Big is beautiful (and inevitable)
A day or two ago, I offhandedly endorsed an article from Jagdish Bhagwati on the continued relevance of global free trade. This provoked a few heated responses from Kevin Carson, who has long argued that economic globalization is almost entirely a result of an elaborate web of state-subsidized networks like public transportation. A truly free market, Carson argues, would privilege locally produced goods and services over long-distance competitors, who rely on an artificial network of state intervention to sustain their business model. It’s an interesting hypothesis, though absent a visit to some alternate universe without railroads and the interstate highway system, I don’t think we will ever be able to conclusively test the merits of his argument. Carson’s comments have provoked a few of my own thoughts on the intersection of local concerns and the free market, however:
1) If you are sympathetic to the idea of local, autonomous communities, I think it’s a good bet that you’re also suspicious of corporatism, subsidies, and other interventionist policies. Ideally, then, you’d want to couch your defense of localism in terms of a return to a truly free market system.
But are localism and a free market economy reconcilable? It seems to me that many local communities derive from premodern and early-modern economic systems that were not characterized by free and unfettered economic exchange. I also suspect that local communities are frequently sustained by their own competing networks of subsidies. For example, I remember reading Patrick Deneen on the surprising persistence of Bavaria’s local traditions, only to find that the German government takes an active interest in preserving (read: subsidizing) the viability of small-scale communities (emphasis mine):
Nearly every yard has an enormous pile of wood, stacked carefully and in perfect symmetry, already today in use as the temperatures dip into the 50s here. Also, in every backyard one sees a compost heap: one pays for each piece of garbage one throws into the waste can, so every incentive is to avoid refuse weight. Moreover, companies must pay for the production of packaging (which must also be separated from the garbage and separately collected for recycling) and must charge a deposit for all plastic bottles. At most public events you will not even be served with plastic: you must pay a “pfand” (deposit) for dishes or glasses, and return it for return of your deposit afterwards. You must pay for plastic bags at supermarkets, an expense most people avoid by bringing their own canvas bags. The German economy, thus, does not measure its growth by the creation of waste products, and the German countryside is not defiled with endless vistas of discarded plastic.
Towns are towns: houses are generally not permitted outside the town limits due to strict zoning laws that have kept American-style suburbanization at bay. This makes for greater population density – even in the smallest towns – and hence also makes feasible vibrant regional and national public transportation systems.
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One of the ways that family businesses have been protected from the large chains is strict zoning laws that limit the building of “big box” stores outside town and city limits (yes, it’s there, but far less than in America). Another strategy has been the store closing times – a subject of fierce debate for several years. Store closing hours have traditionally favored small business owners who hire few or no employees, and who thus must be home to care for schoolchildren during the afternoons and in the early evening. Most businesses still close for several hours at lunch and at 6:30 in the evening. This allows family businesses to compete with the chains, a fact that is everywhere in evidence, and in contrast to the U.S.
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I’ve learned that there is a very effective subsidy now taking place in Germany which guarantees a high rate of return for electricity produced through solar capture. In effect, houses without solar panels are subsidizing houses that have solar.
2) I understand the argument that state-subsidized transportation systems disproportionately advantage large-scale retailers and producers. But the benefits of economies of scale would still exist without an easily-accessible interstate transport network, right? Even in Carson’s counterfactual scenario, I imagine that bigger producers would still create more goods at lower marginal costs. Correct me if I’m wrong, but I also assume that a larger market share allows you to bargain with suppliers from a more advantageous position than smaller competitors. But don’t take my word for it, take Will Wilkinson’s:
To go back to Wal-Mart, once it’s basic structure is in place, it’s hard to see how the marginal outlet significantly increases internal transactions costs. “Bigger” in this sense doesn’t do much to add complexity for the managers of the core firm. But it does create efficiencies. The larger the market Wal-Mart constitutes, the harder a bargain it can drive with suppliers, allowing it to offer consumers lower prices, etc. It seems to me there is market pressure toward larger scale in this kind of retail, whether or not the state subsidizes roads. And it’s worth noting that the innovative efficiencies of Wal-Mart in part explains why localities offer subsidies to attract their stores. Wal-Mart is a stable, reliable source of jobs and tax revenue because it is a highly-successful business because it offers lower prices than competitors in part because of its economies of scale. Big business can be beautiful.
3) Given the inter-connectedness of subsidies and local communities and the inherent advantages of large-scale producers and retailers in any economic context, I think that the localism versus globalism debate is about what we should subsidize rather than whether we should subsidize, period. I think we can (and should) argue over what local features are worth preserving through active government support. But suggesting that localism represents some return to an idealized free market state of nature strikes me as pretty naive.
Great post Will. Are you neoliberal in your inclinations?
The German portion is especially fascinating. I can’t even imagine attempting to implement it here in the US though. It would have to be national or at least state wide in scale because otherwise all of your businesses would merely flee to the neighboring non-localized community and suck the commerce out of your localized enclave. The problem of course is that the US is so diverse and divergent in the people’s respective views of what would constitute an acceptable level of localism that I can’t see a consensus being reached.Report
Oregon implements some of these things on a smaller scale–our land use laws make it difficult to build housing outside of a city’s “urban growth boundary”, and this state pioneered the bottle bill (in the US at least). Recycling is encouraged; however, household waste disposal is still flat-rate, not by weight, and we’ve nothing like Germany’s anti-packaging laws or blue laws.Report
And it was a Republican governor that implemented those policies! NW conservatism!Report
” It’s an interesting hypothesis, though absent a visit to some alternate universe without railroads and the interstate highway system, I don’t think we will ever be able to conclusively test the merits of his argument. ”
I think that the middle of your sentence does make a test – both the railroads and the interstate highway system depended on government support to build.Report
Right, but we’re stuck with both. So it’s tough to test Carson’s hypothesis – that local production would flourish in a truly free market – because we’re never going to get rid of our massive, government-subsidized transportation infrastructure.Report
Except there’s a problem with this thesis.
