Plutocracy, Oligarchy, and the Myth of Free Markets

The Occupy Philosophy blog recently posted an article about “plutocracy,” or rule by the wealthy, written by Brian Leiter, Director of The Center for Law, Philosophy & Human Values at the University of Chicago.  In his commentary on American plutocracy, Leiter asserts that “at historical moments pregnant with the potential for significant social and economic change, the choice of language sometimes matters.”  In light of these premises, let us examine his position.

Leiter identifies “plutocracy” as the primary ill in the modern United States.  He asserts that “plutocrats” have undermined democracy.  He states that “the United States is the most powerful ‘plutocracy’ in the world. It is no longer a democracy.”

To be precise about our “choice of language,” the United States Constitution guarantees a republican form of government, not democracy; and, insofar as the law originally limited political participation to white, land-owning males (the capitalist class), the United States has always been a plutocracy.

But the more profound problem with Leiter’s argument lies in his particular invocation of “plutocracy” as the source of the problem: to equate wealth with power does nothing to explain how wealth translates to power, but simply assumes this as a fact.  This, in one sense, amounts to simply stating the obvious.   It is like pointing out that businesses are run by businessmen, without discussing at all what varieties of business are present, how they operate, or how they are integrated with or, as the case may be, antagonistic to society at large.

I. Whither Capitalism?

Leiter begins by observing that “we are now in the fourth year of the worst economic catastrophe in the capitalist world since the Great Depression.”  While this, at first glance, may appear uncontroversial, some qualification is needed with respect to the use of the term “capitalism.”  Not only are there ideological disputes at issue, but historical conditions which are, on the whole, inadequately addressed in contemporary discourse.

The late 19th Century, in which wage labor became a dominant mode of subsistence, brought about radical changes in the nature of capitalism as industry became increasingly institutionalized and bureaucratized.  The entrepreneurialism of the revolutionary bourgeoisie gave way to a commingling of private and public bureaucracy — of capital and political power — and set the stage for the working conditions of the early 20th century.

It was here we saw the ascendency of the labor union as a serious political and economic power.  The antagonism of government to unionization was a result of the union’s encroachment on the management prerogatives of industry (that is, the setting of wages and working conditions). The state, acting on behalf of capital, revealed the presence of the close-knit connections between political and industrial power that had developed during the second half of the 19th Century.

By the middle of the 20th century, this trend continued to the point where, what had traditionally been called “the market” had ceased to be a relevant force in the dominant culture of the United States.  Classical liberalism assumes that capital (land and machinery) is fixed, while labor is flexible.  Industrialization caused mass migrations of labor from farms to urbanized areas, and workers readily acquired new skills to adapt to different types of labor.

As labor has become increasingly specialized, as two-income households have become more common, and as benefits have become an increasingly important part of employee compensation, labor has accordingly become less flexible.  At the same time, capital has moved overseas, and become more flexible.  By the end of the 20th century, the traditional relationship between capital and labor had been well inverted.

Today, when one uses the term “capitalism,” this term means different things to different people.  The American conservative uses the word to invoke a nostalgic vision of 19th century entrepreneurialism.  The American liberal typically uses the word to indicate a mode of collectivist action wherein professional managers control the means of industrial-scale production on behalf of absentee owners.

There is an important sense in which even Nazi Germany was a capitalist country.  To be sure, it wasn’t market capitalism — any more than market capitalism prevails in the United States today — it was a form of monopoly capitalism that took the State as the primary consumer, and which used an imperialist war of expansion to organize production.

Although the official ideology of the Nazi Party espoused a socialist organization of society, the Nazis did very little to restructure private property or private profit along the lines of socialist ideology (except for the expropriation of Jewish wealth, which was handed over to industrialists and bankers).

