Not capitalism, corporatism

I am convinced that our economic system would be better described by the term corporatism rather than by the more commonly used capitalism. I contend that we live, in fact, in a corporatist economy which is not very different, in terms of efficiency, from a statist economy. I hold, in addition, that corporatist or statist economies are both more compatible with totalitarianism than with democracy. After the statist economic model collapsed under its own weight around 1989, it has become increasingly clear that the corporatist model is equally totalitarian. But this is old news. After all, it was Mussolini himself that said "Fascism should more appropriately be called Corporatism, because it is a merger of State and corporate power".

Capital, stock, means of production

Capital is what Adam Smith called stock, but I tend to like Marx's more descriptive term means of production. It is clear that that is what Adam Smith meant by stock, but when we think today about the stock exchange or capital we tend to think just of money and not of the more broad meaning including tools and raw materials. That capital should be synonimous with means-of-production is borne out by the fact that capital goods refers to goods that are used not as ends onto themselves but as means to produce other goods. It is in this sense that capital investments detract from current consumption in exchange for larger future production (and consumption).

Anyway, from a Marxian point of view ownership of the means of production is an important way of classifying economic systems. I can see four kinds of ownership of the means of production:

• individual ownership
  
• communal ownership
  
• corporate ownership
  
• state ownership
  

The first is the only ownership by physical persons; the last three are ownership by legal persons. My contention here is that a capitalist economy is one in which ownership of capital is mostly individual, and that we live, in fact, in a corporatist economy which is not very different, in terms of efficiency, from a statist economy.

Market failure

I will argue from the point of view of free-market economics. The basic idea (going back to Adam Smith) is as follows: the market mechanism is the most efficient way of allocating resources, but it depends on each economic agent having sufficient freedom, and on the inability of any single economic agent to affect prices. If individuals do not have the freedom to change their economic activity at will to better suit their needs, or if a single agent can control prices (usually by having control of a substantial fraction of the available supply or demand), then there is market failure, and corrective measures need to be taken from outside the market to restore a functioning market. The argument will be that corporatism leads to market failure both because corporations are too large and because they take away economic freedom from individuals.

Corporations and market failure

Corporations lead to market failure because of their size. A corporation the size of Microsoft, Wal-Mart, Starbucks or Bank of America has such control of the supply in their respective markets that in theory, by their very existence, they should threaten the health of the markets in which they operate. In fact, the business model of these large corporations is known to be detrimental to competition and a free market. I will summarize the influence of Microsoft and Wal-Mart on their respective markets, respectively computer software, and retail sales.

Wal-Mart's business model is basically to open a huge new store in a community, sell products under cost for as long as necessary until all the neighbouring small retailers go out of business, and then enjoy a local monopoly in retail for the foreseeable future. They can afford to do this because the losses of one megastore are more than balanced by the large numbers of other profitable monopoly stores that Wal-Mart has elsewhere. Once Wal-Mart has achieved a monopoly, the consequences for employees and suplliers are disastrous, as Wal-Mart will push for lower and lower wages and pay lower and lower prices for the goods it sells; being a monopoly, there's little the workers or the suppliers can do about it. All large retailers ("megastores") operate in this destructive fashion: well-known examples include Ikea in the furniture business or Barnes and Noble in the Bookselling business.

Microsoft has a history of buying out promising startups not so much to develop their ideas (for example, hotmail) but to kill them if they would threaten Microsoft's business in any way (corel, progeny). Its strategy also includes subtly altering standards ("embracing and extending" and "decommoditizing protocols") to create incompatibilities between their products and those of other software companies (because of their larger user base, microsoft's nonstandard version of the standard would win out). We have seen this happen with web browsers, java, and postscript. See the Halloween Documents for more on Microsoft's business model.

Large corporations result in poor product quality, reduced consumer choice and obstacles to accessing the market, all of which are instances of market failure.

For a while is seemed, though, that everyone in the US who could save a little money was buying stock. Together with the increased popularity of mutual funds (even encouraged by the government as an alternative to social security retirement pensions), don't we have individual ownership of the means of production? Not really. For one thing, many of these small stock owners were day traders. They don't own the stock so much as gamble with it. People who put their money in mutual funds also don't directly own the stock. In practice, they are putting money in a high-interest savings account and it is the bank or investment firm that actually owns the stock. In fact, they are obtaining a higher profit buying stock with your money than the interest they give you on it, otherwise they woulnd't offer the service. The situation really is tha the majority of stock in large corporations is held by a very small number of very wealthy people, and by other corporations: a mixture of oligarchy and corporatism.

State ownership and market failure

The negative effects of state ownership of the means of production are not very different from the negative effects of large corporations. They may be worse because the state amounts to a single holding having a monopoly in many sectors, as opposed to a number of smaller corporations having a monopoly in their respective sectors. Because the state already gets to influence demand by focused spending of tax money, state ownership of the means of production can be even more negative. However, at least in a democracy the state administrators can be voted out of office for engaging in distasteful practices, while nobody can vote Nike executives out of office for using sweatshops. Boycotts may be effective in altering corporate policies somewhat, but they take longer to organize and are generally less effective than just waiting for the next election to come around.

In the US, the collusion between the state and the corporation is so great that, although nominally the state is democratic and does not own a substantial part of the economy, in fact it is impossible to be a successful politician without corporate financial backing and the Defense Department, through its huge budget, effectively owns the huge "military industial complex".