Winter 2018 / Volume II, Number 4
Yet this alliance is one of convenience, not logic, and it is on the verge of collapse. As businesses expand and obtain monopoly power, they become threats to the values that libertarians hold dear. The business-libertarian nexus of the late twentieth and early twenty-first century is thus an aberration, with a brief history and no future.
Modern libertarianism developed from the classical liberal tradition of the eighteenth and nineteenth centuries. Both modern libertarians and classical liberals celebrated personal freedom and defended individual rights. But the classical liberals, from Adam Smith to John Stuart Mill, were hardly cheerleaders for business. Smith believed that merchants were naturally inclined to cartelize markets and fix prices and wages. He railed at the corporations of his time, the monopolies established by the British crown. Smith took the side of American revolutionaries who complained that those monopolies unfairly dominated trade, writing in The Wealth of Nations (1776) that, in the imperial system regulating colonial trade, the interest of consumers “has been sacrificed to that of the producer with a more extravagant profusion than in all our other commercial regulations.”
By the time of J. S. Mill, the monopolistic tendencies of vast corporations were clear. Mill argued that they should be regulated or even nationalized. By the late nineteenth and early twentieth centuries, nothing was more obvious to economists than that monopolies were inevitable under the “laissez-faire” capitalism of the time. The fundamental problem was that private property (especially over critical pieces of land), combined with the productivity gains typically associated with the geographic concentration of commercial activity in prosperous cities or along crucial railway lines, tended to create monopoly power for those who owned these critical assets. This made monopoly inevitable if capitalists were allowed to freely coordinate and pool their assets.
Political economists blamed the resulting, massive levels of monopolization and corporate cooperation—exemplified by the great trusts—for immiserating workers, destroying small businesses, overcharging consumers, and corrupting the government. The only question was what to do about the problem.
Much of the most important analysis of monopoly was conducted by the successors of Smith and Mill. William Stanley Jevons and Léon Walras, who launched the “marginal revolution” in economics, reviled monopolies. So did Henry George, an immensely influential journalist, political economist, and close friend of Walras, whose best-selling book Progress and Poverty inspired the Progressive movement in the United States. This new generation of political economists saw monopolies as an oppressive form of centralized authority, just as libertarians today see the state. As George wrote, “The accumulation of large amounts of capital under consolidated control creates a new kind of power. . . . Power from accumulation is destructive. It is often exercised with reckless disregard, not only to industry but to the personal rights of individuals.” Indeed, the political economists of that era made the parallel explicit by noting that the markups charged by monopolies on consumer goods, and the “markdowns” on the wages they paid, were conceptually no different from taxes.
Perhaps the most eloquent summary of this connection came from the Ohio Republican senator John Sherman, follower of the great political economists of the late nineteenth century. In defending the Antitrust Act that bore his name before Congress, Sherman argued, “Monopolies are inconsistent with our form of government. . . . If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life. If we would not submit to an emperor, we should not submit to an autocrat of trade.”
Classical Liberal Opposition to “Monopoly Taxes”
To understand this logic, we need to recall the classical liberal objection to the taxation of labor. Classical liberals believed that taxing labor income (or consumption) discouraged work. Since workers dropped out of the workforce or cut back on effort in response to taxes, taxes caused the economy to perform below its potential. Classical liberals also believed that labor income taxation was unjust because it denied workers their natural reward.
Now imagine that rather than imposing a tax on income or consumption, the government creates a cartel of all the businesses in each industry and induces them to raise their prices, while skimming off the difference between this elevated monopoly price and the competitive price as government revenue. This “markup” would be effectively the same as imposing a tax on consumption. In fact, liquor monopolies that many states use as an alternative to taxing alcohol function almost precisely in this manner. Jevons, Walras, and George noted that private monopoly does essentially the same, except that rather than this tax being paid openly into public coffers, where it can be used for the public good, it accrues more discreetly into the pockets of the private monopolist. To quote George again:
Certain forms of monopoly exercise powers analogous to taxation, and may be treated likewise. . . . When the king granted his minion the exclusive privilege to make gold thread, the handsome income enjoyed as a result did not arise from interest on capital invested in manufacturing. Nor did it come from the talent and skill of those who actually did the work. It came from an exclusive privilege. It was, in reality, the power to levy a tax (for private enjoyment) on all users of such thread.Something similar can happen in labor markets. Suppose that the government organized all employers into a cartel which held down workers’ wages, and that the government taxed the employers on their labor savings, pocketing the “markdown” between these newly depressed wages and the competitive wage as revenue. This is functionally the same as a labor income tax. And in the same way, if, even without government involvement, employers are able to enter cartels, or use their unilateral dominance in labor markets to suppress wages, the wage suppression that is felt by the worker is the same as a labor income tax, except now the “tax” revenues go to the employers rather than to the government. Rather than “monopolists,” employers who act this way are “monopsonists”—a phenomenon highlighted by Beatrice and Sydney Webb in the 1890s and named by economist Joan Robinson in the 1930s. But the logic is the same. To roll back the consumption and labor taxes imposed by private monopolies and monopsonies, respectively, Jevons, Walras, and George advocated attacking a wide range of monopolies and helped inspire the antitrust laws promulgated by lawmakers like Senator Sherman.
