The answer is that the call for privatization does not get at the real reason the private sector works better than the political sector.  The great advantage of the private sector is not private ownership per se but that private owners compete with one another.  Classical liberals would do better to contrast not the “private” and “public” sectors, but the “competitive” and “monopolistic” sectors.  If the goal is efficiency in delivering the goods, private ownership is a necessary but not a sufficient condition.  Instead of calling for the “privatization” of government services, classical liberals should be calling for “de-monopolization.”

Private Monopoly

Suppose a local government decides to privatize trash collection.  This often means that rather than running the trash collection organization itself, the local government offers the monopoly right to collect trash to the highest bidding private firm.  Although the interested firms compete in bidding for the contract, they nonetheless end up with a monopoly privilege in the locality.  From the consumer’s perspective, a political-sector monopoly has been replaced with a private-sector one.

Private monopolies might be marginally more efficient than political ones, if only because they have a bottom line and presumably have to do the job well enough to get the contract renewed.  Those incentives may be stronger than those that flow from the public’s ability to complain or vote out local officials in the case of government provision.  However, notice that the private monopoly ultimately has to please the politicians who dispense the monopoly privilege, not the consumers.  How much the public really gains from swapping a government monopoly for a private one is not at all clear.

Imagine instead that the local government simply opened up trash collection to any firm that wished to sell the service to consumers.  This “de-monopolization” would lead to actual competition among (potential) providers, forcing trash collectors to serve consumers well, instead of just local politicians who hand out monopoly privileges.  Competition drives firms to provide better quality, lower cost goods to consumers rather than political benefits to government agents.  Yes, you can’t have competition without private ownership, but private ownership alone is not enough.  You need de-monopolization to generate the competition that is at the core of the private sector’s effectiveness.

Several Property

In some of his later writing, F. A. Hayek recognized a similar point when he suggested that it was problematic to talk of “private property” and that we should talk instead of “several property.”  The distinction is not merely semantic.  His point is that the important thing about “private” property is not that it is private, but that it is divided among “several” owners who then compete to make the best use of it.

The rhetoric of “privatization” may turn people off who might otherwise be more sympathetic to classical-liberal ideas if we were to frame them as opposition to monopoly rather than as support for shifting resources from “public” to private hands.  It’s also worth mentioning that the “public” sector is far more “private” than the private sector.  Compare how little we know about what “public sector” organizations like the CIA or the Fed do versus how much we know about Apple, Google, or other public corporations, which regularly open their books and provide annual reports to the public.  If we believe that the benefits of de-monopolization will go to “the public” as consumers, then let’s drop the talk of “privatization.”

Private ownership is not a goal but a means to an end.  What really matters is what best serves the public in its role as consumers.  Private ownership only does that if it’s within an institutional context that promotes competition. We classical liberals need to shift our rhetoric from promoting privatization to promoting competition by ending government monopolies wherever possible.  That is the path to lower prices, higher quality, and more freedom.

This fact, however, does not imply that exposure to more economics is necessarily good. The sad reality is that economists too often present their analyses of markets in ways that confuse not only unsuspecting non-economists but also—and too often—economists themselves.

A frequently encountered instance of this confusion is economists’ discussion of competition. What introductory economics textbooks describe as “perfect” (or “pure”) competition resembles nothing that occurs in the real world. In the world of the textbooks, firms don’t differentiate their products from those of their rivals. Firms never try to win more customers by improving the quality of their products. Also, firms don’t advertise. Indeed they don’t even cut prices because each “perfectly competitive” firm is a “price taker”: It’s too small to affect the market price and so can sell as much as it wishes at whatever price prevails in the market.

These and other problems with the model of “perfect competition” have been pointed out repeatedly, especially by economists steeped in the Austrian tradition—see, for example, Hayek’s essay “The Meaning of Competition.” Yet the typical economist still clings to the notion that “perfect competition” is perfect competition. This typical economist, it must be admitted, does understand that the conditions necessary for “perfect competition” to prevail in actual markets can never exist. But the model remains the ideal against which real-world markets are judged. The closer real-world markets appear to be to textbook “perfectly competitive” markets, the more competitive real-world markets are assumed to be.

And competition being a good thing, this typical economist presumes that policies advertised as moving real-world markets closer to the “perfectly competitive” ideal are desirable.

Assumed Conclusions

But such a presumption is unwarranted, in part because many of the conclusions of the analysis are snuck into the model’s initial assumptions.

Most important among this model’s foundational assumptions is that competitive forces play out only in the form of price cuts. Therefore anything that prevents prices from being cut (down to levels that the model specifies as appropriate) is regarded as an obstacle to competition—indeed, as an element of monopoly that prevents the economy from operating more efficiently.

To this day, many mainstream economists describe any firm that can raise, even modestly, the price it charges for its product without driving away all of its customers as possessing some monopoly power.

Note the confusion: A pest-control producer that aims to increase its sales by making a better mousetrap is regarded by this model as behaving monopolistically! Competing for customers by doing something other than simply cutting prices is, according to the model, not competitive.

You can’t make this stuff up.

Another example of how economists commonly confuse themselves (and others) involves the issue of “market failure.” That same introductory economics textbook that teaches the model of “perfect competition” explains a few chapters later that markets perform suboptimally whenever some groups of people act in ways that affect other groups of people without the consent of these third parties. The textbook then explains that, happily, economists know how to design taxes or regulations to fix the problem.

Externalities and Assumptions

Such situations—economists call them “externalities”—are indeed bad. If Smith pays Jones to hit me in the head with a hammer without my consent, I—the third party—am unquestionably made worse off. (A simple, and best, solution in this case is to give me an enforceable property right in my person: No one can hit me and get away with it without my consent.)

But the stories that economists typically tell of externalities—and of how to “solve” them—too loosely sneak in illegitimate assumptions.

Here’s an example: Smith pays Jones for pork chops whose production at Jones’s pig farm next door to where I live fills my house with obnoxious odors. The economist leaps to the conclusion that I am wronged. Perhaps I am. But suppose that I bought my house knowing that it was next door to a pig farm. Am I still wronged? No: The price I paid for my house was discounted because of its location within smelling distance of the farm. Not only have I consented to endure swinish odors in my home, I’ve been compensated for doing so (in the form of a lower price than that of a similar home located in a sweeter-smelling neighborhood).

Or suppose, alternatively, that the pig farm moves into my neighborhood by surprise, after I buy my house. Now am I harmed? The answer is unclear. If the location of my house is such that homebuyers should reasonably expect the possibility that farms might set up shop nearby, then when I bought my house there was an open question about whether or not home-owners have the right to odor-free air in the neighborhood. And because this question cannot be answered by economics alone, it’s illegitimate for an economist to conclude that the farm necessarily should be taxed or regulated for the purpose of cleansing the neighborhood air of stinky odors.

The Largest Externalities

Economists are correct to point out that externalities exist. But economists are far too frivolous in going about labeling this or that effect an “externality”—and, what is even worse, are far too glib in supposing that government can be trusted to “internalize” externalities in ways that improve the allocation of resources rather than making it worse.

