works against the interests of both workers and shareholders.

The central lesson of Ostrom’s work–that there is a rich variety of property forms and governance mechanisms, and not just a choice between the self-aggrandizing central State and the large corporate enterprise–is one we can all benefit from. Karl Hess put it aptly 40 years ago:

Libertarianism is a people’s movement and a liberation movement. It seeks the sort of open, noncoercive society in which the people, the living, free, distinct people, may voluntarily associate, disassociate, and, as they see fit, participate in the decisions affecting their lives. This means a truly free market in everything from ideas to idiosyncrasies. It means people free collectively to organize the resources of their immediate community or individualistically to organize them; . . . Liberty means the right to shape your own institutions. It opposes the right of those institutions to shape you simply because of accreted power or gerontological status.

Amen.

What are those inflationary forces? . . . [M]ost important among them are the incentives in the payment and organization of medical care that cause physicians, hospitals and other medical care facilities to focus at least as much on income and profit as on meeting the needs of patients. . . . The incentives in such a system reward and stimulate the delivery of more services. That is why medical expenditures in the U.S. are so much higher than in any other country, and are rising more rapidly. . . . Physicians, who supply the services, control most of the decisions to use medical resources. . . .

The economic incentives in the medical market are attracting the great majority of physicians into specialty practice, and these incentives, combined with the continued introduction of new and more expensive technology, are a major factor in causing inflation of medical expenditures. Physicians and ambulatory care and diagnostic facilities are largely paid on a piecework basis for each item of service provided.

As a health care worker, I have personally witnessed this kind of mutual log-rolling between specialists and the never-ending addition of tests to the bill without any explanation to the patient. The patient simply lies in bed and watches an endless parade of unknown doctors poking their heads in the door for a microsecond, along with an endless series of lab techs drawing body fluids for one test after another that’s “been ordered,” with no further explanation. The post-discharge avalanche of bills includes duns from two or three dozen doctors, most of whom the patient couldn’t pick out of a police lineup. It’s the same kind of quid pro quo that takes place in academia, with professors assigning each other’s (extremely expensive and copyrighted) texts and systematically citing each other’s works in order to game their stats in the Social Sciences Citation Index. (I was also a grad assistant once.) You might also consider Dilbert creator Scott Adams’s account of what happens when you pay programmers for the number of bugs they fix.

One solution to this particular problem is to have a one-to-one relationship between the patient and a general practitioner on retainer. That’s how the old “lodge practice” worked. (See David Beito’s “Lodge Doctors and the Poor,” The Freeman, May 1994).

But that’s illegal, you know. In New York City, John Muney recently introduced an updated version of lodge practice: the AMG Medical Group, which for a monthly premium of $79 and a flat office fee of $10 per visit provides a wide range of services (limited to what its own practitioners can perform in-house). But because AMG is a fixed-rate plan and doesn’t charge more for “unplanned procedures,” the New York Department of Insurance considers it an unlicensed insurance policy. Muney may agree, unwillingly, to a settlement arranged by his lawyer in which he charges more for unplanned procedures like treatment for a sudden ear infection. So the State is forcing a modern-day lodge practitioner to charge more, thereby keeping the medical and insurance cartels happy—all in the name of “protecting the public.” How’s that for irony?

Regarding expensive machinery, I wonder how much of the cost is embedded rent on patents or regulatorily mandated overhead. I’ll bet if you removed all the legal barriers that prevent a bunch of open-source hardware hackers from reverse-engineering a homebrew version of it, you could get an MRI machine with a twentyfold reduction in cost. I know that’s the case in an area I’m more familiar with: micromanufacturing technology. For example, the RepRap—a homebrew, open-source 3-D printer—costs roughly $500 in materials to make, compared to tens of thousands for proprietary commercial versions.

More generally, the system is racked by artificial scarcity, as editor Sheldon Richman observed in an interview a few months back. For example, licensing systems limit the number of practitioners and arbitrarily impose levels of educational overhead beyond the requirements of the procedures actually being performed.

Libertarians sometimes—and rightly—use “grocery insurance” as an analogy to explain medical price inflation: If there were such a thing as grocery insurance, with low deductibles, to provide third-party payments at the checkout register, people would be buying a lot more rib-eye and porterhouse steaks and a lot less hamburger.

The problem is we’ve got a regulatory system that outlaws hamburger and compels you to buy porterhouse if you’re going to buy anything at all. It’s a multiple-tier finance system with one tier of service. Dental hygienists can’t set up independent teeth-cleaning practices in most states, and nurse-practitioners are required to operate under a physician’s “supervision” (when he’s out golfing). No matter how simple and straightforward the procedure, you can’t hire someone who’s adequately trained just to perform the service you need; you’ve got to pay amortization on a full med school education and residency.

Drug patents have the same effect, increasing the cost per pill by up to 2,000 percent. They also have a perverse effect on drug development, diverting R&D money primarily into developing “me, too” drugs that tweak the formulas of drugs whose patents are about to expire just enough to allow repatenting. Drug-company propaganda about high R&D costs, as a justification for patents to recoup capital outlays, is highly misleading. A major part of the basic research for identifying therapeutic pathways is done in small biotech startups, or at taxpayer expense in university laboratories, and then bought up by big drug companies. The main expense of the drug companies is the FDA-imposed testing regimen—and most of that is not to test the version actually marketed, but to secure patent lockdown on other possible variants of the marketed version. In other words, gaming the patent system grossly inflates R&D spending.

The prescription medicine system, along with state licensing of pharmacists and Drug Enforcement Administration licensing of pharmacies, is another severe restraint on competition. At the local natural-foods cooperative I can buy foods in bulk, at a generic commodity price; even organic flour, sugar, and other items are usually cheaper than the name-brand conventional equivalent at the supermarket. Such food cooperatives have their origins in the food-buying clubs of the 1970s, which applied the principle of bulk purchasing. The pharmaceutical licensing system obviously prohibits such bulk purchasing (unless you can get a licensed pharmacist to cooperate).

I work with a nurse from a farming background who frequently buys veterinary-grade drugs to treat her family for common illnesses without paying either Big Pharma’s markup or the price of an office visit. Veterinary supply catalogs are also quite popular in the homesteading and survivalist movements, as I understand. Two years ago I had a bad case of poison ivy and made an expensive office visit to get a prescription for prednisone. The next year the poison ivy came back; I’d been weeding the same area on the edge of my garden and had exactly the same symptoms as before. But the doctor’s office refused to give me a new prescription without my first coming in for an office visit, at full price—for my own safety, of course. So I ordered prednisone from a foreign online pharmacy and got enough of the drug for half a dozen bouts of poison ivy—all for less money than that office visit would have cost me.

Of course people who resort to these kinds of measures are putting themselves at serious risk of harassment from law enforcement. But until 1914, as Sheldon Richman pointed out (“The Right to Self-Treatment,” Freedom Daily, January 1995), “adult citizens could enter a pharmacy and buy any drug they wished, from headache powders to opium.”

The main impetus to creating the licensing systems on which artificial scarcity depends came from the medical profession early in the twentieth century. As described by Richman:

Accreditation of medical schools regulated how many doctors would graduate each year. Licensing similarly metered the number of practitioners and prohibited competitors, such as nurses and paramedics, from performing services they were perfectly capable of performing. Finally, prescription laws guaranteed that people would have to see a doctor to obtain medicines they had previously been able to get on their own.

The medical licensing cartels were also the primary force behind the move to shut down lodge practice, mentioned above.

In the case of all these forms of artificial scarcity, the government creates a “honey pot” by making some forms of practice artificially lucrative. It’s only natural, under those circumstances, that health care business models gravitate to where the money is.