Between World War I and World War II, German industrialists were a key component to the German rearmament, and the same German industrialists were the key beneficiaries of the war economy.  The industrialist Fritz Thyssen, for example, was a central financier of the Third Reich, as was the Association of German Industrialists.  The automobile manufacturer Volkswagen was a private corporation that produced automobiles for the Third Reich.  Max Amann profited enormously as a publisher of Nazi propaganda.  The Zyklon B used in Nazi gas chambers was a commercial product.

Insofar as the Nazi economy was characterized by a vast agreement between industrialists and politicians, it is worth noting that American business and government alike agree that growth is the key to success.  This is despite the fact that we live on a planet with finite resources, the exploitation of which is characterized by diminishing returns, and that increases in worker productivity are of only marginal benefit to workers themselves, who have been seeing their compensation stagnate or diminish for quite some time.  It is government and industry agreeing that growth is of the utmost importance for the industrial-scale corporation.

II. Who Competes?

The typical American conservative will construct a binary opposition between capitalism understood as “free markets” and socialism understood as “economic planning.”  This is, however, a false dichotomy.

The modern corporation is largely defined by organizational prowess, and insofar as these organizations are risk averse, the chief market operations of the industrial firm are actions meant to eliminate market forces.  This is called planning.  A farmer in the midwest can be fairly certain of finding the fertilizer he needs when he needs it precisely because modern corporations are expert planners.

Stability is the enemy of competition (which must be unpredictable if it is to be fair), and insofar as corporations want to guarantee favorable performance for their shareholders, they set out to ensure economic stability and predictable growth.  Marketing and advertising are means to ensure consistent demand.  Corporations will sell their products at a loss to undercut competitors, and if this fails, they may buy their competition outright.

Because executives rarely go to prison when corporations break the law, corporations are apt to operate in open violation of the law if it will snuff out the competition — this is precisely what Microsoft did in Europe, paying $2 billion in fines during a decade of operation in direct violation of EU trade laws.  Corporations that pollute are granted enormous subsidies: given that most homes and businesses must pay for garbage collection, why should the biggest polluters be exempt to the extent that they are?  Insofar as schooling prepares students for employment, and college trains students in industry-standard skills and software applications, the cost of education represents a form of subsidy.

The result of this relentless push by modern industry to eliminate market forces at every opportunity has a profound impact on daily life — albeit one that is difficult to perceive at first glance.  Although there are many channels to choose from on television, most markets are served by a cable TV monopoly.  Although a consumer has many different brands of computers available to them for purchase, one firm — Intel — makes most of the chips in these computers.  A few large firms make most of the hard drives and optical drives in these computers.  Microsoft makes the operating system for most of these computers.  Computers are highly commoditized, and relatively few firms control the market for this commodity.

This dominant market arrangement is known as oligopoly, and is characterized by collusion between a few major firms to mutually ensure their continued dominance.  And it is not just the the cable television market or the technology sector that is characterized by this arrangement: as of 2005, 90% of the soy crop grown in the US was of the patented Roundup-Ready variety sold by Monsanto.  One company — Archer Daniels Midland (ADM) — claims close to 50% of the domestic market for ethanol.

US Government mandates that gasoline be blended with ethanol increased ADM’s net earnings by 26% in 2006 alone.  This is just one way in which ADM is the beneficiary of subsidies and governmental planning.  ADM also benefits from agricultural subsidies for corn, since most of the ethanol it produces is made from corn.  In 1993, ADM was also the target of the largest price-fixing case in US history.  It’s not just Microsoft that engages in anti-competitive business practices.

The demand for ethanol in gasoline, from which ADM benefits so enormously, is predicated on access to roads.  Roads are heavily subsidized.  For federal highways to be financially solvent, for example, the federal gasoline tax would need to be raised by 40¢ per gallon.  The federal gasoline tax was last raised by a nickel in 1993 — and whatever proceeds might be had from that increase have been consumed by inflation.

