The crises laid at the feet of laissez faire are the crises of markets that are nothing if not fettered. When critics confront us with corporate malfeasance, structural poverty, or socioeconomic marginalization, we should be clear that market principles do not require defending big business at all costs, and that much of what our critics condemn results from government regulation and legal privileges. As a model for analyzing the political edge of corporate power and defending markets from the bottom up, we twenty-first-century libertarians might look to our nineteenth-century roots—to the insights of the American individualists, especially their most talented exponent, Benjamin Ricketson Tucker (1854–1939), editor of the free-market anarchist journal Liberty.

Conventional textbook treatments portray the American Gilded Age as one of relentless exploitation and economic laissez faire. But Tucker argued that the stereotypical features of capitalism in his day were products not of the market form, but of markets deformed by political privileges. Tucker did not use this terminology, but for the sake of analysis we might delineate four patterns of deformation that especially concerned him: captive markets, ratchet effects, concentration of ownership, and insulation of incumbents.

Types of Distortion

Captive Markets. Legal mandates and government monopolies produce captive markets in which customers are artificially locked in to particular services or sellers that they wouldn’t otherwise patronize because political requirements enforce the demand. For example, the car insurance market is shaped by laws requiring insurance and regulating the minimum service that must be purchased. Captive markets legally guarantee privileged companies access to a steady stock of customers, corralled by the threat of fines and arrest.

Ratchet Effects. Legal burdens, price distortions, and captive markets combine to ratchet up fixed costs of living far higher than would prevail in freed markets. To get by, people are constrained by the necessity of covering these persistent, inflexible costs—by selling labor, buying insurance, taking on debt—under artificially rigid circumstances. Ratchets keep many chasing the next paycheck, creating permanent states of financial crisis for the poor.

Concentration. Confiscation, regressive redistribution, and legal monopolies deprive workers of resources while concentrating wealth and economic control within a politically favored business class. Struggling to cover ratcheted fixed costs, workers are dispossessed of the means to make an independent living and enter markets where ownership of land, capital, and key resources are legally concentrated in the hands of a few. Workers therefore depend on relationships with bosses and corporations far more than in freed markets, deforming economic activity into hierarchical relationships and confining rental economies.

Insulation. Captive markets and bailouts protect big players, while legal monopolies, regulatory barriers, and anticompetitive subsidies inhibit substitutes and competition from below. Government support props up big businesses, stifling the market and social pressures that might otherwise be brought to bear. Insulated businesses can treat employees and consumers with far less consideration or restraint; meanwhile, intervention shuts out alternative solutions by blocking smaller, grassroots, or informal competitors.

Tucker’s Big Four

We can, then, turn to Tucker’s central idea: In “State Socialism and Anarchism” (1888), Tucker argued that “Four Monopolies” fundamentally shaped the Gilded Age economy—four central areas of economic activity where government ratchets, concentration, and insulation came together to deform markets into “class monopolies,” regressively reshaping all markets as the effects rippled outward.

The Land Monopoly. Land titles in nineteenth-century America had nothing to do with free markets. All unoccupied land was claimed by government, whose military seized land from Indians, Mexicans, and independent “squatters.” Government ownership and preferential grants monopolized access, excluding free homesteading. (The “Homestead Act,” which supposedly opened Western lands to homesteading, really imposed rigid legal limits on homesteaders that only certain medium-sized commercial farmers could effectively meet. Smaller farms and nonfarmers were excluded.) Tucker identified this concentration of land titles in elite hands as a “land monopoly,” creating a class of privileged landlords by depriving workers of market opportunities to gain freeholds and escape rent.

Since 1888 the land monopoly has dramatically expanded. Governments worldwide have nationalized oil, natural gas, and water resources; in the United States mining rights and fossil fuel exploration are largely accessed through government licenses, due to government’s ownership of 50 percent of the American West. The cost of land is ratcheted and ownership concentrated through zoning codes, eminent domain, municipal “development” rackets, and local policies to keep real estate prices permanently rising. Freed land markets would feature more individual and widely dispersed ownership; land would be less expensive and more often held free and clear; vacant land would be more readily open to homesteading; and titles would be based as easily on sweat equity as on leveraged cash exchanges. Many people would no longer need to rent; those who chose to rent would find that competition had dramatically improved the prices and conditions available on the market.

The Money Monopoly. For Tucker the most damaging of the Big Four was the Money Monopoly, “the privilege given by the government to certain individuals . . . holding certain kinds of property, of issuing the circulating medium,” politically manipulating the money supply, prohibiting alternative currencies, and cartelizing banking, money, and credit. Tucker saw that monetary control not only secured monopoly profits for insulated banks, but also concentrated economic ownership throughout the economy, favoring the large, established businesses that large, established banks preferred to deal with.

Tucker identified the Money Monopoly as an economic force in 1888—before the Fed and fiat currency, the FDIC, Fannie, Freddie, the IMF, or trillion-dollar bailouts to banks “too big to fail.” Today regulatory cartels and political mandates have also captured insurance, alongside credit, savings, and investment, as a Money Monopoly stronghold, forcing workers into rigged markets while shutting out noncorporate, grassroots forms of mutual aid.

Ideas and Extortion

The Patent Monopoly. Tucker condemned monopolies protected by patents and copyrights—“protecting inventors and authors against competition for a period long enough to enable them to extort . . . a reward enormously in excess of . . . their services.” Since copying an idea does not deprive the inventor of the idea, or any tangible property she had before, “intellectual property” meant only a legal monopoly against competitors who could imitate or duplicate the monopolists’ products at lower cost.

“Intellectual property” (IP) has grown vigorously since 1888, as media, technology, and scientific innovation made control over the information economy a linchpin of corporate power. Monopoly profits on IP are the effective business model of Fortune 500 companies like GE, Monsanto, Microsoft, and Disney, which demand virtually unlimited legal power to insulate themselves from competition. Copyright terms quadrupled in length, while massive, synchronized expansions of intellectual protectionism became standard features of neoliberal “free trade” “agreements” like NAFTA and KORUS FTA (United States-Korea Free Trade Agreement). In a freed market such business models would fall—and with them, the ratcheted costs consumers pay for access to culture, medicine, and technology.

The Protectionist Monopoly. Tucker identified the protectionist tariff as a monopoly in the sense that it insulated politically favored domestic producers from foreign competition, and thus ratcheted up daily costs for consumers.

With the rise of multinational corporations and neoliberal trade agreements, tariffs have declined over the years. But the specific legal mechanism was less important to Tucker than the purpose of controlling trade to insulate domestic incumbents. In 1888 that meant the tariff. In 2011, it means a vast network of political controls used to manage the “balance of trade”: export subsidies, manipulation of exchange rates, and multigovernment agencies like the World Bank and IMF.

Metastatic Monopolization

Tucker’s Big Four have only grown more pervasive since the 1880s. But the past century has also seen the metastatic proliferation of government regulatory bodies intended to restructure new transactions and capture new markets. Among today’s Many Monopolies, five are especially pervasive:

The Agribusiness Monopoly encompasses the New Deal system of U.S. Department of Agriculture cartels, surplus buy-ups, subsidized irrigation, export subsidies, and similar measures ratcheting up prices, distorting production toward subsidized crops, and concentrating agricultural activity in large-scale, capital-intensive monoculture. These, inevitably enacted in the name of “small farmers,” invariably benefit large factory farms and agribusiness conglomerates like ADM and Tyson.

The Infrastructure Monopoly includes physical and communications infrastructure. Governments build roads, railways, and airports through eminent domain and tax subsidies, and impose cartelizing regulations on most mass transit. Restricted entry secures monopoly profits for insulated carriers; confiscating money and property to subsidize long-distance transportation and shipping creates tax-supported business opportunities for agribusiness, big-box chain retailers, and other businesses dependent on long-haul trucking. Incumbent telecommunications and media companies like AT&T, Comcast, and Verizon accumulate empires by cartelizing bandwidth; control of broadcast frequencies is concentrated through the FCC’s political allocation; and ownership of telephone, cable, and fiber-optic bandwidth is concentrated through local monopoly concessions for each medium.

The Utility Monopoly grants control over electricity, water, and natural gas to massive, centralized producers through comprehensive planning, subsidies, and regional monopolies. Household generation, polycentric neighborhood systems, or off-the-grid alternatives are crowded out or regulated to death.

Regulatory Protectionism

Regulatory Protectionism may be the most widely dispersed of the Many Monopolies. Like Tucker’s Protectionist Monopoly, it concentrates and insulates incumbent providers by creating hurdles for would-be competitors. Established businesses stifle competition from below by lobbying for regulatory red tape, extortionist fees, and complex licensing for everything from taxi-driving to hairdressing. Industry standards, which would otherwise be set by social convention and market experimentation, are removed from competition and determined by political pull. High compliance costs insulate incumbents who can afford them from competitors who cannot, shutting the poor out of entrepreneurial opportunities and independent livelihoods.