Don’t forget what too many economists seem never to grasp: Collective decision-making itself—from citizens voting to politicians spending taxpayers’ money—is infected with what are perhaps the largest and most intractable externalities. Costs are imposed on third parties constantly.

Economics done properly would highlight the dangers of trying to cure externalities with a process that itself is deeply infected with externalities. Unfortunately economics is too often done improperly.

Overestimating the power of Progressive ideas locally is difficult. Many who eschew the heavy hand of the federal government—railing against corporate bailouts, Medicare, or government ownership of companies—embrace even more extensive government manipulation of private market activity closer to home.

For example, taxicabs are almost all privately owned and operated in the United States, yet municipal taxi commissions and boards regulate virtually every aspect of the business. The codes themselves can include a dizzying array of regulations, from specific details about where cab companies can locate, to how many hours they can operate, what price they can charge, and what equipment they can use to accept calls. My own survey of taxi regulations in 15 cities uncovered 27 separate types of regulations.

Considered separately each regulation may seem reasonable, but the cumulative result has been to protect exiting companies from competition, depress wages for drivers, discourage innovation, and limit services to new customers and markets. Taxi regulations and codes fix prices by law, mandate the way fares are collected (meters), dictate hours of operation (24-hour dispatch service), regulate financial operations (by requiring financial reporting), promote public safety (vehicle inspections), set standards for language fluency and driver competence (tests), and include dozens of other regulations.

Over time many of these ordinances have grown in scope. Where a code might have first been established to ensure a basic minimum level of safety, perhaps requiring vehicle inspections for brakes or lights, modern codes can stretch to dozens and hundreds of pages involving complex and often complicated procedures and standards as the commission legislates every detail of running a taxi business. New York City has just completed a public bidding process for selecting the kind of vehicle taxi drivers will be allowed to use.

This detailed approach to regulation of private business is consistent with the Progressive mindset and political philosophy. Progressives for the most part adopt what political scientists call a “public interest” view of government. Elected officials are said to represent the will of the people, and civil servants thus dutifully carry out their vision of the public will. The problem is that public officials and taxi boards don’t always pursue the public interest, lack sufficient information about the taxi market itself, and often rely on cumbersome, outdated decision-making to enforce their codes and rules.

For example, most taxicab codes assume that operators are full-time employees. In fact most drivers are part-time and choose to drive taxis for lifestyle reasons as much as to maximize their income. My study of the taxi market in Port Chester, New York, estimated that two-thirds of the drivers are part-time. In addition, fares and trips were not evenly distributed throughout the day: They peaked at specific times such as the morning and afternoon rush hours and lunch. Full-time drivers tended to earn fares throughout the day. Part-time drivers met excess demand. In addition, most revenue was earned taking patrons outside the city (and the reach of the taxi commission).

Regulation vs. Diversity

Most taxi codes can’t accommodate this kind of diversity within the industry. The regulations are one-size-fits-all, and almost all either fail to address or acknowledge the valuable role part-time drivers play in meeting customer demand. Part-time drivers, for example, often handle calls through a cell phone and focus their activity around fixed passenger pickup places such as taxi stands, the airport, or train stations. They often charge fixed prices for specific types of trips, regardless of distance. Many drivers also develop a steady and stable client list through personal service.

Yet taxi regulations force the same requirements on every car, driver, and company regardless of service provided. Often part-time drivers are still required to have meters that calculate fares based on distance (when flat fares can easily be negotiated), be officially attached to a dispatch company, or meet requirements such as maximum age limits on vehicles regardless of amount of use. Quite simply, the taxi codes can’t keep up with the dynamics of the service provided.

Some cities regulate taxis at even greater levels of detail. Many cities require companies to submit financial reports to the local government so officials can evaluate their fiscal solvency when they renew dispatch company licenses. Ordinances require dispatch companies to lease office space regardless of the number of calls or the technology that enables them to handle calls in a home office. Many ordinances also require all companies, regardless of their market or client base, to formally affiliate with a dispatch company.

In a survey of taxicab regulations in Ohio, Taxicab Regulation in Ohio’s Largest Cities (1999), the Buckeye Institute found that cities regulated prices in a variety of ways. For example, two cities—Akron and Canton—did not regulate taxi fares at all. They let individual companies decide what prices to charge. The state’s largest cities—Cincinnati, Cleveland, and Columbus—set maximum rates. Only Toledo and Youngstown set rates by ordinance.

In my survey no single regulation was found in a majority of cities. In fact, fewer than half the cities surveyed required fares to be set by distance-based meters. Only 40 percent regulated logos and taxi colors, or mandated radio dispatching. One-third capped the number of vehicles, required public hearings for licenses, or mandated service hours or physician certificates. In terms of overall burden the most restrictive cities required 13 separate regulations while others required just a handful.

Optimal Numbers

Perhaps the most illustrative example of the “government knows best” mindset is found in regulations limiting the number of cabs, drivers, and companies. The theory is that there is an “optimal” number of vehicles for a given market size and the commission’s staff can figure out what that is. It is also presumed that the regulatory board will make decisions about what rules to enforce based on objective criteria. A cottage industry has even emerged of consulting firms that have developed sophisticated statistical models to estimate the number of taxicabs that should be allowed to operate in a city.

In the real world, however, the demand for taxis is dynamic and markets are often separated by the types and needs of diverse customer bases. In Dayton, Ohio, one company focused on airport services, another on spontaneous calls from the street (street “hails”), and a third on specialized services to the local transit agency.

Moreover, the boards and commissions themselves are mostly run by citizens with little knowledge of the taxi market and staff that have little background in the specific workings of the industry.

Not surprisingly, inefficiencies reign. One indicator of inefficiency is the black market for taxi medallions (government-granted licenses that allow someone to operate a taxicab). Caps on the number of taxis as well as other regulations increase the costs of entry into the business, restricting supply well below demand. Common sense (as well as basic economics) suggests that if enough taxis are plying the streets of cities to meet demand, illegal medallion markets would not exist.

In fact medallions in the black market can command staggering sums. In New York City a cap on taxicabs created an illegal market of “gypsy cabs” that may have reached 30,000 in the 1990s. While the city government is slowly increasing the number of medallions, the official price runs upwards of $600,000. In fact, two medallions recently sold for $1 million each in a private sale in October 2011. In Boston the going rate for a black-market license is $400,000. In less restrictive cities licenses still can cost $25,000 or $30,000.

Pricing Out the Competition

While this price might not seem high for many middle-income families, the typical annual wage for a taxicab driver hovers around $30,000. In effect the high prices for a medallion make it virtually impossible for drivers to save up enough money to buy their own cab or start their own company. Increasingly severe restrictions are a boon to existing medallion holders because the value of their licenses increase. Thus one of the more pernicious effects of tightly regulating the taxi market and preventing supply from fluctuating to meet demand is dramatically fewer entrepreneurial opportunities. Low-income and minority communities are hit the hardest when markets that should have easy access are closed.