Health care is a classic example of what Ivan Illich, in Tools for Conviviality, called a “radical monopoly.” State-sponsored crowding out makes other, cheaper (but often more appropriate) forms of treatment less usable, and renders cheaper (but adequate) treatments artificially scarce. Artificially centralized, high-tech, and skill-intensive ways of doing things make it harder for ordinary people to translate their skills and knowledge into use-value. The State’s regulations put an artificial floor beneath overhead cost, so that there’s a markup of several hundred percent to do anything; decent, comfortable poverty becomes impossible.

A good analogy is subsidies to freeways and urban sprawl, which make our feet less usable and raise living expenses by enforcing artificial dependence on cars. Local building codes primarily reflect the influence of building contractors, so competition from low-cost unconventional techniques (T-slot and other modular designs, vernacular materials like bales and papercrete, and so on) is artificially locked out of the market. Charles Johnson described the way governments erect barriers to people meeting their own needs and make comfortable subsistence artificially costly, in the specific case of homelessness, in “Scratching By: How the Government Creates Poverty as We Know It” (The Freeman, December 2007).

The major proposals for health care “reform” that went before Congress would do little or nothing to address the institutional sources of high cost. As Jesse Walker argued at Reason.com, a 100 percent single-payer system, far from being a “radical” solution,

would still accept the institutional premises of the present medical system. Consider the typical American health care transaction. On one side of the exchange you’ll have one of an artificially limited number of providers, many of them concentrated in those enormous, faceless institutions called hospitals. On the other side, making the purchase, is not a patient but one of those enormous, faceless institutions called insurers. The insurers, some of which are actual arms of the government and some of which merely owe their customers to the government’s tax incentives and shape their coverage to fit the government’s mandates, are expected to pay all or a share of even routine medical expenses. The result is higher costs, less competition, less transparency, and, in general, a system where the consumer gets about as much autonomy and respect as the stethoscope. Radical reform would restore power to the patient. Instead, the issue on the table is whether the behemoths we answer to will be purely public or public-private partnerships. [“Obama is No Radical,” September 30, 2009]

I’m a strong advocate of cooperative models of health care finance, like the Ithaca Health Alliance (created by the same people, including Paul Glover, who created the Ithaca Hours local currency system), or the friendly societies and mutuals of the nineteenth century described by writers like Pyotr Kropotkin and E. P. Thompson. But far more important than reforming finance is reforming the way delivery of service is organized.

Consider the libertarian alternatives that might exist. A neighborhood cooperative clinic might keep a doctor of family medicine or a nurse practitioner on retainer, along the lines of the lodge-practice system. The doctor might have his med school debt and his malpractice premiums assumed by the clinic in return for accepting a reasonable upper middle-class salary.

As an alternative to arbitrarily inflated educational mandates, on the other hand, there might be many competing tiers of professional training depending on the patient’s needs and ability to pay. There might be a free-market equivalent of the Chinese “barefoot doctors.” Such practitioners might attend school for a year and learn enough to identify and treat common infectious diseases, simple traumas, and so on. For example, the “barefoot doctor” at the neighborhood cooperative clinic might listen to your chest, do a sputum culture, and give you a round of Zithro for your pneumonia; he might stitch up a laceration or set a simple fracture. His training would include recognizing cases that were clearly beyond his competence and calling in a doctor for backup when necessary. He might provide most services at the cooperative clinic, with several clinics keeping a common M.D. on retainer for more serious cases. He would be certified by a professional association or guild of his choice, chosen from among competing guilds based on its market reputation for enforcing high standards. (That’s how competing kosher certification bodies work today, without any government-defined standards). Such voluntary licensing bodies, unlike state licensing boards, would face competition—and hence, unlike state boards, would have a strong market incentive to police their memberships in order to maintain a reputation for quality.

The clinic would use generic medicines (of course, since that’s all that would exist in a free market). Since local juries or arbitration bodies would likely take a much more common-sense view of the standards for reasonable care, there would be far less pressure for expensive CYA testing and far lower malpractice premiums.

Basic care could be financed by monthly membership dues, with additional catastrophic-care insurance (cheap and with a high deductible) available to those who wanted it. The monthly dues might be as cheap as or even cheaper than Dr. Muney’s. It would be a no-frills, bare-bones system, true enough—but to the 40 million or so people who are currently uninsured, it would be a pretty damned good deal.

“Intellectual property,” on the other hand, creates artificial scarcity where it does not naturally exist and can only be enforced by invading real, tangible property and preventing the owner from using it in ways that violate the supposed intellectual property rights of others. As Stephan Kinsella points out, had a particularly gifted Cro-Magnon man been able to patent the building of log cabins, his heirs today would be entitled to prevent us from building cabins on our own land, with our own logs, until we paid whatever tribute they demanded.

The business model required by proprietary digital information is even more invasive of genuine property rights than traditional copyright law. The digital copyright regime in force under the terms of the Digital Millennium Copyright Act (DMCA), the WIPO Copyright Treaty, and the TRIPS provisions of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), focuses entirely on preventing one from using his own hard drive and other property as he sees fit. It is actually illegal, thanks to such legislation, to sell hardware capable of circumventing DRM (digital rights management) or to publicize the codes enabling someone to circumvent it. As Cory Doctorow points out, “It’s funny that in the name of protecting ‘intellectual property,’ big media companies are willing to do such violence to the idea of real property–arguing that since everything we own, from our t-shirts to our cars to our e-books, embody someone’s copyright, patent and trademark, that we’re basically just tenant farmers, living on the land of our gracious masters who’ve seen fit to give us a lease on our homes.”

All-pervasive DRM prevents the easy transfer of content between platforms, even when a CD or DVD buyer simply wants to play the content somewhere more convenient. And the DMCA legally prohibits circumventing such DRM, even when–again–the purchaser simply wants to facilitate his own use on a wider and more convenient variety of platforms.

The levels of invasiveness required by “intellectual property” in the digital age cannot be exaggerated. The intrusive and inconvenient DRM embedded in proprietary media, and the draconian legislation criminalizing technical means of circumvention, should make that clear. The logical tendency of the digital copyright regime was portrayed quite convincingly by Richard Stallman in a dystopian short story, “The Right to Read” (just Google it–it’s well worth your time).

Corporations rely on increasingly authoritarian legislation to capture value from proprietary information. Johann Soderberg compares the way photocopiers were monitored in the old USSR, to protect the power of elites in that country, to the way the means of digital reproduction are monitored in this country to protect corporate power. Privileged state-connected economic interests are becoming increasingly dependent on such controls. Unfortunately for them, such controls are becoming increasingly unenforceable thanks to BitTorrent, strong encryption, and proxy servers. Case in point: the “DeCSS uprising,” in which court injunctions against a code to hack DVD encryption met with the defiant publicizing of the code on blogs, mirror sites, and even T-shirts. The unenforceability of intellectual property rights undermines the business model prevalent among a major share of privileged state-connected firms.

Obsolete Business Model

In the old days, the immense value of physical assets was the primary structural support for corporate boundaries and in particular for the control of corporate hierarchies over human capital and other intangible assets. This has changed as physical assets have become less important than human capital. As human capital becomes the primary source of corporate equity, the old rationale for corporate institutional control is evaporating.

In the information and entertainment industries, before the digital and Internet revolutions, the initial outlay for entering the market was in the hundreds of thousands of dollars or more. The old electronic mass media, as Yochai Benkler put it, were “typified by high-cost hubs and cheap, ubiquitous, reception-only systems at the end. This led to a limited range of organizational models for production: those that could collect sufficient funds to set up a hub.” The same was true of print periodicals: Between 1835 and 1850, the typical startup cost of a newspaper increased from $500 to $100,000–or from roughly $10,000 to $2.38 million in 2005 dollars.