The Health Care Monopoly is a ripple effect of other monopolies but merits special notice because of the all-consuming growth of the medical sector and because health care and insurance so profoundly shape decisions about jobs, money, and financial planning. The central economic fact of health care is a crippling ratchet effect. Patent monopolies ratchet up drug costs and insulate profits for Pfizer and GlaxoSmithKline. The FDA and medical licensing provide a form of regulatory protectionism, constraining the supply of doctors, hospitals, and pharmaceuticals, concentrating profits and further ratcheting costs. A medical need can become a catastrophic cost, effectively requiring comprehensive insurance. Workers once got insurance through fraternal mutual-aid societies, but money monopolies have now thoroughly corporatized the insurance market through subsidies, mandates, and regulatory control. Workers now are tethered to their employers by the cost of insurance “benefits,” while facing the persistent danger of lost coverage, denied claims, and crippling debt.

Tucker’s analysis of the Four Monopolies controlling the Gilded Age economy, supplemented with the new Big Five that our own era has introduced, goes a long way toward showing why existing markets work the way they work and fail for the people they fail for. It may also inspire some objections from today’s libertarians.

The Many Monopolies deform markets toward stereotypically “capitalistic” business, but government intervenes in more than one direction. What about regulations or welfare programs to benefit poor people, or constraints on large, consolidated firms? These exist, but do not necessarily achieve their supposed aims. As shown in Gabriel Kolko’s Triumph of Conservatism, the Progressive regulatory structure and antitrust law, far from curbing big business, form the core of regulatory protectionism, cartelizing and insulating big business. There are also issues of priority and scale. While I object to SBA loans or TANF (Temporary Assistance to Needy Families) as much as any free-marketeer, in this age of trillion-dollar bank bailouts, even when government puts fingers on both sides of the scale, one finger is pushing harder than the other.

What about the explanations market economists offer for corporate firms’ greater efficiency, based on division of labor, economies of scale, or gains from trade? Wouldn’t large corporations outcompete smaller rivals, even without subsidies and monopolies?

But Tucker didn’t reject the division of labor, gains from trade, or large-scale production. Rather he suggested labor, trade, and scale organized along different lines. Independent contracting, co-ops, and worker-managed shops are forms of specialization and trade no less than centralized firms. Scale can be internalized through central management, or externalized through polycentric trade. A corporate economy is only one among many possibilities for dividing labor and exchanging values. The question is whether it predominates because of economic forces that would persist in markets free of structural privilege, or because of predicaments that would dissipate when competitors are free to offer alternatives with less centralization, less management, and more trade and entrepreneurial independence for ordinary workers.

If Tucker’s analysis proves anything, it proves there are many places in economic life where ordinary people are given a hard shove toward spending money they’d rather not spend with trading partners they wouldn’t otherwise keep. The most pervasive, far-reaching government interventions foster economic concentration, commercialization, hyperthyroidal scale, and the consolidated hierarchy needed to manage it—not because they grow naturally in market economies but because they grow out of control in the hothouse of socialized costs and inhibited competition.

The Belt and the Bones

For most of the twentieth century American libertarians were seen as defenders of “capitalism” (though see Clarence Carson’s doubts about that word in the 1985 Freeman article “Capitalism: Yes and No”). Most libertarians, and nearly all their opponents, seemed to agree that libertarianism meant defending business against the attacks of “big government,” and the purpose of laissez faire was to unleash existing forms of commerce from political restraints.

This was almost a complete reversal from the attitude of traditional libertarians like Tucker, which we might call “free-market anti-capitalism.” He was one of the best-known defenders of free markets in nineteenth-century America, happily summarizing his economic principles as “Absolute Free Trade . . . laissez-faire the universal rule.” For Tucker, then, libertarianism meant an attack on economic privilege by removing the political privileges that propped it up, dismantling monopolies by exposing them to competition from below.

The Many Monopolies are pervasive and fundamentally shape the everyday reality of the corporatist economy. So why then have not only the opponents but also the advocates of free markets so often missed Tucker’s analysis, with Progressives constantly laying the blame for inequality, exploitation, and corporate power on “unregulated markets,” while “pro-capitalist” libertarians respond by making excuses for the economic status quo? Paradoxically, it may be that Tucker’s approach is forgotten partly because of the very depth and pervasiveness of the problems it identifies.

The interventions twentieth-century libertarians were most likely to identify and oppose—progressive taxes, welfare, environmental regulations—are surface interventions, economically speaking. While aiming to reform or restrain the corporate state-capitalist economy, they take its basic features—concentration, insulation, ratcheted costs, and corporate power—for granted, attempting only to contain their most unsightly downstream effects. Countervailing “Progressive” regulations are like a belt put on capitalism. A man may need a belt or he may look better without, but his body remains the same with or without the restraint.

The political means that consolidate the Many Monopolies do more than interfere in the outcomes of preexisting market structures. State-capitalist privileges shape basic patterns of ownership, access, and cost for essential goods and factors of production. They fundamentally restructure markets, inventing the class structures of ownership, ratcheted costs, and inhibited competition that produce wage labor, rent, and the corporate economy we face. These primary interventions are no belt for state capitalism to wear or take off; they are its very bones. Without them, what’s left is not a different look for the same body—it’s a totally different organism.

Because you wear a belt on the surface, it’s easy to see and easy to imagine how you might look without it. Twentieth-century libertarians rightly condemned how the belt was hitched by government coercion—but rarely noticed that however much the anti-business belt constrains the state capitalist economy’s natural shape, without the belt it is still a political product shaped by intervention to its pro-business bones. The Monopolies that create capitalists, landlords, and financiers and uphold corporate power are so deeply embedded in the existing economy, so entrenched in consensus politics, it is easy to mistake them for business as usual in a market society.

We might say—with apologies to Shulamith Firestone—that the political economy of state capitalism is so deep as to be invisible. Or it may appear to be a superficial set of interventions, a problem that can be solved by a few legal reforms, perhaps the elimination of the occasional bailout or export subsidy, while preserving intact the basic recognizable patterns of the corporate economy. But there is something deeper, and more pervasive, at stake. A fully freed market means liberating essential command posts in the economy from State control, to be reclaimed for market and social entrepreneurship. The market that would emerge would look profoundly different from anything we have now. That so profound a change cannot easily fit into traditional categories of thought—for example “libertarian” or “left-wing,” “laissez-faire” or “socialist,” “entrepreneurial” or “anti-capitalist”—is not because these categories do not apply but because they are not big enough: Radically free markets burst through them. If there were another word more all-embracing than revolutionary, we would use it.

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.

To think about this question, we need to avoid being either too romantic or too cynical about governance. While readers of this publication are at no risk of being romantic about government, there is a chance of excessive cynicism. Government currently works very poorly, but this doesn’t need to be so. Competition would force providers of governance to offer high-quality rules and public services at a reasonable price, unleashing institutional innovation and making the world a much better place.

So far, most libertarians have been hacking at branches, while a few come tantalizingly close to striking at the root. We’re going to try to convince you that the root at which we should be striking is a tangled mess of barriers to entry and costs of switching in the governance market. The ax we should be using is the technology to settle the ocean.

Rules Matter

Rules governing interaction and resolving disputes are an essential part of free and prosperous human life. It’s difficult to stress strongly enough the importance of good rules. There are enormous differences in living standards around the world, and affluence is largely determined by the geographical lottery of birth. The average American earns about $47,000 a year, while the average Zimbabwean gets by on a little more than $300. This doesn’t mean that Americans simply have more stuff, but also more health, security, and peace.

The difference between the United States and Zimbabwe is that the former has relatively good institutions that allow trade and specialization, while the latter does not. An even starker demonstration of the power of rules comes from the Korean peninsula. Before World War II, North and South Koreans shared a common culture, history, and set of rules. With the arbitrary division of the country based on the strategic maneuvering by the United States and the Soviet Union, this all changed. The South became more free; the North less. The result of this natural experiment is those in the South are now almost 15 times richer than those in the North.

Of course, even relatively rich countries have their problems, and libertarian policy activists have spent countless hours and pages describing areas for improvement. Patri’s grandfather Milton Friedman, for example, painstakingly laid out the problems caused by many government programs and argued that giving people greater freedom would lead to dramatic improvements. While such reforms would certainly be desirable, simply insisting that we need particular reforms ignores the incentives of the political system.

This neglect is rather odd: Libertarians are well aware of systemic incentives and unintended consequences at the policy level, but most ignore similar problems in the higher-level political system. They will chide statists for assuming they can bring about a particular social or economic outcome through top-down planning, and then go on to specify how they’ll change the rules from the top down to allow bottom-up interaction.

Policy activists are forgetting that the same problems that prevent statist policies from working as advertised also block desirable reforms. The political system is itself a spontaneous order in which the interaction of many individuals operating under various constraints and incentives determines the policy decisions that will eventually be reached. This is where Public Choice theory is helpful: It allows us to analyze the incentives of political actors and suggests a more fundamental level of intervention.

Meta-Rules Matter

Public Choice begins with a simple, indisputable, but somehow widely rejected idea: Politicians, voters, and bureaucrats are not angels. Political actors do not selflessly strive to pursue the common good but respond to incentives. James M. Buchanan describes Public Choice, a field he jointly founded, as “politics without romance.”