Meanwhile existing cab companies, which often have representatives on the boards and commissions that regulate their industries, typically use their influence to prevent competition. Local taxicab ordinances often have “need and necessity” provisions for new applicants that end up protecting a cartel of existing taxicab companies. Under such provisions the presumption is that the commission or board has already set the optimal number of cabs and level of service for the city. A prospective cab company must present evidence that it will serve a part of the market that is not currently being served by existing companies. Often applications are denied simply because existing companies showed they have the capacity to serve the market if it existed. New applicants are caught in a regulatory Catch-22. They have to prove that a market exists for their service. But if that market existed, established companies argue, they would be serving it. Therefore the underserved market doesn’t exist. Application denied.

Unfortunately taxicab regulation demonstrates yet another hard, cold reality of politics: Once the regulatory authority is established in local ordinances, local politics make it difficult to deregulate. The benefits of regulation are concentrated in the hands of a few key players, usually existing taxicab owners and medallion holders, who have strong financial incentives to lock out new competition. They have access to the regulatory apparatus and relationships with regulators that put upstart companies and innovators at a distinct disadvantage. Entrepreneurs are not free to compete in the marketplace. To enter the market they need the permission of regulators influenced by those with a stake in maintaining the status quo.

Laudable Beginnings

Progressives led municipal reform movements across the nation during the 1880s and 1890s in a laudable attempt to purge cronyism and patronage from corrupt political systems. They led efforts to create electoral transparency and fiscal accountability, and recast politics in a more “professional” framework. Many of these municipal reforms led to the professionalization of city management. Even the institution of civil service was a step forward for most cities. Civil-service standards and exams for police and firefighters helped professionalize services. Although the downstream effects of public-sector unionization led to bloated budgets and inefficiency, fiscal transparency and accountability were laudable reforms.

Progressivism, however, has a dark side few fully appreciated at the time. Caught up in the emotional appeal of “scientific management,” many thought government could and should be run like a business. One of the highest profile Progressives was President Woodrow Wilson, a father of modern-day public administration, who wrote pioneering articles in the late nineteenth century advocating the separation of administration from politics in government. The theory put the trained expert—the bureaucrat—at the center of political administration.

Few areas of urban policy reflect the overly optimistic worldview of Progressive thinking, and the negative consequences for consumers and suppliers, as much as taxicab regulation. The fatal flaw in the Progressive view is the belief that administration could in fact be separated from political pressure. Unlike the private market, where greed, egos, and inefficiency would be punished by losses, legislative election cycles are poor mechanisms for providing accountability.

It’s a nice homey analogy but it is wrong on multiple levels. As I pointed out in my reply, the author has apparently never looked at the back of his toaster. If he did he would have noticed that what actually assures him that his toaster won’t explode is not the regulatory power of the federal (or any) government, but the competition in the private sector. Specifically most small appliances in the United States have the stamp of quality assurance from Underwriters Laboratory (UL), which is a private (nonprofit) organization that has tested such appliances for over a hundred years. UL is unaffiliated with the government and provides this quality assurance so manufacturers can to say to their customers that their toasters or clock radios or televisions are safe.

Not the Only One

UL is not the only organization that provides this service, though it is very much the largest. In other sectors of the economy similar groups provide market-produced quality assurance. For example, since 1972 auto repair technicians can be certified by the National Institute for Automotive Service Excellence (ASE). ASE requires that technicians pass a series of tests to get certified; customers are informed by a wall display at the repair shop. Like UL, ASE is a nonprofit that is independent of government. The Professional Association of Diving Instructors (PADI) certifies scuba divers in a similar, though for-profit, fashion.

What’s great about these organizations is that they emerged from the demands of both consumers and producers, not government. Consumers want a way of knowing that they are getting products that won’t explode, mechanics who know their stuff, and scuba instructors who won’t get them killed (not to mention gear that won’t leak). Sellers want to be able to signal to potential buyers that their products and services are of high quality. Solving this problem requires an independent intermediary such as these certification organizations, and sellers are glad to pay to acquire the signal of certification. The certifiers are happy to provide it, and most (though not all) are run as private nonprofits to alleviate any concern about conflicts of interest.

What is also important here is that there is genuine competition via freedom of entry into the certification business. Certification organizations cannot afford to make mistakes since there’s nothing preventing either an existing competitor or new entrant from offering a higher quality alternative. Even if there is no actual competitor at any given time, the threat of competition via new entrants, and consumers’ and sellers’ option to “exit” and use that new firm, keep established certifiers on their toes.

So contrary to the letter writer, it’s not the federal government which helps to assure that his toaster won’t explode, but the competitive forces of the market.

How’s Government Doing?

However, that is only one problem with the argument. It’s also worth asking how well government has done at “certifying” financial products. One of the fascinating questions in the financial crisis is why all those toxic mortgage-backed securities got AAA ratings from Standard & Poor’s, Moody’s, and Fitch? The answer is that starting in 2003, those were the only three agencies allowed by the Securities and Exchange Commission to rate certain types of securities for regulatory purposes. This included many of the mortgage-backed securities that were at the center of the financial crisis.

In other words, the government’s quality assurance providers were a protected cartel (though the law has changed since the crisis). Without freedom of entry — and the threat of competition — these three firms faced reduced incentives to do their job well. More important, without the competitive pressure and the possibility of buyers and sellers exiting to other firms, the discovery process of competition was cut short, preventing the agencies from learning they were making mistakes and how they might do better. The agencies wound up stamping assets “AAA” that were the financial equivalent of an exploding toaster.

The lesson is that  if we want our financial system to be as reliable as our toasters, we need more market competition and less of the heavy hand of the State.

But is that so? Without denying the value of perseverance, and recognizing that the slogan “never give up” can be useful in overcoming certain obstacles, we must keep in mind that failure can act as a guide to more worthwhile activities. For example, in 1921 Walt Disney started a company called the Laugh-O-Gram Corporation, which went bankrupt two years later. If a friend of Disney or the government hadn’t let him fail and move on, he might never have become the Walt Disney we know today.

More important than this individual learning process is the irreplaceable role failure plays in the social learning process of the competitive market. When we refuse to allow failure to happen, or we cushion its blow, we ultimately harm not only the person who failed but also all of society by denying ourselves a key way to learn how best to allocate resources. Without failure there’s no economic growth or improved human well-being.

Economists, especially those of the Austrian school, often emphasize how entrepreneurs discover new knowledge and better ways of producing things. But entrepreneurial endeavors frequently fail and the profits thought to be in hand often don’t materialize. According to the U.S. Small Business Administration, over half of small businesses fail within the first five years. But failed entrepreneurial activity is just as important as successful entrepreneurial activity. Markets are desirable not because they lead smoothly to improved knowledge and better coordination, but because they provide a process for learning from our mistakes and the incentive to correct them. It’s not that entrepreneurs are just good at getting it right; it’s also that they (like all of us) can know when they’ve got it wrong and can obtain the information necessary to get it right next time.

