Monday, June 13, 2005

More on State Monopoly Capitalism

You may remember that a while back I promised regular reports on state-corporate exploitation. This I have so far labelled corporate fascism, after the economic policies of fascist states, or "state monopoly capitalism".

Well, a while back I debated this issue with a chap over at Liberty Forum. This guy, calling himself Heretic, accused me and libertarians in general of ignoring history and relying solely on theory, and so living in our own deluded world, theorising about this and that and ignoring the real world. Indeed, this guy is one of those who thinks that theories prove nothing, only history does, and thus thinks that libertarian anarchism is impossible since it hasn't happened. Of course, you, my much more sensible reader, know that history is useless and meaningless without theory, especially economic history without economic theory, since otherwise all we would have is a list of events that happened without any explaination as to why they have happened. And as for the possibility of anarchism, well, dear reader, I know you are probably wise enough to know that "X cannot happen" does not follow logically from "X has not happened"!

But so far as ignoring history is concerned, this chap claimed

The so called Free Market has only one inevitable course, towards a concentration of power and the control of government by the monopolists and oligopolists. It is inevitable, that's how they became monopolies in the first place.

There are two factors which "free marketers" ignore, the natue of man towards power and the social nature of man.

There is only one truly free market, sans a government protection, and that is in labor. It is the only self renewing resource in which supply exceeds demand. Marx knew this, and that is why in his "On the Question of Free Trade" he advocates for a free market.

Inevitably it will lead to deprivation, dissatisfaction, even hunger and provide the spark for a revolution. His partner Engels also advocated a free market in labor, because the profits of his textile mill depended on the cheapest cotton and wool he could obtain, and he wrote a couple of letters to that effect.

Marx wrote scathing letters to Southern Papers contra slavery, not out of humanitarian concerns, but economic ones (for his friend Engels).

Free the slaves, Marx wrote, and then hire them back at market wages, and you will reduce your cost of production.,thus producing cheaper cotton.

I fail to understand how you can reconcile your knowledge of 19th Century history, with the rise to power of the monopolists and robber barons, and the plight of the working man in the 19th and early 20th Century.

There seems to be a disconnect here.

On the one hand there is theory (or shall we call it belief or religion) on the other hand there are facts (reality) and the two don't reconcile.


My response, here is, IMHO, a damn fine piece on the historical development of state monopoly capitalism in the US, though generally unoriginal and possibly down right plagiarised (!), that I will reproduce it for my dear readers' pleasure in its entirety (OK, stop groaning!). My only worry is that my claim that the dominance of big business is illusory is misconstrued. My point was to show that, just like at the end of the nineteenth century, and just like with the railroads, a high degree of competition exists, despite state supported cartelisation and funding, because it is not the natural tendency of free markets to form monopolies, and the US has a relatively freer economy than other countries. I did not intend to contradict the implication of state monopoly capitalism, that monopolisation in the economy occurs because of state intervention, by saying that there is no monopolisation.
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The so called Free Market has only one inevitable course, towards a concentration of power and the control of government by the monopolists and oligopolists. It is inevitable, that's how they became monopolies in the first place.
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It most certainly is not inevitable. A monopoly exists, according to Websters, when a businness has


exclusive control of a commodity or service in a given market, or control that makes possible the fixing of prices and the virtual elimination of free competition.



Such a state of affairs cannot occur on a free market. It is a theoretical impossiblility, and the history of the robber barons proves this.

As for your "inevitable concentration" of business in fewer and fewer hands, even if that were indication of monopoly (which it isn't), that is not occurring even now. Between 1980 and 1993 America's 500 biggest firms saw their share of the nation's total employment fall from 16 to 11.3%. The most important indicater of the weight of 500 biggest firms in the US is their sales in relation to total GDP. Between '80 and '93 this figure fell from 59.3 to 36.1, a fall of almost a half in only thirteen years. The proportion of the population working for companies that employ over 250 people in those years also fell from 37 to 39 per cent, and the average personnel strength fell from 16.5 to 14.8 persons. Half the firms operating globally today employ less than 250 people.

Of the companies that apperared on the 1980 list of America's 500 biggest companies one-third had gone by 1990, and another forty per cent had gone in the next five years.