The theory makes a distinction between two levels of politics. At the first is the to-and-fro of everyday politics in which rules are created, amended, and repealed. This is the level at which policy activists concentrate their efforts. The behavior at this level, though, is determined by the incentives created at the constitutional level. Public Choice theorists argue that if we want to improve policy, we need to do so indirectly by changing the constitutional meta-rules (rules about rulemaking) through which ordinary rules are established.

This has led many to advocate constitutional limits on the power of government. While this approach is better than lobbying for particular policy changes, since the results are likely to be more robust, Public Choice-influenced constitutionalists have not entirely rid their analysis and approach to activism of romance.

The familiar problems of unintended consequences also arise at the constitutional level. Even if we could design the perfect constitution, we’d need to find a way of implementing and enforcing it. Given that this would need to happen through existing political channels, we’re unlikely to end up with anything good. Constitutional politics is still politics, and those drafting the new constitution have the same foibles as anyone else.

The problem of crafting better meta-rules is the same as that of crafting better rules: We know what the problems are and might even have some good ideas about how things can be improved. What we don’t have is a mechanism for improving things. The interests and passions of people do not disappear when they start drafting constitutions, and political behavior, whether at the policy or constitutional level, emerges from the interaction of various agents. We need to think about the incentives that structure all political behavior, including that of the constitutional level.

The Governance Industry Matters

An extremely useful way to think about the incentives that structure the political game is to consider the market for governance. Rules have economic value, and people would be willing to pay for them. We can think of the bundle of rules and public goods provided by government as a product, governments as producers, citizens as consumers, and taxes as prices.

This seems counterintuitive, especially to libertarians—who realize that markets provide choice whereas governments as we know them do not. There are, however, a number of benefits to this view. It allows us to analyze the industry structure for government and learn why governance quality is currently so low. The current market for governance is dominated by a series of large geographic monopolies not subject to competition. In a competitive market those organizational forms that are not conducive to producing high levels of customer satisfaction are weeded out by natural selection. Without competition, this selection mechanism is absent and we end up with what we have today: bad firms producing bad products.

This is why we have bad constitutional structures.

A number of scholars have already recognized this. The idea of market anarchism is to have governance services such as rulemaking, adjudication, and protection provided on the open market. This would force providers to compete and the incompetent would go out of business. Patri’s father, David Friedman, provided what is, in our unbiased opinion, the best description of how such a polycentric system would work in his book The Machinery of Freedom. Market anarchism is not simply a system of good rules or even a system for producing good rules. It is a system for producing good rule-making organizations.

Similarly, though less radically, some have argued that we need to geographically decentralize political power. With smaller units of governance among which citizens could move based on quality and their idiosyncratic preferences, we’d see governors constrained by the threat of exit and the quality of governance would improve. This was an important argument underlying the federalism of the U.S. Constitution: There would be competition among the several states, and Americans would enjoy better governance.

While market anarchists and decentralists are correct that we need more competition if we are to improve government, they have generally failed to address the reasons we have such an uncompetitive market for governance and therefore provide no route for getting from here to there.

The Technological Environment Matters

When we think of governance as an industry, the problem with policy and constitutional activism becomes clear: Policy advocates are demanding better products without providing a mechanism for products to improve, while constitutionalists are demanding better firms without providing a mechanism for firms to improve. The problem with the arguments of anarcho-capitalists and decentralists is less obvious but simple enough: They demand a better industry structure but have provided no mechanism for the industry structure to improve.

Think about the operating-system (OS) industry. This is one of the least competitive industries around (though it’s still orders of magnitude more competitive than the governance industry). We all know it’s uncompetitive, but simply insisting that we need to increase competition is not useful. It is uncompetitive for a reason. Creating an operating system is an expensive undertaking, and network effects and switching costs mean that consumers are reluctant to change.

If someone genuinely wanted to make the OS industry more competitive, she wouldn’t go about it by simply insisting that we need more competitors. Rather, she would attempt to change the underlying technological factors that cause the OS industry to have high barriers to entry and switching costs. We can see this happening with the open-source software movement, which does not simply create a new competitor to Microsoft, but rather opens a range of possibilities for improvement by making it easier for hackers to build custom OSes. Over time this has produced new versions of Linux that are more user-friendly and compatible with Windows, lowering the cost of switching.

This is the sort of technological activism libertarians need to engage in if they really want to change things. Some are doing this already. Crypto-anarchists aim to help people escape State control by developing more secure communication technologies; agorists aim to develop non-State institutions that would allow people similarly to avoid dealing with the State; and Julian Assange’s Wiki-Leaks project uses technology to make government more transparent. While we applaud these efforts, we don’t think they are going to get us to a radically freer world. The State is a powerful and resilient institution, and it will fight back against these internal threats to its existence. Fortunately, there is another way that has the potential to fundamentally change things.

Seasteading

Developing the technology to create permanent, autonomous communities on the ocean seems like a strange way to solve the problem of bad governance, but we’re convinced it’s the best chance we have for liberty in our lifetimes. This is why Patri established The Seasteading Institute with the mission of developing the technological, political, and economic knowledge we need to revolutionize the governance industry.

If the ultimate problem with that industry is high barriers to entry and switching costs, we need to find a way to dismantle these obstructions to competition. In the past, frontiers have provided the means for disenfranchised groups to start their own country. Unfortunately, we’ve run out of frontier on land. Every square inch of land on the planet is claimed by some existing State, and none is going to give up its claim.

The ocean is a vast frontier unclaimed by States. While they claim some jurisdiction over resources in large areas of ocean, there is much space for political experimentation within these zones and plenty of space outside any State’s practical reach. Starting your own country on the ocean will be difficult and expensive, but at least it’s possible.

The ocean is not yet ready for settlement by most people. It is harsh and unforgiving, and long-term life on the sea is currently limited to only a few pioneers in the fishing, offshore oil, and cruise industries, as well as a handful of dedicated live-aboard sailors.

Technology, though, has the potential to make the ocean a feasible alternative for more people. Early pioneers will learn lessons that will make life on the ocean easier, thus prompting previously unwilling pioneers to make the move. Over time the costs in comfort, safety, and access to civilization will fall and the ocean will be just another place to live. This is the path we see on any frontier. Living in the harsh environment of North America would not have seemed like an attractive proposition to most Europeans a few centuries ago. Eventually, the wilderness was tamed, and North Americans now enjoy higher standards of life than many in the old world.

As it happens, the ocean has another important benefit. Water makes it easy to shift large objects around cheaply. This is what allowed the global shipping industry to prosper, and it could also help make government more competitive. We normally think of buildings as being tied to land, and this has serious implications for competition. Government can do a lot of harm before it becomes worthwhile for someone to move away. The fluidity of the ocean, in contrast, allows people to vote with their house by sailing to a neighboring jurisdiction. If a seasteading government announces an unpopular policy, it could find that it rules over nothing but empty waves. This would allow bad governments to die without bloodshed and force governors to think about what people really want.

While the challenges and uncertainties in settling the ocean are large, there are only a few core problems and none are insurmountable. To make seasteading a reality we need to take a pragmatic, incremental, and business-focused approach. Rather than creating a multibillion-dollar vessel straight away without any clear way to finance it, we encourage seasteading entrepreneurs to think carefully about the business case for particular industries for which seasteading has a comparative advantage. Many industries are overregulated, and a seastead off the coast of a major U.S. city offering medical treatments not yet approved by the FDA, for example, would be a very lucrative proposition.

We know it is possible to live on the ocean; we know there are ways to make money there, and our mission is to drive down the costs of seasteading to transform the ocean from potential frontier into real frontier and eventually into just another option with some serious advantages. This will lead to experimentation and innovation in governance and force existing States to improve or wither away for a lack of residents. The challenges are large but the potential payoffs are much, much larger. By transforming the political problem of bad governance into a hard but achievable technological problem, which humans have a knack for solving, we make success possible.

That’s right. In Louisiana, you can’t sell flower arrangements unless you have permission from the government. How do you get permission? You must pass a test graded by a board of florists who already have licenses. To prepare for the test, you might have to spend $2,000 on a special course.

The test requires knowledge of techniques that florists rarely use anymore. One question asks the name of the state’s agriculture commissioner—as though you can’t be a good florist without knowing that piece of vital information.

The licensing board defends its test, claiming it protects consumers from florists who might sell them unhealthy flowers. I understand the established florists’ wish to protect their profession’s reputation, but in practice such licensing laws mainly serve to limit competition. Making it harder for newcomers to open florist shops lets established florists hog the business.

Other states are considering adopting Louisiana’s licensing law, but before any do, I hope that the law will be stricken. The Institute for Justice, a public-interest law firm, has challenged the licensing in court, saying it violates liberty and equal protection, and so is unconstitutional.

“One of the most fundamental tenets of the American dream is the right to earn an honest living without arbitrary government interference. What could be more arbitrary than saying who can and who cannot sell flowers?” IJ President Chip Mellor says.

