The Corporation as Social Contract

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.

The One Hundred Percent

The preface of Anthony de Jasay’s 1985 book, “The State,” informs us of the central theme: how state and society interact to disappoint and render each other miserable. Indeed, de Jasay–who as a youth had fled communist Hungary–was motivated to write the book in part to explain the inexplicable: namely, how States that have no popular support nor consensus nonetheless manage to persist. In particular, de Jasay was flummoxed by the problem of early 1980s Communist Eastern Europe that literally had a condition of 100%–including the communist party members–being against the regime(s), but the regimes still persisted.

de Jasay, a retired investment banker, entered the arena of political philosophy as an attempt to explain this problem of the “0% vs the 100%.”

The eventual collapse of communism by the late 1980s/early 1990s did not relegate de Jasay’s work to a historical footnote. Quite the contrary. Today, we apparently have a new meme of “1% vs 99%.” But instead of the regimes being communist, we now have them being capitalist. But whether communist or capitalist, the common denominator is the State. This should be a hint.

There is no serious argument that our current condition of State Capitalism is characterized by a non-interventionist State. Empirically, it undeniable that we have a highly interventionist State. This highly interventionist State has given us the condition of “1% vs the 99%.” What rational argument, then, is there for an even greater interventionist State to resolve this problem of “1% vs the 99%.”? de Jasay gives us the outcome of total intervention: “0% vs the 100%.”

The lesson to be drawn, one that has been empirically reinforced by history, is that whatever political adjective we choose to decorate the State with–whether capitalist, socialist, communist–we nonetheless end up with the same condition. The “1% vs the 99%,” which is supposed to represent a repudiation against “free markets,” is actually the final validation of the libertarian critique of the State. Once “Democratic Capitalism” falls, there is nothing left standing. There is no credibility in retreading the “dictatorship of the Proletariat” or the “Socialist Calculation Debate” as alternatives.

What we have,ironically, is a “libertarian moment” that offers no libertarian resolution. This is because the resolution to the problem is actually not less intervention by the State, or even a “non-interventionist State.” This goes back to Benjamin Tucker’s postscript to “State Socialism and Anarchism,” wherein he noted–40 years later after the fact–that the problem of monopoly trust had become so dire that political confiscatory redistribution had become a necessary pre-requisite for any success of a post-anarchist order. And this was 90 years ago. The conditions today are orders of magnitude worse.

This is to say that libertarianism, politically, has a “redistribution problem” to consider. Tucker’s notion of “forcible confiscation” sounds quite a bit similar to Marx’s so-called temporary dictatorship by the proletariat, which is no solution. In other words, the “redistribution problem” is not a propaganda problem, it’s a problem that demands a well-thought out solution(if there is one, or any, to be had).

The problem is that there has been absolutely no progress made toward a plausible resolution of this problem. Indeed, a primary criticism of the 20th century american libertarian alignment with the right is that this problem is not even considered a problem. Instead, the problem became how to “privatize” monopoly actions/claims by the State.

So, in our libertarian moment, we end with claims from the likes of Peter Boettke that Richard Epstein represents the sharpest libertarian thinker currently alive. Epstein argues that the “1% vs the 99%”, with Bill Gates and Steve Jobs as the maestros, is the fulcrum of human progress.

Frankly, if Epstein is the best we’ve got, then we’re fucked…

Anarchism and The Firm

This recent piece, Corporate Personhood, Limited Liability, and Double Taxation, is not Stephan Kinsella’s finest hour. The piece is riddled with problems and inaccurate representations.

Let’s begin by defining our terms, particularly with respect to this thing “left-libertarianism” which seems to be a perpetual bone of contention with Kinsella. In many respects, the political adjectives “left” and “right” are superfluous in terms of the libertarian political critique. We only resort to such decorative adjectives because of (1) the modern association of the term libertarianism with the American political right and (2) the oft apparent identity of civil society to be Wal-Mart minus the State.

Politically, libertarianism is by definition “left-wing” since it’s a rejection of the Status quo ante. Apart from politics, or the political critique, the terms “left-wing” or “right-wing,” however, have little relevance. “Left-wing” or “Right-wing” as adjectives in terms of describing property rights regimes offer little illumination. I certainly reject yeah or nay regarding property property to be the dividing line between left and right. That is to say, private property is not in any sense inherently a right-wing concept.

