As a business owner and a true advocate of free markets, I have, in the past, had a difficult time defending free market principles when people point out the problems in areas such as health care, big pharma, and Enron-type scandals.
I found the answer in my studies on corporatism.
Corporatism is the dirty relationship between government and corporations. It is also a key component of socialism – Mussolini was a champion of corporatism. You can identify it by several characteristics, but one of the simplest and most concise measures is this: Profits are privatized, while losses are socialized.
The Military Industrial Complex is a blatant example of corporatism. When you get into the who’s who of the MIC, you find the same names popping up time and time again. These people move from government positions, both elected and appointed, to top executive positions in the companies of the MIC, and into large, influential lobbying organizations on the behalf of the MIC. It’s a giant revolving door. They are powerful, highly politically connected individuals working to benefit the corporations at the expense of the American people.
When the US government sends helicopters to South American governments to fight the “war on drugs” who do you think lobbied for this decision? Agencies representing the interests of the helicopter maker.
In the 1990s, the Mexican government went on a spree of massive inflation, ravaging their financial system. The US government and its Federal Reserve bailed out the Mexican government on the backs of the American taxpayer. Congress was against it, but the Fed got it done. It turns out that large US investment banks were holding $21 billion in bad debt to Mexican public and private institutions. A key player in the bailout was Treasury Secretary Robert Rubin, the former head of Goldman Sachs. Goldman Sachs held a large share of the Mexican debt, and shortly after the bailout reported record profits. Profits were privatized, losses were socialized. You pay the bill.
The Federal Reserve system is an 800 lb gorilla of corporatism. It is not a government agency, it is owned by the member banks. The Fed has the government protected monopoly on the printing of money. It protects its member banks from failure with the promise of simply printing more money when they make bad investments. The US government borrows money from the Fed, the Fed creates the money out of thin air, and the taxpayers pay interest to the Fed for its role in printing and supplying money to the government.
Then there’s the holy grail of the corporatist: Government contracts. You get to charge $4000 for an ashtray! It’d be pretty hard to not make a buck with that deal. When your budget estimates break down and your project is going to take twice as much time and cost twice as much money, the treasury ponies up.
Look at the whole Blackwater affair. A highly politically connected corporatist builds a security company, and contracts its services to the US government. They call it “privatizing” functions that are normally the province of government. Blackwater gets vast amounts of taxpayer money, then carries out the wishes of the government in doing its dirty work. When the actions of Blackwater are exposed, the corporatist willingly fills his role as the scapegoat.
Hearings are held and well publicized in the mainstream media. Politicians scramble for airtime in the show trial – you can actually see them chomping at the bit – grandstanding in demonstration to the masses that they are fighting in their interest, blaming privatization, challenging these greedy “capitalists” and promising more regulation and accountability. If there’s one thing a politician loves, it’s having someone to blame.
All the while, official government bureaucratic blunders, scandals, and abuses are swept under the rug as quickly as possible. The message gets out to the people: Evil private corporations are being reined in by your representatives. They can’t be trusted. Give the government more control, the market doesn’t work. It’s a win-win proposition for both parties. Government officials get to decry privatization and the market, and the corporatist gets his guaranteed profits.
The examples are many, but let’s get back to the theory and practice of corporatism. It is not the free market at work! It is a violation of free market principles.
Murray Rothbard explained that monopolies and cartels cannot exist in a free market. Let’s say the three biggest steel producers in early industrial America, together holding 90% of the market share, want to assure their profitability despite declining productivity. They band together and agree to set pricing for their products. Here’s a few of the things that will happen:
1) As prices go up, the industry will begin to seek alternative materials. Brass, aluminum, and plastics, for example. This lowers demand for the steel industry, further pressuring their efficiency and profitability.
2) High prices of steel catch the attention of entrepreneurs, who see large profits to be made in the industry. It attracts investment in smaller, leaner, more efficient operations to compete with the big three, seeking to take advantage of the handsome profit margins.
3) The big three start to undercut one another, making side-deals with their best customers…”I’m supposed to charge you x, but you’re one of our best customers. I’ll give you a 15% discount, just don’t let anyone know you’re getting this deal…”
All of these factors continue to the detriment of the cartel. Markets are swift and judicious, if you’re not providing value in the market place, alternatives will emerge.
How does the monopoly or cartel survive? By seeking protection from the government. They will agree to heavy regulation to create a barrier to entry for smaller competitors. They will seek protection from imports in the form of tariffs.
Look into any example of government antitrust legislation, and you will find that it is always to the benefit of some politically favored corporatist entity. It is always done in the name of “protecting the consumer,” yet it always benefits the few at the expense of many.
There is a symbiotic relationship between government and large corporations. Both are immensely bureaucratic, so they work on the same level. Government benefits by imposing unending regulation on the corporations in the name of protecting workers, viewed by the people as their government protecting them from greedy capitalists. The corporations benefit because the regulation burdens smaller competitors, and they get protectionist trade-offs.
New regulation that favors corporatism is sometimes hailed, sometimes opposed by the corporatist. In either case, it is a ploy to gain public support for the measure. The bankers feigned outcry over the formation of the Federal Reserve system. Government sold it to the people as a means of protecting their money from greedy bankers, and when the people saw that Rockefeller was against it, it justified their support because the baron was being reigned in by their protectors. Rockefeller, of course, was one of the architects of the Federal Reserve system, and went on to amass fortune that would have been impossible in free market banking. Corporatists that support regulation are portrayed as altruistic, the rare non-greedy capitalist who agrees to limitations for the benefit of the people, to keep his greedy competitors in check. In the end, he always benefits while the consumer loses and competition is stifled.
As Ron Paul says, we have lost our way. We have lost our confidence in free markets. We look to government for solutions to everything. Corporatism is the tool governments use to undermine confidence in free markets, and to gain control over all production. Mussolini would be proud.