The "dominance" of big business is largely, then, illusory. Sure, the biggest brands stick in our minds, and sure, big mergers are easily seen, but what we see easily often obsures the rest of the picture, and we also forget that big brands are joined by others. Few people remember that Nokia was a small Finnish tyre and boot company a few years ago, and Starbucks, that bastion of globalisation and target for so many objections, where were they ten years ago. New companies achieve dominance, old ones fall, and the cycle goes on.


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There are two factors which "free marketers" ignore, the natue of man towards power and the social nature of man.
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Can you tell me which free-marketeer has ignored the nature of man towards power and the social nature of man, and in what way? As it stands, this is merely an assertion.


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There is only one truly free market, sans a government protection, and that is in labor. It is the only self renewing resource in which supply exceeds demand
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That doesn't make much sense. surely if supply exceeds demand, there would be profit made in employing workers, which would attract the demand. The market would clear.

However, you are correct. Spot on. Bang to rights! A free market is only permitted in labour. It is only amongst workers that a free market is permitted. Has it not occurred to you that this is how capitalists want it? They want it so that it is only amongst workers that free competition is permitted, whilst amongst themselves it is not? That they may actively oppose free competition betweens themselves so that they can exploit labour from a position of monopolistic bargaining?


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I fail to understand how you can reconcile your knowledge of 19th Century history, with the rise to power of the monopolists and robber barons, and the plight of the working man in the 19th and early 20th Century.
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It is precisely because of my knowledge of the nineteenth century and the robber barrons that I have faith in the free market. The robber barons failed. The merger movement, aimed at trying to increase prices, failed. The attempts at forming cartels failed as the higher prices attracted competitors or gave members incentive to break quotas or "Chisel." This is what happened in the railway industry, as Gabriel Kolko (Railroads and Regulation, 1877-1916) showed. It is generally thought that the railroads in the late nineteenth century had almost unlimited monopoly power. In actual fact, though, Kolko showed that long distance transprtation was highly competitive, freight riates were declining, and the number of new railways were increasing until after the end of the century. One line might have a monopoly for sure distances, but a shipper operating between cities had a choice of a many alternative routes - there were twenty between Atlanta and St Louis, for instance (as there were three between Manchester and London). It is frequently said that the railroad rebates were evidence of monopoly. In reality, though, they were the opposite; they were discounts that major shippers were able to get from one railroad by threatening to ship via a competitor.

To be sure, Rail executives often got together to try to fix the rates, just as Adam Smith said that its is seldom that business people can meet without eventually trying to work out some conspiracy against the public. But most of these conspiracies broke down, often in only a few months. Either the parties to the agreement surreptitiously cut rates (often by misclassifying freight or by offering secret rebates) in order to steal customers from each other, or some outside railroad took advantage of the high rates and moved in. JP Morgan is a classic example. He committed his enormous resources and reputation to attempting to cartelise the industry, and yet failed. For example, in 1889 he formed the Interstate Commerce Railway Association to control rates among the western railroads. By March a rate war was going on, and by June the situation was back to how it was before he intervened.

However, by this time a new factor had entered the situation. In 1887 the federal government, backed by much of the railroad industry, created the Interstate Commerce Commission. The ICC's original powers were quite weak, which meant that Morgan's attempts to use it to help enforce his 1889 agreement he failed. However, during the next 31 years, its powers steadily grew, first allowing it to prohibit rebates. Rebates, remember, were the means by which competition kept railroad executives from making monopoly profits - Kolko estimates that the rebates were costing railroads 10 percent of their gross income). Finally, it got the power to set rates.

The people with the greatest interest in what the ICC did were the railroad industry, and consequently they dominated it, in what is now called "regulatory capture", and used it to achieve the monopoly pricing that they had been unable to achieve on the free market. This pattern was clear as early as 1889, when one of the original appointees to the ICC, Aldace Walker, resigned to become the head of Morgan's Interstate Commerce Railway Association. He ended up as the chairman of the board of the Atchinson, Topeka, and Santa Fe. The ICC has served as a cartelising agency for the railroads right up to the present, and has further increased its powers to cover other forms of transportation and so to prevent them, where possible, from undercutting the railroads.