Regional specialization began prior to the invention of railroads, particularly in the United States. Specifically it was the boom in turnpike and canal construction in the 1800s that led to the first major regionalization within the US, with cotton in the south, grain in the midwest and industrialized goods in the northeast.
Most of the early canals were constructed as privately funded joint enterprises. This suggests that so long as there is some comparative advantage to be had in regional production, there will always be some profit motive to allow private corporations to construct a relatively efffective transportation network to link those comparative advantages.
That is to say:
The only times you really need massive government intervention is when you’re serving UNPROFITABLE areas.
What you’d most likely see absent highways and rail is high concentration of wealth in small urbanized or concentrated manufacturing/production areas, with significant outlying regions having more “localized” production but being much much poorer as a result.
Given that infrastructure spending is a rising capital investment vehicle for many private firms (say in India, it’s quite interesting to see how much infrastructure is being directly funded and built by private money) this thesis is relatively falsifiable.Report
Hmmm..a lot to think about. Great post, Will.Report
” though absent a visit to some alternate universe without railroads and the interstate highway system”
What alternative universe? There are no places on the planet with shitty roads unsafe to travel? How well does trade flow in Afghanistan – other than heroin, which is protected by the people who make the roads unsafe for any other kind of transport? Not only is export trade impossible withourt safe roads, but even local trade is feeble. What you get without good roads, and good sea lanes, and safe skies, guranteed by government enforcement, is subsistence economies in parochial communities.Report
There are shortages of morphine for palliative care in many parts of the world; potential legal markets to develop.Report
Actually this isn’t really true.
Afghans are really really really incredibly good at trading.
Just not the sort of trading the US government likes to recognize.Report
I’m very worried. I’m agreeing with you way too often.Report
Worried for you or for Will?Report
Undetermined.Report
Will – excellent post. I have a response brewing.Report
No snark, Will’s post was a shot across your bow, how could you not respond? Looking forward to reading it.Report
Thanks, Will.
I agree that, absent an alternate universe without the railroads or Interstate as a control, a certain amount of counterfactual speculation is involved.
But it’s hard to imagine just how industry could produce for a unified national market without such federally-initiated infrastructure. Alfred Chandler, in The Visible Hand, sees the railroads as central to the creation of a national economy: the national wholesale market piggybacked on the railroad, and then the first national industrial corporations began producing for that market.
I’m afraid the question of inherent economies of scale, independently of questions of transportation infrastructure, strikes me as meaningless. It’s like asking whether someone is your uncle or your aunt independently of whether they have testicles. Since the existence of economy of scale is an empirical question that depends on the entire package of unit costs, how can you say that economies of scale exist if you set aside the question of distribution costs? Again, that’s like saying your aunt is your uncle except for the testicles thing. If internal unit costs at the point of production are less for a large than a small factory, but the increased distribution costs of a large market area more than offset those unit cost savings, then overall the economies of scale are negative.
Ralph Borsodi argued that while the large factory had significant economies of scale at the point of production, they were more than offset by increased distribution costs that went with large scale. He even argued that the existence of electrically powered machinery nullified most of the economies of large scale production which had existed in the steam age (which mainly resulted from economizing on power from prime movers). Electrical power made it possible to scale the machine to demand and site production close to the point of consumption. He even argued that for about two-thirds of what we consume, home production with small-scale electrical machinery was more efficient overall than factory production. Although the factory had significant internal economies of scale, factory production costs were only first costs–while home production costs were final costs.
Note that the increased distribution cost includes not only transportation, but increased inventories and marketing costs. Mass production follows a push distribution model: running enormous machines 24/7 without regard to demand in order to minimize unit costs, and then finding ways to dispose of the product after the fact. In fact, it optimizes unit cost at each step in production within the factory, without regard even to whether the next machine needs what’s being produced. The result is enormous stocks of in-process inventory in the factory, and enormous warehouses of finished goods inventory with no orders. Running the machines 24/7 for push-distribution also requires all sorts of social pathologies to guarantee the output keeps getting consumed–primarily consumer credit and planned obsolescence. That meant, until recently, people maxing out their Visas and cashing out their home equity with Ditech to send everything they owned to the landfill every five years and replace it.
In a decentralized, lean economy, OTOH, all the inventory is eliminated. Because the machines are scaled to production flow and production flow is scaled to local demand, nothing is produced unless there’s an order for it. And because it’s general-purpose machinery that can be switched flexibly from one product to another, there’s no need to overproduce to minimize unit costs.
I don’t consider lower unit costs from superior bargaining power to be economies of scale: they simply shift costs to less powerful actors, rather than reducing them overall.
I’m sure subsidies to small communities and small firms exist, but I think they amount to secondary, ameliorative polices that are intended to limit the effect of the larger overall trend toward centralization. They’re typical of the regulatory state’s Rube Goldberg mechanism: the state introduces secondary regulations to minimize the harm caused by its primary interventions.Report
Kevin –
Thanks for the thoughtful response. You’re obviously more knowledgeable about this stuff than I am, but I do have a few questions for you:
1) Regarding your argument about transportation being a prerequisite to economies of scale, didn’t certain aspects of industrial capitalism and mass production predate the introduction of modern transportation infrastructure? If I’m remembering correctly, Marx identified the nascent stages of industrial capitalism as early as the late Medieval period with the introduction of linen weaving in Lyon and Flanders. This “factory system” managed to thrive despite the complete absence of government-subsidized transportation. Does this mean that bigger producers can sustain a viable business model absent government infrastructure networks?