Not only are roads heavily subsidized, but the research that goes into advanced biofuels represents a subsidy as well: it could be argued that, given the economic law of diminishing returns, the money spent researching biofuels could be better spent investing in various forms of mass transit (though this would make the unpleasant implication that the American way of life is, as presently constituted, unsustainable — so politicians say what they must to get elected, and corporations keep giving consumers whatever marketing departments tell consumers they want).

None of this has happened by chance: the market is not an anarchy of small entrepreneurial firms as it was in the first half of the 19th century.  What we have in the West today is the result of planning.  Given that most wealth in the US is held by corporations, not plutocrats or governments, it is fair to say that most of the decisions about the US economy are the result of planning, since the modern industrial corporation is characterized by planning (that is, collusion with related firms and with government) rather than market competition (or voter turnout).

What is Excessive about CEO Compensation?

Although Mr. Leiter is content with the populist appeals of the Occupy Movement, which hold that excessive CEO compensation is the result of “avarice,” the truth of the matter is more subtle.  The problem of CEO compensation is not one of avarice, but, rather, is a particular solution to the personnel needs of the industrial corporation.

Most CEO’s are already wealthy by the time they are recruited.  Pay itself is not an incentive to work because they have neither fear of privation nor need for additional material comfort.  There are, then, two main approaches to providing them an incentive to work: psychological identification with the goals of the firm, or increased status.

Where CEO’s are recruited, rather than obligated to claw their way up through middle management, it is more difficult to get them to identify with the goals of the firm.  In certain industries this can be accomplished through an identification of the goals of the firm with specific social objectives (such as national defense), or through the dogma of indefinite growth (which even a tobacco company executive can participate in, and thereby contribute to society) — and it is here that a peculiar brand of nationalism comes into play — but in general it is easier to equate wealth with status, and motivate the CEO by enhancing his or her status accordingly (also satisfying the contemporary quantitative mindset).

And so growth becomes a central feature of American capitalism — providing both a psychological justification for those who manage industry on behalf of absentee owners (whose status derives from the circumstances under which they need only sit back and watch the money roll in) and what enables the firm to confer a form of status on the CEO.  It is through this fixation on growth that modern capitalism takes on an imperialist aspect.  It is moreover worth noting in this connection that the CEO is no more a capitalist than the typical pro-business unionized auto worker: the CEO is management, not a an individual proprietor, and is not inherently interested in the amassing of capital.

Of course, to the 99%, the CEO’s are, so to speak, high-status (in addition to being upper-class).  But what is often ignored is the extent to which they inhabit a completely separate social world with completely distinct norms.  There is, among industry, politics, and the military, a distinct affinity group — a set of shared goals, management practices, and close social ties.  You can see evidence of this affinity group where people who attain this status are able to move easily from one sector to the other.

Take former Vice President Dick Cheney, for example: he went from Secretary of Defense (military) to CEO of Haliburton (industry) to Vice President of the US (electoral politics).  It is not the case that the object of the work in any one occupation directly qualified him to occupy the other, especially in this era of specialization.  Yet what Cheney specialized in were certain management practices, bureaucratic proficiencies, and the cultivation of a specific social network.  His case is not an isolated one.

The personnel problem becomes a social problem where these people, who aren’t always the wealthiest, but who have access to authority and the media, set about normalizing the persistence of the affinity group from which they benefit.  It is not a matter of some wealthy folks being “well-intentioned” while others are “sociopathic” — though many in positions of power do exhibit sociopathic personality traits.  There is, more substantively, the important matter of why so many Americans go along with things.

Many Americans see collusion as waste and arrive at the conclusion that government should be run like a business, without ever stopping to think for half a second about what that means.  Many people believe that if government were run more like a business, it would work more efficiently.  If government were to hold efficiency to be of paramount importance, it would simply kill the infirm, rather than offer Social Security.  This is, of course, contrary to the US Constitution’s promise to “promote the general welfare,” understood as a means of guaranteeing “life, liberty, and the pursuit of happiness,” but markets, by definition, offer few guarantees.  It is a very circumscribed definition of “efficiency,” but one that highlights why “playing the stock market” is often equated with gambling.  Sometimes the bottom line isn’t the bottom line.

