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Long on the Corporation

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11/10/2008

The current issue of Cato Unbound features Roderick Long’s critique of “Conflationism,” defined as the “pervasive conflation of corporatist plutocracy with libertarian laissez-faire.” As Roderick rightly points out, in the mixed economy large corporations are among the prime beneficiaries of government largess, such that a wholesale defense of “big business” is silly and counterproductive for libertarians. However, Roderick spoils (for me, anyway) an otherwise excellent summary by jumping to the unwarranted conclusion that today’s corporations are, on average, larger, more hierarchical, and more diffusely owned than the firms that would emerge under laissez faire:

In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles.

As I’ve pointed out many times (1, 2, 3) to Roderick and to Kevin Carson, from whom Roderick draws much of his analysis on this point, this is a purely speculative counterfactual, and an unconvincing one at that. Roderick and Kevin do a fine job documenting a slew of government policies that favor large, complex, vertically integrated firms: direct subsidies, of course, but also indirect benefits from intellectual property law, bootlegger-and-baptist-style restrictions on market entry, transportation subsidies, various aspects of the tax code, etc. From this they conclude that smaller, more “egalitarian” enterprises, such as worker-owned cooperatives, would tend to flourish under the free market.

The problem is that their argument cuts both ways. Certainly large firms benefit from the state. But so do small firms. Corporations are under stricter antitrust and regulatory scrutiny, are more likely to be the victims of political rent extraction (in Fred McChesney’s sense), and are subject to stricter disclosure requirements (SOX being only the most visible, recent example) than their smaller competitors. Small firms benefit from state-funded incubators, SBIR awards, regional development grants, and a host of other interventions designed to foster “entrepreneurship.” Trade barriers, war, state control of education, and a host of other interventions retard the international division of labor, reduce stocks of human capital, and lower the marginal product of labor, all of which reduce the scale and scope economies that favor large-scale production.

Which set of effects outweighs the other? It is impossible to say, ex ante. The firm on the purely free market could be larger, more vertically integrated, and more hierarchical than the typical corporation under the mixed economy. Moreover, the worker-owned cooperative, the partnership and proprietorship, the decentralized “open-production” system, all suffer from serious incentive, information, and governance problems, almost none of which are mentioned in the anti-corporation libertarian literature. I suspect this literature’s preference for small-scale production is based primarily on aesthetic, rather than scientific, grounds.

Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University's Hankamer School of Business.

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