2) If private sector actors recognized the benefits of a government-subsidized transportation system, doesn’t it stand to reason that they could have raised private capital for big infrastructure projects?
3) Finally, I think you’re minimizing the importance of subsidies to local communities in the Deneen post I link to above. Some of these environmental regulations are undoubtedly small – getting rid of plastic bags, for example – but others strike me as pretty significant. I mean, you have the German government subsidizing household solar power production throughout the country. Zoning restrictions literally prevent larger retailers from opening franchises in small German towns. These are non-trivial concessions to local concerns that require significant government intervention. Are all of these subsidies countervailing measures aimed at minimizing harm from other regulatory interventions? Or do they reflect the fact that local economies frequently aren’t sustainable without their own network of subsidization?Report
You make the assumption that “corporatism,” “subsidies,” and “other interventionist policies” are all the same. I don’t agree with your assumption that they should all be weighted equally for strong local communities. I understand why the Germans favor localism.
Part of the problem comes from using monetary value as the measure of things; I’d prefer a system that was based, in part, on one’s mastery, and considered the cost of transporting materials more; that values local food and water production more. Say the plates made by a local pottery of local clay over the melamine imports sold at Wal-Mart.
Small-scale manufacturers struggle with the economies of size. Here in Maine, where I live, there’s a chain of retail stores, Reny’s. I interviewed the founder’s son nearly a decade ago about competing with Wal-Mart; and he had one serious concern: small manufacturers — Carhart, Patagonia, Woolrich — can’t supply the voracious shelves of Wal-Mart. Small Maine craft companies say the same thing of LL Bean, where it seems like they’d find a natural market; but it’s too big for their production capabilities. Smaller manufacturers need smaller retailers to survive. There is such a thing as too big; and I don’t have a problem regulating it.
Trade should be for scarce resources, including the energy to move products around. Buying those plates at Wal-Mart that could easily be made within a 500-mile radius, ought be frowned upon. But here in Maine we like coffee and chocolate and oranges and bananas. Can’t grow those here, though we do grow some might fine tomatoes in the winter; technology shakes things up. We also have an abundance of lobsters, blueberries, maple syrup, potatoes, and paper to print the menu on. I’ve got no problem with sending those all over the world. The trick is figuring out when to smile on trade (lobsters) and when to frown on it. As in the German example, both create an intervention in the free market.Report
zic, your link to the tomato grower in Maine was very interesting, I would like to taste one of those “Backyard Beauties.” The recipe linked sounds good, I’m going to try it soon. Applying heat to the most tasteless “fresh” tomato makes it palatable.
http://www.boston.com/ae/food/articles/2007/03/28/baked_chicken_legs_with_tomatoes/Report
Kevin,
I think the problem with your argument–a problem that Will tangentially touches on but does not really address–is that localism is really only viable when a majority of people essentially engage in subsistence agriculture and industry, i.e. everyone producing what they need with a minimum of trade. This isn’t viable for populations anywhere near our current size. I’m willing to grant that localism has certain benefits, particularly in the area of community and social well-being, but I haven’t seen anyone, including you, come up with a good story about how such a localist utopia could exist with a global population in excess of about a billion people.
Because you’re right, push production does generate a lot of stuff. That’s kind of the point. Yeah, there are inefficiencies in inventory and distribution, but I’d be glad to hear an alternatve method for generating the sheer quantity of stuff that we go through every day. New York City–hell, any town over a few tens of thousands of people–can’t possibly exist without massive investment, probably by the state, in transportation infrastructure. This was just as true of ancient Rome as it is of Los Angeles: large cities essentially import everything they consume, frequently over long distances.
This is all old hat. Adam Smith himself talked about the costs and benefits of specialization of labor:
“The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilised society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.”
It’s one thing to say that the costs outweigh the benefits, which is an argument that can be made, to be sure. But you seem to want to argue that we can have the benefits without the costs. I see no reason to believe this is the case.
So unless you’re really advocating a return to an agrarian economy and a world population about 15% of today’s, I don’t think you’ve got a viable system here.Report
There is an issue of choice here. Liberal democracy has permitted the accumulation of capital to increasingly dictate choice in opposition to governance by majority democratic decision. The market to a large extent has become a substitute for the latter. For example, we should not be forced through capital accumulation by the few to have an inorganic and unsustainable agriculture forced upon us by the market and state. Neither for that matter should we be forced to go back to labor intensive work on the land to increase yield through organic methods if there is a viable and sustainable organic alternative through capital intensive mechanization and automation. The same argument applies generally to production and consumption methods. Whether these should be applied on an international, national or local basis should be judged on their merits but we cannot start to get to that point until the many have control over capital. In simple terms consumer choice in the market and weak political accountability from periodic voting for politicians is poor democratic choice control for the issues we need to confront.Report
Liberal democracy has permitted the accumulation of capital to increasingly dictate choice in opposition to governance by majority democratic decision.
Out of curiosity, can you name any successful companies run on a democratic business model?
Also, are you asking for a command economy? (where your democratically elected government can just decide what which businesses may or may not set up shop, and how large they can grow?)
For example, we should not be forced through capital accumulation by the few to have an inorganic and unsustainable agriculture forced upon us by the market and state.