On this view failure drives change. While success is the engine that accelerates us toward our goals, it is failure that steers us toward the most valuable goals possible. Once failure is recognized as being just as important as success in the market process, it should be clear that the goal of a society should be to create an environment that not only allows people to succeed freely but to fail freely as well.

The Knowledge Problem

Understanding this point requires a broader vision of the market process. For Austrian economists the fundamental economic problem is not the efficient allocation of given resources to our most valued ends at a given time, but rather how we overcome the “knowledge problem”—the division of knowledge that characterizes the social world. It is more important to figure this out than to master the problem of resource allocation because new knowledge drives economic growth and creates prosperity. If the main task of the market were merely to allocate known resources to their most efficient uses, economic growth would seem impossible, since we would be stuck in a primitive world. Where is there any room for the innovation or change that drives progress and improves our lives? If a plow is deemed the most efficient use of iron and all iron is constantly allocated to making plows, how could iron ever be allocated for a new invention such as a tractor? The answer is that entrepreneurs change the most efficient use of resources by discovering new uses. By understanding the economic problem posed by limited, unique, and dispersed knowledge, we can better understand the role failure plays in coping with this problem.

Competition figures prominently in this system. Competition promotes entrepreneurial activity and the discovery of knowledge by empowering a variety of decision-makers to try to find new and better ways of using resources as well as new ends to achieve. This decentralization ensures that what F. A. Hayek called the local knowledge of time and place will be best used. Centralized planning, like other forms of government allocation, necessarily relies on the knowledge of fewer people, limiting discovery and restricting knowledge-dissemination to fewer channels. Competition is a better way to overcome the knowledge problem.

Failure and Opportunity

We can understand the role of failure if we recognize, as Ludwig von Mises did, that all human action intends to “remove felt uneasiness.” We are always striving to improve ourselves by achieving our highest valued ends as often as we can. On these terms, failure is all around us because no human ever achieves a complete lack of felt uneasiness. We always have unsatisfied ends. Israel Kirzner uses the term “alertness” to describe how the entrepreneurial element of human action identifies which ends to strive for and which means are available. Kirzner says that for market action to occur, entrepreneurs must first be alert to opportunities for profit. The possibility of profit keeps entrepreneurs alert to the ways people strive for ends or make use of means that fail to remove felt uneasiness. Once they’ve noticed this failure in human knowledge, the same opportunity for profit spurs entrepreneurial activity to find a new way to achieve those ends, or to find better ends themselves. So a failure in human knowledge becomes the catalyst for producing new knowledge via the entrepreneurial process.

When entrepreneurs attempt to correct a particular failure in knowledge, they often fail themselves and incur losses because of competition. Although bankruptcy is painful in the short term, such failure is an integral part of how entrepreneurial activity and the market function. Failure in a competitive society informs market participants about which activities or jobs to strive for and which to avoid, lest they waste time and money. Jobs that add value to society should be pursued, while those that fail to add value should be eliminated. Markets help guide market participants far better than any bureaucracy can because bureaucracies lack the market’s key components of competition, profit, and loss, which reveal failures and allow for their correction.

Because competition is a voyage into the unknown, we can only know after the fact what works and what does not. Thus economic failure is not “waste.” Calling entrepreneurial failure a “waste” implicitly assumes that one knew ahead of time what the best use of resources was. Such knowledge is not available to anyone, which is why failure is necessary to provide the needed signals.

The subsidies, bailouts, stimulus packages, and other interventions that now increasingly characterize the U.S. economy disrupt this process. Farm subsidies (including cheap water out west), for example, prevent entrepreneurs from finding and capitalizing on failures of knowledge in farming. While there may be new and better ways to grow food, it is difficult for entrepreneurs to find this out if farmers are kept afloat by the government. Perhaps decentralized, local farming would be discovered as more profitable if larger monoculture farms that are possibly damaging the environment were allowed to fail. By preventing inefficient methods of production from suffering losses, subsidies reduce the degree of failure in agricultural markets and make it harder to know that misallocation has taken place and to correct it.

Not letting Chrysler and General Motors fail during the Great Recession prevented an entrepreneurial response to this misuse of resources. The bailouts created two types of negative incentives. First, the companies were encouraged to keep making cars when their losses showed the resources and labor could better be used elsewhere. Second, the government deterred any new entrepreneur from entering the industry and doing things better. Many politicians defended the bailout because they did not want the hundreds of thousands of autoworkers to become unemployed. But when hundreds of thousands of workers become unemployed they do not disappear. They find different jobs that would contribute to society in a better way than working for a bankrupt auto company. The physical assets of bankrupt companies also get reallocated to alert entrepreneurs looking for bargains. Failure is necessary for learning and for success.

The Keynesian argument for government jobs programs is that any sort of work will restart spending in a recession, even hiring people to dig ditches and fill them up. But do a higher GDP and a job by themselves make society better off? Would it be better to have a 2 percent unemployment rate with 8 percent of the employed population doing jobs that don’t add real value (so around 10 percent of the labor force is not adding real value) or more unemployment with everyone who is working really adding value?

Unemployment

Unemployment is a form of failure, and it involves the same considerations as when businesses fail. If a job no longer contributes value this needs to be made clear so that those workers can find jobs that actually do. Imagine if the disemployment of farmers had been prevented during the transition to an industrial economy. In 1941, 41 percent of the U.S. workforce was in agriculture. In 2011 the portion was 3 percent. Where would industry be today if we had prevented the majority of the 41 percent from losing their jobs and finding new ones? It is right that this sort of “failure” was allowed to occur because the displaced farmers found new jobs in the cities and elsewhere. Those new jobs helped society transition from agriculture to industry to services, creating even newer jobs all along the way. This is strong evidence that learning from failure takes place in labor markets.

Autopoiesis (life’s continuous production of itself) is one of the principal characteristics of life, and constant change is its essence. This applies to the economy as well. For us to maintain or increase a high standard of living we must constantly change how we do things. This change won’t be fueled by lucky guesses or by bureaucratic decrees, but instead often by entrepreneurial activity in the face of failure in the market. Since that activity drives the train of progress, it is in society’s interest that the tracks be cleared of governmental obstacles.

They each own and operate popular vending stands outside Turner Field in Atlanta, serving baseball fans with tasty snacks, fully licensed Braves merchandise, parody shirts, and other goodies at steep discounts. They pay all the required and varied taxes on sales and business to city and state officials.

Little did they know that in July 2011 they would find themselves at the center of a major effort to vindicate the rights of street vendors nationwide.

Street vending has long allowed entrepreneurs to provide for themselves and their families while satisfying customer demands and creating jobs. Together Miller and Hambrick employ about a dozen people. They see vending not merely as work but as a way of life. As Miller puts it: “I’ve been able to develop a lifestyle around vending. I’ve been able to purchase me a home and raise children and grandchildren.”

Hambrick takes pride that his business provides jobs, supports his entire family, and pays for his children’s education: “I employ six people, and they are depending on me, and I’m depending on them now. I’ve been able to put my kids through college working here and being successful.”

But a new law on the books in Atlanta is about to destroy both of these businesses, along with untold others throughout the city.