In his history of Rockefeller's attempts to monopolise the oil industry, "Predatory Price Cutting: The Standard Oil (N.J.) Case" (Journal of Law and Economics 1, 1958) John S. McGee showed how cartelisation failed Rockefeller, too. McGee cites Rockefeller's description of an unsuccessful attempt in 1872 to control the production of oil and to drive up it's price:


The high price of oil resulted, as it had always done before and will always do so long as oil comes out of the ground, in increasing the production, and they got too much oil. We could not find a market for it.
... of course, any who were not in this association were undertaking to produce all they possibly could; and as to those who were in the association, many of them men of honor and high standing, the temptation was very great to get a little more oil than they had promised associates or us would come. It seemed difficult to prevent the oil coming at that price.



Attempts at price cutting to secure monopoly also failed. If a monopoly controls 99 percent of a market and I control the remaining one percent it is said that the monopoly could easily drive me out. But this isn't true. If there is no question of the "naturalness" of the monopoly (as there wouldn't be if it was a conspiracy to get a monopoly) then the big company is no more efficient than I am. Consequently if it cut prices, it would be losing just as much money per unit sold - or, in short, even though its resources are 99 times as large as mine, it is losing money 99 times as fast as I am. But it faces worse than this. In order to force me to keep prices down, it must be prepared to sell to everyone that wants to buy at the new price. Otherwise unsupplied customers would come to me and buy at the old price. However, at the new low price there will be more customers, and so the monopolist must expand production, using even more of his resources. If the resource is easily stored, the anticipation of future price rises once the price war is over will cause demand to rise further still.

Meanwhile, I face a number of options. I can continue to produce at full capacity and make a loss, losing one dollar for every hundred or more lost by the monopolist. Or I can close down some plants, decrease production and simply wait for the monopoly to stop wasting its money.

This is the basic reason that Rockefeller was unable to secure a monopoly by price cutting. However, there is another method of price cutting that is more subtle. This is where a monopolist tries to under cut me in the regions in which I am operating, and tries to make up the losses in other regions by raising prices there. The trouble is that the high prices in the other regions attract competitors there, too, which undercut the monopolist in those regions.

Rockefeller did not try to use price cutting tactics to build Standard Oil, but he did threaten to use them, threatening to cut prices and start price wars in order to force competitors to keep production down and their prices up. Howeverm the competitors understood the logic of the situation better than leter historians, as McGee shows by quoting the response of one competitor, the manager of the Cornplanter Refining Company to such a threat: "Well, I says, 'Mr. Moffet, I am very glad you put it that way, because the only way you can get it [the business] is to cut the market [reduce prices], and if you cut the market I will cut you for 200 miles around, and I will make you sell the stuff,' and I says, 'I don't want a bigger picnic than that; sell it if you want to,' and I bid him good day and left."

The threat never appeared. In fact, it seems from McGee's evidence that price cutting more often than not was started by the small independent firms trying to cut into Standard's market, and many of them were very successful. Cornplanter's capital grew, in just twenty years, from $10,000 to $45,000. As McGee says, commenting on the evidence presented against Standard in the 1911 antitrust case: "It is interesting that most of the ex-Standard employees who testified about Standard's deadly predatory tactics entered the oil business when they left the Standard. They also prospered."

One strategy that Rockefeller did try to use was to buy out his competitors. This is usually cheaper than trying to spend a fortune trying to drive them out. Cheap, that is, in the short run. The trouble was that people realised that they could build a refinery, threaten to drive down prices, and then sell to Rockefeller at a whopping profit. David P. Reighard apparently made a sizable fortune selling three consecutive refineries to Rockefeller. The trouble was that there was a limit to the number of refineries that Rockefeller could use.

Rockefeller failed, in the free market. But now what he aimed to achieve has been accomplished precisely because the market is not free. Through federal import quoats and state restrictions on production federal and state governments keep prices high and production low.

Standard Oil and US steel, immediately after their formation, began a process of eroding market share. The merger movement was a failure as the cartels lost their market shares to smaller, more efficient competitors.

This is why Kolko says that "Ironically, contrary to the consensus of historians, it was not the existence that caused the federal government to intervene in the economy, but the lack of it."