1. It is not clear that you are indeed forced. It is like saying that you should not be forced to take any product X where X happens to take a large part of the market. yous should not be forced to buy microsoft, or IBM or some other product. In what way are you being forced now? by the mere fact that so called “inorganic” food is cheaper and therefore more affordable? I suppose you think that all farms should be so strictly regulated that they only use “organic” stuff, or maybe organic products should be subsidised, or tarriffs should be imposed on “inorganic” products?
we cannot start to get to that point until the many have control over capital.
You really look like you’re talking about a planned economy. Seems like you’ve learned nothing from the collapse of the soviet union.Report
Localism seems very much a myth.
“Trade originated with the start of communication in prehistoric times. Trading was the main facility of prehistoric people, who bartered goods and services from each other before the innovation of the modern day currency. Peter Watson dates the history of long-distance commerce from circa 150,000 years ago.”
http://en.wikipedia.org/wiki/TradeReport
I’m taking a chance trying to post this again, since the first try hasn’t shown up. Hope it doesn’t double-post.
Nob Akimoto: Again, though, whether they’re profitable or unprofitable depends on the total cost package, including distribution cost. It doesn’t matter how profitable an industry is, if the cost of distributing outside a certain geographical sphere offsets that profitability; in that case, it’s only profitable within a certain area. Certainly there was some trade on a nati0nal level, because–as with the canals and turnpikes you mentioned–there was at least some national infrastructure. And even without government subsidies, it’s quite possible that local railroad networks would have eventually linked together into regional and national systems of a sort. But everything I’ve seen on the history of the railroads suggests there wouldn’t have been a system of national trunk lines remotely approaching the present capacity, which means the balance between national and local production would have been shifted far more toward the local end of the spectrum.
As for whether productive industry would be limited in those circumstances to large population centers, it depends on the initial capital costs for entering manufacturing–themselves an independent variable. Powering machinery with electric motors destroyed many of the imperatives of scale that had come from steam power (the need to concentrate lots of production in a large factory to economize on power from a prime mover). The Japanese development of CNC machinery suitable for small shops caused capital outlay costs for efficient production to fall another order of magnitude in the 1970s, leading to the shift of production from the old mass-production core to job-shops and flexible manufacturing networks on the Emilia-Romagna model. And current developments in even smaller CNC tools (see the open-source homebrew tools being created by hardware hackers in the “Maker” movemeent–the RepRap, a homebrew 3-D printer, costs about $500 to make, compared to $20,000 or more for a commercial 3-D printeer) are leading to another Factor Ten or Factor Twenty cost implosion.
Ryan Dyson: I think you’re begging the question of the productivity of large- vs. small-scale industry. The production without inventory or push distribution costs you write of has existed in the Toyota Production System since the 1960s, with Single Minute Exchange of Dies permitting rapid switch between products, and production geared to orders. But H. Thomas Johnson, a lean enthusiast and writer on management accounting systems, argues (as do Amory Lovins et al in Natural Capitalism) that the TPS is really an attempt to put new, lean wine in old mass-production bottles, and that lean manufacturing only reaches its full potential in localized flexible manufacturing on the Emilia-Romagna model.
I would argue that decentralized local manufacturing, and efficient soil-intensive horticulture make MORE efficient use of raw materials and soil than their large-scale counterparts, and could feed and supply MORE people with fewer resources. You write as though the amount of stuff mass-production capitalism generates is a feature instead of a bug, but in fact it produces stuff to fall apart in order to keep the wheels of production from being clogged up. It amounts to massively subsidized waste, a sort of Rube Goldberg mechanism, with most of people’s workweeks amounting to the moral equivalent of digging holes to fill them back up again. It’s deliberate waste production just to produce enough 40-hr. “jobs” and keep enough capital utilized to stop asset deflation, when people could probably produce their current material standard of living (but with durable, modular-designed goods that can be repaired) in a sixteen hour week.
So the situation is exactly the opposite of what you say. Mass production industry was capable of serving a billion or two billion people at most; it’s impossible to produce that standard of living for seven billion people, because of the enormous waste of resources in inventory and planned obsolescence. The job-shops of Shenzhen and Emilia-Romagna are making it possible to supply more people. And the garage factories of ten and twenty years from now, using desktop CNC machinery and intensive recycling of locally available waste metal, will probably make a decent standard of living possible for billions more.
It’s the mass-production system you celebrate, that produces mountains of waste for the landfill, that can’t support a world population of more than a billion or two.
So I don’t want to generate the quantity of stuff we go through. I want something presently approximating my actual material standard of living–but with much less stuff that’s built to last, and with efficient use of material inputs rather than the current extensive addition of subsidized waste inputs.
The appeal to “division of labor” is a strawman. Nobody disputes that increased productivity from division of labor, like economies of scale, exists. The question is the scale at which they level off and start becoming diseconomies.
Will: As I said above, there were much lower-capacity national transportation networks predating the railroads. And with such systems, there was some large-scale national industry (just a lot less of it).
The factory system was necessary then for the reason I mentioned earlier: economizing on power from a prime mover. Steam engines were costly and poorly scalable, so unit costs were much lower for larger engines. The result was enormous factories powered by drive shafts and belts from a single gigantic power plant. The volume of production was limited by the number of enormous factories that the low-capacity national transportation system could support.
The introduction of electrical motors changed all this. It was possible to build a cheap, scalable power plant into each machine, and thus scale the machine to local demand and site it close to the point of consumption. For this reason, widespread decentralized industrialism became possible on a local scale, without the need for a high-capacity national transportation system. Electricity would have been ideal for powering small, general-purpose machinery in motorized craft production (a precursor, again, to Emilia-Romagna). Electrical machinery was the central difference between what Lewis Mumford called the “paleotechnic” (coal and steam) and “neotechnic” (electrical and alloy) ages. Unfortunately, he argued, the neotechnic promise was hijacked by the institutional forces of the old paleotechnic power structure, and electrical power was forced into the procrustean bed of the Dark Satanic Mill. Charles Sabel and Michael Piore, in The Second Industrial Divide, argue that the rise of the Emilia-Romagna model in the 1980s amounted to the rediscovery, after an interlude of more than a century, of how to organize industry around electrical power.