Unprecedented Monopoly

Vending is thousands of years old and has thrived in America since the 1600s.

By 2007 street-vending businesses throughout the country generated revenues in excess of $40 billion. Vendors in Atlanta alone brought nearly $250 million to their local economy.

The recession in 2008 tightened consumer wallets and forced many out of work, which led to a street-vending boom. And, sure enough, new regulations followed.

In 2009 Atlanta officials decided to create a citywide vending monopoly. The city signed off on a deal that hands over all vending on public property to a single multibillion-dollar corporation.

Atlanta Mayor Shirley Franklin signed an exclusive 20-year contract with a Chicago-based shopping-mall management company, General Growth Properties (GGP). While governments have long meddled with street vendors, this was the first time in American history that a city gave one company the “exclusive right to occupy and use all public property vending sites . . . including without limitation those vending sites currently occupied by public property vendors.”

The GGP contract calls for the construction of vending kiosks around Atlanta. As the kiosks are built the existing vendors are forced to move out or else start paying up to $20,000 annually in rent and fees to work out of a cramped GGP kiosk. Vendors used to paying $250 a year for their vending site must now hand over $500 to $1,600 every month for the privilege of working for the monopoly. This makes it all but impossible for most Atlanta vendors to stay in business.

This is not the first time Atlanta legislation has had the effect of destroying vending businesses. When Atlanta hosted the Olympics in 1996 then-mayor Bill Campbell gave a personal associate the right to sublease out vending spots throughout the city. Thousands of vendors were pushed away, and many lost their businesses and life savings.

The GGP kiosks now popping up in Atlanta are designed for advertising rather than selling merchandise. They are covered with ads on three sides, limiting visibility and function while making it difficult to attract and interact with customers.

Further, the new Atlanta law absurdly requires GGP to prohibit their vendors from competing with nearby bricks-and-mortar businesses. The contract stipulates that GGP lessees may only sell products that “complement and not compete with existing ‘bricks-and-mortar’ retailers in the areas of the vending units.”

The transition to kiosks is occurring in several phases. As soon as the first phase went up numerous vendors were forced into unemployment. The second phase includes the area around Turner Field, with construction scheduled to begin toward the end of this baseball season. Once phase two is implemented, Miller’s and Hambrick’s businesses will almost assuredly be destroyed.

On July 15 Miller came to work to find a spray-painted outline of a kiosk on the ground next to his vending location. At a press conference two weeks later he pointed to the outline and lamented, “That might as well be my coffin.”

Trouble in Texas

Unfortunately, Atlanta vendors are not alone. Consider Yvonne Castenada.

Castenada is a proud Texan. Born and raised in El Paso, she created a successful vending business that provides for her daughter and injured husband. Castenada is a food vendor. By 5 o’clock in the morning she is already up and getting her food ready for the day. She cooks her popular burritos in a nearby commercial kitchen, loads them into warming trays in her food truck, and sets out into the El Paso streets to serve her customers.

Her business was thriving until city officials passed a law that turned El Paso into a no-vending zone—for the sole purpose of protecting bricks-and-mortar restaurants from competition.

The protectionist regulations made it illegal for mobile food vendors like Castenada to operate within a thousand feet of any restaurant, convenience store, or grocer. The city even prohibited vendors from parking to await customers, forcing vendors instead to constantly drive around the city until a customer flagged them down. Once the customer was served, the vendors had to leave immediately.

Vendors caught violating the new law faced thousands of dollars in fines.

City officials harassed and cited Castenada on multiple occasions. She said, “It has gotten to the point where I’m concerned about being able to pay my bills. I find myself constantly looking over my shoulder just because I might be too close to a restaurant.”

A spokesperson for the El Paso Restaurant Association admitted in an interview by the local ABC affiliate that the law is purely protectionist: “We wanted this ordinance in place to help established restaurants keep their business.”

Even the city’s health inspector admitted before the El Paso city council that the law was put in place “to address concerns of the fixed food establishment. . . . [T]here’s not a health reason or a Texas food rule that I can find that justifies that.”

A National Problem, A Nationwide Initiative

In November 2010 The Economist wrote that “thanks to Twitter and the tough economy, some of the best food Americans eat may come from a food truck.” Predicting that the recessionary street-vending boom would lead to “the biggest shift in America’s culinary landscape in 2011,” the magazine noted that new regulations were popping up in several cities, and in others there was pressure to ease restrictions so vending could flourish.

A new national report released by the Institute for Justice (IJ), Streets of Dreams, evaluated the vending regulations in the 50 biggest cities in the United States. The results were disturbing. For instance:

• 33 cities have established no-vending zones, which often include potentially lucrative areas such as downtown or areas near sporting venues.

• 20 cities ban vendors from setting up near bricks-and-mortar businesses that sell the same or similar goods.

• 19 cities prohibit mobile vendors from staying in one spot, forcing them to spend much of their day moving instead of selling.

• 5 cities prevent mobile vendors from stopping and parking unless flagged by a customer.

In January IJ launched its National Street Vending Initiative, creating a nationwide litigation and activism effort aimed at vindicating the right of street vendors to earn an honest living. The first targets were El Paso and Atlanta.

“I’m fighting for my American Dream.”

Thankfully, Castenada refused to let her competitors and their friends in government run her out of El Paso. Instead, in January she teamed up with other vendors and the Institute for Justice in a major federal lawsuit against the city. They argued that the vending regulations were anticompetitive and unconstitutional on the grounds that they violated the economic liberty of El Paso vendors.

And just weeks after the suit was filed, the city backed down and repealed its protectionist regulations.

Miller and Hambrick joined the vending initiative in July. Together with IJ they announced a lawsuit challenging Atlanta’s vending monopoly. The Wall Street Journal editorialized that “the Atlanta case is one more example of the way that governments tend to collude with private interests to benefit the powerful. We hope Atlanta’s new law is tossed out in court, so vendors like Messrs. Miller and Hambrick can get back to business.”

Hambrick clarified why he brought the lawsuit: “I’m fighting for my American Dream. And I’m fighting for the rights of other vendors and small businesses.”

Indeed, a victory by Miller and Hambrick could have national implications. A ruling in their favor would set a precedent for future challenges to restrictive vending laws in cities across the country.

Momentum is building. On August 17 vendors in Chicago joined forces with area law students and the IJ Clinic on Entrepreneurship in a grassroots street-vending campaign. The city has recently taken to ticketing and even arresting vendors simply for serving their customers. Regulations currently prohibit vendors from working within 200 feet of bricks-and-mortar restaurants. It’s also illegal for vendors to put toppings on a hot dog from their cart or serve any food before 10 a.m. The grassroots campaign seeks to overturn these needlessly restrictive regulations.

Judicial Engagement

Importantly, such vending laws exist throughout the country today because the courts fail to protect economic liberty. In the name of “judicial deference” judges have largely abdicated their responsibility to protect this right and enforce limits on government power. Without meaningful judicial supervision, laws favoring special interests have proliferated to an almost unimaginable extent.

