The Crux of the Matter
Economic conservatives have long been able to identify nefarious practices that distort markets to the benefit of some over others. These would include, among others –
- Tax-and-spend redistribution schemes
- Punitive Tariffs and Subsidies
- Government Regulation
Note that these activities are not only thought of as unfair, but they are rightly blamed for distorting the entire economy in a destructive manner.
The Austrian school adds another source of such economic distortion, plus a predictive theory for how this distortion works. It believes that manipulations of the money supply by the banking system, and especially central banks, create distortions to the economy that not only create winners and losers, but produce the economically destructive business cycle. These negative consequences of tampering with the money supply arise because changes to the supply of money subvert its accounting function. The supply fluctuations are created by the nonsensical financial accounting of the banking system, in which deposits of money are both 'spendable and lendable' at the same time.
Those of us who believe in free markets and sound money have to this point contended that, this being the situation, the destructiveness and unfairness can be practically eliminated simply by 'setting the rules right.'
What Veblen has contributed, which I believe is unique, is the idea that markets may be subverted within the basic legal framework of the free market. This is made possible by the increasing interdependence of market participants as the division of labor increases. The tactic is very simple – use contracts and legal maneuvering to secure legal rights that allow the creation of some sort of market restriction, or more generally, a stream of 'free-income.' The supply restriction (or other contractual installation) essentially subverts the accounting function of money by rewarding the restriction rather than a value contributed to the market. It is like being paid for punching other economic actors in the face -- businessmen start punching one another in the face and getting paid for it, rather than serving the consumer. It also distorts the price structure, causing other actors to adjust their behavior inefficiently in response to spurious market valuations.
The market restriction provides a 'something-for-nothing,' -- a violation of economic reality.
This technique has been known for quite a long time as 'cornering the market,' but in practice it has been difficult to pull off because economic workarounds were relatively easy to come by. As interdependence increases, however, workarounds become increasingly difficult. Each newly installed restriction takes longer and longer to unravel, providing 'free-income' streams of longer and longer duration. At some point they become so difficult that a businessman is better served by trying to string together such subversions of the system rather than building it up with new products and higher efficiencies. The entire system bogs itself down in the schemes of parasitic businessmen, while engineers and technicians struggle with the mechanical side of the equation to wring out what mechanical efficiencies there are to be had.
Just in case these ideas ever manage to become significant, I suggest that this critical economic transition be called the 'Veblen Point.'
But even so, in itself the potential for 'unearned profits' through the installation of a market restriction would be mostly a nuisance, except for the fact that business accounting is further subverted by the boosted revenue stream. Thus, the business that successfully installs a market restriction finds itself over-valued, and able to leverage this overvaluation in capital markets to acquire the resources to extend its activities further and further. It is easy to see how such business activity could 'go viral,' in that each new restriction invites further expansion of the influence of that business and encourages further restrictions. The logical limit to this process would be 'what the market was able to bear.'
Or the social order.
At this point, the reader probably gets the general idea, but needs some concrete examples. The easiest example I can think of would be an exclusivity contract, an example of which Fran posed a few days ago. Why would a large company offer to buy the entire product of another company at an above-market price, when it could simply go into the market and get most of what it wanted cheaper? Simple – to deprive its competitors of access to a key good. In doing so, it estimates that it will be able to raise the final sales price above what it is paying the original producer by dint of being the only supplier to the market. Exclusivity contracts are inherently anti-competitive, extremely common, and if cleverly structured, can provide a stream of 'free-income' for some time.
Another example is provided by none other than oil tycoon John D. Rockefeller. One of Rockefeller's attorneys came up with the idea of having Rockefeller and his associates set up a legal trust, in which all ownership shares of the original companies were placed 'in trust' and new trust shares doled out to each contributing owner in proportion to his contribution. The entire trust was then managed as a single company, effectively establishing a cartel and wiping out competition between them. In this particular case, all the companies belonged more or less jointly to Rockefeller and his associates together, so the combination appears fairly innocent and more intended as a way to coordinate behaviors than to rig markets. However, such a strategy would be very useful for forming an effective cartel, and it is understandable why the public looked on such behavior with suspicion.
It should be plain to see that both arrangements properly executed are anti-market, yet both are completely permissible under a regime of freedom of contract and respect for property rights. I'm quite certain that a clever lawyer or businessman who knew a market well could devise many others. I used to encounter such schemes all the time from businessmen, and I always thought that they were ignorant of the subject of economics. I would point out how the scheme would be undermined by market forces and was a bad idea. I did not realize that while it lasted, it would make them very rich, and by the time the laws of economics finally brought it to an end, they would have devised a new one.