Other states have their own sets of ridiculous  licensing rules. In Virginia, you need a license to be a yoga instructor. Florida threatened an interior designer with a $25,000 fine if she didn’t do a six-year apprenticeship and pass a test, at a cost of several thousand dollars. Fortunately, the Institute for Justice got that law overturned.

I’m rooting for IJ because licensing interferes with the freedom to make a living, harms consumers by limiting competition, and protects established firms. It’s an old story. Established businesses have always used government to handcuff competition. Years ago, small grocers tried to ban supermarkets. A&P was going to “destroy Main Street,” the grocers cried. Minnesota legislators responded to their lobbying by passing a law that forbade supermarkets to hold sales. Consumers were hurt.

What about Doctors and Lawyers?

Okay, while licensing of florists, interior designers, and yoga teachers is ridiculous, what about more important professions, like law? Surely people need protection from people who would practice law without a license. Again, I say no. The lawyers’ monopoly on helping people with wills, bankruptcies, and divorces is just another expensive restraint of trade.

David Price recently spent six months in a Kansas jail because he wrote a letter on behalf of a man who was wrongly accused of practicing architecture without a license. When Price refused to promise never to “practice law” again, a judge sent him to jail.

All he did was write a letter. Price didn’t misrepresent his credentials. However, he did save a man from paying $3,000 to a lawyer. Perhaps that was his real offense.

Competition is better than government at protecting consumers from shoddy work. Furthermore, licensing creates a false sense of security. Consider this: When you move to a new community, do you ask neighbors or colleagues to recommend doctors, dentists, and mechanics even though those jobs are licensed? Of course. Because you know that even with licensing laws, there is a wide range of quality and outright quackery in every occupation. You know that licensing doesn’t really protect you.

A free competitive market for reputation protects consumers much more effectively than government can. Today, online services like Angie’s List make it even easier for consumers to get better information about businesses than government licensing boards will ever provide. We do need protection from shoddy businesses. But it’s freedom and competition that produce the best protection.

Through several examples Sanghavi attempts to demonstrate that a medical market with the customer/patient in charge just doesn’t make sense. With the U.S. government now paying half of all medical bills and consumers paying only 10 percent out of pocket, it is not surprising that Sanghavi can show that marginal efforts to move toward a market without making any fundamental changes in the system do not always work, but let’s look at his examples:

In 2004 President Clinton developed chest pain, was diagnosed with coronary artery disease (CAD) and treated with coronary artery bypass grafting (CABG). Sanghavi notes that Clinton, savvy though we know him to be, did not study New York state’s database of hospital- and surgeon-specific death rates from heart surgery. Had he done so, he might have thought twice about having the surgery at Columbia-Presbyterian in New York City, which the database lists as having “the highest death rate of any of the 35 hospitals doing bypass surgery.” Sanghavi sees this as evidence that even savvy consumers cannot deal with the complexities of the medical marketplace. But is it?

First, in a true medical marketplace, hospitals might find it profitable to advertise the results of the database, something they have little incentive to do now, when patients remain rationally ignorant of the quality of hospitals not covered by their employer-chosen insurance. More important, the database in the form developed by New York state is crude. Are you better off going to a cardiac surgeon who does 50 CABGs per year, restricting his surgery to only otherwise healthy patients with mild CAD, and has a 1 percent complication rate, or are you better off going to a cardiac surgeon who does 500 CABGs per year, takes patients refused surgery elsewhere because they’re viewed as “too risky,” and who has a 2 percent complication rate overall (but among otherwise healthy patients with mild CAD has a complication rate of 0.4 percent—though this breakdown is not in the raw data offered by the New York database)?

How can one obtain such detailed analysis of the data? One can do what Clinton did: Go with the recommendation of the cardiologists he entrusted with his care. In a true medical marketplace he’d have even more options: Businesses would develop that analyzed such data and provided their analysis for a fee (or perhaps it would be available for free on the Internet, paid for by ads, like Google searches).

Sanghavi questions whether it helps for consumers to “have skin in the game”—that is, pay some health care costs directly so they no longer treat it as essentially a free good, overusing it and driving up costs. He acknowledges that the famous RAND Health Insurance Study (1982) showed that when patients paid 25 percent of costs, overall medical spending dropped 20 percent.

But Sanghavi is concerned. He notes that consumers “cut back equally on highly effective and largely pointless treatments.” He fails to say this means that under the highly regulated system he defends, where medical experts are in charge of determining what is needed without worrying about patient cost concerns, “largely pointless treatments” are still available. Of the RAND results Sanghavi notes with a concern that can only be felt by physicians: “The cost savings came from mostly avoiding doctors altogether.” But most people who see doctors have transitory complaints that resolve on their own, caused by problems or pathologies that are never determined, no matter the expense of the workup (headache and back pain being the two most common complaints). So it is good that “the cost savings came from mostly avoiding doctors altogether.”

Most important, the RAND study showed, though Sanghavi didn’t mention it, that with few exceptions, seeing doctors less often and spending 20 percent less overall “had no adverse effects on participant health.”

Of course, if we had a competitive market in health care, with all its implications for easier access to information, broader advertising of various options, direct price competition, easier access to medications, and more, I would expect that consumers might better distinguish “highly effective” from “largely worthless” medical practices. They seem to make good choices now when given the opportunity, in areas like Lasik and plastic surgery.

For Sanghavi, “The usual rules of the marketplace seem not to apply to health care” because doctors apparently know more about medicine than patients do. So doctors control the interaction. So regulations are needed. So the argument goes.

But this argument proves too much. Information asymmetry is the norm not the exception. Car dealers know more about cars than consumers do. The guys behind the Genius Bar know lots more about computers than Apple customers do. Are consumers always being ripped off? Sanghavi the pediatric cardiologist claims—correctly, I’m sure—that no parents ever questioned him when he ordered a special type of color Doppler cardiac ultrasound on their child. But he unfortunately seems to believe a medical marketplace is everything we have now—all the regulatory burdens, supply restrictions, informational prohibitions—except patients will pay more out of pocket. He ignores various other innovations that may help consumers get what they need despite information asymmetry. For example, competing cardiologists trying to simplify matters for patients might offer flat fees, including labs and imaging, so the consumer could compare physician costs more easily and not need to know whether a specific lab or ultrasound was “needed.” Alternatively, consumers could go on the web and use the services of Medical Cost Advocate. Such services would be more commonplace in a truly free market in health care.

Some say that health care is different, and if by that they mean the health care market has been artificially restricted, segmented, regulated, and distorted by government interventions dating back more than a century, they are right. Only the educational and financial industries come close in the degree of government regulation, which doesn’t speak well of regulation’s success. But if they mean health care is more complicated than anything else offered in the marketplace or that health concerns don’t respond to supply and demand or that medical services can only be provided when medical cartels battle government payers while insulating patients from the true costs of care . . . it just ain’t so.

No one can honestly believe that Louisiana’s flower cartel is necessary to protect consumers from renegade flower sellers. Rather, it is a classic case of protecting favored groups at the expense of consumers and entry-level entrepreneurs.

Such is the state of economic liberty in America today. Across the nation, the basic right to earn an honest living is under attack. Legislators and bureaucrats are teaming up with entrenched special interests to create needless obstacles to countless entrepreneurs’ pursuit of the American Dream. In the past few decades there has been a nationwide explosion of protectionist regulations—while there were about 80 occupations with such barriers to entry in 1981, today there are over 1,000.

An Institute for Justice (IJ) case that recently attracted international media attention vividly illustrates the uncontrolled growth of occupational licensing and the outrageous lengths that a cartel will go to protect all facets of its business from the most harmless of trades.

Mercedes Clemens was threatened with thousands of dollars in fines and criminal prosecution unless she stopped . . . massaging horses. In Maryland two powerful groups decided to monopolize the growing field of animal massage by requiring all practitioners to spend four years in veterinary school—where massage is not even taught.

Suggesting that only people with veterinary degrees are capable of massaging animals is like suggesting that only people with medical degrees are capable of massaging humans. Preventing Clemens—who is a licensed human-massage therapist and certified in equine massage—from working in her chosen trade has absolutely nothing to do with consumer or animal safety and everything to do with the financial interests of the veterinary cartel.

In 2004 the Tenth U.S. Circuit Court of Appeals wrote in Powers v. Harris, “[W]hile baseball may be the national pastime of the citizenry, dishing out special economic benefits to certain in-state industries remains the favored pastime of state and local governments.” And for decades, following the instructions of the U.S. Supreme Court, federal and state courts have stood by while legislators engage in this “favored pastime” at the expense of consumers and entrepreneurs.

Government Protects Special Interests

In the absence of meaningful judicial supervision, politicians have gone to almost any imaginable length to protect special interests. When a powerful lobby demands protection from competitors, governments have been all too willing to invent—and courts all too willing to accept—patently ludicrous excuses for shutting down entrepreneurs. A court upheld Louisiana’s florist-licensing scheme, for example, because requiring florists to take a test, which would be graded largely on the subjective beauty of their floral arrangements, might help protect the public from “infected dirt.”