The networked economy, in contrast, is distinguished by “network architecture and the [low] cost of becoming a speaker.” The central change that makes this possible is that “the basic physical capital necessary to express and communicate human meaning is the connected personal computer.” The desktop revolution and the Internet mean that the minimum capital outlay for entering most of the entertainment and information industry has fallen to a few thousand dollars at most, and the marginal cost of reproduction is zero. The networked environment, combined with endless varieties of cheap software for creating and editing content, makes it possible for the amateur to produce output of a quality once associated with giant publishing houses and recording companies. That is true of the software industry, the music industry (thanks to cheap equipment and software for high-quality recording and sound editing),desktop publishing, and to a certain extent even film (as witnessed by affordable editing technology and the success of Sky Captain). Podcasting technology makes it possible to distribute “radio” and “television” programming, at virtually no cost, to anyone with a broadband connection. A network of amateur contributors have peer-produced an encyclopedia, Wikipedia, which Britannica sees as a rival. As Tom Coates put it, “[T]he gap between what can be accomplished at home and what can be accomplished in a work environment has narrowed dramatically over the last ten to fifteen years.”

It’s also true of news, with ever-expanding networks of amateurs in venues like Indymedia, alternative news operations like Robert Parry’s and Greg Palast’s, and Iraqis and American troops blogging news firsthand from Iraq, at the very same time that the traditional broadcasting networks are shutting down.

Agency Problems, Breakaway Firms

This has profoundly weakened corporate hierarchies in the information and entertainment industries, while creating enormous agency problems. As human capital eclipses physical capital as the main source of corporate equity, it becomes increasingly feasible for the human capital assets to vote with their feet. People can take their skills elsewhere, form “breakaway firms,” and leave their former employers as hollowed-out shells owning little more than the company name. This has happened in a few high-profile cases, such as Maurice Saatchi’s walkout from the Saatchi and Saatchi advertising agency, and Salomon Brothers’ loss of a group of traders responsible for 87 percent of the bond-trading firm’s profits. As organization theory writer Luigi Zingales put it, “[I]f we take the standpoint that the boundary of the firm is the point up to which top management has the ability to exercise power. . . , the group was not an integral part of Salomon. It merely rented space, Salomon’s name, and capital, and turned over some share of its profits as rent.”

Economist David Prychitko remarked on breakaway firms in the tech industry back in the 1990s when it was barely underway:

Old firms act as embryos for new firms. If a worker or group of workers is not satisfied with the existing firm, each has a skill which he or she controls, and can leave the firm with those skills and establish a new one. In the information age it is becoming more evident that a boss cannot control the workers as one did in the days when the assembly line was dominant. People cannot be treated as workhorses any longer, for the value of the production process is becoming increasingly embodied in the intellectual skills of the worker. This poses a new threat to the traditional firm if it denies participatory organization.

The appearance of break-away computer firms leads one to question the extent to which our existing system of property rights in ideas and information actually protects bosses in other industries against the countervailing power of workers. Perhaps our current system of patents, copyrights, and other intellectual property rights not only impedes competition and fosters monopoly, as some Austrians argue. Intellectual property rights may also reduce the likelihood of break-away firms in general, and discourage the shift to more participatory, cooperative formats.

In this environment the only thing standing between the old information and media dinosaurs and their total collapse is their so-called intellectual property rights–at least to the extent they’re still enforceable. Ownership of intellectual property becomes the new basis for the power of institutional hierarchies and the primary buttress for corporate boundaries.

The increasing prevalence and imploding cost of small-scale distributed production machinery, along with the rise of “crowdsourced,” distributed means of aggregating capital from small donors, mean that physical production is governed by the same phenomenon to a considerable extent.

Without intellectual property, in any industry where the basic production equipment is widely affordable, and bottom-up networking renders management obsolete, it is likely that self-managed, cooperative production will replace the old managerial hierarchies. The network revolution, if its full potential is realized (as James Bennett put it in the appropriately titled article “The End of Capitalism and the Triumph of the Market Economy”), will lead to substantial redistribution of power and money from the twentieth-century industrial producers of information, culture, and communications–like Hollywood, the recording industry, and perhaps the broadcasters and some of the telecommunications giants–to a combination of widely diffuse populations around the globe and the market actors that will build the tools that make this population better able to produce its own information environment rather than buying it ready-made.

Paying for the Name

Another effect of the shift in importance from tangible to intangible assets is that a growing portion of product prices consists of embedded rents on intellectual property and other artificial property rights, rather than the material costs of production. Tom Peters, in The Tom Peters Seminar, was fond of gushing about the increasing portion of product “value” made up of “ephemera” and “intellect” (that is, the amount of final price consisting of tribute to the owners of intellectual property) rather than labor and material costs. To quote Michael Perelman, “[T]he so-called weightless economy has more to do with the legislated powers of intellectual property that the government granted to powerful corporations. For example, companies such as Nike, Microsoft, and Pfizer sell stuff that has high value relative to its weight only because their intellectual property rights insulate them from competition.”

But intellectual property, as we have already seen, is becoming increasingly unenforceable. As a result, the ownership of proprietary content is becoming increasingly untenable as a basis for corporate institutional power. And we can expect the portion of commodity prices resulting from embedded rents on artificial property rights to implode.

A major component of the business model that prevails under existing corporate capitalism is the offer of below-cost platforms coupled with the sale of patented or copyrighted spare parts, accessories, and so on at an enormous markup. So one buys a cell phone for little or nothing, with the contractual obligation to use only a specified service package for so many years; one buys a fairly cheap printer, which uses enormously expensive ink cartridges; one buys a cheap glucometer, with glucose testing strips that cost $100 a box. Hacking one’s phone to use a different service plan, or manufacturing generic ink cartridges or glucose testing strips in competition with the proprietary version, is illegal. The same goes for manufacturing generic replacement parts for a car or appliance, in competition with the corporate dealership.

“Intellectual property” also serves as a bulwark to planned obsolescence and high-overhead production. As it is now, appliances are generally designed to thwart repair. When the repairman tells you it would cost more than it’s worth to repair your washing machine, he’s telling the truth. But he fails to add that this state of affairs reflects a deliberate design: The machine could have been designed on a modular basis, so that the defective part might have been cheaply and easily replaced. And if the manufacturer were subject to unfettered competition, the normal market incentive would be to do so.

Absent legal constraints, it would be profitable to offer competing generic replacements and accessories for other firms’ platforms. And in the face of such competition, there would be strong pressure toward modular product designs that were amenable to repair and interoperable with the modular components and accessories of other companies’ platforms. Absent the legal constraints of patents, an appliance designed to thwart ease of repair through incompatibility with other companies’ platforms would suffer a competitive disadvantage.

At the global level, intellectual property plays the same protectionist role for transnational corporations that tariffs performed in the old national economies. It’s hardly coincidental that the dominant industrial sectors in the global corporate economy–software, entertainment, biotech, pharmaceuticals, and electronics–all depend heavily on intellectual property. And the central focus of the neoliberal regime, which has been falsely identified with “free trade” and “free markets,” is on strengthening the legal intellectual property regime as the primary source of profits.

On a global scale, patents lock transnational manufacturing corporations into a permanent monopoly on productive technology. The central motivation in the GATT intellectual property regime is to secure the transnational corporations’ (TNCs) collective monopoly of advanced technology and prevent independent competition from ever arising in the Third World. It would, as the Third World Network’s Martin Khor Kok Peng writes, “effectively prevent the diffusion of technology to the Third World, and would tremendously increase monopoly royalties of the TNCs whilst curbing the potential development of Third World technology.”

