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Free Enterprise vs Corporatism

By       Message Derryl Hermanutz     Permalink
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Free Enterprise vs Corporatism

This article began as a comment on Paul Craig Roberts' Jan.27 OpEd News article, "How Ron Paul Could Win".   Jeff Rock replied that "Ron Paul's economic policies are draconian", as Mr. Paul favors a libertarian laissez faire economic policy that, theoretically, allows "the free market" to do its virtuous work.   But Jeff, and I, observe that the conditions under which a free market can function no longer exist in the real world, so laissez faire in fact generates corporatism and plutocracy, not individual liberty.   Market freedom may have motivated primitive capitalism's struggles against landed aristocracy, but mature capitalism is a privately governed oligarchic beast not much different from the feudalism it overthrew.

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Adam Smith's idealized free market was made up of very large numbers of small businesses, small tradespeople and craftsmen and merchants and farmers, cottage industries, and a newly emerging class of small scale (by today's standards) factories.  Small scale is critical to the viability of "free" markets.  If one participant fails, he is too small to affect the industry in which he produces.  Other participants immediately replace his market share.  The economy keeps going, and the failed entrepreneur can try try again, because his personal failure did not bring down the economy, and there is still a fully functioning economy for him to go back to work in.

In today's world we have transnational corporations that control more financial and economic resources than all but the largest nations.  We have private megabankers issuing all the money as loans, with most of the people (and our governments) in debt to the bankers.  If one of these corporate giants fails, the economy as a whole is wounded.  These participants are WAY too big to be "free market" players whose personal success or failure has no noticeable effect on the markets in which they operate.   Too big to fail is too big for a "free" market.

"Corporates" are "collectives" of large numbers of people who all cooperate towards a single purpose.   A "nation" is also a corporate body, whose individual members accept "government", towards achieving the corporate purposes of the whole nation.   Adam Smith's free market was populated by individual human beings who personally feel and are "disciplined by" the consequences of their actions, not by enormous corporate collectives.   Smith's "Wealth of Nations" was written explicitly AGAINST the corporate-government collusion of his era called "mercantilism", which Smith correctly saw as politically empowering some market participants at the expense of the others, to the detriment of the nation as a whole.

In a collective the rewards and costs are necessarily distributed by human political decisions, because the governors of the collective are the people who directly allocate the work and receive the revenues and distribute these costs and benefits to the members.   The political or corporation governors might try to distribute the rewards and costs according to somebody's idea of what the various members of the collective "deserve", but this kind of highly corruptible human evaluation is supposed to be ELIMINATED in a free market where "the invisible hand" makes all these allocations.  

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And as everybody knows by now after seeing bankrupt Wall St bankers once again paying themselves $megamillion "bonuses", political allocations are almost always corrupted by self-serving interests.   The closer you are to the source of the money, the greater portion of it you take for yourself.   Bill Black calls this a "criminogenic environment" that virtually guarantees there will be accounting control fraud to disguise looting of the company by its managers and other employees who are in on the fix.

In a real free market the small businesses' customers directly pay the owners by buying their wares.   A customer "allocates" his spending to whichever individual business he happens to prefer.   Hundreds, thousands, millions of individual consumers, acting independently of each other, effectively determine which businesses flourish and which flounder and fail.  

In a free market it is consumers, not corporate managers or politicians, who allocate resources and reward and punish business behavior.   Failing business people are strongly motivated by personal loss of income to adapt their behavior to the preferences of the marketplace.   Consumers "discipline" businesses, and business people accept and respond positively to the discipline or they suffer the consequences of business failure and personal financial ruin.

People succumb to temptation.   Billions of dollars of corporate revenues that make possible 10s of millions of dollars of employee "bonuses' proves to be irresistible temptation.   Human nature responds to circumstances and opportunity and discipline.   This is what drives individuals to work and innovate and prosper in Adam Smith's free market.   Small business owners personally receive the business's sales revenues which, after paying workers and suppliers and expenses and taxes, become the owner's personal income.   There are no vast pools of other people's money laying around to take as "bonuses".  

Corporatism concentrates access to and control over enormous amounts of money and power in the hands of managers who are supposed to allocate according to the long term good of the collective.   But in the first place, managed economies are notoriously prone to expensive error because managers cannot predict the future, and big moves in the wrong direction are far more costly for the economy than are a small business's small scale personal follies.  

And in the second place human nature drives managers to take the money for themselves, because it is right there, and they figure out ways to "justify' their taking it.   Any "market theory" that fails to acknowledge these intellectual and moral failings of human nature is fantasy if it is naive ignorance; or it is deception if it is preached knowingly.   We know very well what behaviors and consequences will be generated by "deregulating" corporatized markets, because we are currently looking at those criminogenic behaviors and suffering those collapsing economy consequences.

Partisans enjoy constitutional freedom to preach "free markets" when markets are decidedly not free, but believing that these mega-companies are working in a free market is a delusion no different than believing that a comparable size nation like Venezuela is a free market participant.  Everyone recognizes that Venezuela is large enough and powerful enough to "legislate" what it allows and doesn't allow within its borders.

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This is the opposite of Adam Smith's free market, where no player is big or powerful enough to "dictate" what happens within its market.  Each individual enterprise is "subject to" market discipline.   None of them is dominant enough to "administer" discipline.

We must recognize that gargantuan transnational banks and companies behave more like independent sovereign nations like Venezuela, not like free market businesses competing within an economic environment that is   "free" of dominance and control by any human being or legalized collective of human beings.   Control by a group of human beings is called "government", and behemoth corporations do indeed "govern" the industries and economies and nations within which they operate.  

Free market participants, by contrast, govern only their own personal behavior, and enjoy or suffer the personal consequences according to the un-coerced choices of the market's myriad "governors', the consumers.   A functioning free market, if such a system can actually exist in the real human world of greed, ego and power, truly is a form of economic self-government where individual choices are coordinated into a functioning "economy" by the workings of the free market's "invisible hand".  

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I spent my working life as an independent small business owner/operator. My academic background is in philosophy and political economy. I began studying monetary systems and monetary history after the 1982 banking crash that was precipitated by (more...)

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