Thus, as the nineteenth century rolled into the twentieth, the dominant view of the newly emerging profession of economics was that government and business posed a threat to liberty—the liberty to earn and live off a fair wage. Of course, these economists did not oppose business any more than they opposed government; small businesses operating in competitive markets were fine. Rather, they believed that the government should refrain from creating monopolies itself, prevent firms from assembling monopolies through mergers, and punish (or regulate) those businesses that obtained monopolies through other private actions. These economists would not have been impressed with the modern libertarian view that the government should keep its hands off business. The entire experience of laissez-faire capitalism in the nineteenth century contradicted such a view.
The Misguided Embrace of Monopolies
All of this changed with the rise of Communism, especially in the wake of World War II. With the growing prestige of government planning, whose merits seemed, at the time, to have been vindicated by the rapid economic development of the Soviet Union and the success of war planning in many countries, defenders of individual liberty turned their attention back to the dangers of state power. Soviet and Nazi totalitarianism was a far greater threat to individual liberty than the economic behavior of private businesses could ever be. Liberals of the time feared that the attractions of statism—that it seemed to promise organized economic growth while protecting people from the hazards of capitalism—would reconcile people to the loss of individual liberties. In their increasing isolation, liberals saw business leaders, and especially financiers, as natural allies in the fight against statism. As Angus Burgin documents in The Great Persuasion (Harvard University Press, 2015), his magisterial history of the rise of “neoliberalism,” business leaders saw the theories of thinkers like Friedrich von Hayek and Milton Friedman as the most potent antidote to burdensome state regulation. To help spread their ideas, the business leaders poured money into foundations and other organizations that supported them.
The most potent outgrowth of this development was the school of economic thought that originated at the University of Chicago, to which both Hayek and Friedman contributed. But the most important figure in that school for the theory of monopoly was a less well-known economist named Aaron Director. Director founded the “Chicago School” of antitrust, which argued that private monopolies and cartels were naturally unstable, and for that reason antitrust enforcement could, and should, be scaled back.
Director’s arguments were effective for two reasons. First, he (and his followers) pointed out that the government’s legal theories about the problems posed by monopolies, which had been mostly accepted by the courts, were a mess. Courts had agreed that certain common business practices—for example, “resale price maintenance,” where a manufacturer of a product would mandate a minimum price at which that product could be sold—were almost certainly monopolistic, when in fact it was possible to justify them with quite innocent explanations. The courts’ lack of economic sophistication led to poorly reasoned judicial opinions that were easy targets for a clever economist.
Second, when Director developed his ideas, in the 1950s and 1960s, it seemed plausible that the monopoly problem had largely been contained. The big trusts were gone. Many industries—banking, for example—were highly fragmented, even more so than in other countries. A recent study finds that during this period the “tax” attributable to market power (i.e., the markups made possible by a lack of competition) on the economy was roughly 20 percent, low by historical standards, while all told government taxes were about 35 percent and much higher on the highest incomes. Thus, to an economist, the major threat to liberty in the form of a “taxing power” was government, not private business, at this time.
Director and his followers made a crucial mistake, however. They attributed the weakness of monopoly to the inevitable laws of capitalism. Chicago School economists like George Stigler proposed theories that explained why cartels were hard to form and inherently unstable. But the healthy market of that period was created by vigorous government enforcement that picked up dramatically during Franklin Roosevelt’s New Deal. It’s as if the economists looked at a low-crime city like New York today and concluded that, because crime is low, a police force is not needed.
This was not a mistake that an economist writing in an earlier era would have made......MUCH MORE