But let us recall our history. As I outlined in previous post, we can identify three libertarian wings that emerged from French liberal history: capitalist(Bastiat), Socialist(Proudhon), and Communist(Déjacque). We can plot these three wings on a line segment of sorts and then loosely bifurcate the segment into “individualist” and “social” parts. Both parts shared the political critique of the State, but they differed in regards to the natural, spontaneous order of civil society. The “individualist” side more or less accepted the liberal, bourgeois civil institutionalism of private property, capital, and markets. The individualists however viewed the State and state privilege as corrupting it. The “social anarchists,” however, viewed the liberal, bourgeois civil institutionalism itself as product of state privilege. So it’s not corrupted by the State; rather, it serves to corrupt the State. The “Individualist” side was predominantly American while the “social” side was predominantly European, although the latter did find significant import into the United States at the latter part of the 19th century.

This libertarian dispute over the natural products of civil society has been there from the start. However, Kinsella seems determined to ignore libertarian history. Certainly, “anti-capitalism” means something entirely in terms of the individualist perspective as opposed to the “social anarchist perspective.” The individualist or liberal perspective does not reject private property or capital, but it does reject the current Capitalist schema being representative of a “free market.” The “social anarchist” side does reject private property and the “free market”(read: economic rent) outright.

Unfortunately, Kinsella, in his many critiques of “left-libertarianism,” makes it practice to conflate the two spheres, even after being perpetually corrected on the matter. So, in the end, Kinsella seems intent on proving his point via the logical fallacy of the Straw Man argument.

Kinsella writes that “the standard leftist critique of the corporation is the ‘concession’ theory outlined by Robert Hessen in his seminal study In Defense of the Corporation.” This is certainly not true in my case. Hessen’s treatment is more or less a legal defense of the corporation. I’m more interested in a market and/or bargaining theory treatment of the corporation. Indeed, part of my critique is that defense of the corporation invariably retreats to a legal treatment, and not a market one. And Hessen, in his book, conceded that there was no market or strong contractual foundation of tort limited liability.

Kinsella makes a silly suggestion about left-libertarianism and the “Marxist labor theory of value.” It’s silly because (1) left-libertarians on the individualist side do not subscribe to the “labor theory of value,” at least not since the 19th century and (2) the labor theory of value is Adam Smith and David Ricardo; The labor theory of value is only Marxist in the sense that Marx himself was a Ricardian.

Rather than diverge on a rant over classical economics, it is more germane to point out Kinsella’s apparent confusing reading of Hessen. Kinsella equates shareholder liability with the “paternalistic” common-law doctrine of respondeat superior. Kinsella instead argues “each person is responsible only for his own torts, not for those of others.” But my reading of Hessen’s “In Defense of the Corporation” has Hessen specifically conceding the problem of such a contractual basis of limited liability in torts. Writes Hessen:

How, if at all, can limited liability for torts be integrated into a contractual theory of corporations? The answer is that it can’t–and it needn’t be. The question poses a false alternative: either limited liability for torts is a state-created privilege or it is a contractual(which it obviously is not). In fact, there is a third possibility.

Chapter II: Are Corporations Creatures of the State?

Hessen’s “third possibility” is a direct appeal to respondeat superior to resolve the agency problem of limited liability for torts. Investors and shareholders are only passive agents. The only pertinent agency is between the employer(or active management) and the employee, and the only relevant principal is the employer(or active management). The investor(or shareholder), as a passive agent, is thus outside the scope of the agency definition. Only in the event of the investor or shareholder becoming active in management does such an agent open itself up to tort liability as a principal.

We thusly find Kinsella and Hessen to be actually at odds with one another. Hessen denies Kinsella’s contractual claim of limited liability for torts while Kinsella accuses “left-libertarians” of invoking respondeat superior— to justify a principal agent other than the causative agent–when it is actually Hessen who appeals to this common-law tradition to place the passive investor(as a principal) outside the agency definition.

I’ll readily concede the legal defense of the Corporation, in particular Hessen’s treatment(read: I’m not interested in debating his legal points). But as I previously mentioned, it is only the market treatment(and game theory strategic treatment) of the corporation that is of interest to me. From an economic standpoint, there is no consensus on the theory of the firm or why we even have them.

Oliver Williamson won the Nobel prize in Economics in 2009 for his theory of the firm that views them essentially as DROs(Dispute Resolution Organizations). I would contend this is probably the more accurate model than, say, Ronald Coase’s version of “transaction costs” model. In the Williamson version, the transaction costs are more a function of comparative governance costs.

This article, at The Libertarian Standard, Continued confusion over the “rights” of corporations, implies that Kinsella is more or less in agreement with the Williamson model. Writes the author:

As Stephan Kinsella has explained, corporations are nothing more than a series of contracts enabling a large number of people to work together toward common goals.