The true victims of this new “favored pastime” are people like Clemens and countless other Americans, honest individuals whose lives have been turned upside down solely to protect the politically powerful. Such examples are seemingly endless.

In Texas, all computer-repair technicians must now become private investigators. “If you’re investigating or analyzing data, then you should need a little more credentials than someone who just repairs computers,” the legislative sponsor said. The PI license requires a criminal-justice degree—or a three-year apprenticeship under a licensed private investigator. If a consumer knowingly takes his computer to get repaired by an unlicensed specialist, he faces thousands of dollars in fines and a year in jail. This law no doubt benefits special interests, but those benefits come directly at the expense of ordinary repair technicians and their customers.

A new law in Philadelphia will make it a crime in the coming weeks to talk about the Liberty Bell for money without the government’s permission. Unlicensed tour guides will be subject to hundreds of dollars in fines for talking about the place where the Declaration of Independence was written. Perhaps the most well-organized cartelization effort underway in the United States today is in the interior-design industry. A powerful faction of insiders has already put thousands of its competitors, mainly middle-aged and elderly women, out of work.

The American Society of Interior Designers (ASID) represents less than 3 percent of all designers, but its members have designated themselves as spokespeople for the entire industry. In over 30 years of lobbying, ASID has never presented a single shred of evidence to support its extraordinary claim that literally “every decision an interior designer makes affects life safety and quality of life.”

ASID has been relentless in teaming up with legislatures coast to coast in its strategy for total cartelization. IJ has documented these efforts in a study titled “Designing Cartels.”

Such laws exist today for one reason: Our nation’s judicial system fails to protect the right to earn a living. Courts have decided that this fundamental right—economic liberty—is simply not as important as other rights, and less-important rights are thus not subject to meaningful judicial scrutiny and rarely are afforded protection under the law. If the government can simply dream up a conceivable reason for violating economic liberties, even if that reason is based on no facts, the regulations are generally upheld. Amazingly, courts will even help by inventing their own hypothetical rationales for economic protectionism. This system does not just stack the deck—it gives the politically powerful a hand full of jokers.

Thankfully, entrepreneurs are fighting back. Taxicab drivers, African hair-braiders, sign-hangers, waste haulers, casket sellers, and others have battled the odds (with help from IJ) to strike down occupational-licensing schemes.

Mercedes Clemens’s lawsuit has already caused one of the licensing boards to backpedal. The Philadelphia tour guides, now represented by IJ, had a hearing in federal court on October 6. In Texas, computer-repair technicians and interior designers are standing up for their constitutional rights.

F. A. Hayek famously wrote that “the great aim of the struggle for liberty has been equality before the law.” That is precisely what the fight for economic liberty is all about.

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.

by Goetz Aly

Metropolitan Books • 2007 • 431 pages • $32.50

Reviewed by Richard M. Ebeling

In Hitler’s Beneficiaries, German historian Goetz Aly “focus[es] on the socialist aspect of National Socialism” so as to better understand “the Nazi regime as a kind of racist-totalitarian welfare state.”

Since the 1930s many historians on the left have tried to portray Nazism as an extreme right-wing system meant to preserve and serve the German capitalist order. The use of the word “socialist” in the full name of the Nazi movement—the National Socialist German Workers Party—has been interpreted as a ruse meant to manipulate and deceive the people of Germany.

Aly emphasizes that the ideology and practice of the Nazi regime were in fact deeply socialist. Within Germany, among the German people of “pure Aryan blood,” the ideal was an egalitarian social order in which every German would be freed from traditional class barriers so that he might have the opportunity to rise to any level of success in serving the fatherland. The welfare-state policies begun by Bismarck in late nineteenth-century imperial Germany were viewed by the Nazis as a prelude to a complete guarantee of a quality standard of living for all “real” Germans that would be paternalistically provided by the National Socialist state.

The problem was that the promises of the welfare state could not be fulfilled within Germany’s 1933 borders. If the German people were to have this material paradise on earth, someone would have to supply the manpower and the resources to provide the means for this massive redistribution of wealth.

Aly points out that before and during World War II, the German “capitalist class” was made to pay its “fair share” for the benefit of the rest of the German people. Taxes were proportionally far higher on the “rich” in Germany than the rest of the population. During the war the government established mandatory overtime pay in all industries and imposed wage increases to keep “the masses” loyal to the regime—all at the expense of German business. At the same time, German industry worked under government-commanded four-year plans from 1936 until the end of the war in 1945.

But it was only after the war started that the machine of redistributive plunder was really set into motion. Every country overrun by the German army not only had to pay the costs of the occupation, but also was systematically looted for the benefit of the German population as a whole.

Aly’s book is remarkable because, rare among histories of the period, it explains how the Germans used inflation to loot the occupied countries. After most of France was occupied in June 1940, German soldiers were issued scrip that by mandate had to be accepted by French businesses. Retailers willingly accepted the scrip because the Nazis also mandated French banks to redeem it in francs; the banks in turn could redeem it for francs it at the Bank of France. The only way for the French central bank to meet this obligation was to print more money. With some variation Germany did this in every country it conquered.

German servicemen stationed in occupied Europe were regularly given scrip bonuses at holiday times so they could buy up virtually anything and ship it to family and friends. Thus along with the soldiers, tens of millions of Germans back home benefited from the inflationary plunder of Europe.

On top of this the German government imposed taxes and surcharges on the governments in the occupied countries—their contribution to Germany’s establishment of the “new order” for the “benefit” of all the people of Europe. In many cases the redistributive tax burden was larger than the nation’s annual prewar budget.

Both within Germany and around the rest of Europe, the great “enemy” that the Nazis were determined to eliminate was the Jews. Before the war the regime had attempted to pressure German Jews to leave the country. After the war began the government was determined to expel all Jews in western and central Europe to “the East.” Finally, the “solution” to the “Jewish problem” was found in the concentration and death camps.

But beginning in 1941 and 1942 the expelling of Jews from Germany and the rest of occupied Europe was accelerated as part of the Nazi welfare state. When Britain began to bomb German cities, first thousands and then tens of thousands of Germans found themselves homeless, with all their belongings destroyed. Municipal governments, with the approval of the Nazi leadership in Berlin, began to confiscate the Jews’ houses and apartments, including the contents, to make room for racially pure Germans needing new places to live.

In every occupied country the Nazis initiated similar confiscatory policies with local accomplices with whom they shared looted Jewish property. (Only in Belgium and Denmark did large segments of the population and the bureaucracy resist participating in this plunder of the Jews.) The Nazis first nationalized Jewish property and then distributed it to those deemed worthy among the German or occupied populations.

Hundreds of trainloads of stolen Jewish property were either given away or sold at discounted prices in German cities, large and small, throughout the war. Aly estimates that because of this looted property and the goods sent back to Germany by soldiers, many, if not most, Germans enjoyed a more comfortable standard of living throughout most of the war than the civilian population in Great Britain.

What also fed a large part of this Nazi plunderland was the invasion of the Soviet Union in June 1941. In the East, Hitler wished to show none of the minimal “niceties” with which the people of western Europe were treated. The vast and rich lands of Russia and Ukraine were to become the economic Promised Land in the Nazi dreams of the future. Under the plan at least 20 million Russian peasants would be worked and starved to death in the countryside after a German victory to make room for a huge German resettlement that would provide the living room for the Aryan race. The cities of Moscow and Leningrad were to be razed, their populations left to die.

Besides the official plundering of the Soviet cities and countryside, there was a vast black market at work in the East that left those under German occupation with almost nothing.

The vast majority of German families continued to feast, even under the allied bombings, thanks to the locust-like seizure of anything and everything across occupied Europe. Aly estimates that during the five-and-a-half years of war, the Nazis plundered $2 trillion worth of property, goods, and wealth from the peoples of Europe—a large sum by any standard, but truly huge considering the much lower levels of output and income in Europe 70 years ago.

Of course, the German people finally paid dearly for their adventure into international welfare redistribution through war. When Germany finally surrendered in May 1945, millions of Germans had been killed in the conflict, all the major cities of the country were in ruins, capital accumulated over decades was destroyed, and Germany was occupied and divided by the victorious Allies for more than half a century. It was high price for pursuing the ideal of National Socialism.

* * *

The Big Ripoff: How Big Business and Big Government Steal Your Money

by Timothy P. Carney

Wiley • 2006 • 241 pages • $24.95

Reviewed by Sheldon Richman

Timothy Carney has written a refreshing book. There is no shortage of books critical of big business, but almost without exception their authors are hostile to free markets. Carney is an avowed fan of free markets and a critic of big business’s collusion with government—collusion that enables businessmen to gain profits they could never obtain under free, open, and unprivileged competition.