In other words, they knew economics perfectly well, well enough to know that they stood a good chance of getting away with it. Now I realize that they had discovered the secret to wealth under our system, and I was the ignorant one.
Other examples of ways to create market restrictions or otherwise secure 'something-for-nothing,' some of which rely on government, others which are generally considered legitimate would include --
- Monopoly and Cartelism
- Intellectual Property - creates a restriction in technology applications
- Banking/Monetary Inflation - I can't think of a more glaring example of 'something-for-nothing' than fractional reserve banking. In addition, it creates the financial illusion of a shortage in capital goods, which is just as useful in many respects as the real thing
- Corporatism - creates a whole host of nonsensical legal situations, including a legal 'person' that is not a real person, a separation of ownership from control, and shedding of personal risk (which can be a very valuable 'free good')
- Immigration - although some consider this to be legitimate, it can be used to create an artificial 'shortage' of jobs, especially in a targeted fashion to undercut what would otherwise be higher salaries and supplying 'free income' to a business
- Regulation - provides all sorts of opportunities for milking the system
- Deficit spending by government - provides government spending while avoiding taxation
- Bankruptcy - provides the ability to repudiate debt
The Myth of America's Free Market
Fran has pointed out that the first really sweeping, major legal departure from a laissez-faire system was the Sherman Anti-Trust Act, which was passed in 1890 largely in response to such schemes as the Rockefeller oil trust described above. The mid- to late-19th century was a period of rapid industrialization of the US. It was the heyday of such notables as Jay Gould, J.P. Morgan, John D. Rockefeller and Andrew Carnegie, who became some of the wealthiest men ever to live. No other period in American history comes close to producing so many staggering fortunes, some larger even than those of modern titans like Bill Gates and Warren Buffet, corrected for inflation of course, and at a time when the economy was far less productive.
All four were notorious for their monopolist business practices, and, incidentally, so is Bill Gates. It would astound me to learn that most businessman prior to their time were angels of the markets and refused to engage in such practices. It seems more likely to me that they were simply unable to do it. I conclude that something important changed sometime around 1870-1890.
The Veblen Point.
The problem, which parallels that of the banking system, is that freedom of contract and property rights don't actually guarantee a liberal and open marketplace. Capitalism, it seems, is not nearly as robust as we tend to think. It doesn't seem to handle market restrictions well. The accounting function of money is easily thrown into disarray, both by the nonsensical financial practices of the banking system and by anti-competitive practices by business. Both strategies are protected by the capitalist legal order. In addition, government imposed market interference also contributes to the mayhem, thought that is generally considered anti-capitalist.
This creates a disconnect between financial and material reality, a highly lucrative disconnect rife for exploitation. The disconnect was always there, and there were always forces at work trying to exploit it, but they were effectively held in check until the system reached the Veblen Point. Prior to that time, the errors were probably not negligible, but at least they could not be exploited to such a degree that they called the entire system into question. Capitalism plodded along acceptably well. But after that point, the problems could no longer be ignored. Something had to be done.
At that point, a disastrous mistake was made. Rather than actually addressing the problems that were arising, in both the monetary and the business cases the legal order attempted to 'turn the facts to account to established legal conventions,' when it should have been the other way around. The banks cartelized under the FED, and eventually created a system of deposit insurance in an attempt to meet legal obligations in a way that flies in the face of material reality. Both practices further undermined the money system's ability to reflect economic reality. It effectively institutionalized the practice of fractional reserve banking, when the correct approach would have been to somehow abolish it.
On the legislative side, government attempted to break up monopolies and take an active role playing umpire in markets. But now that the camel's nose was under the tent, and legislation that violated property rights and free contract had been deemed justifiable in the name of the public interest and protecting the free-market, there was no stopping it. And, naturally, once that ball got rolling, most of the waves of legislation that followed were not really aimed at 'protecting markets,' but bending them to the will of some special interest or another.
The rest of the 20th century is history. Society responded to contradictions in the marketplace, which were really contradictions of the Enlightenment, with a legislatively created 'pretend free-market.' A managed market is what it really was – managed for the benefit of entrenched interests. Ever since the Veblen Point was reached and the pot started to boil, the West has struggled to keep the lid on the pot. Rather than address material reality, it has tried to respond with legislative band-aids, and as material reality has diverged from legal practice, and the system has fallen further and further into corruption, 'something-for-nothing' opportunities have proliferated.
The Problem With 'Something-for-Nothing'
The problem with 'something-for-nothing,' aside from its blatant violation of economic reality and implicit unfairness, is that each opportunity creates 'vested interests' – groups with an interest in perpetuating and expanding their own established perquisites that parasitize the system. Worse, they inherently centralize the system they are feeding from.