Drawing to a Close

But to repeat, the good news is that, in both the domestic and global economies, this business model is doomed. The shift from physical to human capital as the primary source of productive capacity in so many industries, along with the imploding price and widespread dispersion of ownership of capital equipment, means that corporate employers are increasingly hollowed out and only maintain control over the physical production process through legal fictions. When so much of actual physical production is outsourced to the independent small shop (be it a Chinese sweatshop or a GM supplier) the corporation becomes a redundant “node” that can be bypassed. As blogger David Pollard described it, from the perspective of a future historian in 2015:

The expensive outsourcers quickly found themselves unnecessary middlemen. . . . The large corporations, having shed everything they thought was ‘non-core competency’, learned to their chagrin that in the connected, information economy, the value of their core competency was much less than the inflated value of their stock, and they have lost much of their market share to new federations of small entrepreneurial businesses.

For all the harm it does, intellectual property is not really even necessary as an incentive for innovation. Industrial analyst F. M. Scherer argued in the 1990s, based on a survey of 91 companies, that some 86 percent of all process and product innovations would have been developed from “the necessity of remaining competitive, the desire for efficient production, and the desire to expand and diversify their sales.”

And copyright is no more necessary for artistic creation than patents are necessary for invention. In the open-source world there are many businesses that manage to make money from auxiliary services even though their content itself is not proprietary. For example, Red Hat makes money off the open-source Linux operating system by customizing the software and offering specialized customer support. Phish has actively encouraged fans to share its music free of charge, while making money off of live performances and concessions. Radiohead offered a recent album for free download, collecting only voluntary contributions via what amounted to a glorified PayPal tip jar.

Since intellectual property is not necessary to encourage innovation, this means that its main practical effect is to cause economic inefficiency by levying a monopoly charge on the use of existing technology.

In any case, for those whose libertarianism follows from the principles of self-ownership and nonaggression, whether or not intellectual property is necessary to profit from certain forms of economic activity is beside the point. That’s the same argument used by protectionists: Certain businesses would be unprofitable if they weren’t protected by tariffs. But no one has a right to profit at someone else’s expense, through the use of force. In particular, no one has the right to make a profit by using the State to prevent others from doing as they please with their own pens and paper, hard drives, or CDs. A business model that isn’t profitable without government intervention should fail.

This means it is a mistake to consider any particular form of state intervention in isolation, without regard to the role it plays in the overall system. (See Sciabarra’s “Dialectics and Liberty, The Freeman, September 2005, http://tinyurl.com/6pa6pg.)

Another libertarian, blogger Arthur Silber, contrasts dialectical libertarianism with what he calls “atomistic libertarianism,” whose approach is to “focus on the basic principles involved, but with scant (or no) attention paid to the overall context in which the principles are being analyzed. In this manner, this approach treats principles like Plato’s Forms. . . .” Atomistic libertarians argue “as if the society in which one lives is completely irrelevant to an analysis of any problem at all.”

To determine the function a particular form of state intervention serves in the structure of state power, we must first ask what has been the historical objective of the state. This is where libertarian class analysis comes in.

The single greatest work I’m aware of on libertarian class theory is Roderick Long’s article, “Toward a Libertarian Theory of Class” (Social Philosophy & Policy, Summer 1998). Long categorizes ruling-class theories as either “statocratic” or “plutocratic,” based on the respective emphasis they place on the state apparatus and the plutocracy (the wealthy “private-sector” beneficiaries of government intervention) as components of the ruling class.

The default tendency in mainstream libertarianism is a high degree of statocracy, to the point not only of (quite properly) emphasizing the necessary role of state coercion in enabling “legal plunder” (Frédéric Bastiat’s term) by the plutocracy, but of downplaying the significance of the plutocracy even as beneficiaries of statism. This means treating the class interests associated with the state as ad hoc and fortuitous. Although statocratic theory treats the state (in Franz Oppenheimer’s phrase) as the organized political means to wealth, it still tends to view government as merely serving the exploitative interests of whatever assortment of political factions happens to control it at any given time. This picture of how the state works does not require any organic relation between the various interest groups controlling it at any time, or between them and the state. It might be controlled by a disparate array of interest groups, including licensed professionals, rent-seeking corporations, farmers, regulated utilities, and big labor; the only thing they have in common is that they happen to be currently the best at latching onto the state.

Murray Rothbard’s position was far different. Rothbard, Long argues, saw the state as controlled by “a primary group that has achieved a position of structural hegemony, a group central to class consolidation and crisis in contemporary political economy. Rothbard’s approach to this problem is, in fact, highly dialectical in its comprehension of the historical, political, economic, and social dynamics of class.”

I have argued in the past that the corporate economy is so closely bound up with the power of the state, that it makes more sense to think of the corporate ruling class as a component of the state, in the same way that landlords were a component of the state under the Old Regime. Blogger Brad Spangler used the analogy of a gunman and bagman to illustrate the relationship:

Let’s postulate two sorts of robbery scenarios.

In one, a lone robber points a gun at you and takes your cash. All libertarians would recognize this as a micro-example of any kind of government at work, resembling most closely State Socialism.

In the second, depicting State Capitalism, one robber (the literal apparatus of government) keeps you covered with a pistol while the second (representing State allied corporations) just holds the bag that you have to drop your wristwatch, wallet and car keys in. To say that your interaction with the bagman was a “voluntary transaction” is an absurdity. Such nonsense should be condemned by all libertarians. Both gunman and bagman together are the true State.

Given this perspective, it doesn’t make much sense to consider particular proposals for deregulating or cutting taxes without regard to the role the taxes and regulations play in the overall structure of state capitalism. That’s especially true considering that most mainstream proposals for “free market reform” are generated by the very class interests that benefit from the corporate state.

No politico-economic system has ever approximated total statism, in the sense that “everything not forbidden is compulsory.” In every system there is a mixture of compulsory and discretionary behavior. The ruling class allows some amount of voluntary market exchange within the interstices of a system whose overall structure is defined by coercive state intervention. The choice of what areas to leave to voluntary exchange, just as much as of what to subject to compulsory regulation, reflects the overall strategic picture of the ruling class. The total mixture of statism and market activity will be chosen as most likely, in the estimation of the ruling class, to maximize net exploitation by the political means.

Primary and Secondary Interventions

Some forms of state intervention are primary. They involve the privileges, subsidies, and other structural bases of economic exploitation through the political system. This has been the primary purpose of the state: the organized political means to wealth, exercised by and for a particular class of people. Some forms of intervention, however, are secondary. Their purpose is stabilizing, or ameliorative. They include welfare-state measures, Keynesian demand management, and the like, whose purpose is to limit the most destabilizing side-effects of privilege and to secure the long-term survival of the system.

Unfortunately, the typical “free market reform” issuing from corporate interests involves eliminating only the ameliorative or regulatory forms of intervention, while leaving intact the primary structure of privilege and exploitation.

The strategic priorities of principled libertarians should be just the opposite: first to dismantle the fundamental, structural forms of state intervention, whose primary effect is to enable exploitation, and only then to dismantle the secondary, ameliorative forms of intervention that serve to make life bearable for the average person living under a system of state-enabled exploitation. As blogger Jim Henley put it, remove the shackles before the crutches.

To welcome the typical “free market” proposals as “steps in the right direction,” without regard to their effect on the overall functioning of the system, is comparable to the Romans welcoming the withdrawal of the Punic center at Cannae as “a step in the right direction.” Hannibal’s battle formation was not the first step in a general Carthaginian withdrawal from Italy, and you can be sure the piecemeal “privatizations,” “deregulations,” and “tax cuts” proposed are not intended to reduce the amount of wealth extracted by the political means.

Regulations and Increasing Statism

Moreover, regulations that limit and constrain the exercise of privilege do not involve, properly speaking, a net increase in statism at all. They are simply the corporate state’s stabilizing restrictions on its own more fundamental forms of intervention.

