The Relationship between Capitalism and Government

I want to get into a topic that came up a few weeks ago, the difference between Markets and Capitalism. Boy, has this turned out to be hard to find simple, clear discussions of this idea online. So, the below excerpts are seriously, super long, and I apologize for that, but they tell a necessary story in three parts. The last excerpt is just there as a reference. As always we'll go through the readings on the day of the discussions!


The Safe Distribution of Private Power
—[In the US,] what we want to do, to the best of our ability, is use our public government mainly to ensure the safe distribution of private power. The basic idea was that if you distribute private corporate power widely enough, then people will compete among themselves in ways that are good for both our democracy and our economy.
—Did Wilson proceed to do this?
—One of the first things his administration did was fix the many flaws of the original Sherman Antitrust Act by passing the Clayton Act. The second thing they did was put the public fully in control of the money supply. A lot of people have problems with the Federal Reserve, and there’s a lot of reasons to have problems with the Federal Reserve. But the Federal Reserve we have today is better than having JP Morgan run the money supply, or Jamie Dimon.

Wilson also acted to ensure that farms were not taken over by giant combines, that small businesses, small stores were not taken over by giant chains like Woolworths.
Wilson and Brandeis, like the New Dealers twenty years later, took three basic approaches to antimonopoly policy, which were: If you had a natural monopoly, railroads, telephony, your business would be regulated for the public good. If you ran a big industrial firm like U.S. Steel, the goal was to provide you with as much competition as possible, but not break up your business into inefficient bits. The goal was not to create a whole bunch of backyard steel furnaces, but to create some kind of real competition for U.S. Steel. Third, there are areas where you don’t need efficiency, or where efficiency is much harder to measure. This includes activities like farming and retail. The idea here was to try to keep the market as open as possible, and ownership as local as possible. Practically, this meant using the law to protect against the use by capital of the chain store and the combine to roll over the small business person and the small farmer.
—But then, this revolution, this second American revolution against concentrated power, was stopped in its tracks about 16 months in by the outbreak of the First World War in Europe. The First World War was a shock of the first magnitude. I mean, they had to shut Wall Street for more than a year.
—They did? In 1914?
—Yeah. So the Wilson administration’s ability to enact major domestic reforms was pretty much put on hold.

The Story of Monopoly in the USA
—Do you remember André Schiffrin?
—Yes.
—He was a famous book editor, he was at Pantheon and later the New Press. He wrote several books about the publishing industry, and in one of them, he tells the story of the merger of Random House and Alfred A. Knopf in 1960. The day after the merger is announced the attorney general called, very concerned about it. But those two companies combined were only 1 percent of the market. And you look today, the entire publishing industry is basically controlled by a handful of companies, and no attorney general gives a damn.
I’ve seen similar cases from the mid-sixties in the beer business. The Supreme Court forced Pabst to unwind a merger with Blatz because their combined market share would have been 4.49 percent.
—That was blocked?
—Yep.
—Okay. How does that industry look now?
—Well, now there’s two foreign companies, Anheuser-Busch InBev, which is controlled out of Brazil, and MillerCoors, which is controlled out of London. And those companies control about 80% of the US market. And until recently they controlled about 90% of the market.
Jesus Christ. What happened? How did we go from being worried when someone was going to control 4.49 percent of the market, to now we don’t care when two companies control 80 percent of the market? What the hell happened?
—Well, legally what happened was that in the early days of the Reagan Administration, one of their very first actions was to say, hey, these anti-monopoly laws and antitrust laws that you use to make markets, and create competition, and spread out opportunity, and insure industrial liberty, and, protect our democratic institutions—all these many laws that make up our competition policy, wouldn’t it be better if we take all of these laws and simplify them, so we aim at one outcome only, efficiency? Because if we are able to make our economy more efficient, we’d be able to produce more stuff for you, the consumer. Won’t that be a swell world to live in, with more stuff for you, the consumer?
—So all of a sudden it’s all about the consumer. All the stuff you’re saying about industrial liberty and freedom from bigness, private governance, whatever, industrial feudalism, all that’s gone and it’s about the consumer and prices?