Whether one is speaking of welfarism, corporatism, tax policy, monetary inflation, cartelism, regulation, market restriction, or any of the other offshoots of the disconnect between material and legal reality, the effect is to both centralize discretionary power and to create opportunities for parasitism. They go hand in hand. They are inherently inseparable. Once a 'profit' opportunity presents itself, whether legitimate or not, it will be exploited by some group of actors, creating a dependency that seeks to have its interest institutionalized. This creates a ratchet effect, as some fraction inevitably succeeds.
Every new free-income stream attracts new workers into parasitic roles and away from productive roles. Every free-income stream, however it arises, boosts the market capitalization of the beneficiary business, allowing it to expand ever larger. As resources 'follow the money,' smaller enterprises which lack 'free-income' shrink or get taken over. Wherever it operates, something-for-nothing creates centralization, bureaucracy, homogeneity, and inefficiency.
That is not to say that a business or group that manages to land itself a free-income stream is on easy street. Of course, others will try to dislodge its position to their own advantage. It must be on constant guard, always defending its position from others. The point here is that business efforts will be directed inordinately towards defending an established gravy train and seeking out new ones as opposed to actual innovation and seeking out new efficiencies.
Established interests don't like newcomers, either.
Veblen blames the 'mechanical mindset' on the machine process. No doubt this is true, but I tend to think that the greatest contributor to this mindset is one specific outgrowth of this movement which he tends to neglect – public schooling.
The first 'public schools' got their start, actually, as 'charitable' initiatives of some of those monolithic corporations mentioned at the end of the 19th century. They were not public because they were state supported, they were public because they admitted anyone. As one might have guessed, their industrialist patrons ran them as 'education factories,' and since they were the basically the toys of multi-millionaire megalomaniacs, they became the objects of 'practical experimentation.' Why so many well-meaning people seem to think the minds of small children are the ideal material for social experimentation, and why their parents put up with it, I'm not sure. But experiment they did, completely overturning the 'character education' provided by classical methods and replacing it with 'practical knowledge.' Government eventually took over these 'enterprises,' and continued more or less in the same vein.
The main reason I think this development has fomented the mechanical mindset more than any other effect is that children are brought up in a bureaucratic environment in which rewards are doled out according to the ability to please an authority figure. Bureaucratic, authoritarian environments tend towards formalized, mechanical interactions among people. Though there are occasional exceptions, that is more or less how almost all public education works, and it is how children are brought up to think that the world works.
To a large extent, they are correct. As time passes, the effects noted above tend to centralize social and business structures into bureaucratic hierarchies, and the drive for innovation is squeezed out by the vested interests. Learning to operate within a bureaucracy is probably the most effective thing a young child can learn. Of course, this is all to the advantage of the vested interests, as young, uncreative bureaucrats tend to keep to their places, not rock the boat and mind their own business.
Much as I hate to admit it, I wonder if perhaps the reason that I, and I believe others, tend to focus on God's authority flowing from his status as absolute and ultimate Judge might actually be a result of having been brought up in such an environment. Perhaps this is the next step in the progression that Veblen observed, from King, to Artisan, to Relic, to Authoritarian Judge.
The New Feudalism
Veblen thought that most societies naturally progressed into hierarchies, where one class performed the productive labor while the other engaged in various unproductive activities. He did not think that our society was headed there. He thought it was already there.
The two classes do not neatly correspond to the pecuniary class and the mechanical class, but the two are related. The unproductive class consists of those few titans of industry and finance, the political class, and others with 'vested interests' in maintenance of the system, plus their hangers-on who perform menial services for them and otherwise operate unproductively in various capacities to maintain the structure. Hence their title – the vested interests. The vested interests live off the productive activities of the outsiders – the common man.
The vested interests are in charge, and have been for some time. They have subverted the money system, the economy, and the educational system. Until recently, they controlled the media and Hollywood. They have subverted our democracy. They vet the candidates and fund them, then tell them what to do in office. We get to pick the ones we like. Our social order has slowly been calcifying, with the overwhelming preponderance unable to grasp that anything is amiss.
They set policy, and they control the agenda. When something disturbs them, they adjust. Banks threatened? Taxpayer bailouts. Wages getting uncomfortably high? More immigration.
This, finally, is the New Feudalism – all the power-mongering, wealth-extracting hierarchy of old, none of the humanity. Unless, I suppose, one happens to have a soft spot for the welfare state.
But those who've been paying attention have noticed the cracks forming in the edifice.
Which leads one to ask – what is next?