I really don’t understand how a libertarian economist thinks of large corporations as wrong in general.
Well, if you ask me to compare my feelings about government with my feelings about large corporations, I will sound like a libertarian economist.
But large corporations trouble me for many reasons.
1. There is a lot of power concentrated at the top.
2. By the same token, there usually are many workers who lack autonomy.
3. What I call corporate soap opera, and what most people call office politics, is a big part of life in large corporations.
4. Internally, a business is run as a command-and-control operation, not as a market. In any command-and-control setting, a lot of effort goes into gaming the system. That is, for any set of compensation policies and corporate rules, the employees mostly try to maximize their ratio of reward to effort. For its part, top management has to put a lot of effort into designing and policing the system in order to try to minimize gaming.
5. Large corporations and government tend to form symbiotic relationships, aka crony capitalism. The big corporation can negotiate for favors (“too big to fail” being one example). And big corporations are handy targets for regulation and extortion.
By the way, I found many of the comments on that post, about the Internet’s bad turn, insightful.
Some other interesting interviews on the state of the net
http://nymag.com/tags/the-internet-apologizes/
Related to no. 5, corporations, primarily existing to limit shareholder liability, can only exist through the state, so there is some element of state coercion in a corporation’s very being.
Interestingly, state “coercion” also limits individual liability as well.
If I as an unincorporated plumber wreck all the plumbing in your house, or even your whole neighborhood, the “coercive” power of the state limits my liability only to my present and future wealth. For example, the “coercive” power of the state forbids you from selling my children into slavery to pay my debts or, for very large debts, from selling my cousins into slavery.
So now that we’ve established that “unlimited liability” is actually “limited liability”, we can debate the optimal boundaries of those limits and debate whether it is appropriate to call what the state is doing in recognizing limited liability corporations “coercion”.
The things that trouble you about corporations are all amplified within government bureaucracy. And these days many of those bureaucracies have their own SWAT teams.
I don’t understand why so many people who fear big corporations want them all controlled or replaced by a single, immensely larger, heavily armed, and nearly unaccountable government.
As a libertarian, I find large corporations a fascinating, and sobering counter-argument to my libertarian ideas. Here is an example of central planning evidently working better than distributed self-coordination. The question is why is this true, and at what scale does it stop being true (as it evidently does, at the scale of entire countries).
To my mind, a country is essentially a large, heavily armed not-for-profit corporation. If you dislike big corporations, you should dislike big government. And, if you are a libertarian who thinks big government exists only because it is heavily armed, then how do you explain the existence of (unarmed) large corporations? (And don’t tell me they exist because they’ve captured the armed government – they may do that, but that’s not why they exist.)
Also, as a libertarian, I find I have a distaste for large corporations (if you dislike big government, you should dislike big corporations), which gives me a starting point for finding common ground with my leftist friends (who generally dislike large – not all – corporations, but think government – a large, armed corporation is the solution).
Here is an example of central planning evidently working better than distributed self-coordination. The question is why is this true, and at what scale does it stop being true (as it evidently does, at the scale of entire countries).
This was Coase’s question in “The Nature of the Firm.” It has led to a large literature, including (for what it’s worth) several Nobel Prizes. One thread has been to point to “market-like” structures in successful firms.
One way that corporations differ from governments is that corporations fail all the time. Even big ones. In the 1960s and ’70s, John Kenneth Galbraith used to give a lecture about how big corporations controlled their markets and couldn’t fail. It is interesting to go back and see how many of those corporations no longer exist, or are greatly reduced in employment and profitability.
BTW: it was heartening to see how many people on the left opposed the GM bailout.
Here is an example of central planning evidently working better than distributed self-coordination. The question is why is this true, and at what scale does it stop being true (as it evidently does, at the scale of entire countries).
It’s true mainly because (a) the goals of the corporation are finite and (b) people choose to deal or not to deal with the corporation.
The result of this is that shareholders, customers, and employees of the corporation are all pulling the same way with regard to the goals. When everyone agrees on the goals, central planning is actually very efficient for a great many decisions because it allows each participant to focus only in their particular arena and not have to consider any larger strategic picture. And since the corporation allows exit, anyone who disagrees with the goals or execution is free to discontinue their relationship with it.
Entire countries cannot be described by either of these. Except in time of existential war, when, incidentally, central planning is more successful due to greater alignment of goals, people’s goals are very divergent and national goals are downright frightening things that people rightly rebel against. And since countries occupy the territories where people live, individuals do not have any low cost options for exit.
This really should not be sobering or a counterargument to libertarian ideas. It is all about voluntary relationships and involuntary relationships. The involuntary relationships should be minimized, which means minimizing central planning by governments. Individuals’ relationships with corporations are voluntary by their very nature.
Individuals’ relationships with corporations are voluntary by their very nature.
Except when they aren’t. Some corporations are extremely difficult to avoid; some governments can be quite limited. As a practical matter Google is a greater threat to my liberty than the town government of nearby Kilearn, FL.
Of course, it’s easy to move away from (“exit”) Kilearn, Florida.
Yes, and if there was a practical way to exit Google and the credit rating agencies I would be much less concerned about them. An American usually can’t get a job without being Googled and can’t get a place to live (apartment or mortgage) without a credit check.
5. Is a problem that would not exist in a “libertarian” government; therefore it’s not fairly a critique of large corporations.
3 and 4 are substantially similar: the purpose of office politics is gaming.