—All that’s gone, all the traditional concern with protecting our rights as producers of work and ideas and goods, and suddenly it’s all about the consumer, it’s all about, how do we promote your welfare as a consumer? And that’s actually the phrase they use, the “consumer welfare test.” So nowadays, what this means in practice is that if you are a big capitalist, if you go to the Justice Department and say, I’m gonna merge the number one beer company to the number two beer company, or the number one steel company to the number two steel company, and this deal will result in all sorts of big savings, because this deal will let me fire all these excess people and close all these excess plants, and I’m going to pass at least some of those savings on to the consumer, put a few pennies in their pocket, then you get a stamp of approval from the U.S. government. That’s the test put in place in ‘81 and ’82. And that’s the test still in place today. I mean, the Department of Justice just last year let the number one book publisher in America, Random House, merge with the No. 2 book publisher, Penguin. Which is insane.
I was politically literate in the early ’80s, and was reading newspapers, and I don’t remember any debate about this at all.
—There was a big debate in 1981, which I’ve gone back and studied. Much of the debate took place within the Senate. Howard Metzenbaum led the challenge to it. The Reagan people came in and said, we’re going to impose this radical change to your antitrust laws which you’ve been using since 1773 to protect yourselves against concentrated power. . .
Wait, so they worked this huge change in antitrust without actually getting a new law passed, am I right?
—Yes, that was what was so brilliant about what they did. The Department of Justice establishes guidelines that detail how regulators plan to interpret certain types of laws. So the Reagan people did not aim to change the antimonopoly laws themselves, because that would have sparked a real uproar. Instead they said they planned merely to change the guidelines that determine how the regulators and judiciary are supposed to interpret the law.
But they didn’t change the laws, the laws were still on the books, is what you’re telling me.
Yes. Here we have laws that go back 200 years in America, and 400 years to Elizabethan times, and 800 goddamn years to the Magna Carta, and the Reagan people came along and said hey, ya know what, we’re so much smarter nowadays, we’re technocrats, we’re scientists, so let’s take these laws and enforce them in a slightly different way, based on this slightly different goal, this scientifically determined goal of efficiency, and you’re going to be so much happier because we’re going to help you live better as a consumer, we’re going to get you so much more stuff. When they said that, there was some real opposition from both Democrats and Republicans. Metzenbaum was against it. Arlen Specter was against it.
—Not much of a Republican.
—Well, back then he was a pretty mainstream Republican.
—Okay.
—So Metzenbaum and Specter were like, what the hell is going on here, this is a big problem, you people in the Reagan Administration can’t just gut our antimonopoly laws like this. But then another group of people came along and said, well no, these radical changes in antimonopoly law are actually a good idea. And this really confused matters, because some of the people who agreed with the Reagan Administration stood on the left wing of the Democratic Party. They were, in essence, the grandchildren of the old Teddy Roosevelt Progressives – people like John Kenneth Galbraith and Lester Thurow.
—So wait, they want regulation-
—What Galbraith and Thurow wanted was to get rid of competition, which they thought was inefficient and wasteful.
—To say a word for my leftists: That can make sense if the giant companies they’re talking about are regulated, right?
—Depends what sort of regulation you’re talking about. As Brandeis used to say, competition is often the best regulator. Top-down regulation by government “experts,” on the other hand, can tend toward sclerosis and corruption, the blending of state and private power.
What’s most important to understand about the radical reframing of antimonopoly law by the Reagan people in cahoots with the Progressives is just how massive a political shift it set into motion in America. In 1978 Robert Bork published a book called The Antitrust Paradox, which became sort of a primer for the Reagan people. Bork argued that monopoly could be more efficient, and efficiency in the name of the welfare of the consumer should be our primary goal. Back when Bork wrote that, there were tens of thousands of families who ran grocery stores in America and hardware stores and garages and general merchandise stores, and that was because the law protected them from concentrated capital. Jump ahead 32 years and we’ve got a single company, Wal-Mart, that is the de facto governor of commerce in many small towns and even small cities all across America. Wal-mart has sucked Main Street right inside their walls. And that has huge political and economic effects. Wealth from these communities flows off to distant places, Bentonville, Wall Street. And power over these communities is exercised from distant places, like Bentonville, and Wall Street. But we see the effects also at a national level. Here you have one family with as much wealth as the bottom 41.5 percent of all Americans. One family with as much wealth as 130 million Americans.
—But they do sell stuff cheaper.
—Do they?
—David Brooks writes about this all the time.