A really good recent history of this period and up to the modern day, in forming the state monopoly capitalism that now exists in the US can be found here

However, if that 36 page article is too long for you, try the short version in this magazine here

Then there is Joseph Stromberg, here.
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Unfortunately, Heretic's only response was rather idiotic and proved that he didn't read my post. He quoted me saying "It most certainly is not inevitable. A monopoly exists, according to Websters, when a businness has 'exclusive control of a commodity or service in a given market, or control that makes possible the fixing of prices and the virtual elimination of free competition.' Such a state of affairs cannot occur on a free market. It is a theoretical impossiblility, and the history of the robber barons proves this." But his only response was

Theory again as juxtaposed to reality and human nature. I sigh.
The history of the robber barons is that they accumulated their wealth in the absence of government regulation and control, then once they had it, they used (bought) government to give them protection.

I don't know where a truly free market has ever existed, except in some primitive tribal societies, and then social custom set limits on the free market.

It's vexacious to try and argue religion and ideology it is arguing with a utopian ideal and not with reality, and human nature.


It is again, an assertion that I ignore history made in response to a post full of history!!!!!! Moreover, the "robber barons" did not accumulate their power in absence of state regulation and control - railroads were subsidised and given land grants by governments, for instance - but they did accumulate it under circumstances that were relatively free of regulation and control, compared to later. But what they did not have (so much of) was monopolistic power or wealth. Exploitation cannot occur in absence of monopoly. If monopoly did not exist, employees who thought they were not being paid enough, or were getting shoddy conditions, could simply work elsewhere, and consumers unhappy with prices or quality could shop elsewhere. It is only when they can't do this that businesses and corporations gain threatening degrees of power... and the facts are that towards the end on the nineteenth century the general trend, inspite of tariffs, rail subsidies, etc. was towards greater competition.

As shown above all the private attempts at cartelising and monopolising various industries and sectors of the economy failed. Businesses wanted cartelisation and monopolisation, as you would expect - of course, MacDonalds would rather that it was the sole supply of burgers! Price wars forced them to reduce prices, competition prevented them from charging cutomers more, and from reducing supply - as is all shown above. It was state intervention that enabled them to accomplish the cartelisation of American industry, and that is why big business welcomed state intervention. As Gabriel Kolko wrote, in The Triumph of Conservatism (and by conservatism he means a movement to secure existing power structures from change - a change that would have occurred in perpetuity were free competition to prevail), regarding the Federal Trade Commission,

The provisions of the new laws attacking unfair competitors and price discrimination meant that the government could now make it possible for many trade associations to stabilize, for the first time, prices within their industries, and to make effective oligopoly a new phase of the economy.


The FTC and Clayton Acts cucceded in doing what the trusts had failed to do: They allowed a handful of firms to stabilise their share of the market and to maintain an oligopoly structure between them. As Kolko continues:

It was during the war [the First World War] that effective, working oligoply and price and market agreements became operational in the dominant sectors of the American economy. The rapid diffusion of power in the economy and relatively easy entry virtually ceased. Despite the cessation of important new legislative enactments, the unity of business and the federal government continued throughout the 1920s and thereafter, using the foundations laid in the Progressive Era to stabilize and consolidate conditions within various industries. And, on the same progressive foundations and exploiting the experience with the war agencies, Herbet Hoover and Franklin Roosevelt later formulated programmes for saving American capitalism. The principle of utilising the federal government to stabilize the economy, established in the context of modern industrialism during the Progressive Era, became the basis of political capitalism in its many later ramifications.


It was big business, then, which primarily befenfitted from the growth of state intervention in the early twentieth century, and big business that primarily backed it. For instance, in the meat packing industry, the Meat Inspection Act (a piece of legislation that began the stepping stones towards the creation of the Food and Drug Administration - FDA), was primarily backed by big meat packers. In the 1880s a series of scandals involving tainted meat led to American producers being shut out of European markets. The big producers, then, turned to the US government to conduct inspections on exported meat. By carrying out this function through the state they managed, then, to remove quality inspection as a competitive issue between producers and gained from the government a seal of approval at the public expense. The problem with this early form of meat inspection was that only the largest packers were involved in the export trade, and so mandatory inspection gave advantage to the smaller firms that supplied only the domestic markets. The main motive behind Roosevelt's Meat Inspection Act was to bring the smaller firms into the inspection regime and so end this competitive advantage.