Silber illustrated the dialectical nature of such restrictions with reference to the question of whether pharmacists ought to be able to refuse to sell items (such as “morning after” pills) that violate their conscience. The atomistic-libertarian response is, “Of course. The right to sell, or not sell, is a fundamental free-market liberty.” The implicit assumption here, as Silber pointed out, is “that this dispute arises in a society which is essentially free.” But pharmacists are in fact direct beneficiaries of compulsory occupational licensing, a statist racket whose central purpose is to restrict competition and enable them to charge a monopoly price for their services. Silber wrote:

The major point is a very simple one: the pharmacy profession is a state-enforced monopoly. In other words: the consumer and the pharmacist are not equal competitors on the playing field. The state has placed its thumb firmly on the scales—and on one side only. That is the crucial point, from which all further analysis must flow. . . .

. . . [T]he state has created a government-enforced monopoly for licensed pharmacists. Given that central fact, the least the state can do is ensure that everyone has access to the drugs they require—and whether a particular pill is of life and death importance is for the individual who wants it to decide, not the pharmacist and most certainly not the government.

When the state confers a special privilege on an occupation, a business firm, or an industry, and then sets regulatory limits on the use of that privilege, the regulation is not a new intrusion of statism into a free market. It is, rather, the state’s limitation and qualification of its own underlying statism. The secondary regulation is not a net increase, but a net reduction in statism.

On the other hand, repeal of the secondary regulation, without an accompanying repeal of the primary privilege, would be a net increase in statism. Since the beneficiaries of privilege are a de facto branch of the state, the elimination of regulatory constraints on their abuse of privilege has the same practical effect as repealing a constitutional restriction on the state’s exercise of its own powers.

To expand Spangler’s bagman analogy, a great deal of alleged statism amounts to the gunman telling the bagman, after the victim has handed his wallet over at gunpoint, to give the victim back enough money for cab fare so he can get safely back home and keep on earning money to be robbed of.

When the state is controlled by “legal plunderers” and every decision for or against state intervention in a particular circumstance reflects their strategic assessment of the ideal mixture of intervention and non-intervention, it’s a mistake for a genuine anti-state movement to allow the priorities for “free market reform” to be set by the plunderers’ estimation of what forms of intervention no longer serve their purpose. If the corporate representatives in government are proposing a particular “free market reform,” you can bet your bottom dollar it’s because they believe it will increase the net political extraction of wealth.

The corporate ruling class’s approach to “free market reform” is a sort of mirror-image of “lemon socialism.” Under lemon socialism, the political capitalists (acting through the state) choose to nationalize those industries that corporate capital will most benefit from having taken off its hands, and to socialize those functions the cost of which capital would most prefer the state to bear. They shift functions from the private to the state sector when they are perceived as necessary for the functioning of the system, but not sufficiently profitable to justify the bother of running them under “private sector” auspices. Under “lemon market reform,” on the other hand, the political capitalists liquidate interventionist policies after they have squeezed all the benefit out of state action.

A good example: British industrialists felt it was safe to adopt “free trade” in the mid-nineteenth century, after mercantilism had served its purpose. Half the world had been hammered into a unified market by British force of arms and was held together by a British merchant fleet. Britain had stamped out competing industry in the colonial world. It had reenacted the Enclosures on a global scale, stealing enormous amounts of land from native populations and converting it to cash crops for the imperial market. The commanding position of British capital was the direct result of past mercantilism; having established this commanding position, it could afford “free trade.”

The so-called “free trade” movement in the contemporary United States follows the same pattern. A century ago, high tariff barriers served the interests of American political capitalists. Today, when the dominant corporate interests in America are transnational, tariffs are no longer useful to them. They actually impede the transfer of goods and partially finished products between the national subdivisions of a single global corporation.

On the other hand, so-called “intellectual property” today serves exactly the same protectionist function for transnational corporations that tariffs used to serve for the old national corporations a century ago. So the political capitalists promote a version of “free trade” that involves doing away with outmoded tariff barriers while greatly strengthening the new protectionism of “intellectual property” law.

We must remember that the measure of statism inheres in the functioning of the overall system, not in the formal statism of its separate parts. A reduction in the formal statism of some separate parts, chosen in accordance with the strategic priorities of the statists, may actually result in a net increase in the overall level of statism. Our strategic agenda as libertarians, in dismantling the state, must reflect our understanding of the overall nature of the system.

The first and probably the most important subsidy of history is land theft, by which peasant majorities were deprived of their just property rights and turned into tenants forced to pay rent based on the artificial “property” titles of state-privileged elites.

Of course, all such artificial titles not founded on appropriation by individual labor are completely illegitimate.

As Ludwig von Mises pointed out in Socialism, the normal functioning of the market never results in a state of affairs in which most of the land of a country is “owned” by a tiny class of absentee landlords and the peasant majority pay rent for the land they work. Wherever it is found, it is the result of past coercion and robbery.

Murray Rothbard, in The Ethics of Liberty, explained the injustice of feudal landlordism:

But suppose that centuries ago, Smith was tilling the soil and therefore legitimately owning the land; and then that Jones came along and settled down near Smith, claiming by use of coercion the title to Smith’s land, and extracting payment or “rent” from Smith for the privilege of continuing to till the soil. Suppose that now, centuries later, Smith’s descendants (or, for that matter, other unrelated families) are now tilling the soil, while Jones’s descendants, or those who purchased their claims, still continue to exact tribute from the modern tillers.Where is the true property right in such a case? It should be clear that here . . . we have a case of continuing aggression against the true owners—the true possessors—of the land, the tillers, or peasants, by the illegitimate owner, the man whose original and continuing claim to the land and its fruits has come from coercion and violence. Just as the original Jones was a continuing aggressor against the original Smith, so the modern peasants are being aggressed against by the modern holder of the Jones-derived land title. In this case of what we might call “feudalism” or “land monopoly,” the feudal or monopolist landlords have no legitimate claim to the property. The current “tenants,” or peasants, should be the absolute owners of their property, and, as in the case of slavery, the land titles should be transferred to the peasants, without compensation to the monopoly landlords.

So rather than defending all existing land titles in the name of the “sanctity of property” and protesting when some left-wing government institutes a land reform that transfers feudal land titles to the peasantry, Rothbard favored 1) dividing up Southern plantations and giving freed American slaves “forty acres and a mule,” and 2) transferring the latifundia from Latin American landed oligarchies to the peasants.

In the Old World, especially Britain (where the Industrial Revolution began), the expropriation of the peasant majority by a politically dominant landed oligarchy took place over several centuries in the late medieval and early modern period. It began with the enclosure of the open fields in the late Middle Ages. Under the Tudors, Church fiefdoms (especially monastic lands) were expropriated by the state and distributed among the landed aristocracy. The new “owners” evicted or rack-rented the peasants.

Expropriating from the Peasantry

The Restoration Parliament of the seventeenth century carried out a series of land “reforms” that abolished feudal land tenure altogether—but only upward. There were two ways Parliament could have abolished feudalism and reformed property. It might have treated the customary possessive rights of the peasantry as genuine title to property in the modern sense, and then abolished their rents. But what it actually did, instead, was to treat the artificial “property rights” of the landed aristocracy, in feudal legal theory, as real property rights in the modern sense; the landed classes were given full legal title, and the peasants were transformed into tenants at will with no customary restriction on the rents that could be charged. The most important component of this “reform” was the Statute of Frauds of 1677, which nullified rights of copyhold by making them unenforceable in royal courts.

Finally, the Parliamentary Enclosures of the eighteenth and early nineteenth century robbed the peasantry of their rights of common. The propertied classes of England saw the economic independence provided by the commons as a threat, first to an adequate supply of agricultural wage labor on the landed oligarchy’s own land, and later to an adequate supply of factory labor willing to work the long hours and low pay demanded by the owners. The literature of the propertied classes of the time was quite explicit on their motivation: the laboring classes would not work hard enough or cheaply enough so long as they had independent access to the means of subsistence. They had to be made as poor and hungry as possible so that they would be willing to accept work on whatever terms it was offered.