The corporation then is a form of economic governance. But we should be careful to avoid “the Corporation as Social Contract,” in that there is actually no strong contractual foundation of this DRO organ. A market analysis may show a net benefit for, say, purchasers and suppliers, to coalesce into DRO clumps as means to efficiently reduce the bargaining costs from the gains of trade in terms of the opportunity costs of asset allocation. Put another way: “I,Pencil” is a product consisting of a number components that have opportunity costs for alternative usage. It is likely more efficiently produced by corporations up the vertical chain than by a large set of independent purchasers and suppliers bargaining over the allocation of assets that are specific to each other.

No doubt, this can be a powerful market argument for “DRO clumping,” but we should also acknowledge that we can also end up with, “I, Solyndra,” which is a recent example of DRO clumping that gives us an example of a final product representing an allocation of assets that could have best been deployed elsewhere.

The Williamson bound on Firm Size–in terms of being an efficient DRO device–is demarcated both by the bureaucratic costs of delegation and erosion of entrepreneurial incentive, which more or less means the size at which (Economic Rent) –> 0. The problem with the Williamson bound is that in political economy, the costs of bureaucracy and loss of entrepreneurial incentive have little bearing on this limit of economic rent; indeed, they are usually necessities in the competition for artificial economic rent.

This leads us to the actual political economic critique of Hessen’s contention that Corporations are not “Creatures of the State”. Namely, the empirical fact that the investor class is not all that passive. It is a professional class with it’s own agency definition that includes its own principals that are quite active. The term “institutional investor” should familiar with everyone these days(although it was likely not quite so familiar at the time of the original publication of Hessen’s book, in 1979), and it denotes a largely corporate investment banking principal that specializes in being quite active in Washington, DC.

With the corporatization of investment banking, the advent of institutionalization of investment, and with corporations being the primary investors in other corporations, Hessen’s contention, in 1979, that the investment class constituted passive agents and thus were immune from the agency problem can only now be viewed as laughably naive and quaint. Today, we should understand that it is the institutionalization of the investment class which gives us “too big to fail.”

The obvious conclusion, from a libertarian perspective, is that any claims of a group or class to be outside the agency definition of a DRO is fraught with problems. Incredibly, Kinsella refuses the lesson and instead makes a utilitarian argument for the legitimacy of “Corporate America.” Writes Kinsella:

This is because, if you accept Mises’s calculation argument, a centrally run economy cannot be economically prosperous. If most of corporate America is “really” part of the state, then the calculation argument means we must be in a USSR-style shambles, despite appearances to the contrary. Sure, I realize the GDP measure has methodological problems, and that the state exaggerates and propagandizes, but what’s more plausible: that we are really all poor, living in a 1970s Soviet-Style morass with just faked prosperity (hey, maybe we never made it out of the Malthusian trap in the 1800s after all; maybe the whole Industrial Revolution is a mirage!); or that there is actually a vast amount of prosperity generated by the underling genuinely free market economy despite the state’s depradations? As far as I can see, the left-libertarians have to argue the former; I think most sensible libertarians will take the latter view.

That Kinsella invokes the “Misean Calculation Argument” to justify corporate America only reminds us why the “Misean Calculation Argument” is wrong and why Mises lost the original Socialist Calculation Debate. Figures like Oskar Lange used a similar utilitarian type argument against Mises to demonstrate the ability of the Walrasian auctioneer to “discover” prices. And Lange, even back at that time–the early part of the 20th century–defrayed the criticism of the “socialist incentive problem” by citing the capitalist incentive divisions, as an agency problem, between the investment class and the management class.

The Argument for Liberty

This month, The Boston Review is featuring a Libertarianism and Liberty discussion on the failure of liberty as a rational foundation for libertarian public policy.

The starting point:

Libertarians embrace liberty as their fundamental starting point. From this, they advocate a program of limited government and lower taxes.

But it’s not clear how they get from their starting point to their policy conclusion.

TM Scanlon begins the discussion with the essay, How Not to Argue for Limited Government and Lower Taxes. Writes Scanlon:

Libertarianism presents itself as a simple, clear, and principled view. It appears to provide a moral basis, in the value of individual liberty, for a specific political program of limited government and low taxes. The moral significance of liberty seems obvious even to those who believe it is not the only thing that matters. But the claim of the libertarian political program to be founded on this value is illusory. Three lines of thought lead to conclusions that might be seen as libertarian. But none of these shows that respect for the value of individual liberty should lead one to support the political program of low taxes and limited government that libertarians are supposed to favor.