This sort of regulation is in effect a compulsory cartelisation fo the industry. It has the same effect as would have been achieved if the different firms in the idustry had got together and promised not to compete against each other in the area of offering a good quality product anymore, only the regulation has the further effect that producers cannot leave the cartel and still operate in the industry, or excede quotas, and new producers cannot enter the industry without entering the cartel - all of which in a free economy would lead to the destruction of the cartel. And so, this ensures, (a) that there is only one standard available - the government approved standard - and if this standard is not the best, or indeed, if it is too more rigourous than necessary, nobody may choose differently, and (b) that companies can charge monopoly prices free of fear that a new competitor, attracted by these high prices, may enter the industry and under cut them.

And if this root to providing big business with monopoly power it would not be able to achieve is bad enough in the US, it is even worse in other countries, and is amongst the principle sources of poverty in many developing countries. For instance, licensing is a form of state intervention that ensures are compulsory cartelisation of an industry by restricting free entry, and forbidding people from operating in the industry without meeting the terms of the license. Licensing authorities can therefore be used by the regulated industry to shut out competitors and to charge monopoly prices (recently in the UK backing for licensing of providing various forms of cosmetic surgery, specifically using botox, came largely from the cosmetics industry itself). But this is even worse in the Third World. For instance, getting a legal license for a factroy with two sewing machines in the shanty towns of Lima occupied 289 six-hour days of travelling to the authorities, queuing up to see the right people, filling in forms and waiting for an answer, added to which the process cost $1,231 dollars, more than thirty times the minimum monthly wage. Obviously to rich or well connected people, these obstacles mean little. But to the very poor they make carrying out business legally impossible, and so ensure that the rich can effectively cartelise the economy.

The problem, then, is not too much capitalism, but too little, - too much state capitalism, and not enough free market capitalism - and that is exactly as the capitalists want it. The growth of the regulatory state has not been a struggle against the evils of big business on behalf of the oppressed. It has been a struggle to protect big business and to ensure oppression.

9 Comments:

Anonymous sbks said...

Libertarianism and exploitation: The true root of the class struggle


RE:
Good day, please revise everything you are writing asap. Why? Simply because capitalism HAS DIED a long while ago dead.

Central banking (debt based economy) is the 5th plank of the communist manifesto and taxation the 2nd. The entire planet is into collectvist mode because of this.


The problem is our global debt based economy.


06/07) "The Grip of Death: a study of modern money, debt slavery and destructive economics"
http://www.cfoss.com/grip.html


As long our currencies will not have an intrisic value - and that the average John Doe remains oblivious to the tricks invented by the GOVt to debase the currency, all of which enable economic tricks widespread corruption and exploitation, the world will get worst before its gets better...

Knowledge is power. Currency debasement is as old as humanity. This plague has always been with us... time to spread the word, dont you think?

A FEW QUOTES:
The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. "... - Thomas Jefferson... No state shall coin money emit Bills of Credit; make anything but Gold and Silver a Tender in payment of debts. U.S.Constitution A1s10


"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some....The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose." - John Maynard Keynes Economic Consequences of the Peace, 1920


"We in the Congress have a moral and constitutional obligation to protect the value of the dollar and to understand why it is so important to the economy that a central bank not be given the unbelievable power of inflating a currency at will and pretending that it knows how to fine tune an economy through this counterfeit system of money." -- Dr. Ron Paul, US Congressman, R, Texas

1:37 PM  
Blogger Richard said...

I see little need to revise everything I am writing. Sure, central banking is an enormous part of the problem, and I agree that it and taxation are part of the Communist Manifesto - but since they are part of the state capitalist problem, why should I revise my critiques of state capitalism in the light of this fact?

9:49 AM  
Anonymous sbks said...

Richard: there is NO capitalism without sound money but economic fascism... True Capitalism died centuries ago. Calling our system Capitalistic is helping spread fallacies. It is about time to stop supporting fascist/collectivist monetarist policies embraced by the Left/Right... remember: divide to rule - Cheers

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