—They don’t always sell stuff cheaper. That’s the thing about old, decrepit systems, and Wal-mart is increasingly an old, decrepit system. They have stock-outs all the time. They’ve got empty shelves sometimes. They sometimes don’t have enough people in the stores to stock the shelves. My friend Tracie McMillan went and worked in a Wal-Mart in Michigan in their produce department. She then wrote a book about her experience, and one of the things she details is the remarkable wastefulness of the Wal-Mart system.
—That’s cool. Those small towns will generate competitors then and put Wal-Mart out of business, right? *laughs*
—*laughs* Yeah, well. So it was a political revolution that happened.
Here we are having all of these discussions in America about inequality. Inequality in wealth. Inequality in voice. And yet no one’s looking at one of the main sources of that inequality, which was the overthrow of antitrust in 1981 by the Reagan Administration.
This is the fascinating thing. Look where we are today. There are monopolies everywhere in American life now. Well, monopolies or oligopolies. You mentioned beer. You mentioned retail.
It’s not all that hard to manufacture eyeglasses. But there’s a single company, Luxottica, an Italian company, that controls most of the business in America. You go shopping for eyeglasses. You go to a place called Lenscrafters. You go to a place called Sunglass Hut. You go to a place called Pearle Vision. You go to Target Optical. You go to Sears Optical. You go to Macy’s Optical. You’re comparing quality, comparing prices, imagining you live in an open and competitive market. And yet all of these stores and most of the product in them are controlled by Luxottica.
—I wear glasses. The selection that’s available in the eyeglass market drives me crazy. It’s like there are only one or two styles and then little variations on them.
You have Donna Karan and Brooks Brothers and Ray-Ban and Oakley and they’re all put out by Luxottica. And the other thing about Luxottica is they’re both a retailer and a manufacturer. Even when you go to these fancy boutique stores you’re mainly dealing with Luxottica. A large proportion of the products on those shelves are also made by Luxottica. And now they are also integrating into medical services, and insurance, into other aspects of the eye care environment.
—Okay, give me some other examples.
—Toothpaste, there’s really just two companies. You stand there and you look at all the different products…
—That’s right. All the Colgate products. All the Crest products.
—Yeah. It’s just Colgate and Crest. And there’s this practice called category management where a retailer like Wal-Mart basically outsources the task of stocking shelves and setting prices to one company, say Colgate, which then sets prices for both.
—I didn’t know that.
—This is America in 2014. We have a simulacrum of competition, but there’s often no real competition at all. In toothpaste, it’s an overt duopoly.
—Another.
—Milk. There are parts of the country [where] you’ll go to the milk aisle and every one of those bottles of milk will be coming out of one plant. They have different labels on them. They have different prices. Some of them say organic. Yet it’s all coming from the same place.
—Okay. This is disturbing. So when I was writing “What’s the Matter with Kansas?,” farmers were complaining about this all the time. They feel that they are uniquely in the jaws of monopoly because there’s only going to be one or two people buying their grain or buying their hogs or whatever it is. Maybe three at the most.
—Not any more. If you’re in the business of growing chickens in this country, you mainly just sell to one company.
—Tyson is the biggest one, right?
—Tyson’s or Pilgrim’s Pride or a few others. There are still a few companies. But it’s not like the individual farmer can simply pick up his business and move it from one company to the next. You are always free to quit the business, of course. But for many of these farmers, that means walking away with nothing, as a complete bankrupt. The economists have actually come up with a name for this kind of relationship; they call it the “tournament” system. That’s when you have a single buyer and that buyer sort of pits the people who depend on the company to process their product against each other. In an open market, maybe the price of chicken is a buck a pound. If you have 200 different farmers all selling chicken into this open market, they all make more or less a buck a pound, with some differentials based on quality. In the tournament system, these same 200 families all have to sell into one processing plant. And whoever owns the plant gets to set pretty much whatever price it wants, for each farmer. And that price can vary hugely.
So some people get paid more and some people less for the same thing? They can do this?
Yes, they do it all across America. My friend Chris Leonard just wrote a book about the tournament system. It’s called the Meat Racket.  I’ve also written about the tournament system. The key thing we have to understand is that the processor-farmer relationship has nothing to do with any sort of market system. It is a relationship based entirely on arbitrary power. The company may say it is pitting these farmers against one another in some sort of carefully engineered competition designed to increase efficiency. But there is absolutely no regulation of the quality of the feed provided the farmers. And there is no regulation of the quality of the chicks. And there is no auditing whatsoever of the measurement of the final weight.
