Corporatism and Income Inequality

In a tremendous, and essential article for Project Syndicate, Nobel laureate Edmund Phelps, and regular reader Saifedean Ammous team up to obliterate the view that the West is at present a capitalist system, and that the problems of the West are problems of capitalism:

The term “capitalism” used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise.

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

I too have spent a whole lot of energy and time lambasting our present system of corporatism.

The trouble is, the advocates of the status quo, and everything that means — government intervention in markets, central planning of the economy, the welfare-warfare state, bailouts, huge deficits, surveillance (for the purposes of taxation) and so forth — do not see themselves as corporatists, so much as they see themselves as go-gooders who want to “manage” the economy to a better place. They oppose the free market because they believe they know better than the market. They believe that our system today is a form of “constrained” capitalism which averts its worse excesses. Most significantly, they believe that the problems with the present system — income inequality and corporate power — are problems of capitalism, and that freer markets would make these problems worse.

As Ammous and Phelps suggest, they are blaming “capitalism” for the problems of corporatism.

There is strong evidence against doing so.

The growth in corporate power and income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.

Unsurprisingly, this led to a huge growth in the American and global money supplies:

This new money was not exactly distributed evenly:

A lot of that money seems like it ended up in corporate profits:

A shrinking share has gone to wage labour:

It is this stuff — the decrease in real wages, the growth in corporate profits, the growth in CEO pay, the growth in the wealth of the top 1% — that has inspired and informed movements like Occupy Wall Street. Sadly, such movements have largely avoided confronting the reality that this monstrous outgrowth of corporatism has developed in a heavily-regulated, socially-engineered, managerialist and interventionist economy, and not in a capitalist economy or in a free market, as so many occupiers claim.

It is completely inaccurate to paint these figures as problems of capitalism.

As I wrote earlier this week:

This psychological trend can be summed up as the idea that the first recourse for social and economic problems is more government action. Too much inequality? Regulate against it. Too little innovation? Legislate for it. Too little demand? Stimulate it. Too much bad government? Elect a better one, who will do more of the things we “love”, and less of those we “hate”.

The idea, in the simplest terms, is that changes to society should come from the great overhanging monolith, and not from the little individuals on the ground. No, we are just fish swimming in an ocean of dialectical chaos. We are just flecks of paint on the great canvas of humanity. No, let us not agitate or gravitate. Instead, we must “co-ordinate” and “unite” under the aegis of government; the blind painter.

The climax of this bizarre psychological trend was the election of Barack H. Obama. After all the misdeeds of Bush and Cheney, he would be the one to restore government to its “proper” role: “helping the people”, “creating a better America”, “investing in tomorrow”, etc, etc, etc, blah, blah, blah.

This is a licence for more central planning, more interventionism and more government largesse. There are two problems here:

  1. Regulatory Capture: As David Rothkopf has argued: “Geography, pedigree, networking and luck unite a superclass of 6000 individuals that possess unparalleled power over world affairs.” Obama’s top contributors are the same old people. Obama appointed more ex-Wall Street figures to his administration than anyone before him. Ultimately, the people chosen as central planners have a track record of enacting policies that enrich themselves more than everybody else. The people lining up at Davos calling for a new system, i.e. more government, are the same elite who have ruined the old one. As Jonathan Weill writes: “It’s becoming hard not to suspect that the annual gathering in Davos has become a conclave for global elites to promote crony capitalism and state-backed enterprise, ensuring that national coffers remain available to be tapped for private gain.”
  2. Unintended, and Unexpected Consequences: Central planners are often pretty bad at the job. Bernanke and Yellen failed to predict the end of the housing bubble (that their predecessor Alan Greenspan helped create) with terrible consequences. Tim Geithner lashed that there was “no chance of a downgrade” right before S&P downgraded US Treasuries. Angela Merkel demands austerity from a frail and ailing Greek economy suffering from a severe contraction that is only worsened by austerity. The Iraq and Afghani wars created more terrorists than they killed, and added a multi-trillion dollar shackle of debt to the American government. America’s deindustrialisation (in the name of cheaper Chinese goods) has created huge unemployment in America, as well as making the American economy ever more dependent on the fragile flow of trade for components and energy. History is dominated by black swans — and the history of  central planning is dominated by unintended consequences. We just don’t understand reality well enough to centrally plan it.

After many decades of central planning and interventionism we are left with monstrous income inequality and corporate power.

Is it not fair to conclude that the two are intrinsically connected?

30 thoughts on “Corporatism and Income Inequality

  1. Excellent post.

    I suggest this is distributed to the leaders of OWS so they can formulate some guiding principles, rather than being hijacked by socialist hippies banging drums and blowing whistles, which just makes a mockery in the press. Most of OWS is wanting more of the same bureacratic guiding hand, but more in favour of them (wipe out college loans etc)

    For one no protester should be able to assemple unless they are wearing corporate wardrobe. Then they will be taken seriously. Pretend they are going for an interview. Humans judge a book by its cover.

    At least rioting mobs in the 30’s were well dressed. look at the photos and footage.

    Seriously John, when are you taking this site mainstream? Have you thought of printing physical flyers and handing out on the street?

