Carson had a very nice article in the Freeman this month. I’m hoping to kick off a discussion about it. Here are his key points:
A big business operates in precisely the way that libertarians, particularly Austrians, hold is a poor way to operate. If the business is vertically integrated, it produces intermediate goods without recourse to any real prices - even if it uses internal pricing, the prices are determined by declaration, not supply and demand. Workers have no profit motive in producing efficiently, and managers, like central planners, lack knowledge of how the business actually works.
The preponderance of big businesses, which ought not to be able to compete in the market, can only be explained by government action.
Another thing to be explained is the fact that workers compete for jobs, when employers ought to be competing for workers - since demand is infinite, why is there any difficulty finding a job, given that people always want things done for them?
The key to explaining these conditions is a feudal past. In the feudal past, the rightful owners (homesteaders) of land were expropriated by a ruling class, and as a result could no longer work their land, but instead had to become wage-slaves. They had no option but to work for those who owned land, and be given permission to live somewhere as a result. Given that, they had no incentive to produce efficiently. Their incentive is to do the minimum work necessary to avoid being fired, and sometimes to increase their output for bonuses, but not to maximize production.
The government continues the process to this day through special privilege and subsidies for big business.
Yerp, I agree. I’m surprised Carson is so controversial amongst libertarians. The only position of his I’m aware of that should be controversial is the labour theory of value.
Well he makes an attempt to synthesize or reconcile both the labor theory of value and the subjective theory of value. I think he ultimately fails at doing this, but I also think that some of the Austrian attacks on him as being a “marxist” are mischaracterizations. It’s strange when someone is called a “marxist” for taking what pretty much amounts to a classical individualist anarchist position.
Because the works must be paid, so there is a limit to what the employer is willing to pay and the employee is willing to do the work for. Because you need to invest in capital, namely human capital like college attendance, in order to do some kinds of work.
I think it would be interesting to discuss some specific cases. A big consumer like government needs a big supplier to get its services from, so its very well possible it steams from this. Anyway, a lot of big businesses are successful because their model is not as centralized as some might think: that’s surely the case for franchises.
Could someone give a brief explanation of why this is? The only thing I can think of would be subsidies and perhaps some regulation favoring certain businesses but I feel like there must be more to it than that.
But how much of the capital need is created by government? For instance, in the absence of government, how many jobs that now require a 4 year degree wouldn’t? In fact, why should any job require it, rather than a skill set? In a related point, as Hayek pointed out in his Nobel acceptance speech, if the market can produce intermediate goods in the correct proportions to meet human desires several years out, why is labor such an issue? Now, you’re right, it isn’t as easy as I sketched to go from “demand is infinite” to “no unemployment” but I still think the path is there. There is a limit to what the employer is willing to pay - until he can’t get anyone to do it at that price - and there is a limit to what the employee is willing to work for - whenever a society pretends that it’s possible to eat without working.
Franchises might be a special case, since ownership is distributed in some sense. But the general point stands, I think.
There’s differential tax policy and the like, but there are many other more important centralizing forces. For a (relatively) small example, look at the dairy industry. Large commercial dairies were producing lower quality milk than small farmers, and doing it in such dirty conditions that they needed to pasteurize their milk, which added cost. As a result, they were being outcompeted. They went to their friends in government and, under the guise of “public safety” got pasteurization required. The small farms weren’t selling enough volume to pay for the fixed cost of a pasteurization machine, and so largely closed up.
There’s differential tax policy and the like, but there are many other more important centralizing forces. For a (relatively) small example, look at the dairy industry. Large commercial dairies were producing lower quality milk than small farmers, and doing it in such dirty conditions that they needed to pasteurize their milk, which added cost. As a result, they were being outcompeted. They went to their friends in government and, under the guise of “public safety” got pasteurization required. The small farms weren’t selling enough volume to pay for the fixed cost of a pasteurization machine, and so largely closed up.
