Yesterday, the Roberts court affirmed the Obama defense of the so-called “Affordable Care Act.” To me, it is not a particularly surprising result. Two years ago, I noted that the Obama Admin’s principal argument relied on the classification of the mandate as a tax and that the legislation–all 2000 pages plus–was carefully crafted to categorize any penalty as an excise tax. As I wrote at the time, Obama–his “socialist” caricature notwithstanding–wasn’t arguing the case by making appeals to the Communist Manifesto. He was merely relying on past American constitutional precedent. He had “the firm’s” legal team carefully draft the new rules of the health care political economy to pass compliance strictly with the firm’s monopoly power to tax.
And it passed the compliance test. Indeed, John Roberts used this decision to affirm the role of his court to be the adjudicators of compliance and not the arbiters of constraint. Really, the judiciary is the only possible monkey wrench in a model of total government by political competition/rent-seeking. Yesterday, Roberts proclaimed that the role of the judiciary is not to save us from democracy, which, of course, means “the firm.”
We simply pose a simple question to Mr. Roberts: who wrote that 2000 page piece of legislation? Who could compose an entire model of political economy from the mere power to tax in a fully “compliant” manner. Justice ain’t that blind, sir….
Incredibly, there are some so-called libertarians who are hailing this decision as a bulwark against the future regulatory State because of some speculative nonsense that Roberts has now taken the “commerce clause” off the table. Sheeeeyyyyyytttttt. The regulatory state ultimately derives from the power to tax. The Firm more or less is the regulatory state. It is not going anywhere.
Let us dispense with the romance and the delusion. Politics is a rent-seeking game. Richard Posner and the Chicago School had it wrong. It is not a game where nothing is being redistributed, that is, where outlays = rents. Tullock and the Virginia School have the better model but resorted to a ridiculous “inefficient market hypothesis” to try to save liberalism in a public choice context when it became apparent that rents >> outlays. Tullock, himself, in explaining why he couldn’t convert to the libertarianism, more or less admitted that he simply preferred the blue pill to the red pill–he was too married to the institutionalism he was critiquing to defect.
If we accept that firms can arise in a “free market” of horizontal trading partners because a hierarchy of economic governance can sometimes prove to maximize economic rents relative to a regime of horizontal trading partners–as a consequence of the frictional costs of bargaining–we have to accept the reality of “firms” in political competition. It is indefensible to hold a position of firms as a consequence of economic rent-seeking in a free market but no firms as a consequence of rent-seeking in political competition. Yes, we can think of political parties as “firms,” but the actual firm is the State.
Today we know(or we should know) that Madisonian Democracy is a horribly flawed political concept. The idea that high institutional frictional costs constrain political competition/rent-seeking is just wrong. On the contrary, the high institutional transaction costs are what actually guarantee the emergence of “the Firm.” Equal competitive agents(“gangs”) fighting over rents in a highly frictional environment can be literally infinitely wasteful. To avoid this, you thus have a type of hierarchical, economic governance that emerges–the Firm.
John Roberts, “evil genius,” I think not. I think the evil geniuses are these libertarian think tanks and mags that keep propagandizing “proper role of government,” “limited government,” and demonstrate infinite capacity to find “silver linings” in libertarian-conservative fusionism. You doubt the “State as Firm?” Well, sometimes you just have to actually give a demonstration of the empirical reality. Below is just the “legislative component” of “the Firm.” Do you see any silver linings, any evidence of limited government, any evidence that it matters one fuck whether it is the monopoly power to tax or to “regulate” regarding the ends of our Firm?
The House Legislative Component of The Firm
The Senate Legislative Component of The Firm
Although I’m not a progressive, I nonetheless still generally enjoy the content published by Counterpunch. Counterpunch, after all, is in my blogroll. However, occasionally they will publish something that I find to be completely bullshit. The last time I made note of such an example involved a ridiculous screed by Pam Martens regarding the Free State project that more or less reduced to advocating police state tactics to get rid of the rift raft in her neighborhood. Now I’ve found another example with this article, Saving the Postal Service (and Union Jobs), that amounts to little more than a PSA from the Post Office.