Scanlon then proceeds to argue that neither market utilitarianism, personal autonomy, nor non-interference serve as normative grounds for libertarian policy. I as a libertarian, offer no rebuttal on this point. I don’t dispute that there is no normative case for liberty as a political value. I consistently have made that point myself and have argued that you cannot dress up the new wine of libertarianism in the old wine skins of liberal categories. These categories failed liberalism and they burst under any attempt by latter 20th century american libertarians to re-cast libertarianism in terms of them.

But Scanlon has his own problem, namely the failure of liberal categories to provide normative grounds for why we should obey the State. Historically, since libertarianism rejected the social contract, I don’t see much of a problem presented by debunking a liberal recasting of libertarianism within the social contract. However, for Scanlon, who accepts the social contract, he has a real problem when I can point out that the reality of National Security State obliterates any moral foundation of this social contract.

Scanlon is noted for his moral foundation of “What We Owe to Each Other.” But the National Security State presents an empirical dilemma regarding this moral legitimacy of the State. Either “What We Owe to Each Other” is in such dispute that enforcement of these obligations requires a massive security/intelligence State, which demonstrates that the social contract is not rooted in any moral agreement/recognition, but rather pure force. Or, if there is a contention of moral agreement/recognition, then we have the equally disturbing problem of a huge superfluous security organs not in any way morally rooted in the necessity of the social contract. Either way, the legitimacy of the State, from a contractarian standpoint, is called into question. And Scanlon must deal with the problem that there is no convincing normative case for moral obligation(or duty) as a political value.

Admittedly, I am highly influenced by Anthony de Jasay, who argues the point of the “presumption of liberty.” If liberalism demonstrates that it, in the end, it offers no real constraints against moral claims of authority by the State–which the national Security State demonstrates–then the only relevant political argument is a (presumption of liberty) vs (presumption of authority). This was actually the conclusion drawn by the radical 19th century libertarians. With de Jasay, however, you have the added argument, in the 20th century context, that the presumption of liberty is a requirement for the epistemology of the scientific method.

The radical libertarian rejoinder to Scanlon is to point out the rejection of the premise of liberty as a normative political value. Instead, the libertarian political critique is rooted in the repudiation of the moral authority of political institutions themselves. Once we understand this to be the actual libertarian political critique, we understand how we can get from here to there: via the collapse of trust in political institutions.

Free Markets and Coercion

A popular critique of the “Free Market” is a simple presumption against it’s actual existence. If they don’t exist, then any debate on the matter is a pointless exercise. Occasionally, there will be an attempt to make the case for justifying such a presumption by attacking the supposed proposition that the free market implies no coercion. So, if we demonstrate that there is no such thing as “no coercion,” then we have logically falsified the “free market.”

In symbols:

FM –> ~c
which is equivalent to: c –> ~FM

So, if we show c(coercion), we show no free market.

This type of argument is typically represented by this recent blog post: Libertarianism: Coercion Seen Through a Fun House Mirror. The gist of the argument is to debunk the supposed libertarian premise: “Any libertarian will tell you that contracts are ‘coercion free.'”

Well, I deny that premise. If we define coercion as a form of a moral claim, then I would concede that all social interactions(and contractual arrangements) are “coercive.” For example, consider a contract between a Homeowner A and a carpenter B for a Home Improvement I in exchange for monetary sum M. In the contract, it’s specified Carpenter B must guarantee it’s work. This certainly can impose a possible moral claim on the time and labor of B, beyond it’s own calculation of such quantities involved, in the event of a claim of an unsatisfactory outcome by A. The uncertainty or risk of such an outcome is certainly not trivial. This is why, in part, you may often have bonded insurance of such workers.

But couldn’t this insurance premium then be considered a “tax,” one that is just a “market representation” of “coercion.” (1) The enforcement to make sure this “tax” is paid requires an enforcement body–a State agency against B. (2) Since “taxes” are being paid and there is enforcement agency to enforce payment of such taxes, why not have the State simply pay it through direct taxation, to relieve the burden on B. Or better yet, why not a tax-financed community worker project for home repairs? After all, we already have established a market principle for “taxation,” and the necessity of an enforcement agent for tax collection. So, why not?

Note: my little example is not the argument advanced by the above referenced author against the “no coercion” premise. That particular argument relied on demonstrating that arbitrary agents Ai, in whatever context, are never equally powerful to one another. So the market exchange is fundamental exploitative. So we show c(coercion) by showing exploitation.

My example is more subtle. It demonstrates that uncertainty or risk can lead to “coercion,” without having to make any assumptions regarding the relative bargaining power of agents.