Regarding your second point, the benefits of subsidized infrastructure are only benefits as long as they’re paid for by someone else. Subsidized infrastruucture permits production scale larger than would prevail in a free market, precisely because it’s subsidized and it renders profitable what wouldn’t be if people were paying for it on their own nickel. If the large factories had to pay the full cost currently externalized on the taxpayer, it would obviate the whole point.
Regarding point three, I probably just didn’t organize my thoughts well in my earlier comment. I didn’t mean to deny the significance of subsidies to localism and decentralization. I just argue that the political pressure from such subsidies results from the perceived negative effects of the dominant process of centralization, and that this latter is primarily the result of state subsidy to centralization. So I think it’s a case of countervailing measures: secondary state intervention to offset the side-effects of primary state intervention.
BTW, for anyone who’s still interested in an extended take on the history of mass-production industry and the rise of recent decentralized alternatives, I’ve got a series on industrial policy at Center for a Stateless Society (C4SS).
MOLOCH: Mass-Production Industry as a Statist Construct
http://c4ss.org/content/888
The Decline and Fall of Sloanism
http://c4ss.org/content/1030
The Homebrew Industrial Revolution
http://c4ss.org/content/1148Report
Murali: I can’t speak for Bruce Smith, but I think the causality is just the opposite. The state has artificially inflated the capital-intensiveness of production, and with it the initial capital outlays and overhead costs of production. The best way to secure control of capital by the many is to remove these artificial floors and let the competitive market select for forms of production with low entry costs that can don’t require large-batch production to service the overhead.
Technological advance is contributing to this. Doug Rushkoff observed that the tech industry destroyed California’s economy: the desktop revolution reduced capital outlays for software, music, publishing, etc., by one or more orders of magnitude, and consequently left a great deal of venture capital superfluous. I expect the revolution in garage manufacturing (e.g. Factor e Farm’s Fab Lab and open-source design catalog, and the 100kGarages project) will have a similar effect on surplus investment capital for physical manufacturing.
In the specific case of factory farming, we don’t need new state intervention. We need to eliminate existing state intervention. Let the Interstates fund themselves entirely by weight-based fees on the big rigs that cause most roadbed damage, and eliminate the state-subsidized irrigation water to legacy haciendas in California, and most in-season produce will come from local truck farmers. You just have to take agribusiness off the taxpayer teat.
Your reference to the collapse of the USSR is interesting, because I consider the present model of corporate capitalism to be a statist construct whose metrics (GDP, GAAP accounting principles, etc.) are almost as fake as those of the Soviet planners. And it’s probably headed for a similar collapse.Report
Murali. I do not believe in centralized state planning or nationalized production. I do believe in worker-owners having an equal say in the running of private businesses above a minimum size. Here is a website list of American worker-owned corporations:-
http://www.esca.us/aboutus.asp?subpage=escamembers
You must check out their relative success for yourself. You should also check out the Spanish worker-owned Mondragon Corporation which has subsidiaries in the US. Also check out the John Lewis Partnership in the UK and Northern Italy which has I believe many successful worker-owned cooperatives.
In the middle of the Gulf of Mexico there is a patch of dead sea approximately 7,000 square miles in area and growing where nothing can live. The cause of this is nitrate fertilizer, pesticide and insecticide run-off from farms traveling down the river systems into the sea. There are approximately 84,000 chemicals in use in the United States only 200 of which have received government approval for use unlike the EU where prior approval for use has to be achieved. Finally, many small farms are going out of business and being bought up by large agricultural corporations who enjoy substantially large farming subsidies from the US tax payers. Nobody can really argue that the market fundamentalist capitalism we have had to experience over the last thirty years is successful for all citizens with declining real wages for a significant percentage and regular boom-busts and massive growth in indebtedness both private and public. An increasingly larger percentage of citizens cannot afford to buy organically grown farm produce despite their desire because of the higher costs relative to their low wages. This is where lack of choice comes in with regard to consumption and environmental damage.Report
I do believe in worker-owners having an equal say in the running of private businesses above a minimum size.
Do you mean that this is a business model that works and that you recommend, or is this something that should be imposed by the government?
Here is an honest question (but a bit of laziness on my part) In what sense are these companies democratically controlled. Do they have shares in the company, so they have genuine incentive to contribute to a large, long term sustainable profit margin? Who does the actual decision making? Are any sacrifices made in terms of the growth rate of the company and profits? Even a 0.3% reduction in your annual income growth rate can result in you giving up a few thousand dollars a year, 20 years down the road.
If worker control is imposed by the government, is it just to do so?
In the middle of the Gulf of Mexico there is a patch of dead sea approximately 7,000 square miles in area and growing where nothing can live. The cause of this is nitrate fertilizer, pesticide and insecticide run-off from farms traveling down the river systems into the sea.
Now, this is more than tragic. And most libertarians wouldn’t mind taxing, or otherwise penalising practices that create negative externalities. After all, even though you may do whatever you want to your property, you cannot simply modify or appropriate the commons in such a way that it is unusable by the rest of us, nor for that matter can you pollute my property.
Finally, many small farms are going out of business and being bought up by large agricultural corporations who enjoy substantially large farming subsidies from the US tax payers.