It’s arbitrary. So these guys have all the power…
—Yes, the foreman of the processing plant basically gets to determine whether a particular farm lives or dies. Whether a particular farmer gets to pay off his bank note or not. As one of my farmer friends says, “It’s a kiss-ass economy.” Which means if you kiss the foreman’s ass they might let you live. And if you stand up to them, they will crush you. And they can do it at will. —This is America in the year 2014.
—There is just a huge gaping question here which is this: the people who have done this, who have built this system, they always use a certain phrase. You know what it is: “free markets.” There’s a religion of the free market among the very people you’re describing. We’ve both written about this, we’ve documented this ideological obsession among these sort of Reagan conservatives. What you’re describing is not a free market in the least.
—There is no market here whatsoever. Any real market is open. Prices are transparent. You can enter it or exit a real market at will. You can compare contracts. So the free market ideology basically leaves us free of markets. The free market ideology is the fastest way to complete concentration of power.
—So the free market ideology has killed markets?
—The free market ideology has killed markets.


Corporations As Private Governments
—Well, let’s look at the corporation Amazon. Amazon now essentially governs business within the book industry. Amazon has so much power that it virtually gets to tell really big companies like Hachette, the French publisher, what to do. You’re gonna sell this book at this price. You’re gonna sell that book at that price. That means Amazon pretty much has the power to determine how many copies of a book a publisher might sell. That’s not citizens trading with one another in an open market setting those prices, that’s a giant corporation setting those prices. Which means what we are witnessing in the U.S. book industry, I think, is a form of top-down government.
— . . . Then a corporation becomes government.
—Yeah. Think about the word “corporation.” Harvard is a corporation. The city of Miami is a corporation. Alcoa is a corporation. All three of these institutions are designed to govern people and property. Each of these institutions has an internal constitution that determines how it is governed. All three of these institutions are also, to some extent, governed externally, such as by the need to compete. Miami has to compete with other cities. Harvard has to compete with other universities. But what happens when Alcoa captures complete control over, say, the manufacture of aluminum, as was actually the case until 1945? It then, in essence, has captured the power to govern that entire human activity, and all the people who work in that activity. It decides how much aluminum will be manufactured each year. It decides what aluminum engineers will earn each year. It decides how many aluminum engineers will have jobs. That’s private government.


Government Rules Make Markets and Capitalism Possible
Markets, like governments, are very much social constructs. The market is a set of behaviors that is structured by rules, and many of the most important rules have been developed and enforced by government. Without these rules, our prized free-market economy would be a stunted and feeble version of what we see today. To see how this is the case, lets looks at these essential “rules” – the vast infrastructure of laws and policies that make a modern capitalist economy possible.
Limited Liability Laws. Capitalism requires capital – lots of it. But without limited liability laws, investors are unlikely to risk investing their money in businesses. In the 19th century, before the passing of laws that limited the liability of investors, anyone who put money into a business that then went under could be held liable for the debts of the company. They could have their personal assets seized and could be financially ruined. Needless to say, this discouraged investment. Without limited liability laws, the economy would not have access to the capital it needs to grow and prosper.1
Property Rights. Without the right to own property and dispose of it as you wish, capitalism as we know it could not exist. These legal rights are created and protected by the government. Moreover, in the U.S., the federal courts have extended to corporations the same property rights given to citizens. Corporate property rights – one of the main legal instruments that insulate business from government power – can be created and maintained only by government.
Law and Order. A market system cannot work well without a functioning criminal justice system. Otherwise, organized crime would easily take over large sectors of the business community. Extortion, bribery, kidnapping, and murder would become the reigning corporate model. Without the rule of law, our economy would resemble the “mafia capitalism” that Russia has suffered from in its transition to capitalism.