The Big Ripoff is a myth smasher. Leftists and rightists alike tend to think that business people favor laissez faire, which is well defined as the political-economic system that lacks any government-sponsored privilege. But it is a rare business person who wants the government out of the picture. Free competition is nerve-wracking. It respects no vested interests or historical market share. As Frank Sinatra sang, “You’re ridin’ high in April, shot down in May.” Those darn consumers are fickle. So business people (including agribusiness people) have lobbied for regulations, licensing, price floors, price ceilings, codes, inspection, tariffs, import quotas, subsidies, loan guarantees, taxes, tax exemptions, eminent domain, and more. It is easy to assume that no big company would want new taxes and regulations, until one realizes that those things burden smaller and yet-to-be-started companies more heavily. Government impositions are de facto subsidies and barriers to entry.

Big companies have had no trouble getting such things from Congress and the various state legislatures—because another myth is that government tends to be hostile to business. In a mercantile society such as the United States, business people are highly influential. Politicians see them as indispensable to economic stability, jobs for constituents, even labor peace, and hence want to keep them happy. Business has always had political clout in America, both nationally and locally. The period usually regarded as the most hostile to business, the Progressive Era, was nothing of the sort, as historian Gabriel Kolko documented in The Triumph of Conservatism. To his credit, Carney appreciates Kolko’s research and helps to dispose of the fairy tale that statism in the early twentieth century was the product of Marxism and other foreign left-wing imports. While “progressive” intellectuals saw opportunities for power and prestige in the rise of American-style corporatism, they were riding the coattails of the Morgans, Rockefellers, Carnegies, and others who turned to the state to tame unruly (read: competitive) markets. (This is not to overlook the relatively few true entrepreneurs described by Burton Folsom in The Myth of the Robber Barons.)

Things haven’t changed much since the Progressive Era. In our time business people are as influential as ever, perhaps more so. And the influence is rarely in the direction of more economic freedom. Carney documents the quest for corporate welfare (which, curiously, gets much less attention from the right wing than that other kind of welfare), regulation, taxes, and environmental—yes, environmental—controls.

Do you want to know why Phillip Morris joined the “war on tobacco,” why General Motors pushed for clean-air legislation, why Boeing supports the Export-Import Bank, why Archer Daniels Midland likes ethanol, and why the Chamber of Commerce often supports higher taxes? Do you think Enron was a creation of the market and supported general deregulation? Read Carney’s book to find out.

The Enron story is valuable because misunderstanding about that company has provided an abundance of ammunition against the deregulation of energy markets. “Most analysts use the term deregulation to describe the setting in which Enron thrived, deceived, and then collapsed. But in nearly every corner of the Enron tale, we can find the fingerprints of big government,” Carney writes. If Enron’s CEO, the late Ken Lay, was what a New York Times reporter called him—“an evangelical believ[er] in free markets”—then Britney Spears is up for Mother of the Year.

Would a free-marketeer have called for a government bailout when his company began to collapse? (Fortunately, Lay didn’t get it.) While running the company, would he have supported export subsidies, energy regulations and price controls that favored Enron’s interests, and the Kyoto Protocol limiting carbon emissions? Obviously not. So why did Lay do it? Because he had no principled objection to using government power—physical force—to advance his company’s fortunes (not to mention his own).

Carney’s reporting clarifies our understanding of political economy. Regulation and taxation are anti-competitive. Incumbent firms don’t like competition, so they like intervention. But competition is good for worker-consumers because their welfare is enhanced by unhampered bidding for their business and services. Thus they constitute the real natural constituency for the free-market movement.

* * *

Income and Wealth

by Alan Reynolds

Greenwood Press • 2006 • 223 pages • $55.00

Reviewed by George C. Leef

Writing in the Wall Street Journal shortly after the 2006 election, Jim Webb, the victorious U.S. Senate candidate in Virginia, argued that the American economy has become a rigid class system. The rich are getting richer while the poor are getting poorer. Top business executives used to earn about 20 times as much as average workers, but now they’re raking in more than 400 times as much, Webb complained. The United States, he said, was “literally a different country” from the one in which he grew up. Webb viewed his election and the Democratic takeover of Congress as proof that people want the government to do something about this horribly unfair situation.

Many other politicians and writers have repeated this economic indictment, which has political “traction” both with the envious poor and the guilt-ridden wealthy. As Alan Reynolds shows in Income and Wealth, however, the indictment should be summarily dismissed since it is based on misleading statistics and tendentious rhetoric. H. L. Mencken once wrote that politics is just about frightening people with “an endless series of hobgoblins” to keep them clamoring for politicians to protect them. After reading Income and Wealth, it’s clear that the campaign to convince Americans that we face disaster unless the government does something about “the income gap” is another of those hobgoblins.

The first point Reynolds, a senior fellow at the Cato Institute, makes is that the current frenzy over inequality has nothing to do with poverty. Back in the 1960s and 1970s, “liberals” worried about the poor and there was a national debate on how best to improve the lives of people at the bottom of the income scale. That changed in the early 1990s. “Starting around 1992,” Reynolds writes, “inequality began to be redefined in such a way that nearly all the attention shifted away from the troubles of the bottom quintile to the high incomes of the increasingly tiny number of people at the top.” (He doesn’t speculate on the reasons for that shift. My surmise is that the leftists knew they had gotten all the mileage they could out of the plight of the really poor—after all, the government had been running all sorts of antipoverty programs for decades without much success—so they decided to fashion a new “issue” out of the enormous wealth of a few.)

Creating this new issue called for resourcefulness to make people think that dark, momentous changes were occurring in the economy. There have always been some super-rich; the trick was to get people up in arms by suggesting that those people were profiting unconscionably at the expense of the disappearing middle class. Reynolds easily refutes that idea. The middle class isn’t disappearing, although quite a few people who used to earn “middle class” incomes now earn significantly more—scarcely a problem.

Furthermore, it’s not true that the earnings of middle-income workers have been “stagnant” since the 1970s. That illusion, Reynolds shows, is based largely on the fact that due to tax-law changes in 1986, increasing amounts of investment income common to middle-class people no longer show up in income-tax data—401(k) and college savings plans, for example. Other changes in tax law tend to have the opposite effect on the reported income of the wealthy. If instead of looking at income-tax data, you look at data on consumption spending, the whole “crisis” vanishes.

Another major component of the “income gap” mania is supposedly excessive compensation paid to business executives. Is it really the case that the average CEO now makes more than 400 times as much as the average worker? No. Reynolds handily demolishes the notion that greedy CEOs are robbing workers (or, more plausibly, stockholders) of money that should be theirs.

What’s really going on here is an elaborate cover for a host of interventionist policies desired by various special-interest groups. “Nobody who uses income distribution figures as an argument for adopting their pet government policies would advocate different policies even if they could be persuaded their statistics are wrong,” Reynolds observes. Those who are against free trade, for example, cite the “shrinking middle class” as an excuse for protectionism. For union advocates, the same myth serves to justify their desire for new pro-union laws.

Not only is there no “income gap” problem, but the remedies offered would be economically harmful. In his concluding chapter, Reynolds makes the case that laissez-faire policies to reduce the size and meddlesomeness of the government will continue the real trend in our economy: the rich get richer and the poor get richer, too. If, however, we adopt the policies of the egalitarians and interest groups, we actually will “improve” the income gap. Everyone would be poorer, but the wealthy would lose proportionally more.

Reynolds has given us an important and timely book, a refutation of the economic equivalent of the global-warming scare.

* * *

The Sarbanes-Oxley Debacle What We’ve Learned; How to Fix It

AEI Press • 2006 • 135 pages •
$25.00 paperback

The Joy of SOX: Why Sarbanes-Oxley and Service-Oriented Architecture May Be the Best Thing That Ever Happened to You

by Hugh Taylor

Wiley • 2006 • 283 pages • $50.00

Reviewed by Barbara Hunter

These two books cannot really be considered two analyses of the Sarbanes-Oxley Act, which was signed into law in 2002 following several high-profile corporate scandals. The first book examines the law, its effects on the conduct of publicly traded businesses, and its failure to accomplish its purported purposes of preventing fraud and restoring investor confidence. The second simply adopts the thesis that Sarbanes-Oxley is a beneficent and effective law and that all that is required is to learn the best methods for compliance.

The Sarbanes-Oxley Debacle raises an issue rarely so much as mentioned in the voluminous literature on this law: the return on investment resulting from time, money, and talent expended on behalf of the law’s many requirements. This is no small matter when considering a law whose annual direct compliance costs on business run into the billions.

The cost figures bandied about in the popular financial press ignore the manner in which the law now influences the minutiae of individual corporate decision-making when the shadow of bureaucratic enforcement hangs over every decision, from internal production methods to mergers and acquisitions. This must inevitably produce a significant opportunity cost that will, to some extent, deter risk-taking in business. Professors Butler and Ribstein make that point very clearly.

Another unique point in this book, and one that has been virtually ignored by other writers, is that no combination of laws and penalties can produce total protection from fraud at every possible level within a company. Thus shareholders may understandably accept the possibility of some level of fraud if, on the one hand, its influence on the company’s bottom line is considered insignificant and, on the other hand, the cost (in time and money) of ferreting out every such conceivable instance is exorbitant.