The libertarian response to this will usually focus on qualifying the “first-order” definition of coercion as simply a form of a moral claim. The libertarian insists on a second-order distinction, namely that coercion is an involuntary moral claim. Taxes are a product of involuntary moral claims. If a contractual arrangement is voluntary, however, then the insurance premium is just a type of rent paid to a third party to offset the risk of the voluntary transaction not being mutually beneficial. Rent collectors do not need to be the State.

However, using “voluntary” and “involuntary” as the moral sprinkle dust to differentiate between taxes and rent, as economic transfers, reverts to a type of moral argument that has yet to achieve any moral consensus. And indeed, I would question, on the libertarian side, whether the libertarian principle is simply decorating “moral claims” with “voluntary.” I would argue that it’s a bit more than that.

Game Theory, a framework for analyzing strategic decisions under uncertainty, provides us with a means to examine agent bargaining. A mutually beneficial bargain between agents is a cooperative outcome that can arise from agents attempting to more or less minimize the moral claims they have to concede in pursuit of a benefit. Agents bargain because, in a general condition of the world–which is characterized by scarcity– cooperation creates “additional surplus.”

It’s important to emphasize a few points. Agents are not pure “first-order coercion” minimizers. If that were the case, then the optimal state would be the “state of nature,” that is the defection state, for everyone. However, as bargaining agents, humans will act to minimize their own concessions in pursuit of the surplus of the bargaining outcome. This makes them strategic agents. In terms of a bargaining problem, the libertarian principle is really the Lockean Proviso, which is a boundary constraint on the bargaining outcome: no one is worse off in the bargaining outcome relative to the defection state, or “no agreement.”

So, the libertarian principle, in terms of a bargaining problem, is a constraint on agent moral claims in the cooperative outcome. Coercion,as a second-order definition, is a moral claim on an agent in the cooperative outcome that makes it worse off than it would be sans the bargained outcome(i.e., the defection state). That is, coercion, as a second-order definition, is the use of force to enforce an agreement to a bad bargain. In this sense, the “libertarian society,” in terms of coercion, is not so much dependent on a demonstration that all social arrangements are purely voluntary, but rather on the ability to voluntarily exit bad bargains without punishment.

So, this alternative libertarian definition of coercion definitely creates a “Fun House Mirror” effect for the presumption of coercion. Namely: a “progressive” argument–from the author cited above–that builds from the premise that markets are simply constraint-bounded social constructs that are fundamentally violated by the unequal bargaining power of agents that concludes with a claim that the ultimate representation of unequal bargaining power, the State vs the individual, is the contractual foundation of the rule of law.

The flaw is a simple failure to understand basic bargaining theory, which is based on strategic decisions under uncertainty. If there is no uncertainty regarding the relative bargaining power of agents, then there is no bargain to be had, particularly if exploitation can be shown. That we continue to see bad bargains, under such strategic certainty, may have something to do with the claim that “a law is a contract in which one of the parties is a government entity,” which, of course, implies the rule of law derives from the ultimate instance of unequal bargaining power.

So we end up with a progressive argument that seems quite reasonable to progressives under a presumption of coercion, but ends being an embarrassing admission if the presumption itself is challenged.

The Free Market

The Free Market is not:

FM –> ~c

Nor is it, as I have explained previously, a premise about regulation. That is,

FM –> RM

where RM=Regulated Market(NOTE: although an “un-free market” is a sufficient condition for an unregulated market).

Instead, a “free market” can be succinctly defined as a market that serves no political or moral ends. The practical meaning of this is more or less a statement about competition in “economic rent,” or “rent-seeking” behavior. One type of economic rent seeking can be a boon to human welfare, and is representative of an entrepreneurial economy, while the other type is a bane to human welfare and is representative of protectionist political economy.

The definition of Economic rent differs a bit from the popular meaning of rent as an income stream for use of a resource. Instead Economic rent refers to income flows for use of a resource in excess of that resource’s opportunity costs.

So, as an illustration, in our example above, the contract between Homeowner A and a carpenter B, that required a flow of payments to a third party to insure risk against a guarantee default by B, is a form of rent. But how much of this rent would be economic rent, that is payments in excess of opportunity cost? We would surely want competition in any rent-seeking behavior here to the extent these rents exceeded opportunity cost. This would be an entrepreneurial opportunity.

What we would NOT want to have is protectionism in terms of who qualifies to be bonded or who insures the bondable carpenters. Nor would we want some tax code to encourage(give a tax exemption advantage to home improvement) home improvement as an artificial market for protected bondable craftsmen. The competition in this type of economic rent is the essence of Political Economy.

The free market then is not some abstract ideal rooted in some abstract moral claim. It is something that very much can be approximated and spotting it’s violations is very much a matter of practical endeavor.

