Devil Red

http://www.frontpagemag.com/Articles/ReadArticle.asp?ID=3054
By Robert Locke
FrontPageMagazine.com | September 13, 2002

We are probably heading into some economic heavy weather which will spur needed debate on what's right and wrong with our economy. This will require our being clear about what kind of economy we really have. I have mentioned before that we increasingly live not in a capitalist society but in a corporatist one, and I would like to flesh out this notion.

What is corporatism? In a (somewhat inaccurate) phrase, socialism for the bourgeois. It has the outward form of capitalism in that it preserves private ownership and private management, but with a crucial difference: as under socialism, government guarantees the flow of material goods, which under true capitalism it does not. In classical capitalism, what has been called the "night-watchman" state, government's role in the economy is simply to prevent force or fraud from disrupting the autonomous operation of the free market. The market is trusted to provide. Under corporatism, it is not, instead being systematically manipulated to deliver goods to political constituencies. This now includes basically everyone from the economic elite to ordinary consumers.

Unlike socialism, corporatism understands that direct government ownership of the means of production does not work, except in the limiting case of infrastructure.1 But it does not represent a half-way condition between capitalism and socialism. This is what the West European nations, with their mixed economies in which government owned whole industries, tried to create until Thatcherism. Corporatism blends socialism and capitalism not by giving each control of different parts of the economy, but by combining socialism's promise of a government-guaranteed flow of material goods with capitalism's private ownership and management.

What makes corporatism so politically irresistible is that it is attractive not just to the mass electorate, but to the economic elite as well. Big business, whatever its casuists at the Wall Street Journal editorial page may pretend, likes big government, except when big government gets greedy and tries to renegotiate the division of spoils. Although big business was an historic adversary of the introduction of the corporatist state, it eventually found common ground with it. The first thing big business has in common with big government is managerialism. The technocratic manager, who deals in impersonal mass aggregates, organizes through bureaucracy, and rules through expertise without assuming personal responsibility, is common to both. The second thing big business likes about big government is that it has a competitive advantage over small business in doing business with it and negotiating favors. Big government, in turn, likes big business because it is manageable; it does what it is told. It is much easier to impose affirmative action or racial sensitivity training on AT&T than on 50,000 corner stores. This is why big business has become a key enforcer of political correctness. The final thing big business likes about big government is that, unlike small government, it is powerful enough to socialize costs in exchange for a share of the profits.

The key historical moments in the development of American corporatism can be easily traced. It got its start from the realization, during the Progressive period around 1900, that the night-watchman state was too weak to make the large corporate actors of the economy play fair. The crucial premise that enters here is that the capitalist economy cannot be trusted to be self-regulating, as it previously had been. This collapse of trust was also implicit in the 1913 creation of the Federal Reserve system. What the Great Depression did was destroy a second kind of trust: that the economy would reliably deliver material goods without government intervention. With these two different kinds of trust gone, corporatism becomes not only worthwhile, but necessary. Crucially, it becomes psychologically necessary, independently of whether government can deliver on its promises, because people instinctively turn to government as their protector.

Anyone who is serious about getting rid of corporatism must explain how they are going to restore these two kinds of trust or persuade people to live without them. In particular, it is almost certainly useless, as verified by the fact that government has grown under every postwar Republican administration, to try to nibble away at big government without renegotiating the social contract that underlies it. If we don't have a plan to renegotiate this social contract, we must face the fact that the electorate will demand that it be respected. Newt Gingrich, who thought that the failure of Clinton's health plan signified the electorate's rejection of "socialism," learned this the hard way.

Clearly, the New Deal was the biggest jump forward into corporatism, though this was not fully understood at the time. Many people, both pro and con, misunderstood it as a move towards socialism.2 As is well known, Roosevelt was an empiricist, not a systematic thinker, and many elements of the New Deal that were tried, such as the notorious National Recovery Administration, were rightly discarded. But the fundamental proposition, that government should take responsibility for ensuring the flow of material goods to the people, was rapidly embraced by the American people, which continues to embrace it today whether it admits it or not. When people demand that the government "do something" about a falling stock market, they are playing at capitalism while practicing corporatism.

The fundamental essence of corporatism is not technocratic but moral: what does government have the responsibility to do? What do people have the right to demand be done for them?

The economic Left likes corporatism for three reasons:

It satisfies its lust for power.

It makes possible attempts to redistribute income.

It enables them to practice #2 while remaining personally affluent.

The economic Right likes corporatism for three different reasons:
It enables them to realize capitalist profits while unloading some of the costs and risks onto the state.

The ability to intertwine government and business enables them to shape government policy to their liking.

They believe the corporatist state can deliver social peace and minimize costly disruptions.