For instance, IJ challenged a blatantly protectionist law in Louisiana that made it illegal to arrange and sell flowers without first obtaining permission from the government—the only law of its kind in the country. Aspiring florists were forced to pass a subjective licensing exam . . . that was graded by existing florists! Remarkably, a court upheld the law on the grounds that it was theoretically possible that without a flower cartel the public could be harmed by “infected dirt.”

Unless judges are engaged—taking our rights and the facts before them seriously—such abuses are inevitable. For vendors and other Americans to fully enjoy their right to earn a living, the courts must decide that protectionism is not a constitutional exercise of government power. Currently the federal circuit courts are split on this issue.

For their part, Miller and Hambrick are ready to fight all the way to the Supreme Court if that’s what it takes to vindicate the right to earn a living for entrepreneurs nationwide.

The term entrepreneur as used by catallactic theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action. In using this term one must never forget that every action is embedded in the flux of time and therefore involves a speculation. . . . There’s many a slip ’twixt cup and lip.

* * *

Like every acting man, the entrepreneur is always a speculator. He deals with the uncertain conditions of the future. His success or failure depends on the correctness of his anticipation of uncertain events. If he fails in his understanding of things to come, he is doomed. The only source from which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of the consumers.

* * *

An entrepreneur can make a profit only if he anticipates future conditions more correctly than other entrepreneurs. Then he buys the complementary factors of production at prices the sum of which is smaller than the price at which he sells the product.

* * *

[C]ompetition does not mean that anybody can prosper by simply imitating what other people do. It means the opportunity to serve the consumers in a better or cheaper way without being restrained by privileges granted to those whose vested interests the innovation hurts.

* * *

The social function of catallactic competition is, to be sure, not to establish who is the smartest boy and to reward the winner by a title and medals. Its function is to safeguard the best satisfaction of the consumers which they can attain under the given state of the economic data.

And from “Profit and Loss” in his Planning for Freedom:

What makes profit emerge is the fact that the entrepreneur who judges the future prices of the products more correctly than other people do buys some or all of the factors of production at prices which, seen from the point of view of the future state of the market, are too low.

As for Kirzner, in Competition and Entrepreneurship he wrote (emphasis in original):

Now I choose . . . to label that element of alertness to possibly newly worthwhile goals and to possibly newly available resources . . . the entrepreneurial element in human decision-making. It is this entrepreneurial element that is responsible for our understanding of human action as active, creative, and human rather than as passive, automatic, and mechanical.

* * *

There is a certain temptation to conceive of the entrepreneur as one who simply knows more accurately than others do where resources can be purchased most cheaply, where products can be sold at the highest prices, what technological or other innovations will prove most fruitful, which assets can be expected to increase most in value, and so on . . . . I speak of the essentially entrepreneurial element in human action in terms of alertness to information, rather than of its possession. . . . Ultimately, then, the kind of “knowledge” required for entrepreneurship is “knowing where to look for knowledge” rather than knowledge of substantive market information. The word which captures most closely this kind of “knowledge” seems to be alertness.

Everyone an Entrepreneur

For Mises and Kirzner, entrepreneurial action is risk-taking in an open-ended world of significant uncertainty. And for them, all action is therefore entrepreneurial. Other conceptions of human behavior stress the maximization of utility through the optimal allocation of given means among given ends. In the Misesian model human beings are creative agents capable of discovering means and ends in the process of acting that are not already known. In the market the entrepreneur is the one who formulates a plan to enlist “undervalued” factors of production in order to create a good which he or she intuits that consumers will be willing to pay enough for to reimburse money costs (including interest) with enough left over – the entrepreneurial profit — to make the project worthwhile (compared to alternative uses of the money).

In a freed market, as opposed to corporatist mixed economies, entrepreneurial profit is always fleeting because competition, unmolested by government restrictions on upstarts and privileges for incumbents (such as taxes, antitrust laws, patents, subsidies, guarantees), bids up the price of inputs and drives down the price of finished goods. In a freed market, then, we get the best of all worlds: The lure of entrepreneurial profit excites alertness to hitherto overlooked possible ways to make our lives better, while competitive forces prevent the concentration of wealth that justifiably worries so many people.

Corporatist Economy

Steve Jobs worked not in a fully free economy, but rather in one — despite its relatively large scope for entrepreneurship — that is riddled with government intervention, some of which benefited him, some of which did not. One suspects that on net he benefited. But he did not create that interventionist system, however much he, like most of his competitors, took advantage of it. (Thank goodness Jobs didn’t believe ideas could really be owned when he visited Xerox PARC in 1979 and saw the Alto personal computer with mouse and graphical user interface.)

Despite all this, we can see in Steve Jobs the Misesian entrepreneur. He certainly  had a knack for anticipating what people would want. In a variety of ways he blazed trails and brought forth products that make our lives more pleasant, more productive — more fun. And he did it with a vision and style — a romance with technology — that could not be ignored. One need not prefer his closed-architecture philosophy to appreciate his accomplishments and what it inspired in others.

Except for an older iPod, I use no Apple products. Nevertheless, Jobs changed all our lives for the better, and I for one will miss him.

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.

Licensing, for example, prices poor people out of business.

Take taxis: in New York City, you have to buy a license, or “medallion.” New York restricts the number of medallions so tightly that getting one costs hundreds of thousands of dollars.

“There are not many black-owned taxis in New York City,” George Mason University economist (and Freeman columnist) Walter Williams told me. “But in Washington, most are owned by blacks.” Why? Because in Washington, “it takes $200 to get a license to own and operate one taxi. That makes the difference.”

Regulation hurts the people the politicians claim to help.

People once just went into business. But now, in the name of “consumer protection,” bureaucrats insist on licensing rules. Today, hundreds of occupations require expensive licenses. Tough luck for a poor person getting started.

Ask Jestina Clayton. Ten years ago she moved from Africa to Utah. She assumed she could support her children with the hair-braiding skills she learned in Sierra Leone. For four years she braided hair in her home. She made decent money. But then the government shut her down because she doesn’t have an expensive cosmetology license that requires 2,000 hours of classroom time—50 weeks of useless instruction. The Institute for Justice (IJ), the public-interest law firm that fights such outrages, says “not one of those 2,000 hours teaches African hair-braiding.”

IJ lawyer Paul Avelar explained that “the state passed a really broad law and left it to the cosmetology board to interpret.”

Guess who sits on the cosmetology board. Right: cosmetologists.

And they don’t like competition.

One day, Jestina received an email.

“The email threatened to report me to the licensing division if I continued to braid,” she told me.

This came as a shock because she had been told that what she was doing was legal. Twice, in fact.

No customers complained, but a competitor did.

One cosmetologist claimed that if she didn’t go to school she might make someone bald.

But this is nonsense—hair-braiding is just . . . braiding. If the braid is too tight, you can undo it.

The cosmetology board told Jestina that if she wanted to braid hair without paying $18,000 to get permission from the board, she should lobby the legislature. Good luck with that. Jestina actually tried, but no luck. How can poor people become entrepreneurs if they must get laws changed first?! Jestina stopped working because she can’t afford the fines.