Yes, this is corporate welfare, which no honest libertarian should support. I dont think you would find any libertarian who supports corporate welfare like these farm subsidies. I want food production to be as efficient as possible with very minimal negative externalities. (Does hydroponics sound good anyone?) This can be done with Pigouvian taxes and just letting the market do its job. (Alternatively, a massive class action lawsuit by the fishing industry/residents against big agribusiness could do the trick. I’m thinking Erin Bronkovich.
Nobody can really argue that the market fundamentalist capitalism we have had to experience over the last thirty years is successful for all citizens with declining real wages for a significant percentage and regular boom-busts and massive growth in indebtedness both private and public.
It is not clear that US has been some model of free market capitalism. In fact the are quite a few countries which have been far freer economically. Singapore and Hong Kong come to mind. Even Denmark has a freer market than the US. (high taxes are in fact double counted in the heritage index under both fiscal freedom and size of government)
Neither is it clear that real wages have been declining. Pre crisis purchasing power is more than it was 5 years ago, or 10 years ago or for that matter 50 years ago. I know 10 years ago, having a computer in your house was a big thing. Now each member of the family has their own laptop.
As far as booms and busts go, it is not clear that they are a product of pro-market policies. Even the whole concept of keynesian counter-cyclical spending assumes that booms and busts will happen. I’m not sure how booms and busts are indictments of free market policies. It is not clear that we wont have them even in your current mixed economy. Moreover, it seems that the relatively more free market singapore would not be suffering if US had a freer market. Also, markets in Southeast Asia seem to be rallying much faster than the US. (56% vs 14%)
Private debt is not due to any free market policy, but can entirely be laid on the feet of your SS program.
And since when was the way america borrowed from other countries any reflection of free-market capitalism?
An increasingly larger percentage of citizens cannot afford to buy organically grown farm produce despite their desire because of the higher costs relative to their low wages. This is where lack of choice comes in with regard to consumption and environmental damage.
There are all sorts of luxuries than people can’t buy because they are too poor to do so. E.g a car, or landed property etc. None of that implies that they should be subsidised. Also, you may want to consider that making factory farmed food as expensive as organic food may very well result in increased levels of starvation. On the other hand, if american agriculture industry collapses (from lack of subsidies), importing from 3rd world nations would actually boost their economies. Importing your food from third world nations may in fact be cheaper in the long run.
In the specific case of factory farming, we don’t need new state intervention. We need to eliminate existing state intervention. Let the Interstates fund themselves entirely by weight-based fees on the big rigs that cause most roadbed damage, and eliminate the state-subsidized irrigation water to legacy haciendas in California, and most in-season produce will come from local truck farmers. You just have to take agribusiness off the taxpayer teat.
I wouldnt object at all. But I’ms skeptical about your claim that this would increase levels of localisation. Maybe for seasonal produce, but for perennial staples, it would be different. Besides, I think we’ve reached a point where people are used to consuming more than just the seasonal vegetable. There is still going to be a massive demand for off season (non-local) vegetables and fruits as well as cereals like corn, wheat and rice which people consume all year long and not just in january after harvest. (rice is usually harvested by mid january towards the end of the monsoon season in traditional annual varieties)
I consider the present model of corporate capitalism to be a statist construct whose metrics (GDP, GAAP accounting principles, etc.
I’m not disagreeing here. But I think that freer markets will just fuel more globalisation, instead of this imperfect mixture we have. I’m not sure that your localism is sustainable in any real way in a free society.
In fact, privatisation of infrastructure is going to make suburban and rural living extremely expensive. I forsee massive urban growth, fewer rural areas (barring small isolated low tech villages which just have not plugged in yet) But its just a matter of time. I dont see how privatising infrastructure is going to preserve the traditional small town. Utilities etc would be unprofitable to provide and the quality of life is more or less going to sink back to the middle ages there.Report
Murali. In response to your long list of questions I think it useful for me to first of all declare my view on the nature of freedom since your different view of it seems so fundamental to your arguments. I find myself in agreement with Christopher Boehm’s argument in his book “The Hierarchy of the Forest.” that human beings like to dominate each other but hate being dominated and accordingly like their primate cousins have developed “reverse dominance hierarchy” to ensure the cooperation and survival of the group. Here is a less jargon free explanation:-
http://greatergood.berkeley.edu/greatergood/2007winter/Boehm.html
Accordingly, following on from Christopher Boehm’s argument I agree with Karl Polanyi’s statement on page 257 of his book “The Great Transformation.” that:-
“No society is possible in which power and compulsion are absent, nor a world in which force has no function.”
Polanyi also in the last two sentences of his book, page 258B, argues in reference to man’s ability to transform society that:-
“As long as he is true to his task of creating more abundant freedom for all, he need not fear that either power or planning will turn against him and destroy the freedom he is building by their instrumentality. This is the meaning of freedom in a complex society; it gives us all the certainty that we need.”
In simple terms, therefore, I have no difficulties with power being used to create an increase in the number of capital owning and controlling individuals to counter-balance capital elites and thereby expand freedom.
With regard to the rest of your questions I would answer as follows:-
I have already answered your question about whether this is a business model that works by giving you a list to explore. I would add though that by giving the work-force equal share holding and control you are doing at least two things improving the level of trust thereby allowing the amount of money spent on supervisors/managers to be reduced and profits increased. If Peter Senge’s ideas on the Learning Organization are adopted then there is also a greater chance the business adaptivity will improve and hence the profitability and life expectancy (The average business life expectancy is only 40 years). The research I have read seems to suggest that worker-owners with involvement in the management of a business produce a higher profit return to their company but you must check this for yourself.