Bankruptcy Protection. Business is inherently risky and one of the largest risks is business failure, particularly during recessions and depressions. In the 19th century, before the creation of bankruptcy laws, business failures would usually saddle entrepreneurs with large and ongoing debts, making it impossible for them to make a fresh start and often putting them in debtors’ prison. Investors and creditors also often failed to get any of the money due to them. Bankruptcy laws protected otherwise healthy businesses that were temporarily short of funds. And these laws allowed entrepreneurs to be eventually freed from crushing debts. Along with limited liability, bankruptcy rules formed a crucial financial safety net for entrepreneurs. It is important to note, however, that bankruptcy laws were passed not simply out of concern or sympathy for failed entrepreneurs, but also as a way to lessen economic risk and therefore encourage more investment and economic growth.2
A Stable Money Supply. Without reliable money, markets would be based primarily on barter and thus be extremely limited. In the U.S., before the Civil War, almost all paper money was issued by private banks – not the government. This was an unreliable and incredibly chaotic system. Sometimes merchants would not even accept certain currencies. It also meant there was no real control over the money supply – which has a crucial impact on inflation and economic growth. Widespread commerce and a stable economy both require a stable and dependable money system – one in which consumers and merchants have faith. This can only be provided and maintained by the federal government.
Patents and Copyrights. Large portions of our economy would grind to a halt if the government did not grant patents and copyrights. Without this massive intervention into the free market, the drug, music, publishing, and software industries could not exist. Bill Gates likes to think of himself as a self-made man, but he would not be one of the richest men in the world if the government did not make it illegal for anyone but Microsoft to copy and sell Windows.
Banking Regulation and Insurance. As we have seen recently, a capitalist economy depends heavily on stable banks to finance growing businesses. But banks are inherently vulnerable to “runs” – where worried depositors all seek to take out their money at the same time. Banks cannot survive runs because they have loaned out most of the money deposited with them and therefore cannot pay it out to a large number of depositors at once. Before the passage of banking regulations and federal deposit insurance, banks regularly had runs and failed. The main reason that we had no disastrous runs on banks (and money market funds) during the financial panic of 2008 was that government was there to guarantee those deposits.
Corporate Charters. Capitalism today is corporate capitalism. But the corporation itself is a creation of government. Corporations can come into being only through charters: the legal instruments by which state governments allow businesses to incorporate. These charters and state business laws define what a corporation is, how it is organized, how it is governed, how long it may exist, who has a say in decision making, the rights of stockholders, the extent of its liability, and so on. Most states also retain the right to revoke the charters of corporations that break the law or harm the public interest, though this power is seldom used these days.
Commercial Transaction Laws. Businesses could not operate effectively without laws governing commercial transactions. Few would risk doing business on a wide scale unless there was some way of making and enforcing contracts. Who would sell goods if they couldn’t be sure they would be paid, and who would buy goods if they couldn’t be sure they would receive them? The Uniform Commercial Code is a set of legal rules that determines, among other things, what a valid contract is, how contracts can be enforced, and various remedies for fraud, default, etc. It is over 800 pages long and covers every aspect of commerce in great detail, including laws governing the sales of goods, payment methods, receipts, warrantees, titles, shipping of goods, storage of goods, how sales are financed, and the leasing of goods. It is the legal infrastructure that allows business to be conducted smoothly and reliably.
International Trade Law. Global capitalism would be impossible without trade. Governments create the legal frameworks – the treaties and international trade laws – that facilitate and make this trade possible. “Free trade” is a misnomer because it implies that it is international trade that exists free of any political framework. But this is hardly the case. The North American Free Trade Agreement, for instance, takes up two volumes and is over 900 pages long – covering such things as tariffs, customs, dumping, corporate and investor rights, intellectual property rights, financial services, government procurement, and dispute resolution procedures. It also establishes a secretariat, a commission, dispute panels, scientific review boards, eight industrial sector committees, and six working groups to oversee implementation of this agreement. It turns out that free trade requires a great deal of regulation.
Enforcement of Laws. All of these rules and laws that facilitate business and markets have to be enforced, otherwise they are worthless. Just as international trade treaties require elaborate enforcement mechanisms, so do all our national laws that facilitate the business process. And this is no small effort. We and our governments spend billions of dollars every year to provide police to protect private property, courts to interpret and enforce contracts, and agencies to protect patents, oversee banks, and act as watch dogs in the stock and bond markets. It is revealing that most civil suits are not brought by individuals harassing corporations – as conservatives would have it – but by businesses suing other business. The courts are indispensable for resolving business disputes and thus ensuring the smooth operation of the economic system.

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