The book further notes that Sarbanes-Oxley circumvents and in effect nullifies existing state laws that may have been more effective than the new law, and federalizes yet another field that historically has been within the purview of the states.

For such a slim volume, The Sarbanes-Oxley Debacle manages to include a startling number of significant arguments relating to the deleterious effects of this ill-considered law.

A review of The Joy of SOX needs to be tempered by the fact that its author is an officer of one of the ever-growing number of companies dealing in computer programs devoted largely to compliance with the Sarbanes-Oxley Act. In light of this, it may not surprise the reader that Sarbanes-Oxley’s negatives, especially its compliance costs, are never mentioned. Even within this perspective, however, its exuberant embrace of the law occasionally borders on the absurd. The author goes so far as to dismiss those who contend that the costs of the law exceed its benefits as “whiners.”

Taylor assumes that Sarbanes-Oxley places everyone on the same compliance basis and thus is not a problem. Sadly, experience has demonstrated that the cost of compliance is far from equal; in fact, its burden on small companies, as a percent of sales, is far higher than on large companies. Regulation tilts the playing field.

On occasion, the author’s acceptance of the near-axiom that government regulation is beneficial and therefore desirable leads him to use examples that are badly at variance with the truth. In his introduction Taylor writes, “In the last century, American businesses resisted labor organizations and workplace entitlements, only to discover that modern labor practices and diversity programs created long-term loyalty among employees and helped build strong brands.” Many businesses, of course, have found just the opposite—that the effects of dictatorial federal labor regulation have been very harmful—and in any event it does not follow that Sarbanes-Oxley is beneficial just because some other federal laws allegedly are.

The structure of the book is a theoretical discussion by the department heads of an imaginary company that, on the one hand, must comply with Sarbanes-Oxley and, on the other hand, must be able to make quick decisions in order to meet customer needs and competitive pressures. The book’s pervasive themes are two: “agile compliance” and “compliant agility.” It soon becomes evident, however, that compliance comes first and the firm’s well-being comes second, as is the case with every regulatory compliance regime.

Those who expect any insight into the effects of Sarbanes-Oxley will find this volume a disappointment, and those who have read The Sarbanes-Oxley Debacle will laugh at the idea that this law could be “the best thing that ever happened”—unless you’re in the business of selling compliance software.

There is much hand-wringing and teeth-gnashing among politicians who decry businesses for maintaining monopolies that harm consumers. Yet in a free market such businesses will find any monopoly position fleeting. If they charge too much or fail to provide suitable quality in their products and services, other entrepreneurs will recognize a profit opportunity and jump in to take market share away from them. It isn’t enough to obtain a dominant position in an industry; even a “monopolist” faces competitive pressures if it wants to keep that position.

There is an exception to this rule, however: government-protected monopolies. If other businesses are prevented from competing with the monopolist through laws, regulations, or exclusive agreements (such as franchise agreements) with the government, there really is no chance of competition. In this case, consumers are harmed because the monopolist has little incentive to provide the lowest prices, the highest quality, or the most innovative products so long as the necessary lobbying is done and tribute paid to the government. This is not a free market. Thus one could say that the only “bad” monopoly is a government-protected monopoly.

Today at least one type of government-sanctioned monopoly is starting to break: the cable-television market. Cable-television companies typically have to negotiate with local governments and pay them a portion of their revenues and other compensation for the exclusive right to offer cable services in an area. Few parts of the country have allowed any competition at all in local cable markets, but that is starting to change.

In the past two years state governments have attempted to streamline the cumbersome and costly process of obtaining numerous local government video franchises by allowing cable and telecommunications companies to apply for a single franchise issued by the state. These reform efforts also remove the local monopoly protection, permitting multiple competitors. The change is intended to open up competition, particularly to telephone companies such as AT&T and Verizon Communications, which have been trying to break into the cable market, and to offer consumers greater choice and lower bills.

It should be noted that even where franchise rules prevent competition among cable providers, they may face competition from satellite providers. According to J.D. Power and Associates surveys, satellite providers have increased market share from just 12 percent of U.S. households in 2000 to 29 percent in 2006. During this period, cable providers have seen their share fall from 66 percent to 58 percent. A December 2006 Federal Communications Commission (FCC) report found that satellite competition did not appear to affect cable prices. But this may be because satellite providers often offer more channels and premium services than cable providers do or better new-subscriber promotions, such as free installation and equipment. If so, consumers are getting more for the same prices they would pay for cable. In any case, that cable is steadily losing market share to satellite indicates that many consumers feel they are better off with the added competition and services.

State and Federal Reform Efforts

Michigan most recently passed cable-franchise reform when Governor Jennifer Granholm signed the Uniform Video Services Local Franchise Act in December. Consumers and telecommunications companies won another significant victory when California passed the Digital Infrastructure and Video Competition Act of 2006 last September, opening up the state’s sizeable market to competition. Under the previous franchise structure in California , a potential cable provider would have needed to gain approval of over 500 separate franchises from local governments to provide service across the entire state. The video-franchising process typically took six to 18 months, resulting in significant costs from business lost during the negotiation process and the time and energy spent on the negotiations themselves, not to mention concessions required by municipal governments as a condition of obtaining the franchise. In response to the California law, AT&T announced that it would invest an additional $1 billion in California through 2008 to upgrade its telephone network and launch an Internet-protocol video entertainment that will compete with cable-television providers. Verizon similarly announced additional investments of “hundreds of millions of dollars” to expand its fiber-optic network, which will allow it to provide television, as well as Internet and telephone, service. These investments are expected to result in the creation of thousands of jobs in the state.

Texas began the reform trend in 2005. In 2006 similar reform measures were passed in California, Indiana, Kansas, Michigan, New Jersey, North Carolina, and South Carolina . Arizona and Virginia also passed reforms, but these measures did not establish statewide franchise authority. In Connecticut and Oklahoma , officials ruled that telephone companies that offer video services through their networks (such as Internet protocol television, or IPTV, platforms) are not subject to local franchise regulation. In addition, a cable-franchise reform bill made it to the desk of Louisiana Governor Kathleen Blanco, but she vetoed it because she feared it would adversely affect municipal-government finances. Still other video-franchise reform measures have been under consideration in Iowa, New York, Pennsylvania, and Tennessee.

On the federal level Congress took up cable-franchise reform last year but failed to pass a bill. In June the House of Representatives passed the Communications Opportunity, Promotion, and Enhancement (COPE) Act of 2006, which included a provision that would allow companies to apply for a nationwide television-service license. However, the Senate telecommunications bill, S. 2686, was bogged down by debate over an unrelated “Net neutrality” provision, which concerns whether Internet service providers (ISPs) may charge website owners fees to load their sites more quickly than those of nonpayers, and the measure died.

Action on similar legislation in the new Congress is uncertain, although the momentum built up at the state level could lead Congress to address the issue again. A key factor may be whether cable-franchise reform, which has pretty broad support, will be separated from Net neutrality. Democrats are more likely to call for mandates on this, while ISPs, including telephone and cable companies, want to maintain the flexibility and freedom to offer the services they like and set their prices as they see fit.

The FCC entered the fray in December when it voted 3–2 to pass a set of cable franchise-reform rules. The rules require local governments to act on video-franchise applications from new potential competitors within 180 days and within 90 days if the applicant has already secured access to local rights of way. The rules also prohibit local governments from requiring competitors to build out their video networks faster than existing cable companies.

Benefits of Cable-Franchise Reform

Cable-franchise reform benefits consumers in a number of ways. The reduction in costs from seeking numerous franchises from local governments opens up competition to other providers. This competition will lead to greater choice and reduced cable and broadband prices for consumers. (Note that “cable” or “video” services include not only cable television but also data and voice services such as high-speed Internet access and Voice over Internet Protocol [VoIP] telephone service—and perhaps other services not yet anticipated.)

Competition has resulted in significant savings to consumers where it has been allowed to flourish. A study analyzing FCC data on competitive and noncompetitive cable markets found that subscription rates for basic and expanded basic services averaged 16 percent less in competitive markets. In addition, a Bank of America study concluded that when new competitors enter a cable market, existing providers drop prices 28 to 42 percent.

The longer we wait to deregulate, the greater the forgone cost savings. A Phoenix Center study, “The Consumer Welfare Cost of Franchise Reform Delay,” estimated that if cable competition were to be delayed another four years, consumers would end up spending $30 billion more nationwide than under a more open market with franchise reform, including $3.1 billion just in California. A March 2006 study by George Mason University professor Thomas Hazlett estimated even greater consumer savings of $9 billion per year from wireline video competition.

Some have argued that franchise monopolies and current regulations are not such a big problem because Congress prohibited local governments from granting exclusive franchises after December 4, 1992. Yet monopolies persist in most areas because of the artificially high barriers to entry created by unnecessary existing regulations. Today only a small percentage of households nationwide are in areas with multiple video operators, largely because of the high costs of entering the market. It should come as no surprise that, according to a 2006 FCC annual report on cable services, between 1995 and 2005, cable rates increased 93 percent while interstate telephony prices decreased nearly 40 percent and wireless charges fell almost 80 percent.  In discussing the survey’s findings at a December 2006 meeting, FCC Chairman Kevin J. Martin concluded: “In recent years, consumers have had limited choice among video service providers and ever-increasing prices for those services, but, as was just demonstrated in our annual price survey, cable competition can make a difference and can impact cable bills. Again, it found that only in areas where there was competition from a second cable operator did average prices for cable services decrease.”