I would recommend worker-ownership and management participation for the reasons I’ve outlined above. But there are additional ones not least maintaining market demand on a more consistent basis through higher and maintained incomes and improving psychological well-being.
With regard to government imposition I’ve answered your question above. I have no difficulty with it being democratically facilitated providing that market valuation is paid for stock or share thereof.
I would prefer 50/50 control with worker-owners having 50% and large scale stock owners and private owners having the other 50%. There are at least two reasons for this. It makes sense to try to retain original owner/management expertise and also allow individuals to diversify investment. What is normally important for any society is to build capital accumulation and invest it wisely in production for society but also maximize retention of invested capital albeit that it is switched around. I would, accordingly, prefer taxation to be based on annual consumption amounts and the rates decided democratically by citizens not politicians. This has some privacy issues, however, and I’m not sure for want of investigation whether they can be easily overcome. I also think it would make sense for the businesses to be newly constituted as trusts using Partnering techniques to prescribe new rules of operation. Arrangements could be made for outside investors to have trustee representation to overcome the principal/agent problem.
Decision making is no different from a normal company with managers and board.
No sacrifices are made in terms of growth rate or profit other than pay down of loans for worker stock purchase comes out of profits and retained profits. Taxation incentives can be structured around this process.
I think I have answered your question above about the morality of government being involved in facilitating such a restructuring of businesses. There is no morality about it. If it’s the democratic will of a majority of the people it happens. If they hate the domination of the power of elite capital they will vote for it, if not they won’t.
Peter Barnes has some interesting ideas about the use of trusts for the Commons in his book “Capitalism 3.0” but I’m uncertain how you could best marry that to the farming industry where monitoring inspection for environmental abuse is costly.
I think capital intensive hydroponics sounds promising because of the scope for automated systems and easier pollutant recycling but I’m uncertain of its cost effectiveness.
Enormous sums of money since the 70’s have been spent by capital elite businesses and organizations representing those businesses to establish market fundamentalism in which they can pick and chose the regulations and subsidies, or absence thereof, that best suit them. The fact that other countries may have been more successful in doing this is not necessarily anything to get too excited about after the Financial Super-Bubble Crash which according to George Soros in his book “The Crash of 2008 and What It Means.” has been building since the end of the Second World War. Free market capitalism has after all been a struggle for hegemony between the capital elites and the rest of us for a very long time and both sides screw up in their struggle with each other.
We must agree to disagree over declining real wages for a large percentage of the population. Most of the economic commentaries I’ve read state they are.
Boom/busts can be regulated and Alan Greenspan should have regulated the housing boom but wanted to win the 2004 election for George W. Bush and so breached the terms of his job description. However, I don’t believe that you can easily prevent boom/busts because of feedback loops. Individuals and businesses act on their views of a situation, thereby changing the situation. If they believe a stock is going to go up they will buy it and so bid it up. What caused the price to rise was their belief and no market fundamental may exist for its rise. Certainly, as a society we could restrict the gambling that takes place on Wall Street or make its terms safer for society by adjusting leverage and margins. If worker-owner financial businesses were also gambling with their own money there might be more prudence.
I’m not sure how you are linking private debt with the social security program.
The American current account and budget deficits have been carried by the purchase of US government bonds which has maintained demand for the dollar. Much of this has been the result of American imperialist military pressure on oil producing countries in trouble spots to recycle their revenues into US bonds and currency manipulating countries like China that wish to grow their economies by exports to the huge US market. This is not free market capitalism but extortion plain and simple. However, there is Pete Murphy’s theory that the higher the density of a country the less room they have to domestically absorb large size products but to create jobs have to resort to a reliance on exports to other countries. Japan is a classic example according to the theory.
I’m not suggesting that people should be subsidized to buy food, just the opposite. I’m suggesting that real wages be improved by workers having the power to recover their surplus value.
Nor am I suggesting making factory farmed food as expensive as organic food.
We should aim for balanced free trade with each country unless we democratically decide to do otherwise and Partner with developing, or developed countries, for whatever reason seems appropriate (Marshall Aid for example).
On localism I think I’ve made my point in my previous post that if locals are fed up with being dominated by near-monopolies they should have the democratic power to do something about it. In hunter-gatherer times the members of a tribe would take appropriate action to deal with free-loaders and cheats. They used their natural instincts not to be dominated. Why should free market capital elites not be dealt with in the same way if they are judged to be exploiters?Report
I think I have answered your question above about the morality of government being involved in facilitating such a restructuring of businesses. There is no morality about it. If it’s the democratic will of a majority of the people it happens. If they hate the domination of the power of elite capital they will vote for it, if not they won’t.
1. I hope you’re not a skeptic about morality. If you are, then this conversation is more or less over. You could however, come to my Blog or E mail me, where we can have philosophical conversations and debates.
2. As you guessed, we likely do disagree about freedom. (although I’m not sure what your quotes have to do with freedom)
3. Even though people have a propensity to dominate eachother, this does not mean that they ought to do so. (H/T to David Hume for is ought distinctions) This is not a particularly new observation, Kant in the 18th century observed that people display an unsociable sociability in that they join with society to benefit from dominating others while want to withdraw from social enterprises because they do not wish to be dominated. The rational solution, Kant saw, to resolving this problem was a system of rights, which placed boundaries on how we may interact with people.
4. I take your word for it that the employee ownership scheme is more efficient. Even so, it is wrong to impose it on businesses. The way I see it, if people want to form worker’s cooperatives, they can. Even if worker’s cooperatives were drastically inefficient, the government should not be in the business of approving or disapproving of business plans.