“The first offense is $1,000,” she said. “The second offense and any subsequent offense is $2,000 each day.”

“It is not unique to Utah,” Avelar added. “There are about 10 states that explicitly require people to go get this expensive, useless license to braid hair.”

Fortunately, IJ’s efforts against such laws have succeeded in seven states. Now it’s in court fighting for Jestina, which, appropriately, means “justice” in her native language.

Once upon a time, one in 20 workers needed government permission to work in their occupation. Today, it’s one in three. We lose some freedom every day.

“Occupational licensing laws fall hardest on minorities, on poor, on elderly workers who want to start a new career or change careers,” Avelar said. “[Licensing laws] just help entrenched businesses keep out competition.”

This is not what America was supposed to be.

Only 10 of the 54 African countries can be labeled economic success stories: Angola, Benin, Botswana, Ghana, Madagascar, Malawi, Mali, Mauritius, Uganda, and South Africa. This hardly comes as a surprise as Africa is the most economically unfree continent. No African country is classified by the Heritage Foundation/Wall Street Journal’s 2011 Index of Economic Freedom as “free.” Mauritius is classified as “mostly free,” and listed as “moderately free” are Botswana, Cape Verde Islands, South Africa, Rwanda, Madagascar, Uganda, and Burkina Faso. (Some of the countries labeled economic success stories have undemocratic political systems: Angola, Burkina Faso, Madagascar, Rwanda, and Uganda.)

Ironically, traditional Africa, in contrast to modern Africa, was characterized by much economic freedom for centuries before the arrival of the European colonists. There the basic economic and social unit was the extended family, the lineage, or the clan. The means of production were owned by the lineage—a private entity separate from the tribal government—and thus privately owned, although individual ownership was common. Land, for example, was lineage-controlled, giving rise to the myth of communal ownership, while hunting gear, spears, and fishing canoes were individually owned. Nevertheless the extended family acted as a corporate unit, marshaled family labor, and decided what crops to cultivate on the family land. There was sexual division of labor, and the cultivation of food crops was always a female occupation in traditional Africa, which explains why over 70 percent of Africa’s peasant farmers today are women. Produce harvested from the farms was used to feed the family; any surplus was sold in free village markets.

Ubiquitous Markets

Markets were ubiquitous in precolonial Africa. Two types were distinguishable: the periodic (weekly) rural markets and the large regional markets. Some of these regional markets grew into large towns such as Timbuktu, Kano, Salaga, Sofala, and Mombasa. They served as exchange points for long-distance trade. Timbuktu and Kano, for example, served the long-distance caravan trade over the Sahara and the long distance trade from the coastal areas. Free-trade routes crisscrossed the continent. Goods and people moved freely along them. Men dominated the long-distance trade while women held sway over the rural markets, which largely involved trade in agricultural produce.

Prices on Africa’s markets were not controlled or fixed by chiefs or tribal governments. They have always been determined by bargaining in accordance with the laws of demand and supply. For example, when corn is scarce, its price rises, and the price of fish generally tends to be higher in the morning than in the evening, when fishmongers are anxious to return home.

Besides primary activities such as agriculture, hunting, and fishing, Africans engaged in a variety of industrial activities in the precolonial era—such as cloth-weaving, pottery, brass works, and the mining and smelting of iron, gold, silver, copper, and tin. In Benin, “the glass industry made extraordinary strides,” Cheikh Anta Diop writes in Pre-colonial Black Africa. In Nigeria, “the cloth industry was an ancient craft,” adds Richard Olaniyan in Nigerian History and Culture. Kano attained historical prominence in the fourteenth century with its fine indigo-dyed cloth, which was traded for goods from North Africa. Even before the discovery of cotton, other materials had been used for cloth. The Igbo, for example, made cloth from the fibrous bark of trees. The Asante also were famous for their cotton and bark cloth (kente and adwumfo).

Startup Capital

To secure initial startup capital for commercial operations, African natives turned to two traditional sources of finance. One was the “family pot.” Each extended family had a fund into which members made contributions according to their means. Among the Ewe seine fishermen of Ghana, the family pot was called agbadoho. Members borrowed from this pot to purchase their fishing nets and paid back the loans.

The second source of finance was a revolving credit scheme that was widespread across Africa. It was called susu in Ghana, esusu in Yoruba, tontines or chilembe in Cameroon, and stokfel in South Africa. Typically, a group of, say, ten people would contribute perhaps $100 each to a fund. When the fund reached a certain amount—say, $1,000—it was handed over to the members in turn, who invested the cash in an endeavor. The Grameen Bank in Bangladesh was built on this concept of a revolving rural credit scheme.

Profit made from these economic activities was private property; it was for the traders to keep, not for the chiefs or rulers to expropriate. The traditional practice was to share the profit. Under the abusa scheme devised by the cocoa farmers of Ghana at the beginning of the twentieth century, net proceeds were divided into three parts: A third went to the owner of the farm, another third went to hired laborers, and the remaining third was set aside for farm maintenance and expansion. Under the less common abunu system, profits were shared equally between the owner and the workers. Variants of this profit-sharing scheme were extended beyond agriculture to commerce and fishing.

Chiefs and kings played little or no role in economic production. Their traditional role was to create a peaceful environment for trade and economic activity to flourish. No tribal government enterprises existed. In most cases across Africa, Peter Wickins writes in An Economic History of Africa, “there was no direct interference with production.” In fact State intervention in the economy was the exception rather than the rule in precolonial Africa. As Robert H. Bates observed in Essays on the Political Economy of Rural Africa, “In precolonial Africa, the states underpinned specialization and trade; they terminated feuds; they provided peace and stability and the conditions for private investment; they formed public works. . . . In these ways, the states secured prosperity for their citizens.”

Peasant Capitalism

The system described above may be called “peasant capitalism.” It differs from Western capitalism in two respects. First, as noted, the operating unit was the clan, not the individual. Second, profit was shared. Regardless, the clan was free to engage in whatever economic activity it chose. It did not line up before the chief’s palace for permission to engage in trade, fishing, or cloth-weaving. If an occupation or a line of trade was unprofitable, African natives switched to more profitable ones and always enjoyed the economic freedom to do so. In modern parlance, those who go about their economic activities on their own free will are called “free-enterprisers.” By this definition, the kente weavers of Ghana; the Yoruba sculptors; the gold-, silver-, and blacksmiths; as well as the various indigenous craftsmen, traders, and farmers were free-enterprisers. The natives have been so for centuries. The Masai, Somali, Fulani, and other pastoralists who herded cattle over long distances in search of water and pasture also were free-enterprisers. So were the African traders who traveled great distances to buy and sell commodities—a risk-taking economic venture. The extended family system offered them the security and the springboard they needed to launch and take the risks associated with entrepreneurial activity. If they failed, the extended family system was available to support them. By the same token, if they were successful, they had some obligation to the same system.