There are other problems with holding that government should be run like a business.  Businesses are not democratic organizations, they are authoritarian (you do what your boss tells you to do, and you don’t get to vote your boss out of office if you don’t like it); their management practices are in many cases proprietary (as opposed to publicly announced laws) and their office holders are appointed, rather than elected.

Furthermore, there are reasons to suppose that the ethical standards of conduct with respect to business and government are incompatible. Whereas a business man must be on the lookout for opportunities to engage in commerce, when an office holder does this, it’s called bribery or a conflict of interest.

Business (of the desirable, market-based kind) needs competition, but government needs loyalty. It doesn’t even make sense to think of government as competing: the whole point of a constitutional republic is that the state has a monopoly on the legitimate use of force as a means of coercion; the alternative is vigilante justice.

And What of it?

Where the notion that business represents a superior model for governance coincides with the ideology of political freedom deriving from economic freedom, it is worth noting that the sort of absolute freedom advocated by American conservatives is not the pinnacle of civil society, but its complete opposite.

In John Locke’s Second Treatise on Civil Government, published 1690, he states: “where there is no law, there is no freedom: for liberty is, to be free from restraint and violence from others; which cannot be, where there is no law: but freedom is not, as we are told, a liberty for every man to do what he lists” (57).  Liberty is having assurances everybody obeys the same law.

Laissez-faire economics is contrary to the Western Constitutional tradition, as originally conceived, and as understood in the mid 20th century.  Some centuries after Locke, in 1944, free market advocate Friedrich Hayek echoed much the same position, in articulating his view of rule of law: “The Rule of Law thus implies limits to the scope of legislation: it restricts it to the kind of general rules known as formal law and excludes legislation either directly aimed at particular people or at enabling anybody to use the coercive power of the state for the purpose of such discrimination. It means, not that everything is regulated by law, but, on the contrary, that the coercive power of the state can be used only in cases defined in advance by the law and in such a way that it can be foreseen how it will be used” (Road to Serfdom, Chapter 6).  Provided that individuals have a say in what laws are passed, freedom is having to obey only the law, and not yield to the whims of others.

The contemporary trend to privatize governmental services, then, is contrary to the goals of a just, democratic (or, republican, as the case may be) society.  It takes public resources and removes them from democratic control, under the banner of re-instating some nostalgic, 19th Century vision of entrepreneurial capitalism.

Of course, we have the benefit of history to tell us what that style of capitalism leads to: 15 hour workdays, no weekends, sweatshop conditions, mere subsistence pay, occupational safety hazards, and the like.  Union organizers fought tooth and nail for decent working conditions.  And already we can see both how far we’ve slid back into these precise conditions, and how they represent not the cooperation of individuals under the law, but the subjugation of individuals to what working conditions employers dictate.  This is an issue of no small concern, given that most people spend the better part of their waking hours for the better part of their lives working.

Say Again?

Where Mr. Leiter explains, “The social and economic world is both vast and complex, and in market economies, all the incentives of daily life demand focus on the immediate moment: closing this deal, getting to this business meeting, pleasing that client and, overridingly, getting what you can for yourself,” he is guilty of a gross over-simplification.

The very existence of government subsidies favorable to industry speak to the fact that these firms plan quite far ahead, and the lengths to which they go to undermine competition speaks to the extent to which they are averse to market participation.  The flaw here is the assumption that the conditions of a market economy are a relevant factor in shaping the shared goals of industry and politics.  These conditions do not prevail; rather, monopoly and oligopoly prevail.  There may be competition among filling stations and convenience stores or fast food restaurants within a particular neighborhood, but, the franchise agreements under which these small operators open up shop, as elsewhere, insulate the oligopoly from the risks of actual market participation.