I’m going to let someone else respond to your general commentary, but let me throw my 2 cents…
Sure, for instance, lawyers have some protections that probably needn’t be for simple trials like traffic cases. Anyway, for the most part, you want to invest in capital because it increases productivity. For instance, in a software company here, a girl was hired that didn’t know how to program. She was initially hired for a simpler kind of work, but now that she’s been programming, she is slow and slows everyone else. Besides, anyone can program after some instructions, but it doesn’t mean the results are that good. A firm and the customers will have to evaluate exactly if the productivity is worth the pay. It may very well be that paying a super-hacker is more worth the money than hiring some fool. Certainely, a medic with a good record will be paid way better than someone out of med school.
You also have to see that leisure as value. People want to work as less as they can. So, productivity increases not only give us more products, but allows each of us to live just as well while producing less.
Yeah, I always thougt a possible hedge for retirment savings firm, if investments start to return poorly, to buy intermediate goods. Anyway, this only applies to a small selection of them. Besides life span issues, most goods nowadays being electronic get obsolete pretty quickly.
Can you elaborate on this? If he said, in as many words, what your synopsis provides then he is wrong wrong wrong. The decision to vertically integrate can only be made efficiently if an outside market exists for the service to be incorporated into the business. Can I vertically integrate the task of shipping my product out to retail stores and warehouses profitably? That can only be answered by estimating the cost of trucks, drivers, gas, how quickly I need to have the product delivered, etc. I could come up with a per shipment estimated cost and compare it to using FEDEX, UPS and others. That will help answer my question as to whether the investment in delivering my own merchandise is efficient.
This is far different from saying that any vertical integration whatsoever is done without recourse to prices and thus is inefficient, which is obviously wrong. And I find it not very shocking that amongst the lefties here, so consumed with hate for big business, that they gloss over that very first point and shout a unanimous “YES, I AGREE” not even considering that the point, as ascribed to Mr. Carson, is indeed sloppily thought out. I too hate the fact that our current tax/subsidy/regulatory environment has made businesses far too big and inefficient compared to what a free market would allow, but lets keep our emotions and hate in check and remain reasonable. In the way that Mr. Carson’s point is made (as paraphrased by the OP), he is saying that any vertical integration, and thus any big business, is inefficient. But, on the free market there will/may be vertically integrated businesses (big business). They will tend to be as vertically integrated as profitability in that line (efficiency) will allow.
However, if Mr. Carson had said something to the affect that vertical integration has occurred in business today TO SUCH A DEGREE that comparison with outside prices is difficult and thus production is less efficient than otherwise, then I think we can all agree that he is correct.
I don’t think anyone, myself or Kevin, is arguing that there can be vertical integration without government interference. Without putting words in his mouth, I hold that vertical integration has advantages - cost savings and economy of scale, and disadvantages - I do include a version of the calculation problem among the disadvantages though. I also would say that the present regulatory environment makes this balance out in favor of vertical integration to a larger extent than would be the case otherwise.
The distinction between “vertical integration is done without recourse to prices” and “vertical integration may only be done efficiently if recourse to market prices may be made” is an important distinction. I agree that you, and Mr. Carson must have meant the latter, however the two are very different so I think it is important to know which point precisely he is arguing, which is why I posted.
I have to agree with Block here in observing that one can not know the optimal vertical integration of a firm, because that will be specific to the abilities of the personell, decisions of management, availability of certain resources and a host of other factors. Thus it can not be stated with any deductive certitude that vertical integration is ‘bad’, we can merely say that a world-monopolist can not calculate. But the intermediates we can say nothing about.
Of course, existing legal institutions as well as historical developments do seem to indicate overcapitalization and government-industry industry subsidization and cartelization. So I’m not disagreeing with you in that the laws and facts do lead toward this as a very solid empirical conclusion, but that it is not apodictic in certainty.
I agree, but I think we can add that we can know, with apodictic certainty, whether or not a particular policy will, all else being equal, cause more or less integration, or have no impact. I think we can know with apodictic certainty that our current policies tend to promote integration. That’s not quantitative, and the impact could in principle be small enough that no difference is actually produced (although I doubt it) but the tendency is still, I think, known with certainty.
He calls himself a “free market anti-capitalist”, IIRC. I suppose that would sound Marxian to someone who doesn’t know what he means by that. And to be honest, it’s not realistic to expect the majority of people not to make that association.