Tuesday, July 19, 2011

Does Big Business have a Special Interest in Preserving Capitalism?

 Does Big Business have a Special Interest in Preserving Capitalism?

The word capitalism was coined by none other than Karl Marx, who hoped that it would help in his crusade to denigrate the system of private property and free enterprise and to promote socialism.   Marx insinuated that the only beneficiaries of capitalism were the capitalists. (DiLorenzo 2004, 1) 

A society in which liberal principles are put into effect is usually called a capitalist society, and the condition of that society, capitalism. (Mises 2005, xxv)


The introductory quotations highlight perennial terminology problems that arise when reading works on economics.  Specifically, the terms capitalism, socialism, and liberalism from the quotations above have inconsistent meanings both across authors and across time.   To further complicate the matter, one can easily find examples of adjective modifiers attached to these terms in order to create new terms  such as Kolko's political capitalism, finance capitalism, and laissez faire capitalism, or DiLorenzo's free-market capitalism versus crony capitalism or Sombart's monopoly capitalism. Likewise, the term socialism has various adjective modifiers attached to it that create terms such as agrarian socialism, Christian socialism, Marxian socialism, national socialism, and democratic socialism. Finally, the term liberalism could be modified with modifiers such as neo- or American or English or nineteenth century or classical.  As a specific example, Rothbard (1994, 89) speaks of corporate liberalism. Sadly, this is not an exhaustive list of possibilities.

For the purposes of this post, the terms liberalism and capitalism are used interchangeably to mean property unregulated by government. The term socialism is defined as property regulated by government. These definitions are adequate because the intention of this post is to focus on whether businesses have a vested interest in an economy that is unregulated by the government.

The Progressive Era and Regulation

The Progressive Era refers to a period of American history running from approximately 1890 to 1920 although there is some variation regarding which range of years should be used when defining this era.  One definition for the Progressive Era is "the period from approximately 1900 until the United States' intervention in the war, labeled the 'progressive' era by virtually all historians" (Kolko 1977, 2).  However, including the decades before 1900  is acceptable because these decades certainly influenced what happened at the turn of the twentieth century.  For example, the merger movement period ran from 1897 to 1901 (Kolko 1977, 24).  The early twentieth century events involving Standard Oil also have influences going back to the 1870s, for example, consider the fact that  "the period Standard exercised greatest control of the industry, [was] 1875-1895" (Kolko 1977, 39).   Rothbard (1994, 81) mentions changes in the National Banking Act in 1887, defines the merger movement period as the period from 1898 to 1902 (1994, 85), mentions earlier Morgan cartelization attempts in the 1860s and 1870s foreshadowing the later merger movement (1994, 84), and discusses the Panic of 1873 (1994, 78).  Consequently, the period from 1860 to 1890 as well as from 1890 to 1920 is germane when discussing the Progressive Era.

One could argue that, conceptually, the Progressive Era goes right back to the founding of the American republic.  Both Kolko (1977, 4) and DiLorenzo (2008, 141) see the Progressive Era as nothing but a reincarnation of the "Hamiltonian unity of politics and economics."  DiLorenzo mentions how it was "Alexander Hamilton and his followers were the first to push for special privileges from the government, as they advocated a more centralized government that would centrally plan the economy primarily for the benefit of business interests" (2004, 44).  Some other terms used to describe the Hamiltonian way of thinking include:  corporatists, mercantilists, political entrepreneurs (as opposed to market entrepreneurs), and business/government partnerships (DiLorenzo 2004, 6-7).

The Progressive Era provides a case study for testing the idea that big business and big government are rivals (DiLorenzo 2008, 174).   This idea states that businesses grows bigger and bigger until they monopolize each industry.  Then government must intervene because failure to regulate the use of property will lead to the exploitation of the masses by this handful of private monopolies.  This idea sounds exactly like what Hayek calls the Marxist doctrine of the concentration of industry (Hayek 2007, 91).

The idea is wrong.  Kolko's study of the Progressive Era comes to the conclusion that "contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it" (1977, 5).  Contrary to the doctrine of the concentration of industry, the Progressive Era shows that competition grows more and more intense without government regulation.  "The first decades of this century were years of intense and growing competition" (Kolko 1977, 26).  In other words, Kolko comes to the same conclusion that Hayek does, namely, that monopolies are formed only with state intervention, what is a granting of privilege.  "Anyone who has observed how aspiring monopolists regularly seek and frequently obtain the assistance of the power of the state to make their control effective can have little doubt that there is nothing inevitable about this development" (Hayek 2007, 93).