A version of the same phenomenon took place in the Third World. In European colonies where a large native peasantry already lived, states sometimes granted quasi-feudal titles to landed elites to collect rent from those already living on and cultivating the land; a good example is latifundismo, which prevails in Latin America to the present day. Another example is British East Africa. The most fertile 20 percent of Kenya was stolen by the colonial authorities, and the native peasantry evicted, so the land could be used for cash-crop farming by white settlers (using the labor of the evicted peasantry, of course, to work their own former land). As for those who remained on their own land, they were “encouraged” to enter the wage-labor market by a stiff poll tax that had to be paid in cash. Multiply these examples by a hundred and you get a bare hint of the sheer scale of robbery over the past 500 years.

Contrary to Mises’s rosy version of the Industrial Revolution in Human Action, factory owners were not innocent in all of this. Mises claimed that the capital investments on which the factory system was built came largely from hard-working and thrifty workmen who saved their own earnings as investment capital. In fact, however, they were junior partners of the landed elites, with much of their investment capital coming either from the Whig landed oligarchy or from the overseas fruits of mercantilism, slavery, and colonialism.

In addition, factory employers depended on harsh authoritarian measures by the government to keep labor under control and reduce its bargaining power. In England the Laws of Settlement acted as a sort of internal passport system, preventing workers from traveling outside the parish of their birth without government permission. Thus workers were prevented from “voting with their feet” in search of better-paying jobs. You might think this would have worked to the disadvantage of employers in underpopulated areas, like Manchester and other areas of the industrial north. But never fear: the state came to the employers’ rescue. Because workers were forbidden to migrate on their own in search of better pay, employers were freed from the necessity of offering high enough wages to attract free agents; instead, they were able to “hire” workers auctioned off by the parish Poor Law authorities on terms set by collusion between the authorities and employers.

Legalized Discrimination Against Laborers

The Combination Laws, which prevented workers from freely associating to bargain with employers, were enforced entirely by administrative law without any protections of common-law due process. And they were only enforced against combination by workers, not against combination by employers (such as blacklisting “troublemakers” and collusive setting of wages). The Riot Act (1714) and other police-state legislation during the Napoleonic Wars were used to stem the threat of domestic revolution, essentially turning the English working class into an occupied enemy population. Such legislation criminalized most forms of association.

Even fraternal associations for mutual aid, burial and sick benefits, and the like operated in the face of hostility from the state, according to historians of the friendly-society movement such as Bob James and Peter Gray. Under the terms of the Combination Act, friendly societies were subjected to close judicial supervision lest direct craft production be organized for barter among the unemployed, or the societies’ benefits cross the line and function as de facto unemployment insurance for striking workers. The Corresponding Societies Act, passed around the same time, prohibited all societies that administered secret oaths or were federated on a national scale.

So the Industrial Revolution was, in fact, built on a system of legal peonage in which employers were directly implicated. The form taken by the factory system surely reflects this history. In a Britain composed of peasant smallholders, with no restraints on free association, workers would have been free to mobilize their own properties as capital through mutual credit institutions. Absentee ownership and hierarchy would likely have been far, far less prevalent, and the factory system where it existed far less oppressive and authoritarian.

A similar process occurred in the colonization of settler societies like America and Australia, by which the colonial powers and their landed elites attempted to replicate feudal patterns of property ownership. In such colonies, the state preempted ownership of vacant land and restricted working people’s access to it. Sometimes they gave title to vacant land to privileged land speculators, who were able to charge rent to those who homesteaded it (the legitimate owners).

E. G. Wakefield, an early nineteenth-century British theorist of colonialism, advocated just such preemption on the same grounds that the propertied and employing classes of Britain had supported Enclosure: it was easier to hire labor on favorable terms to the employer. In England and America, he wrote:

In colonies, labourers for hire are scarce. The scarcity of labourers for hire is the universal complaint of colonies. It is the one cause, both of the high wages which put the colonial labourer at his ease, and of the exorbitant wages which sometimes harass the capitalist. . . .

Where land is cheap and all men are free, where every one who so pleases can obtain a piece of land for himself, not only is labour very dear, as respects the labourers’ share of the product, but the difficulty is to obtain combined labour at any price.

Consequently, “[f]ew, even of those whose lives are unusually long, can accumulate great masses of wealth.”

Wakefield’s disciple, Thomas Merivale, wrote of the “urgent desire for cheaper and more subservient labourers—for a class to whom the capitalist might dictate terms, instead of being dictated to by them.”

Land preemption was a major element of colonial policy in early American history. Gary Nash, in Class and Society in Early America, described land grants in colonial America comparable to those of William I in England after the Conquest. In New York, for example, the largest estates granted by the British colonial administration (after the New Netherlands was acquired in the Dutch Wars) ranged from the hundreds of thousands to over a million acres. Governors continued to grant tracts of land in the hundreds of thousands of acres to their favorites, well into the eighteenth century. Under Governor Fletcher, some three-quarters of available land was granted to 30 persons.

Albert Jay Nock, in Our Enemy, the State, argued that “from the time of the first colonial settlement to the present day, America has been regarded as a practically limitless field for speculation in rental values.” Many leading figures in the late colonial and early republican period were prominent investors in the great land companies, including George Washington in the Ohio, Mississippi, and Potomac Companies; Patrick Henry in the Yazoo Company; Benjamin Franklin in the Vandalia Company, and so forth.

In The Ethics of Liberty, Rothbard condemned such preemption (“land-engrossing, where arbitrary claims to virgin land are used to keep first-transformers out of that land”) on the same grounds that he criticized feudal landlordism. He called for voiding all current titles to vacant and unimproved land, and opening it up to free homesteading. In addition, in cases where current mortgage holders and landlords trace their title to state grants of land, the proper claim lies with those who first homesteaded the land, or their heirs and assigns.

The Homestead Act of 1862, an apparent exception to this general trend, was really just another illustration of it. The majority of land, rather than being claimed under the terms of the Homestead Act, was auctioned to the highest bidder. Even for land covered by the Act, according to Howard Zinn, the $200 fee was beyond the reach of many. As a result, much of the land was not homesteaded on Lockean principles at all, but initially went to speculators before being partitioned and resold to homesteaders. And compared to the 50 million acres covered by homestead legislation, 100 million acres were given away as railroad land grants during the Civil War—free of charge! In other words, the privileged classes got the gravy, and ordinary homesteaders got the bone.

Keeping the System Going

What I have described here are only the initial acts of coercion and robbery on which our existing form of industrial capitalism was founded. Of course it didn’t stop there. Once the system was up and running, it depended on the state’s ongoing efforts to maintain a legal structure of privilege, based on artificial property rights and artificial scarcity: enforcement of absentee titles to vacant and unimproved land; entry barriers for the banking industry to make credit artificially expensive and scarce; the artificial property rights of patent and copyright; and more. And starting in the late nineteenth century the modern form of corporate capitalism depended on even more massive state intervention: subsidies to long-distance shipping to make market areas and firm size artificially large; the cartelizing effects of patents and tariffs; regulatory cartelization; and entire industries and sectors of the economy either brought into existence or guaranteed a taxpayer-funded market by the post-1941 perpetual war economy.

Contrary to popular mythology, the New Deal was not a departure from some preexisting idyllic state of “laissez faire.” There never was anything remotely approaching laissez faire. Capitalism—that is, the existing historical system as it actually developed—has had very little to do with free markets and a great deal to do with robbery and coercion.

This is not to say that all avenues to economic advancement through independent entrepreneurship have been closed off. But it’s much more of an uphill struggle than it would be in a free market, and the field is unfairly tilted in favor of the big players.

In seeking to institute a genuine free market, libertarians shouldn’t lose sight of these facts. What lessons are libertarians to learn from the previous historical account?