No Accountability in Liberal Democracy…A Reply to E.D. Kain

E.D. Kain’s “Case for Democracy” suffers from an apparent flaw: namely, there is no case made. Instead, the piece reflects a “presumption of democracy” and then proceeds with a case against libertarianism as undermining democracy. In the interest of accuracy, then, the piece should be re-titled, “The Presumption of Democracy.” Cast in those terms, I would have no quibble with a criticism of libertarianism as undermining such a presumption. But that line of attack is not sufficient to demonstrate that “Theoretically, the ideal libertarian society would have no democracy at all,” or that “in order for it to exist as a model for society, democracy must be snuffed out through coercion.”

Kain attempts to justify his claims regarding the “ideal model of libertarianism” with an appeal to Michael Lind’s article. But this absolutely misses the boat. Why? Because libertarianism is not the only political philosophy that scoffs at a presumption of Democracy. There are plenty others. For example, liberalism.

To clearly see this, we should understand that a “presumption of democracy” holds that voting is the only means of legitimate collective action, and this legitimacy is sanctioned by a 50.01% majority and above. I seriously doubt that Kain, or anyone else–other than rabid communitarians–actually holds to such a presumption. So, what we end up, in terms of an actual presumption, is democracy decorated with an adjective; for example, “liberal democracy.” And what we really mean by “democracy with adjectives” is a preference regarding constraints on simple majority rule.

Now we should begin to see, once the terms of the argument are properly defined, how Kain’s presumption claim begins to unravel. The accusation vis a vis democracy against the likes of Mises and Hayek can be levied against anyone. H&M are simply guilty of preferring liberal outcomes and liberal constraints over a non-liberal outcome sanctioned by voting, or a “presumption of democracy(that is, they rejected democracy sans liberalism).” It’s a simple as that. Liberalism, whether enlightenment(classical) or modern, does not subjugate principles of liberty or equality to a “presumption of democracy.” That is to say, they aren’t up for a vote. This admission, which should be admitted by anyone who claims the label of liberal(and really, it’s an admission that can be generalized to anyone who ascribes to a “democracy with adjectives” constraint on the presumption of democracy), is not equivalent, however, to the necessity of eliminating voting as an instrument of collective action. Indeed, I could argue that any insistence of banishing democratic collective action would almost certainly violate the libertarian principle and that it cannot be shown that such a ban is either a sufficient or necessary condition for a libertarian outcome.

So, to summarize: libertarianism is hardly unique in it’s opposition to a “presumption of democracy.” And it’s a non sequitur to imply that a “presumption against democracy” follows from opposition to a “presumption of democracy.”

Kain is guilty of a logical fallacy but attempts to correct himself with this follow-up post, Liberty & Democracy, that drops the simple presumption of democracy for one decorated by an adjective, in particular, “liberal.” So the discussion properly shifts to one of liberal preferential constraints on simple majority rule.

It is at this point that the libertarian political critique becomes germane. A libertarian argument against a “presumption of democracy” is a trivial one. The meat of the libertarian political critique is it’s attack on the “presumption of liberal democracy.” It’s essential summary: much of the State’s actions are not rooted in consent. Liberal constraints fail to constrain the State’s actions. Democracy is not a means to constrain or ensure accountability against a monopoly moral claim on the legitimate use of force.

The essential summary can be best rolled up under the banner of “libertarian class theory.” E.D. Kain is, I’m sure, familiar with this critique, but he dismisses it, or at least dismisses it as a fatal blow against the “presumption of liberal democracy,” largely on the premise that all “social arrangements are coercive.” Another way to state the premise is that “coercive force” is a natural monopoly. This premise is a familiar claim and is often used to blunt the libertarian political critique with the charge that libertarian social arrangements would be rooted in coercion as well.

In the end, the “presumption of liberal democracy” survives; but it survives as a type of dilemma. In other words, we end up with the oft quoted phrase, “Democracy is evil, but it’s the least evil alternative we have.” Put yet another way, we end up with the “presumption of liberal democracy being the least worst rights’ violator.”

That a consideration of coercion supposedly leads us to this dilemma is illustrative why a mathematical minimization of this quantity called coercion is not the foundation of the social order(nor should serve as the basis of social analysis). If we understand the libertarian principle, in a social context, to be the Lockean Proviso and not NAP, then it’s fairly straight-forward to debunk the “Dilemma Presumption.”

For example, consider a workplace democracy scenario(Scenario #1) where workers vote on an increase in income flows to go toward immediate increased salary compensation or a deferred benefit retirement plan. If one’s preferred choice loses out in the vote, is that person then a victim of coercion? Consider, of course, that the increased income flows may be a consequence of increased labor hours.