Indigenous Africa under Colonial Rule

When Africa was colonized, the Western powers sought to control indigenous economic activities. For the most part, however, the natives were free to go about their business. In West Africa, European settlement was confined to the urban enclaves and the rural areas were left almost intact. In central and southern Africa the story was a little different. The plunder and barbarous atrocities against the natives in King Leopold’s Congo need no belaboring. In southern Africa, where the climate was more congenial to European settlement, there were widespread land seizures, massive dislocation of the natives, and restrictions on their movements and places of residence. Nonetheless, despite the formidable odds, the natives could open shops and compete with European firms. Many did and were successful. There were rich African shopkeepers as well as timber merchants, transport owners, and farmers during the colonial period. Given the opportunities and access to capital, African natives showed themselves capable of competing with the foreigners.

The Golden Age of Peasant Prosperity

The period 1880–1950 may be described as the golden age of peasant prosperity in Africa. Though colonialism was invidious, one of its little-acknowledged benefits was the peace it brought Africa. The slave trade and competition over resources had fueled many of the tribal wars in precolonial Africa. The abolition of the slave trade in the 1840s eliminated a major cause of war, and the introduction of cash crops to service Europe’s Industrial Revolution provided new economic opportunities. In addition, skeletal forms of infrastructure (roads, railways, bridges, schools, post offices, and so on) were laid down during this period. This greatly facilitated the movement of goods and people and gave economic expansion a tremendous boost. For example, A. A. Boahen writes in Topics in West African History,

The volume of cotton exports from French West Africa rose from an average of 189 tons in 1910–14 to 495,000 tons in 1935–39, while that of coffee soared from 5,300 tons in 1905 to 495,000 tons in 1936. The volume of groundnuts (peanuts) exported from Senegal alone increased from 500,000 in the 1890s to 723,000 tons in 1937. However, the greatest success story was that of cocoa production in Ghana, whose volume of exports rose from only 80 lbs in 1881 to 2 million lbs in 1901 and 88.9 million lbs in 1911. This made Ghana the leading producer of cocoa in the world, and the quantity continued to rise until it reached a record figure of 305,000 tons in 1936.

The economic system used by African natives to engineer that prosperity was their own indigenous system. Except for a few places in Africa, notably in the Portuguese colonies, plantation agriculture was unknown. Cash crops—cocoa, coffee, tea, cotton—were grown by peasant farmers on their own individual plots using traditional farming methods and practices.

The fundamental point is that African natives had the economic freedom to decide for themselves what crops they could cultivate and what to do with the proceeds. As Francis Kendall and Leon Louw—two white South Africans—noted in After Apartheid: The Solution: “The freedom that characterized tribal society in part explains why black South Africans responded so positively to the challenges of a free market that, by the 1870s, they were out-competing whites, especially as farmers.” But black success had tragic consequences. White colonists feared black competition:

Not only were blacks better farmers but they were also competing with white farmers for land. Moreover, they were self-sufficient and hence not available to work on white farms or in industry, particularly in the Transvaal gold mines where their labor was badly needed. As a result a series of laws was passed that robbed blacks of almost all economic freedom. The purpose of these laws was to prevent blacks from competing with whites and to drive them into the work force.

In 1869, 1876, and 1884 the Cape Assembly passed a series of Location Acts (the first set of apartheid laws) that sought to protect white farmers from black competition and to force blacks to become wage laborers by working for white farmers. Then came the Native Land Act of 1913. The rest is history.

Postcolonial Predation

Elsewhere in Africa the natives were stripped of their economic freedom by functionally and culturally illiterate leaders after independence in the 1960s. Claiming that free-market capitalism was a Western ideology, most of the first generation of postcolonial African leaders adopted State socialism—the antithesis of free markets—as their economic ideology. A proliferation of socialist ideologies swept the continent, including some quite bizarre examples: Julius Nyerere’s Ujaama (“familyhood,” or socialism, in Swahili) in Tanzania; Leopold Senghor’s vague amalgam of Marxism, Christian socialism, humanitarianism, and “Negritude” in Senegal; Kenneth Kaunda’s humanism in Zambia; Marien N’Gouabi’s scientific socialism in the Congo (Brazzaville); Muammar Gaddafi’s Arab-Islamic socialism in Libya; Kwame Nkrumah’s Nkrumaism (“consciencism“) in Ghana; Mobutu Sese Seko’s Mobutuism in Zaire; and Habib Bourguiba’s Bourguibisme in Tunisia.

Unoccupied land, along with the commanding heights of the economy, was seized by the State in Angola, Ethiopia, Nigeria, Mozambique, Tanzania, and other countries. Foreign companies were nationalized, and a plethora of government controls were instituted to assure State participation in the economy. A dizzying array of State enterprises was established haphazardly.

Fundamentally Alien

This socialist ideology is fundamentally alien and failed miserably everywhere it was implemented in Africa. State ownership, controls, and intervention were never part of Africa’s economic heritage.

More outrageous were the frontal attacks on trade and commerce the natives had engaged in for centuries. In many African countries they were squeezed. Indeed, there was a time when the director of the Club du Sahel, Anne de Lattre, would begin her meetings with the remark, “Well, there is one thing we all agree on: that private traders should be shot” (West Africa, Jan. 26, 1987, 154). Under Sekou Toure’s nonsensical program “Marxism in African Clothes” in Guinea, “unauthorized trading became a crime” (New York Times, Dec. 28, 1987, 28).

In Ghana the Marxist Rawlings regime denounced indigenous markets as dens of economic profiteers and saboteurs. It slapped stringent price controls on hundreds of goods during the 1981–83 period. Markets were burned down and destroyed at Accra, Kumasi, Koforidua, and other cities when traders refused to sell at government-dictated prices.

On May 18, 2005, another episode of economic lunacy was repeated in Zimbabwe. Paramilitary units armed with batons and riot shields smashed up stalls of street traders in a police operation in the capital, Harare. “The official statement claimed that the raids were aimed at black-market profiteers who were hoarding commodities,” the New York Times reported. In what President Robert Mugabe dubbed “Operation Murambatsvina,” which the State-owned press translates as “Operation Restore Order” but in Shona translates as “Operation Drive Out the Rubbish,” the police destroyed 34 flea markets and netted some Z$900 million ($100,000) in fines and seized some Z$2.2 billion of goods. “President Mugabe blamed the West for the nation’s economic crisis,” BBC News Africa reported. At least 22,000 street traders were arrested and over 700,000 people left homeless.

No African chief or king could commit such acts of economic lunacy and cultural perfidy and remain chief. There is nothing wrong with the traditional economic system of free markets, free enterprise, and free trade. All the leadership had to do after independence was to build on it. Only Botswana did this. But the vast majority of African leaders—an assortment of black neocolonialists, Swiss-bank socialists, quack revolutionaries, and crocodile liberators—instead went abroad and copied all sorts of alien practices to impose on their people.

Have they learned? No. Black neocolonialists have been busy importing another alien ideology, from China: On August 14, 2010, Xinhua reported: “A total of 25 Confucius institutes have been opened in 18 African countries.”