    Once you get critical mass and donations, you can organise Chapters to do the same in other countries.

    Otherwise it is a bunch of intellectuals with too much time on their hands, when waking up or going top bed, arguing amongst ourselves. If a tree branch falls in the woods and only the camping group heard it, did the actions of the branch falling produce a butterfly effect?

    You only have one chance in life to make your ideas immortal.

    • The only way to take this site “mainstream” is to spread it around the net. A few people post links to it on Zero Hedge. Reddit, Facebook, Twitter, etc, are the best tools.

      Also, I do have some quite influential readers on my subscribers list, including the professor who wrote the article I was quoting from, so I do think the ideas here are spreading, and we are changing the debate. And I don’t necessarily think that the stuff I write here are “my” ideas. They’re ideas I have come to with help from others, including all the people who take the time to read and comment my posts.

      But by all means if readers want to e-mail the Huffington Post, Bloomberg, the Wall Street Journal, etc, and suggest that they publish a version of this article, I would be very grateful. Or, on the other hand, if they want to print out the article and give it to Occupiers, that would be a very good idea too. I do not live in a big city. There are no Occupy protests here. But lots of sheep and chickens.

      • Unfortunately the blogosphere is still not mainstream, and frequenters of the blogosphere typically gravitate towards sites that fit their particular world view.

        The key is to draw more people into the blogosphere and expose your views to the apathetic. A few pamphlets here and there can create entire new audiences. By the time most people realise their ignorance, it will be too late for them.

        • G’Day TwoDogs, I saw your comment on the Age but I could not reply. Computer Glitch on the Age end?

          Nice to know you are a fellow Aussie.

          BTW Because I am self employed and enjoy writing to Politicians to cause a stir, I thought a Stand in Collins St and Martin Place, manned bt an out of work OS student might cause a few feather ruffles.

          The RBA Mandarins have no idea. They have lost control. My insiders suggest Big 4 going alone with a rate increase to shake out RBA and Labour Government.

  2. About Merkel, if you remember, she and Wolfgang Schauble were the single leaders who actually and originally asked (I think as early as 2010 if I’m not mistaken) for private sector involvement in the Greek debt haircuts. So I would hold Merkel and the Germans as the most capitalist leaders of the last 2 years. But of course, after that, they realized that due to how the economic system is constructed, it was them and their claim for PSI that exacerbated the crisis (contagion fears, other bond holders began fearing haircuts as well) so they had to back off and say that Greece was a singular case. Of course, it probably won’t be (Portugal is waiting on the sidelines).

    And I’m rather sick of this portrayal of the Germans as the nazis who torture Greeks. The Germans would love to kick Greece out of EMU so that the Greeks will do whatever they please without bothering them.

    • Merkel has a very mixed record; on one hand she has called for bondholder haircuts, on the other (and sometimes in the space of the same week) she has said that such a thing would be a disaster. Sometimes she says it is unfair for Germany to bailout Europe, sometimes she says it is a necessity. I do not know where she truly stands.

  3. Yes, good post, however we have never really had capitalism, not the type you and others speak about. In Britain, land was taken from the commoners (see Enclosure Acts), they were forced to become wage slaves (or unemployed, through deliberate ruling class and State policy) pouring into the new towns and factories. In America the Indians were killed and conquered, the Railways westwards were only built through government help.


    Corporate Capitalism As a State-Guaranteed System of Privilege
    by Kevin A. Carson

    The Commercial and Agricultural Magazine warned in 1800 that leaving the laborer “possessed of more land than his family can cultivate in the evenings” meant that “the farmer can no longer depend on him for constant work.” [Thompson, The Making of the English Working Class, 219-220, 358].

    • Certainly, there has never been a purely free market. Certainly not in England, a little more so in America, but never entirely.

      It is a beautiful, but problematic ideal. There will always be government, and there will always probably be some kind of redistribution. But, I think, we can make government’s focus maintaining a free market, and giving everyone an opportunity to access it.

  4. Forget corporatism and adopt managerialism, that is the modern term, as in my book with J-C Spender, Confronting Managerialism (Zedbooks, 2011).

    • Hi Robert, I’m a big fan of your work, and as you probably noticed, I used the term “managerialist” in the article.

      I’d like to qualify that I think there is some difference between corporatism and managerialism. My definition of corporatism is, more or less, Mussolini’s: the intermeshing of big business and the state (to rig the market mechanism, remove competition, etc). My definition of managerialism is more of a PHILOSOPHY than a political or economic system; in this case the idea that central planners know better than the market because of their managerial expertise (a related concept to the managerialist trend in corporate governance, etc).

      i.e., I’d say managerialism is a very important concept, and I’d urge readers of my blog to pick up your book. But corporatism — which today is a significant manifestation of managerialism — is a pretty important concept too.

      • I was being provocative in that comment, but not just provocative. Corporative is a old term and it is used as you use it, as an attack on the free market system and competitiveness. But I dont believe that this is much of an issue today. That is why I use the term managerialism, which is not a philosophy, but a way of firm governance, in a private nonstate (even in certain ways anti-statist) system, that concentrates power in the hands of a managerialist caste that uses the legal system and government to suck the wealth out of the economy and channel it into its own coffers (the top 1%).