The answer would generally be no, if we assume that the worker is better off in the workplace bargain than without it. Agents do not enter into contracts or bargains as means to satisfy a mathematical min behavioral constraint on coercion–indeed, if humans were coercion “minimizers,” they would never enter any contracts or bargains. In short, there would be no society, no cooperation.

Humans cooperate and enter into contracts because it increases their welfare. The act of cooperation creates surplus. Bargaining theory deals with how humans will rationally bargain the distribution of such a surplus. One obvious constraint is that if an agent is made worse off in a bargain, it shouldn’t agree to the bargain.

If we consider say another democratic scenario(Scenario #2) where a geographical group of voters vote to impose a protectionist requirement, or barrier of entry, for our agent to make a workplace bargain, then it should be obvious that this agent is made worse off by this type of bargain, and it should reject it.

The distinction between #1 and #2 isn’t best illuminated by an analysis of coercion, but rather by an analysis of the Lockean proviso constraint. With #1, we have a collective body that has to bear the responsibility of it’s agreements and operates under a bargaining constraint. #2 gives us a collective body that does not have to bear the responsibility of it’s actions and is incentivized to maximize artificial surplus, under no bargaining constraint, while dispersing the costs to others.

#1 is an example of a collective action that does not violate libertarian constraints while #2 is an example of one that does. #2 is often dressed up in the language of the “Social Contract,” but it is evident that #2 can be a bad bargain for some(or many, or even most), so the presumption of something like the Social Contract, from a LP perspective, is not warranted.

An easily anticipated counter-argument is the appeal to a greater context that the State operates in, particular with respect to it’s other actions that may be said to create “positive externalities” which would offset the “bad bargain.” But this is actually a utilitarian appeal; in no way does a school or a road offset the bad bargain for those rotting in a cage because of protectionist laws. Indeed, tax-subsidized roads, for example, can be a bad bargain for mom-pop businesses that cannot compete against subsidized economies of scale.

The libertarian principle is not a utilitarian one, but the utilitarian argument, that is, the argument of overall welfare, doesn’t fare particularly well under the libertarian knife. A public Choice analysis of the competition for artificial rents in money,land,patents, tariffs and security provides a political economic model for welfare reduction. The model also provides us with an empirical measurement of a ruling class: when the flow of economic rent far exceeds the competitive money bidding for such rent, we have a “ruling class.”

The obvious empirical problem for a welfare defense of a the social contract presumption is what need does a utilitarian welfare state, one that is on the business of manufacturing positive externalities, have with things like the secret police? Why has the utilitarian liberal welfare state seen the need to overtly eviscerate it’s legal foundation of the Great Writ? These aren’t the actions of a liberal state ; rather they are the actions of an Actor that views the presumption of the social contract as a thing to be enforced, not as something rooted in consent.


From a social theoretic perspective, treating libertarianism as a theory of rational moral constraints–as a boundary condition on moral claims–rather than a moral theory of coercion(NAP), avoids the argument for a claim of the presumption of the social contract(the social contract of liberal democracy) rooted in a “coercion dilemma.”

Coercion as the foundational tool of social analysis is useless. Human social interaction is not explained by a coercion max/min problem. Indeed, if humans were coercion minimizers, they would never socially interact. We would all be Robinson Crusoes.

Instead, human social interaction, in a world of scarcity, is best explained by the fact that human cooperation creates “surplus.” The libertarian principle is a boundary constraint on this human cooperation, namely that any given rational agent benefits from the cooperative equilibrium relative to the defection state1.

Since it can be demonstrated that there are examples of social interactions of “constrained maximizers” vs those that incentivize unconstrained maximization, there is no real basis for the presumption of the Social Contract.

Further, E.D. Kain’s social contract presumption suffers from the empirical fact that the presumption of the State, the National Security State, is that it’s citizens do not abide by the presumption of the social contract. That’s why you have a National Security State and a secret police. The ballot box is not a means to legitimacy when there is none to be had.

1 For more details, refer to the these previous posts:

“The Penalty of Treason is Death”

So proclaimed supposed left-winger Bill Maher to the applause of his supposed left-wing audience Friday night. The question: a brief consideration of Ron Paul’s critique of Obama’s assassination of Anwar al-Awlaki. Seth MacFarlane commented that while he trusted Obama with this power, he would be troubled with the exercise of such power by someone like Michelle Bachmann. Salman Rushdie, apparently unbothered by any consideration of irony regarding unilateral issuance of death edicts, informed us that those who commit treason forfeit any claim to rights, a comment which prompted Maher’s succinct editorial conclusion: “…And the Penalty of Treason is Death.”