First, there is nothing “libertarian” about the instinctive tendency to rally to the defense of existing property titles without regard to justice. As Karl Hess said in The Libertarian Forum, back in 1969,

[L]ibertarianism wants to advance principles of property but . . . it in no way wishes to defend. . . all property which now is called private. Much of that property is stolen. Much is of dubious title. All of it is deeply intertwined with an immoral, coercive state system which has condoned, built on, and profited from slavery; has expanded through and exploited a brutal and aggressive imperial and colonial foreign policy, and continues to hold the people in a roughly serf-master relationship to political-economic power concentrations.

Second, in advocating free-market reform, we must consider the role of this historical legacy of injustice (the subsidy of history) in determining the winners under the present system. A “free-market reform” that simply locks in the beneficiaries of past robbery and privilege, and ratifies the past theft from which they benefit, will merely reward injustice and secure its ill-gotten gains.

From a libertarian ethical standpoint, the standard model of “privatization” (selling off state property to a large, politically connected private corporation, on terms most advantageous to the corporation) is therefore highly dubious. That’s especially true considering that much of the property was created in the first place—at taxpayer expense—for the primary purpose of subsidizing the operating costs of big business. Much of the state-owned utility and transportation infrastructure in the Third World was created, at the behest of transnational financial elites, as a precondition for profitable Western capital investment. And the odious debt thus incurred, often by corrupt dictatorships acting in collusion with global finance, is then used by the World Bank to blackmail those countries into selling off their infrastructure to the very same transnational corporations it was created to benefit—usually at pennies on the dollar.

An Appropriate Model for Privatization

Rothbard’s model of privatization is far superior: to void state titles to property and treat it as unowned, subject to immediate homesteading by those actually mixing their labor with it. That would mean that state universities would be transformed into the property of their students or faculty, as consumer or producer cooperatives. Government-owned utilities would become consumer cooperatives owned by ratepayers, and state-owned factories would be handed over to the work force and reorganized as worker cooperatives.

We must also be wary of pseudo-Coasean arguments that it “doesn’t matter” who the property was originally stolen from, because it will end up in the hands of the “most efficient” owner. That’s essentially the same argument used for eminent domain. Regardless of whose hands the property winds up in, the rightful owners and their descendants—who never received compensation—are out the value of what was stolen from them. And even the most inefficient ways of organizing production are pretty “efficient,” comparatively speaking, when you have the competitive advantage of working with stolen property.

Besides, there is no such thing as generic “efficiency”; efficiency depends on the owner’s purpose. The most efficient technique for subsistence farming on a small plot—economizing on land by building soil and adding intensive labor inputs—is entirely different from that for a feudal oligarch producing cash crops with access to more stolen land than he could possibly use, and often holding a majority of his stolen land out of use altogether. In any case, the rightful owner would no doubt find it far more “efficient” to be feeding himself on his own land, than starving in a shantytown because he can’t afford to buy even the cheapest food from those “efficient” plantations occupying his stolen land.

The actual system of political economy that so many corporate apologists refer to as “our free market system” has in fact been characterized from the beginning by robbery. We must beware of “free market reforms” carried out by the robbers. They amount in practice to allowing the robbers—hands still full of loot—to say: “All right, no more stealing, starting . . . now!”

F. A. Hayek, in “The Use of Knowledge in Society,” used distributed, or idiosyncratic, knowledge—the unique situational knowledge possessed by each individual—as an argument against state central planning.

Milton Friedman’s dictum about “other people’s money” is well known. People are more careful and efficient in spending their own than other people’s money, and likewise in spending money on themselves more so than in spending money on other people.

A third insight is that people act most efficiently when they completely internalize the positive and negative results of their actions.

The corporate hierarchy violates all of these principles in a manner quite similar to the bureaucracy of a socialist state. Those at the top make decisions concerning a production process about which they likely know as little as did, say, the chief of an old Soviet industrial ministry.

The employees of a corporation, from the CEO down to the worker on the shop floor, are spending other people’s money, or using other people’s resources, for other people. Its managers, as Adam Smith observed 200 years ago, are “managers rather of other people’s money than of their own.”

By its nature, the corporation substitutes administrative incentives for what Oliver Williamson called the “high powered incentives” of the market: effort and productivity are separated from reward. As Ronald Coase observed some 70 years ago,

If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so. . . .

It can, I think, be assumed that the distinguishing mark of the firm is the supersession of the price mechanism.

So why is all this the case? Why does the corporation systematically abandon the basic knowledge and agency benefits of a free market, and rely on the same kinds of central planning and bureaucratic incentives that free-market advocates rightly attack on the part of the state? Why does the corporation function, internally, as an island of nonmarket operations?

A classic essay by C. L. Dickinson, “Free Men for Better Job Performance,” was reprinted in the same issue as my article. Dickinson described the harmful effects of the managerial revolution and the bureaucratic style of corporate governance. He quoted Douglas McGregor (The Human Side of Enterprise): “Many managers agree that the effectiveness of their organizations would be at least doubled if they could discover how to tap the unrealized potential present in their human resources.”

Unfortunately, the structural preconditions of the present system rule out, from the start, an organization which can tap that potential. The system starts from the legacy of a historical process (called “primitive accumulation” by radical historians of various stripes) by which the land was stolen on a large scale from the peasantry in the early modern period. The process included the enclosure of open fields, the legal nullification of copyhold and other traditional tenure rights, and the Parliamentary Enclosures of common land.

As Murray Rothbard observed, whenever we witness a majority of peasants paying rent to a small class of “owners” for access to the land they cultivate, it’s a safe guess the cultivators are the rightful owners and the landlords’ “property rights” are some sort of feudal legal fiction stemming from conquest or privilege. The effect of the assorted “land reforms” of the early modern era was to transform the landed oligarchy’s “property” in feudal legal fiction into a modern freehold right and reduce the rightful owners to at-will tenancy. The result of these expropriations was to drive the majority of peasants off the land, deprive them of independent access to the means of production and subsistence, and force them into the wage-labor market—at the same time as their former property was consolidated into the hands of the plutocracy.

As the industrial revolution developed in England, further accumulation of wealth by the owning classes was fostered by state-enforced unequal exchange, the result of coercive state restrictions on the free movement, free association, and freedom to bargain of the laboring classes. These included the Laws of Settlement (a sort of internal passport system restricting the movement of labor in search of better wages) and the Combination Laws.

Subsidizing Centralization

The state’s entry barriers, like licensing and capitalization requirements for banks, reduce competition in the supply of credit and drive up its price; enforcement of artificial titles to vacant and unimproved land has a similar effect. As a result, labor’s independent access to capital is limited; workers must sell their labor in a buyer’s market; and workers tend to compete for jobs rather than jobs for workers.

State subsidies to economic centralization and capital accumulation also artificially increase the capital-intensiveness of production and thereby the capitalization of the dominant firm. The effect of such entry barriers is to reduce the number of employers competing for labor, while increasing the difficulty for small property owners to pool their capital and create competing enterprise.

The cumulative legacy of these past acts of state-assisted robbery, and ongoing state-enforced unequal exchange, determines the basic structural foundations of the present-day economy. These include enormous concentrations of wealth in a few hands, the absentee ownership of capital by large-scale investors, and a hired labor force with no property in the means of production it works.

Necessarily, therefore, the absentee owners must resort to the expedients of hierarchy and top-down authority to elicit effort from a workforce with no rational interest in maximizing its own productivity. Oliver Williamson’s concept of “satisficing” is relevant here. Workers have an interest in maintaining just enough productivity to keep their jobs and increasing it enough to earn whatever limited administrative rewards are available, but no rational interest in maximizing it per se, because any additional increase in productivity beyond the minimum will likely be appropriated by management.