Coase, as I understand him, described the reasons for 1 and 2. The costs of inefficient allocation of resources from command and control in a corporation can be lower than the costs of negotiating every single activity of the employee. Therefore some amount of command and control is more efficient than free markets for every employee activity.
As the corporation gets larger, the costs of 3 and 4 grow. At some point, the firm can no longer compete with other, more efficient firms. The firm must at that point either tame the costs of 3 and 4, or fail. (under a libertarian, free market government with no rent-seeking).
Therefore I believe that without 5, you should not have a problem with 1,2,3, and 4. They represent an allocation of resources continually evolving toward efficiency.
Governments can endure much larger 3 and 4 problems because of their monopoly of the use of force, which they use to suppress opposition. IMO, that’s why it can be intellectually consistent to be comfortable with the existence of large corporations (under a libertarian government), yet opposed to large governments.
But large corporations trouble me for many reasons.
Since I made the original comment, I forsee that large corporations are filling the gap of the old Lords of the Europe did from 1300 – 1800 or Religion did until 1914. They were the balance against large government/Monarch power that helped mitigate their absolute power. (So in 1800 US Congress/British Parliment did a lot of the basic governing while balance the Executive Branch/Queen Victorias power over the population.) (Note this is very poli sci theory that as federal government diminishes other actors fill in.)
1) I still think in 100 to 200 years a large corporation will declare war on a small nation that screws them over. (They can hire an outsource company for this.)
2) The government and large corporations model did survive the Great Recession a lot better than the The Great Depression experience. It was messy as hell but it did decline like The Great Depression did.
3) Is worker autonomy that important? And I do feel libertarian economist underestimate the power of cooperation that a good running company can produce. (Just think how effective Amazon is today only being 24 years old that has already become a company that is taking on the Post Office & Wal-Mart.)
4) It does seem conservatives are really lamenting the diminished role of religion over the society. (It was a local control over the US population until 1960ish.) Is this gone forever and I don’t see libertarian economist with any good ideas here?
5) With tech it is lot easier for large corporations to manage economies of scale. Taking Econ in 1990, I did have a Professor that asked why the Marginal cost must always increase at some point? In 1990 it felt like it generally did but he was right in the tech era. Some much is systems that competitors have a hard time competing (I think is driving the Big Bank advantage), and just think that Amazon with low profit needs and continuous falling marginal cost make grow to. (It will become a monopoly in retail but just think how many people are now Prime? 100M…That is nearly 30% of the population.)
6) I suspect the coming mistrust of large corperation for libertarians is:
5a) As a group, large companies are no longer controlled by conservatives. They love mostly libertarian economist but tend to support liberal social issues and I believe they are comfortable with a slight neocon US foreign policy. Large corporations really like the US being the world police.
5b) A lot of threats of the police state are corporation security and choices. Just think how many security cameras there are in the US and most are private companies that have your licence plate on every single time you visited a grocery or department store. Or how cashless our society is becoming in general. Most of this is corporation and consumer choices not a government mandate.
why the Marginal cost must always increase at some point?
It does, but that point is sometimes outside of the relevant economic space.
Consider an ebook. There is very little marginal cost to making an extra copy. If you were trying to make as many copies as possible, eventually you would run out of available memory. You would have to buy a new hard drive (flash drive, whatever). If you kept going, you would eventually bid up the price of hard drives. The marginal cost would increase.
But in reality, there’s more than enough memory available to provide a single copy of a typical ebook to anyone who wants it, and the marginal value of a second copy is small. No ebook has ever run into this problem.
Bitcoins have. Bitcoin mining became a big enough business that the supply of hardware used for mining (midrange graphics cards) experienced a shortage and price increases.
I share the commenter’s political leanings and also his distrust of large corporations (though I observe, counter to my expectations, that Amazon has been a notable force for good in my life — it A) saves me a ton of time in acquiring goods and B) facilitates reading more books). I reduce cognitive dissonance on this by thinking about Bryan Caplan’s Six Stages of Libertarian Denial http://econlog.econlib.org/archives/2010/11/the_stages_of_l.html. Usually I resort to step 2 — if some company is too big for comfort, you can usually identify some way in which regulatory barriers discourage competition. I’m not so sure about Facebook (which I think of as akin to Big Tobacco in terms of producing social bads).
“Too big” for comfort is somewhat misleading. The fundamental issue here is competition, and there were many historical examples of small companies that were still effectively local monopolies.
And sometimes monopolies arise for ‘natural’ economic reasons that have nothing to do with regulation or even anti-competitive bad behavior. In most traditional natural monopoly contexts, the state imposes special constraining regulations under “regulated utility”, “common carrier”, or other legal regimes. So far, these regimes have not been extended to certain internet services, though there are strong arguments that they also tend toward a new kind of natural monopoly – maybe a “spontaneously coordinated socially entrenched monopoly” (or just “social monopoly”) and that, indeed, being a natural monopoly is an indispensable economic feature of a durably profitable company in a zero-marginal-costs environment. (There is an analogy to money, but that’s beyond my scope here.)
It’s also worth remembering that internet information-and-communication companies are special because they now play a special and uniquely important role in our society. Without healthy competition or regulation, if internet and media companies start to agree with each other on ideological norms and what can and cannot be said over their platforms, then they are inescapably exercising political power over the individual who has no adequate alternatives given the platforms all his social counter-parties are using.
I think it is reasonable for a Libertarian to argue that their vision of a free society requires that no entity without effective competition – either state or company – should be able to exercise that kind of power, and it would be a lesser evil to grant the state the power to force competition or openness than to grant a private monopoly the power to control what is permitted in the society’s exchange of ideas.