That was the cue for the audience applause, but it also served as a reminder that what supposedly passes for “liberal” is usually anything but. The liberal would have corrected Rushdie that US presidential edict is not sufficient to establish the crime of treason. It has to be substantiated in open court. And the liberal would have reminded Bill Maher that death is not the only the punishment prescribed by congress for this crime. The penalty for those convicted is either death or imprisonment not less than five years. However, the liberal would also be quick to remind both Rushdie and Maher that “treason” hitherto has been a very rare charge/prosecution in American history, with conviction even rarer still, and execution yet even rarer. Indeed, there have been as many pardons1 of “treason” convictions as executions.

Convicted and Executed:
Herbert Hans Haupt: German-born naturalized U.S. citizen, convicted of treason in 1942.

Civil War:
(i)Mary Surratt, Lewis Powell, David Herold, and George Atzerodt, conviction by military tribunal concerning the Lincoln Assassination
(ii) William Bruce Mumford: convicted of treason and executed for tearing down a United States flag

John Brown Slave Revolt(technically, tried by the commonwealth of Virginia and not the Feds):
(i) John Brown
(ii) Aaron Dwight Stevens

Those pardoned of the crime of Treason
(i) Tokyo Rose, pardoned by Gerald Ford
(ii) Tomoya Kawakita, deported by JFK in lieu of execution

Civil War:
(i) Jefferson Davis, Robert E. Lee, and other leading confederates given amnesty from indictment or trial of Treason by Andrew Johnson

Dorr Rebellion:
Governor Thomas Dorr, guilty treason verdict in 1844 anulled in 1854

Whiskey Rebellion:
Philip Vigol and John Mitchell pardoned by George Washington

The liberal, then, rather than clapping to Maher’s assertion, dampens the Obama celebration with the point of objection: “Actually Bill, up to now in American History, the penalty of Treason, as a convicted crime, has just as likely resulted in a pardon than execution. This is what is supposed to separate us from the barbarians, such as Iran, right Salman?”

Then the liberal, amidst the onset of partisan booing, proceeds to set the actual historical and legal meaning straight: this power the US Executive claims actually has nothing to with usurping the constitutional parameters of treason. It goes way beyond that. It’s claim of extrajudicial power to murder overturns the entire liberal legal tradition. We’ve returned to the original historical meaning of “outlaw,” which denoted someone declared outside the sphere of legal protection. Any person saddled with this designation was fair game, meaning anyone was “legally” sanctioned to do anything they wanted to against that person, including murder.

The liberal legal tradition ultimately derives from the principle of the Great Writ, habeas corpus, which subjugates any “legal sanctioned” punishment to due process. This simply means that the State, the King, or the Authority cannot sanction any punishment against the accused as “legal” without “due process,” that is, without some mechanism in place for the accused to challenge the accusation. Habeas corpus puts an end to the historical meaning of outlaw because the State does not have the legitimate power to legally define someone as “fair game.”

The liberal will then point out the final egregious error of the partisan Obamatard defenders, such as Mother Jones. If you are liberal, it is far better to deal with a Bush/Cheney regime that operates under a unitary executive principle that any action by the President is legal by virtue of the office itself than with an Obama regime that legitimizes it under the “rule of law.”

Let me spell out the problem for liberalism: The “rule of law” under the “liberal State” has now re-legitimized the old historical legal concept of the “outlaw,” a legal concept, specifically, it’s abolition, that more or defines the raison d’etre of the liberal State itself.

Mother Jones attempt to legitimize Obama under the “rule of law” only reminds us of the validity of the libertarian critique. The “rule of law” phrase itself means shit; the historical definition of “outlaw” was enforced by two thousand years of interpretation regarding the “rule of law.”

Eventually, the honest liberal comes to understand that “eternal vigilance” largely means nullifying the “rule of law.” “Outlaw,” however, cannot be nullified in the court. The American revolutionaries, under charge of “outlaws,” didn’t nullify it in King George’s court of law. They nullified it on the battlefield.

Here’s the current reality. The people of the world, under the rule of “American Exceptionalism,” now largely despise their governments. Thus, there shouldn’t be any surprise that the US wields the greatest unaccountable secret intelligence/military complex in the history of the world. And it shouldn’t be any surprise that American law now has resurrected the historical legal sanction of “outlaw.”

In the end, we should understand what is meant by American Exceptionalism: the liberal legitimization of “outlaw.”

1 The term Pardon here, for brevity, has a more expansive meaning than it’s actual technical meaning. In this context, it refers to pardon, deportation, amnesty, or anullment.