Hierarchy necessarily results in the divorce of effort from reward, and of productive knowledge from authority. Each rung of authority interferes in the efforts of those who know more about what they’re doing; each rung of authority receives only information filtered from below based on what it wants to hear; and each rung of authority is accountable only to those higher up the chain of command who are even more unaccountable and out of touch with reality. The hierarchy, in short, is a textbook illustration of the zero-sum situation that results from substituting power for market relations.

The obvious solution, the worker cooperative, would—by uniting knowledge with authority and reward with effort—slice through the overwhelming majority of the hierarchical corporation’s knowledge and agency problems, like a sword through the Gordian knot. The distributed knowledge of those engaged in production would be applied directly to the production process on their own authority, without the intervention of suggestion boxes and “quality improvement committees.” The problem of socially engineering the wages and benefits system so as to “encourage people to work” would disappear; the elimination of privilege and unearned income, and the receipt by labor of its full product, would tie reward directly to effort.

But this solution is ruled out by the system’s structural starting assumptions: concentrated wealth and absentee ownership. So the hierarchical corporation is adopted as a sort of Rube Goldberg expedient, the most rational means available given fundamentally irrational presuppositions.

Market Outside, Planning Inside

The corporate hierarchy also interferes with efficiency in another way: by substituting planning for market relations. Internally the corporation replaces market exchange with central planning. The simulated prices used by its internal accounting system, necessarily, are largely fictitious. Even when they use outside market prices as a proxy, the conditions under which those outside prices are set do not match the relations of supply and demand within the corporation. But more often, internal transfer prices are assigned to goods for which there is no outside market, like intermediate goods unique to a firm; in that case, the prices are based on cost-plus markup. As Seymour Melman has observed in the case of Pentagon contractors (The Permanent War Economy), cost-plus pricing creates perverse incentives to maximize, rather than minimize, costs.

The ideal, in terms of efficiency, is the allocation of goods entirely by a genuine price mechanism, with a minimum of vertical integration. Insofar as the production process involves a series of discrete, severable steps, the best way of avoiding information and incentive problems may be to relate the separate steps to one another by contract—especially if each step, organized under a separate firm, takes the internal form of a worker cooperative.

Each step, although a black box to those outside, is from an inside perspective ideally suited to aggregating all relevant information for consideration by a single group of decision-makers. In a self-managed enterprise, the same elected management that considers the relative prices of different productive inputs, and the price of the finished product, is also experienced in the actual production process in which the inputs are used. They are most qualified, of all people, to decide both the relative priority by which productive inputs ought to be economized, and the most effective technical methods of organizing production in order to economize those inputs (that is, combining Mises’s “entrepreneurial” and “technical” functions without the intermediation of several layers of pointy-haired bosses).

Just as important, unlike a production unit within a corporate hierarchy, the production workers within an independent producers’ co-op fully internalize all the costs and benefits of their production decisions. Unlike the case within a corporate hierarchy, there is no conflict of interests resulting from the decision-making by managers who stand to reap the benefits of increased productivity while workers suffer only the increased burden of speedups and downsizing. For a self-managed production unit, any decision concerning production methods will be a tradeoff of costs and benefits, all of which are fully internalized by the decision-makers.

From an outside perspective, on the other hand, contracting firms are able to make a virtue of necessity in treating a particular stage of production—organized as a separate firm—as a black box. The outside contractor and the internal corporate hierarchy, equally, are ignorant of goings-on inside the black box. The difference is that an outside contractor, unlike the apparatchiks in a corporate hierarchy, has no need to know what’s happening in the internal production process, and no power to interfere with what he doesn’t understand. So long as the inputs (likely in money terms) are specified by contract and the outputs are verifiable and enforceable, what goes on inside the box isn’t the contractor’s problem.

If the ideal contract is Ian R. MacNeil’s “sharp ins by clear agreement, sharp outs by clear performance,” then it is far simpler and less costly to simply monitor the contractually specified “ins” and “outs” going across firm boundaries than to monitor the internal use of inputs within the production process. The contracting party has no need to worry about the internal efficiency of the production process because it has effectively outsourced the responsibility for decisions on how best to organize production to those engaged in production. And the other firm, if cooperatively owned by self-managed workers, is uniquely qualified to organize production most efficiently given the specified ins and outs. Both the authority to organize production, and the productivity benefits from doing so in the most efficient manner, have been internalized by those who have the most direct knowledge of the production process.

But—again—the state’s intervention in the market raises almost insurmountable barriers to this form of organization. The state artificially promotes hierarchy at the expense of markets by subsidizing the input costs of large-scale enterprise and by protecting large corporations against the competitive ill effects of inefficiency. It subsidizes long-distance transportation and thus artificially inflates market and firm size. Its differential tax advantages for corporate debt and capital depreciation (or more accurately, its differential tax penalties on those not engaged in such activities) encourage mergers, acquisitions, and excessively capital-intensive forms of production with high entry costs. Its cartelizing regulations, in addition, limit competition in product features and quality. Thus the boundary between hierarchy and market is artificially shifted so that the dominant firms are far larger, more hierarchical, and more vertically integrated than they would be in a free market.

The state’s so-called “intellectual property” laws, especially, are a powerful force for cartelization. Many oligopoly industries were created by controlling patents (for example, AT&T was based on the Bell patent system) or exchanging them (GE and Westinghouse). Patents also enable corporations to restrict the supply of replacement parts for their goods and thus render artificially expensive the choice to repair an old car or appliance as an alternative to buying a new one. This facilitates a business model based on planned obsolescence, large production runs, and “push” distribution.

“Intellectual property” also artificially promotes hierarchy even in industries where the minimum level of capitalization has ceased to be an effective barrier to self-employment. One of the original justifications for corporate hierarchy was that the enormous scale of even the minimum capitalization, in entertainment and information, was an entry barrier: To start a newspaper, radio station, movie studio, publishing house, or record company required, at minimum, an outlay of several hundred thousand dollars. As a necessary result, media and entertainment were concentrated in the control of a few gatekeeper corporations.

Revolutionary Change

But as Yochai Benker observed in The Wealth of Networks, the digital revolution has reduced the cost of the basic item of capital equipment—the personal computer—to under a thousand dollars. And supplemental equipment and software for very high-quality desktop publishing, sound editing, podcasting, and so on can be had for a few thousand more. The ability to replicate digital information on the Internet, at zero marginal cost, renders the corporate dinosaurs’ marketing operations obsolete.

The gatekeepers’ only remaining basis for power is the state’s “intellectual property” monopolies—which explains why Microsoft, the RIAA, and MPAA have pursued such draconian copyright legislation to protect themselves from market competition. The intrusive DRM (digital rights management) used by Microsoft and the entertainment companies, and the legal penalties for circumventing it, in effect outlaw precisely what computers are made for: the replication and exchange of digital information. Without copyright and patent monopolies, peer production by self-employed information and entertainment workers would likely be the norm in software, music, and publishing. (It’s probably no coincidence, by the way, that industries dependent on such “intellectual property” monopolies are the main profitable sectors in the global economy. It’s a case of artificial “comparative advantage,” created by state-erected barriers to the diffusion of knowledge and technique. The most profitable industries are those whose profits amount to rents or tolls for access to artificial property.)

The problem is not hierarchy in itself, but government policies that make it artificially prevalent. No doubt some large-scale production would exist in a free market, and likewise some wage employment and absentee ownership. But in a free market the predominant scale of production would likely be far smaller, and self-employment and cooperative ownership more widespread, than at present. Entrepreneurial profit would replace permanent rents from artificial property and other forms of privilege. Had the industrial revolution taken place in a genuine free market rather than a society characterized by state-backed robbery and privilege, our economy today would probably be far closer to the vision of Lewis Mumford than that of Joseph Schumpeter and Alfred Chandler.