The basic plot of the Progressive Era is growing competition, which threatens the established business interests.  The established business interests then try to cartelize the free market using a variety of techniques including voluntary cartels and mergers.  These attempts fail badly for the cartelizing firms.  New competitors rise up and seriously threaten the established business interests because the new firms are usually more efficient than the older ones.  "Most of the new mergers started out with less than monopoly control, and virtually all lost their initial share of the market. [...] due to the rise of important new competitors and the significant economies of size attainable at lower production levels" (Kolko 1977, 28).  In order to save themselves, the established interests then use the federal government to regulate and enforce the cartel.  These regulations, naturally, are meant to discriminate against the competitors and their use of their property.  Rothbard provides an excellent example of how the federal government becomes a tool for cartel enforcement.   Rothbard (1994, 84-85) documents how the railroad cartelization attempts of the 1860s and 1870s failed to work without government regulation.  To make the cartel work "the Morgan-led railroads turned to the federal government to regulate railroads and thereby to enforce the cartel that they could not achieve on the free market" (Rothbard 1994, 84-85).  A similar story is told by DiLorenzo regarding the banking industry in this era.  "During the late nineteenth and early twentieth centuries the banking industry faced the same issue that many other industries did:  too much competition. [...] bankers tried to create voluntary cartels, but cartels are notoriously unstable.  So inevitably they turned to government to enforce their cartel for them" (DiLorenzo 2008, 166).


Consequently, established businesses have no special interest in the unregulated capitalist or liberal system.  They do, on the contrary, have an interest in government regulation that provides them with special privileges.  The Progressive Era example highlights government offering special privileges to certain firms in order to protect them from domestic competition.  The Rothbard example pertains to competition from newly established alternative railroads; the DiLorenzo example highlights competition from state banks against the New York banks.  Without government regulation of property, the established business interests are always being threatened by rivals.  The rivals will use their property to their own benefit and will harm the vested interests of the established businesses.  With government regulation of property, the established business interests are protected from these rivals.  The rivals now can no longer use their property as they see fit.  They may be blocked from competing against the established businesses because of  licensing regulations for example.

Perhaps, the most extreme form of regulation of private property is the declaration that the state can regulate business profits possibly by calling this a regulation on "excessive" profits.  These regulations on profit, once again, harm the new rivals and help protect the established business firms.

But today the income tax absorbs 80 or more percent of such a newcomer's initial profits.  He cannot accumulate capital; he cannot expand his business; his enterprise will never become big business.  He is no match for the old vested interests.  The old firms and corporations already own a considerable capital.  Income and corporation taxes prevent them from accumulating more capital, while they prevent the newcomer from accumulating any capital.  He is doomed to remain small business forever.  The already existing enterprises are sheltered against the dangers from ingenious newcomers.  They are not menaced by their competition. (Mises 2007, 11)

The idea that established businesses will favor government regulation over the unhampered market economy in order to protect their interests against competition is nothing new.  It dates back to at least Adam Smith and his 1776 book The Wealth of Nations (DiLorenzo 2004, 44).  It reflects a failure on the part of classical liberalism to overcome the slogans of both interventionist and socialist parties (Mises 2005, 121). We are stuck in the Montaigne fallacy world where one group's profit coming from the losses of other groups.
From a practical perspective, no political party nowadays calls for classical liberal ideas.  When do politicians today speak as such: "The liberal candidate can only say to all voters that the pursuit of such special favors is antisocial" (Mises 2005, 140)?  Liberalism means no special favors for business, for labor, for banks, or for anybody.  To bring about positive change and to end this ongoing problem, we need a return to the "successful use of competition as the principle of social organization" (Hayek 2007, 86).  In this way, the interests of business must align with the interests of the masses of consumers.  Profit can only be earned when businesses best serve the needs of the consumers.  This suggests that modern movements such as the Tea Party are mistaken when they place emphasis on revolutionary symbolism such as the Boston tea party and the Gadsden flag (i.e., the yellow flag with the rattlesnake and the motto "Don't Tread on Me).  This approach marginalizes the movement by making it look extremist.  The message of the liberal reformers should be simply, "no special favors."  This is the only way to stop groups from fighting among one another.


DiLorenzo, Thomas J.  2004.  How capitalism saved America:  The untold history of our country, from the Pilgrims to the present. New York:  Random House.

---.  2008.  Hamilton's curse:  How Jefferson's archenemy betrayed the American revolution--and what it means for America today. New York:  Random House.

Hayek, F. A. 2007.  The road to serfdom:  Texts and documents. Definitive ed. Chicago:  University of Chicago Press.

Kolko, Gabriel.  1977.  The triumph of conservatism:  A reinterpretation of American history, 1900-1916. New York:  Free Press.

Mises, Ludwig von.  2005.  Liberalism:  The classical tradition.  Ed.  Bettina Bien Greaves.  Indianapolis:  Liberty Fund.

---.  2007.  Bureaucracy. Ed.  Bettina Bien Greaves. Indianapolis:  Liberty Fund.

Rothbard, Murray N.  1994.  The case against the Fed. Auburn:  Ludwig von Mises Institute.

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