        • …even in certain ways anti-statist system.

          It’s “anti-statist” when it suits them, and they want to pay less tax. But I will say a lot of it is rhetoric; I don’t see many of the managerialists at the helm of major corporations saying no to state subsidies and bailouts. I don’t see any great libertarian or anti-statist trend, either in corporations, or among the managerialist caste in general. The biggest corporate donations go not to the most anti-statist candidates (Paul, Johnson), but to the most “corporatist” ones (Obama, Romney).

          I figure that the managerialist caste would not be doing very well at all right now had the government not stepped in to save their bacon and insulate them from market forces in 2008 onward i.e. the collapse of the shadow banking system, the collapse of the stock market, a lending freeze, and more recently the weakened consumer demand, etc. I figure a whole swathe of MBA bums would be out on the street, their reputations totally sullied by total and systemic failure, had government not stepped in to make sure they didn’t fail.

          The problem, I fear, is that the managerialist caste has successfully captured the apparatus of the state for their own ends. This is a huge topic, but I think it begins with the “cult of expertise” as Nassim Taleb calls it — which if I recall correctly is a topic you also cover (quoting from Wiki because I don’t have your book to hand):

          [Managerialism] is what occurs when a special group, called management, ensconces itself systemically in an organization and deprives owners and employees of their decision-making power (including the distribution of emolument), and justifies that takeover on the grounds of the managing group’s education and exclusive possession of the codified bodies of knowledge and know-how necessary to the efficient running of the organization.

          And its greatest manifestation thus far has been in the halls and chambers of government. Perhaps we are seeing it on a bigger scale in Europe today than we ever did in America, e.g. the advent of “technocrat” governments in Greece and Italy.

          So I think Edmund Phelps and Saifedean Ammous are absolutely correct to identify the culmination of this trend as “corporatism” — the intermeshing of state and government. Perhaps the real underlying motivations are managerialism and greed. So in that sense you may be right that the problem is managerialism rather than corporatism.

        • I made my career, challenging Managers.

          They don’t know everything! They rely on pandering Middle Managers who are just as ignorant.

          The problem with Management compensation schemes is that they are not penalised for mistakes, that manifest at a future date, especially when they move on with “Golden Parachutes”. For example, a class action on behalf of shareholders.

          This is why large corporations an large government meddling in the market, cause such imbalances and inefficiency.

        • It isn’t the markets that bring about distributive justice in a corporate world but the legal framework in which the firm is governed. If we have director primacy and managerialism as the system of firm governance, as in the US & UK, then it doesn’t matter if the firm’s income is drived from free markets or monopollies, it is distributed by those who control the distributiion in the firm to the top 1% by the top 1%. But if a system of co-determation governance exists then the distribution decisions are made by compensation committees made up of employee reps and stockholder reps and maybe other outsiders — and there is a greater chance for distributtive justice. Keep up the good work, we’re both on the same track.

        • Employee suggestion boxes (Anon.) work wonders when used by an Independent investigative committee!

          Hubris is extinguished overnight, and corrective action can be taken before damage is done.

          And don’t forget about graft and corruption. Many products and contracts signed that are not the best in the long term interest of the business, nor satisfy the market.

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  12. Unfortunately the term Capitalist includes people who are also landlords and those exploiting the nature of the land. There is a big difference between the use of land and the use of the invested durable capital goods. The former are in limited supply whilst the latter are man-made and should there be a shortage, it can be filled relatively easily. Due to the way that land values are being exploited by landlords and their supporters the banks, the cost of producing goods and services and of residences has become very high. This means that production of useful items and dwellings has become limited with a result that progress of the economy is slowed, jobs are hard to find and poorly paid and produce is in a low demand compared to what it should be. Thus the activities of landlords who are not really capitalists is both immoral and damaging to our society. A sensible government should tax land values and by so doing drive down the way that land values are exploited because with this tax more land would be put to proper use and the competition for its availability will become less along with its cost.

    Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?

    Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).

    However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005).

    Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.

    Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community and (after an initial start), not by the natural resources. As the city expands, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid by tenants make their residence more costly and the provision of goods and services more expensive. It also creates unemployment, causing wages to be lowered by the monopolists, who control the big producing organizations, and whose land was already obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.

    The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily for its right of access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce too, and can charge more for this access right than what an entrepreneur, who seeks greater opportunity, normally would be able to afford.

    A wise government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed 136 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and find that land dominance has its own reward.

    17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics

    Four Aspects for Government:

    1. LVT, adds to the national income as do other taxation systems, but it replaces them.
    2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all.
    3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
    4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).

    Six Aspects Affecting Land Owners:
    5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
    6. The land owner pays his LVT regardless of how his site is used. A large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
    7. LVT stops speculation in land prices and the withholding of land from proper use is not worthwhile.
    8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
    9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
    10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).

    Three Aspects Regarding Communities:
    11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
    12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
    13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Ethics:
    14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks–LVT is a natural system of national income-gathering.
    15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
    16. The improved use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
    17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.

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