The Downside of Cable-Franchise Reform

The benefits of cable reform notwithstanding, the legislation that has passed is not without a number of drawbacks. While it eliminates the city-to-city quest for franchise approval, it merely centralizes franchise approval authority in a state (and potentially federal) government agency. Thus providers still must seek the government’s permission merely to conduct business—only they must do so at the state level instead of the local level.

Cable providers are also typically still subject to numerous “public interest” regulations. They are forced to maintain a number of “public, educational, and government” (PEG) channels (or contribute a portion of their gross revenues to support such programming) that their viewers may not want and/or that may not be economically justifiable. Furthermore, government often continues to dictate where providers may offer their services through “anti-redlining” provisions that force providers to offer all services to all areas, not just higher-income neighborhoods. Competition and technological advances—including satellite-television services—make this less of a concern today than 30 or 40 years ago anyway, but companies should have the right to do business where they want and offer new, experimental, or higher-quality services to higher-income areas to test new technologies and more quickly recoup their investment costs before rolling them out to the rest of their service areas. After all, digital and on-demand cable service is hardly an unalienable right.

Perhaps the greatest concern, however, is that the concentration of franchise power in the state government could actually lead to higher franchise costs and more burdensome regulation in the long run. One of the common complaints of cable and telephone companies is that local governments often engage in extortion by conditioning franchises on payments for numerous pet projects or social causes that may have nothing to do with the franchisee’s business.

At the December FCC meeting, Chairman Martin decried the local government practice of conditioning franchise awards on “extraordinary in-kind contributions” (some would call it blackmail or graft) such as requiring applicants to build public swimming pools and recreation centers. Martin made special mention of Lynbrook, N.Y., which required Verizon to provide video equipment for filming a visit from Santa Claus in return for allowing the company to offer services. An October 28, 2005, Wall Street Journal article detailed several other examples of the in-kind “contributions” local governments were requiring of Verizon for the privilege of serving their residents. They range from the frivolous to the outrageous. Holliston, Mass., wanted free television for all houses of worship. Massapequa Park, N.Y., wanted $27,000 to plant wildflowers on the median of a four-lane highway and to hang flower baskets to decorate old-fashioned street lights in the village center. Others demanded high-speed Internet for sewage facilities and junkyards, fiber connections to traffic lights for traffic-flow monitoring, and free Internet connections for poor elementary students. When Verizon asked Tampa, Fla., for permission to offer television services, the city presented it with a $13 million “wish list” including money for an emergency communications network, digital editing equipment, and video cameras to film a math-tutoring program for kids.

What would happen if these practices continue at the state level? Imagine that because a state is experiencing a budget crunch or an influential politician has a program he wants others to pay for (I know it’s a stretch), you could not do business within the entire state unless you agreed to pay the requisite tax (sorry, “fee”). If federal legislation passes, will bureaucrats and influential politicians be able to prevent a company from doing business in the entire country if it doesn’t jump through the requisite hoops? Herein lies the problem of allowing politics to interfere with market forces.

While cable-franchise reform like California’s and Michigan’s represents a step in the right direction, it does not address the heart of the problem: government regulation itself. Replacing one set of regulations with another set of slightly more efficient or less burdensome regulations is always welcome, but this still preserves the general regulatory structure that has led to artificially high prices and stifled both consumer choice and cable and broadband investment. To truly benefit consumers and businesses alike, policymakers must strike at the root of the problem and eliminate such unnecessary regulation altogether.

In several ways, the specter of re-regulation of the airlines raised its head in 1999. A number of bills in Congress aimed at increasing smaller airlines’ access into major hub airports like Chicago’s O’Hare by giving such airlines (or service from smaller cities) legal preference over other new service. And several other bills would have created a “passenger’s bill of rights” imposing new federal controls on the terms and conditions of airline service.

Fortunately, none of these measures was enacted, leaving intact the enormous consumer benefits of the Airline Deregulation Act of 1978. Thanks to the hands-off policy created by that measure, air travelers save some $19 billion per year over what they would have paid had federal control of routes and fares remained in effect. While the measures considered by Congress would not have brought back total government control, they would have put us on a slippery slope toward government—rather than market—decision-making about who can fly when, where, and at what price.

That said, however, it is clear to most frequent flyers that today’s airline service leaves much to be desired. Record-high levels of delay, overcrowded planes, less meal service, new restrictions on carry-on baggage . . . flying in many ways is not what it used to be. But if government regulation is a cure worse than the disease, what hope is there for beleaguered air travelers?

The answer is supposed to be competition. If you don’t like the quality and price of Airline A, take your business to Airline B instead. Surely some profit-seeking entrepreneurs will attempt to offer a better combination of price and performance to appeal to those frustrated by today’s typical airline service. And indeed, there are some such alternatives. For millions of people, the low-fare, no-frills, but highly reliable service of Southwest is a viable alternative. For others, Midwest Express offers a much more luxurious form of service, albeit at a somewhat higher fare. But for millions of other air travelers, innovative airline service offerings are very hard to find. This is especially true at many cities with a single large airport where the vast majority of service is provided by a single airline’s major hub—for example, Atlanta (Delta), Minneapolis (Northwest), and Pittsburgh (U.S. Air).

Why haven’t airline entrepreneurs broken into such markets, offering clearly different alternatives for air travelers? It turns out that many have tried, but have had great difficulty obtaining gates at such airports. And that leads us to one of the key respects in which airline deregulation is an “unfinished revolution.” While airline service itself has been freed of economic regulation and allowed to become a dynamic industry, U.S. airports are still run in the old-fashioned, static, bureaucratic manner typical of the pre-deregulation era. Among other things, this means that their management style is more passive and risk-averse than that of the world’s growing body of privatized airports, now numbering more than 100 (and including the main airports in such cities as Auckland, Buenos Aires, Dusseldorf, Johannesburg, London, Melbourne, and Rome).

Privatized airports (and also leading “corporatized” airports such as Amsterdam and Frankfurt) are run as businesses, intended to make a profit by aggressively developing various profit centers, tailoring their services to many different groups (including airlines, originating passengers, transfer passengers, meeters and greeters, and employees). Recent research at Oxford University has shown that the management approach of privatized airports is—not surprisingly—significantly more passenger-friendly than that of traditionally managed airports.

Willing to Take Risks

Privatized airport managements are also more willing to take on the risk of new investments—such as the creation of new terminal space to provide gates for new-entrant airlines. And this brings us back to the question of increased competition by such airlines, especially in “fortress hub” cities where air travelers today have very limited options. Under typical U.S. airport management practice, the major incumbent airlines have signed long-term gate-lease agreements (making them “signatory” airlines). From the standpoint of risk-averse airport management, these long-term agreements give them a more-or-less guaranteed revenue stream to pay off the bonds they issue to build the terminal facilities. But in exchange for this security, they give up substantial control to the signatory airlines. Usually, the long-term agreements give these airlines what amounts to a veto power over any terminal expansions. That means when new-entrant airlines want to start service at such an airport, there are often no gates available at all—or there is only “remnant” space available at odd hours at gates leased by the signatory airlines, which they might make available to the newcomer, at two to three times as much as what the incumbent is paying under its lease!

These barriers to entry are well known within aviation circles. In October 1999, the U.S. Department of Transportation (DOT) released an important report, “Airport Business Practices and Their Impact on Airline Competition,” explaining how all this works and concluding that, indeed, “Airport business practices play a critical role in shaping airline competition. Access at many of the nation’s airports is limited . . . because of long-established airport business practices.”

What the report did not do was to contrast these business practices with those of corporatized and privatized airports around the world. Had DOT’s researchers done so, they would have found that an airport run as a for-profit business does not cede de facto control over its facilities to its largest customers. At most such airports the gates remain under the control of the airport company and are allocated hour by hour to individual airlines, as needed. (That is why at many European airports, and at the privately run Terminal 3 in Toronto, the airline signage at each gate is electronic, permitting it to be changed in moments from one airline’s name to another.) And that is how gates will be managed at the new International Arrivals Terminal at JFK in New York—a $1 billion project being developed and operated by a private consortium including the for-profit company that owns and operates Amsterdam’s Schiphol Airport. The IAT consortium is taking the entire risk of keeping the gates occupied because it wants the management flexibility to get the most value out of each and every gate.

In short, the answer to today’s serious limitations on new airline entry at U.S. airports is outright privatization, in which existing airport owners (cities, counties, and states) sell or long-term lease these facilities to professional airport firms.

Real airline competition is being impeded by the outmoded management approach of U.S. airports. Much of the world is moving to a new paradigm—the airport as a for-profit enterprise—that is far more consistent with a dynamic, competitive airline market. It is high time the United States did likewise.