Subtitled "What Would Ben Franklin Say," the piece is an exercise in the logical fallacy of special pleading that ostensibly makes the argument that monopoly postal rates are the price we pay for funding public union pension plans. Of course, that's not how the argument is actually presented. Instead its the typical clap trap that postal delivery is a public good and austerity measures pursued by the forces of privatization threaten not only public pensions but vital Saturday delivery for little old ladies out in the boondocks who will likely drop dead as a consequence. Besides, we are told, since 1970, the post office has not accepted a nickel of tax-payer monies. And the current postmaster Patrick Donahoe(Wilford Brimley has apparently retired) promises a new era of Gorbachev-esque market reforms for our monopoly provider.
Ordinarily, I probably would have let the article slide without comment except I was struck by the subtitled reference to Franklin, the conservative appeal to tradition–why, the horrors, the “historically significant” Ben Franklin post office on Market St is under siege–and the snide reference to Somalian anarchy. Well, that did it for me. If we are going to appeal to tradition then I would only remind our author, Jack A. Smith, that it was an American anarchist, Lysander Spooner, back in 1844, who demonstratively kicked the Post Office’s collective ass, operating his American Letter Mail Company though a maze of loopholes for 7 years until the Government finally shut it down for good. But by that time, however, Spooner’s company had managed to deliver the mail, without subsidy, for a postage rate of 3 cents. As such, Spooner is the rightful father of the 3 cent stamp. The State shut down Spooner but matched the postal rate–of course, with a tax subsidy. When the direct subsidies ended in 1970, that’s when the postal rates began their current ascent.
So, Mr. Smith, little old ladies in the boondocks would have received their medicines in the mail for 3 cents–without subsidy. Now, truth be told, the Post Office is not really that high on my shit list. Frankly, I appreciate the noise. After all, little old ladies are not the only one who get their drugs through the mail.
This is a follow up post to an earlier piece, Anarchism and The Firm. A re-summarization of that piece:
If we accept the institution of the market, then we must accept the concept of economic rent–if we wish to engage in economic reasoning. Markets will then have rent-seeking participants/actors1. Economic rent is simply earnings or income for use of a resource in excess of that resource’s opportunity costs. In a world of perfect competition equilibrium, there is no economic rent(or firms). But we don’t live in that world(that is, a world where every resource/asset is traded at opportunity cost). We have (i) economic inefficiencies or (ii) relatively inelastic supply curves for specialized labor2 or (iii) product heterogeneity and/or shifts in demand and supply curves3, etc,etc.
Competition in these types of economic rents is a good thing and improves the human condition, at least from an economic standpoint. A dynamic perspective views the entrepreneur as rent-seeking agent that both “creates quasi-rent” and dynamically enforces economic rent as quasi-rent, that is, long-term earnings for asset usage that approach opportunity cost.
Economic inefficiencies explain why we might expect “firms” in a complex economy. For one explanation of this, we can turn to the work of Oliver Williamson regarding the Firm. In a complex economy, you will end up with assets that are specific to one another that may have a trade value much greater than opportunity cost. If these assets are owned by different entities or agents, these mutually dependent trading partners, absent long-term contracts, will have substantial quasi-rents to bargain over in actual returns. This creates the following bargaining dynamic: (1) trading partners have an incentive to “haggle” to maximize their share of the available quasi-rents; this is a type of transaction cost (2) when it is difficult to switch trading partners, the defection state–that is, a failure in negotiations–represents large surplus losses.
The “Williamson Firm” then is a type of DRO, a form of economic governance that arises as means to minimize the bargaining costs of quasi-rents and the costs of defection.4,5
The “Williamson Firm” provides a plausible bargaining foundation for “the Firm” in a free market. A number of qualifiers, however.
(i) the “Williamson Firm” is not necessarily equivalent to the legal construct of the “Limited Liability Corporation”
(ii) the “Williamson Firm” would only be specific to certain economic sectors and would not be universal across all sectors. It arises out of the quasi-rents of asset specificity. Vertical integration is explained in terms of efficiency, and not “market power.”
