Mises Wire

More on the Corporation

More on the Corporation

Roderick Long has kindly responded to my critique of his essay on corporatism. I don’t find Roderick’s reply very convincing, however. I don’t have posting privileges on Cato Unbound so I’ll offer a brief response here.

My basic critique of Roderick’s position is two-fold. First, on substance: Roderick’s arguments strike me as a form of what Harold Demsetz called the Nirvana fallacy. Essentially, Roderick identifies various inefficiencies associated with large, hierarchically organized corporations and concludes that smaller, “flatter” firms, such as worker-owned cooperatives, must be better. But all feasible forms of organization are imperfect. All real-world firms are plagued by inefficiencies — agency and information problems, coordination failures, various kinds of transaction costs, and the like. A sweeping claim that the corporate form is per se inefficient, and that therefore it can only have survived because of state privilege, requires a comparative assessment of the strengths and weaknesses of alternative forms of organization, and this Roderick does not provide. Nowhere in his original post, nor in his reply to my comment, does he address the organizational drawbacks of proprietorships, partnerships, and patron-owned enterprises (more commonly known as “cooperatives,” though I dislike that term, for reasons explained by Mises).

Second, the form of Roderick’s argument is deeply unsatisfactory. As I pointed out in my post, there are substantial technical literatures in economics, organizational sociology, and business law on the benefits and costs of alternative organizational forms, and Roderick does not grapple with these literatures at all, either in the original post or in the reply. He relies heavily on Kevin Carson’s work to justify the superiority of workers’ self-management. With no disrespect to Kevin, however, whose work I admire, what would Roderick think if I offered a radical new interpretation of, say, Aristotelian ethics, offering as my primary sources a self-published book and a some articles from the Freeman? I imagine Roderick would dismiss me as a crank. And yet, he freely discourses on economic organization without demonstrating any familiarity with the relevant technical literature.As to Roderick’s specific claims in his reply:

1. Roderick says the fact that large firms lobby heavily for trade barriers, war, and state education shows that they are the prime beneficiaries of these policies. But here Roderick confuses marginal and total effects. Firms of all types lobby up to the point where the marginal benefits of further lobbying are equal to the marginal costs. If large firms lobby more heavily than small firms, this indicates only that large firms perceive a higher marginal net benefit from lobbying than do small firms. One possible explanation is that small firms are already receiving high levels of state benefits, such that there is little gain from marginal expenditures on political influence. State-granted privileges and penalties for large firms may also be more sensitive to political influence than those affecting small firms (this is certainly true of antitrust and regulatory policy, as Fred McChesney has argued). Large firms might also find themselves in a kind of prisoners-dilemma game against other large firms, with each lobbying for benefits to avoid being at a strategic disadvantage relative to rivals, who are lobbying for similar benefits, even though all firms are worse off when all lobby. In short, the fact that large firms actively seek state support does not indicate that they, alone, receive it. To gauge the net effect of state intervention on firm size and organizational form we need to estimate the quantitative magnitudes of the effects of various interventions. We would also want to track lobbying expenditures by firm type over time, and must deal with the fact that lobbying expenditures, relative to GDP, have not risen appreciably over the last century, despite the rise of the large firm and the corporate hierarchy. It is a complex issue, one that a few simple assertions cannot resolve.

2. Roderick concedes that small firms also benefit from state intervention, but argues that “the small firms that benefit from government assistance are those that are seen; the ones that are most harmed by government action are those that are unseen because they are prevented from coming into business in the first place.” But the same argument applies to large firms. We see those that benefit from government action, but we don’t see those that are harmed — the small firms that would have become large, the large firms that would have become larger or more diversified or more hierarchical or whatever, were it not for the predator state. Imagine the large, highly efficient firms we might see in a truly free market! Roderick goes on to state that “[t]he assistance that small firms receive comes largely at the expense, not of larger firms, but of still smaller firms — or of those who would start such smaller firms if they could.” Again, this is assertion, not argument or evidence. When small-business subsidies and benefits are financed by taxation, including taxes on corporate income and on the incomes of large partnerships and proprietorships, they come at the expense of large firms. Large-firm subsidies and benefits also come at the expense of other large firms. Large firms may seek benefits not to benefit large firms as a class, but to punish specific (and equally) large rivals. Why assume that the larger firm always exploits the smaller?

3. Roderick has misunderstood my point about vaguely-defined property rights. I suspect he has not yet had a chance to consult the literature I cited, because this literature has nothing to do with limited liability, which Roderick discusses extensively in his reply, but deals instead with the organizational disadvantages faced by firms whose ownership claims are not alienable assets that trade on secondary markets. Patron-owned firms, as described in this literature, suffer from two kinds of free-rider problems, a horizon problem, a portfolio problem, a control problem, and an influence costs problem. You can read the details by following the link above. When ownership of the firm is tied to patronage — as an employee, consumer, or producer, owners face multiple and frequently conflicting interests in their joint capacities as owners and patrons. Different patrons also have different objectives: full-time employees and part-time employees disagree about how the firm should be run; farmers close to retirement want the buying cooperative to focus on short-term earnings, while younger farmers want it to invest now in anticipation of future returns; a consumer with a large house and a consumer with a small house disagree about what prices the community-owned electric cooperative should charge; and so on. In a corporation, dissatisfied owners hold liquid assets and can exercise their dissatisfaction through exit. When ownership is tied to patronage, exit is much costlier, and such conflicts are typically settled through voice – a highly inefficient mechanism. Moreover, when equity claims are not tradable, owners do not share the gains from increases in the capital value of the firm, and have reduced incentives to purse long-term objectives. These problems are well-known in the literature on cooperatives. Roderick refers several times to principal-agent problems in corporations but seems unaware that all multi-person organizations suffer from potential principal-agent problems.

4. Finally, Roderick confesses that he has an ethical aversion to “corporate hierarchies,” based on “an opposition to seeing people pushed around, even in ways that don’t violate libertarian rights.” If “pushed around” means treated rudely, asked to do things beyond what should be required, used as means to someone else’s end, then, sadly, people are equally “pushed around” in proprietorships, partnerships, and patron-owned firms — indeed, in all forms of social cooperation. Unless Roderick has a way to create a New Cooperative Man, I see no reason why people should behave any more ethically under workers’ self-management. Later he says that people who have worked in corporate hierarchies “know from their own experience how completely clueless the highly paid upper managers tend to be about what is actually happening, and how much of the firm’s success depends on workers simply ignoring the insane directives from above and doing what needs to be done.” This kind of statement may tell us something about Roderick’s personal preferences, and maybe experiences, but tells us nothing about the nature of the firm.

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