5. By your logic, if the majority decided to ban gay marriage, or miscegenation, or other kinds of contractual relationships which are not in any way rights violating, then that wouldn’t be morally problematic either.
6. Your article seems to be confusing a lot of political concepts. Democracy is just about majority rule and voting etc. Democracy is where the larger gang tells everybody what to do. The republic is different, there are minority protections, limits placed on what one may do to another even though one group forms a 90% majority… i.e. the difference between the minimal state and demoktesis is massive. Democracy in its purest forms is just Demoktesis: Each person owns a share in everybody else such that he is effectively a slave to the majority.
7. Your article seems to be straining some logic. The mere fact that many tribes seem to actively put bullies down so as to prevent the devolution into hierarchical societies in no way implies or even suggests that hierarchy is natural while egality is artificial. In fact, it demonstrates the opposite: that people have both egalitarian (is this the best word?) and dominating instincts.
8. Free market capitalism has after all been a struggle for hegemony between the capital elites and the rest of us for a very long time and both sides screw up in their struggle with each other.
I’m going to say this once and for all. There may be some self descrbed free marketers who have at one time or another been shills for big businesses and their rent seeking, but that is not what free markets are about. It is about letting people do their own thing and make whatever agreements they want to as long as those agreements do not involve rights violations and slavery. Its about allowing people to come together for mutual gain. Talking about it as though it is just an ideology of upper class interests is wrong on a vaiety of accounts including
a) You are not even trying to judge the veracity of free market ideas
b) Many of the economic and cultural elites are not libertarian and promote various kinds of democratic control of capital.
c)What us are you talking about?
9. Social security disincentivises savings. If people are going to be supported into their old age regardless of how much they save, then there is less reason for them to save (or have children which is in itself one of the biggest investments a person could make) and more reason to spend all your money now. There is good evidence to suppose that social security displaces private savings.
10. We really ought to have unilateral free trade even if the other side doesn’t reciprocate.
11. I suppose I’ve fleshed out my position better. I don’t think your position on this is morally defensible.Report
Murali. I thank you for your comments and I will digest them carefully but since I don’t believe that Neoliberalism and Libertarianism are a complete political philosophy or ideology, most notably in the role of democracy, I think we would be wasting each other’s time to debate further. That is not to say that some of the ideas of Neoliberalism and Libertarianism have not been of importance and usefulness but their incompleteness is dangerous as the Financial Crash shows. With your good self excluded, I also think that Neoliberalism and Libertarianism is used by the sociopathic, or at least the narcissistic, as a mask for greed hence my remark about the missing role of democracy in the ideology. So, for example, collective accumulation of capital with control for the few is acceptable within the ideology but collective workforce accumulation of capital with control within businesses as a mainstream solution for production in the interests of “morality” or fairness is not. This is not to imply I’m a Marxist socialist. I am not. I’m much more in the center as a traditional Liberal. I believe in free markets and capitalism but see them as having ambivalence because of their vulnerability to abuse by the greedy particularly under market fundamentalist beliefs. The ambivalence is no different than the majority of a hunter-gatherer tribe taking the view that some members of the tribe are free-loaders, or cheaters, based on the democratic notion that the common good of all is important for the tribe’s survival. However, with regard to the potential of tyranny by that majority I do subscribe to LT Hobhouse’s view that majority decisions should strive to be tolerable and subject to fair deliberation to safeguard the rights of the minority. In other words we should always attempt to impose tolerable limits upon ourselves. In that light I regard Neoliberalism and Communism to both be authoritarian and alien ideologies that use force either by the power of capital, or the power of state, or both, to maintain their hegemony. I don’t perceive a great deal of difference, for example, in Neoliberal hegemonic manipulation between the USA and China. Indeed in the USA they used to use slave and child labor. In China they still do.
I’ve come to the conclusion that the use of the word “morality” is not very useful. The theocratic and authoritarian dictatorship in Iran, for example, believes that it has the right to hang onto power by cheating and repression because it has superior morality based on its interpretation of the Koran. I was brought up as a protestant Christian, later had the hallucination equivalent of a Near-Death-Experience of Heaven, but not God, as a drug taking student and later took a great interest in Zen Buddhism. I discovered that with the latter that if you use your ego to stop your ego having controlling thoughts about the past and the future you can feel connected with everything in the present but so what! You can combine different religions and Buddhism (which refuses to speculate on the origins of the universe on the grounds of causality) and think that God, or Gods (Mother and Father Gods, for example) made the universe and built benignity into you. But there is a discrepancy between believing this and how you actually operate. Accordingly, whilst I used to believe in the importance of believing in God and Heaven as a moral energizer I now think it causes conceptual problems for people about their true nature. It is far better that we see ourselves realistically as operating continuously on a spectrum between self-concern and other-concern, albeit ultimately driven by gene survival. This is the operation of both the survival instinct for the self and for the group. Evolutionary biologists have been arguing for at least fifteen years that this spectrum of operation is hard-wired within our brains. If, therefore, it is accepted that this is the way we operate (which earlier philosophers such as Hobbes and Locke implied in their writings) then mechanisms of democracy are critical to resolve the conflicts between self-concern and other-concern engendered amongst individuals in human society. Trying to find information though on workable democratic theory within Neoliberal and Libertarian ideology is like looking for a needle in a haystack. Try Googling it. Anyway for what its worth to understand more eloquently what I am trying to say I would recommend David Harvey’s “A Brief History of Neoliberalism.” 2005 even though it will go against the grain and also Dag Einar Thorsen and Amund Lie’s “What is Neoliberalism?” :-
http://folk.uio.no/daget/neoliberalism.pdfReport