(iii) The bounds of the “Williamson Firm” are an important consideration
To succinctly rephrase the qualifying remarks: If the Williamson framework is defined in terms of rent-seeking and adaptation, we should give important consideration to bounds of the firm, given that, in a sense, the vertical integration is explained by the inefficiency of completeness in contracting(for certain sectors). In short, the rent-seeking can very easily become a matter of contrived rents and not quasi-rents.
As I pointed out in my original piece, Stephan Kinsella’s claim of a contractual foundation of “shareholder limited liability,” which he implied had been substantiated by the likes of Robert Hessen, was not an accurate claim. Hessen actually denied the possibility of any strong contractual foundation of shareholder limited liability. Hessen instead appealed to the legal principle of respondeat superior backed by a claim of investor passivity.
My response was that in the absence of a strong contractual foundation, to avoid “the Corporation as Social Contract,” you had to provide an economic or bargaining rationale for the thing you are claiming. In particular, I was referring to limited liability in torts. There is no economic bargaining foundation for this legal protection aspect of the Firm.
I then noted that “investor passivity” was a myth, that it was actually a quite active institutional agent on its own. In fact, I identified this institutional agency as the foundation of “too big to fail.”
Interestingly, over the weekend, I read this summary post at Global Guerrillas that linked to this complexity analysis, The Network of Global Corporate Control, authored by a trio of theorists from Swiss Federal Institute of Technology in Zurich. The technical paper employs a complex graph analysis(a standard tool in complex network analysis) to model the global capitalist network, a network the researchers found to form a giant bow-tie arrangement knotted by a small, interconnected core of financial institutions.
For non-technical summary, refer to this informative New Scientist article.
What we empirically see is that the knot is controlled by a “super-entity” of 147 firms, almost all financial institutions. If you study the paper, what you will see, in plain startling form, is the empirical proof(or a highly compelling proof) that demonstrates the incompatibility of limited liability torts and investor passivity with the free market. Of course, we are defining the free market as a mechanism of competitive dissipation of economic rents. And we are reminded why we should never consider the free market as serving any moral ends–in this case, as means to an ends of a moral claim of ownership liability.
Complex network analysis has no need of conspiracy theories or “bad actors.” It simply models the complex order that emerges from the rules of the system. And what we find is not necessarily collusion of over economic rents, or a violation of the Williamson bound vertically for monopoly rents, but rather a complex entanglement-which violates the Williamson bound–naturally geared toward network preservation. In other words, not “public choice,” but “ruling class.”
What appears to have been empirically verified is the Corporation as Social Contract…
1 The term “rent-seeking” is usually reserved for contrived/artificial rents that are typically a product of government action. But we can generalize it to include profit seeking that includes quasi-rents. The generalization then includes the entrepreneur as a rent-seeking agent. Of course, competition in quasi-rents results in the dissipation of such rent.
2 Easy examples are highly skilled professional athletes, entertainers, or technical personnel. Most, if not all of their compensation(or income), is economic rent, meaning that they would earn much less in an alternative profession or endeavor.
3 Steve Jobs/Apple is an excellent example. Jobs perfected “taste” as a basis for product heterogeneity in consumer computing/electronics, allowing for Apple to enjoy the benefit of economic rent(in this case, profits above “normal profits). There is nothing wrong this type of economic rent-seeking, unless the rent-seeker also seeks to use the patent/copyright regime to prevent competition in product heterogeneity, which is the case with Jobs/Apple. Thus Steve Jobs attempted to use protectionism to protect Apple’s quasi-rent as permanent rent, thus disqualifying him as an “entrepreneurial ideal.” It’s amazing how many libertarians apparently miss the boat on this.
4 For a more detailed account, refer to the 2009 summary compiled by the Economic Sciences Prize Committee
5It is easy to see that the concept of economic rent is a primary dividing line between social anarchism and “free market anarchism.” Social anarchism holds hierarchy mechanisms of governance to be immoral whereas the “free market” variety, in its acceptance of economic rent, cannot make such blanket moral judgements regarding hierarchical forms of governance.