This process has been described as "socializing the losses, privatizing the profits" by its leftist critics, who also call parts of it corporate welfare. What they don't get is that in a society which grants the fundamental premise that government should take care of everybody, government will, and big business is part of "everybody." Most economic arguments today are not between a socialistic ideal and a capitalistic one, as many seem to believe, but are arguments within the corporatist consensus. This consensus is incapable of gelling into a unitary consensus because it is supported by the two sides for different reasons. There is also no public, coherent ideology of corporatism because almost no-one is willing to admit they believe in it.
Let's look at some specific examples of corporatism:

The Export-Import Bank. This government agency helps finance exports of American products. The aim, laudable enough, is to create jobs in the US. But there is still the problem that doing this requires the government to consume capital, which might have created more jobs, (or just more wealth) if it had been allocated elsewhere. So this is classic corporatism: government allocating capital to private industry on the basis of political favoritism.

Agricultural price-supports. Contrary to myth, most of the money goes to agribusiness, not small farmers.

Industrial bailouts, like the recent one of the airlines. People do not trust the market to provide the airline service they think they "need." The truth is this country has more carriers than the market can support and a few should be allowed to die. No-one who really believes in free-market economics accepts the argument that jobs can be saved in the long run in this fashion.

Corporate bankruptcy law. This law assigns an artificial value, not supported by economics, to keeping dying companies alive, rather than letting the carcasses of competition's losers nourish the winners. It is responsible, for example, for preventing a needed cull of the airline business by letting Continental Airlines pass through its protections not once but twice.

Tariffs, quotas, and other trade restrictions. These transfer wealth from consumers to producers in the affected industries, whatever their other possible merits.

Affirmative action is generally viewed as a social-policy question rather than an economic-policy one, but it fits neatly into the corporatist model: government forces private industry to distribute jobs to a favored political constituency. If people really believed in markets, they would realize that irrational discrimination imposes a cost on employers, who therefore already have an incentive not to engage in it.

Fannie Mae, the government agency which raises money for mortgage loans in the private capital markets. This agency has deliberately been spinning out loans to sub-par borrowers who are doomed to default on them. It has become a major prop holding up real-estate prices, and is thus a key culprit in the ongoing mortgage bubble. Conservatives accept it on the grounds that home ownership makes people more conservative. But this may not be true forever if private ownership of housing becomes a public entitlement. This is part of an ongoing phenomenon that corporatism helps to drive: the erosion of the determination of political preferences by the ownership of property.3

Sallie Mae, the government agency which supervises student loans. The government has a system of directly-financed public universities, but is has also in effect annexed private universities. Cleverly, it uses a relatively small amount of public money to package the flow of a much larger amount of private capital to tuition. The principal problem with this is that it has become a subsidy machine for the spiraling cost of higher education. There is also the problem that any institution receiving federal funds becomes susceptible to regulations that otherwise wouldn't be legal. Bribes-if-you-do are a much less disruptive means of manipulating behavior than sanctions-if-you-don't, and corporatism hates disruption and loves business as usual.4 One way to interpret corporatism is as a systematic way for government to distribute bribes for submission to its authority.

In local government, corporatism is principally a matter of real estate. Let's take New York as an example, just because I know it best and the pattern is clearest here, though similar dynamics work in other locales to a greater or lesser degree. Basically, real estate development here has become so over-regulated and over-taxed that it is virtually impossible to do profitably without government help. Government is aware that it has strangled development, but still wants it to occur because voters want jobs, campaign contributors want their projects, and projects create patronage opportunities for politicians. Therefore, government selectively lifts the burden of taxation and regulation on certain projects to push them into the black. It does this with tax abatements, loan guarantees, zoning changes, condemnations, outright subsidies, tax-exempt bond issues, exemption from regulations, and selective public infrastructure investments. As a result, only projects with political support can happen, and every skyscraper is a monument to the political deals that enabled it to get built. The result is capitalist in the sense of being privately owned, but it is not a free market. Government is expected by developers to keep a steady flow of profits going (while keeping politically-unconnected competitors out of the game.) It is expected by construction unions to keep a steady flow of construction jobs. It is expected by the public to deliver shiny new skyscrapers full of jobs.

In science and technology, corporatism principally takes the form of federal government financing of research expenditures whose value is difficult for the private sector to capture on its own. Government pays for universities to provide industry with the raw feedstock of new discoveries that can be commercialized. State governments have entered this game on a lesser scale. Tax credits for research and development may also be interpreted as a public subsidy.

In the capital markets, the quintessential corporatist institution is the Federal Reserve Bank. Legally, it is not technically a government agency at all but a cartel of private banks. Prior to 1913, the maintenance of a viable capital market in the U.S. was not a government responsibility.5 From the 30's to the 70's, the Fed tried to institute the grand corporatist project of Keynesianism, but abandoned it when inflation proved it unworkable. Nevertheless, the responsibilities of the Fed have tended to grow as people expect it, for example, to bail out a falling stock market with cheap credit, as I have mentioned before.

Bankers are quite well aware that they can make speculative loans to financially weak nations and count on being bailed out by the government if anything goes wrong. Naturally, this creates a moral hazard, not to mention a misallocation of capital. But given that the Left wants to see capital allocated to the Third World, the Right wants banks to be profitable, and the public fears a crash, the bankers can always count on a bailout.

One can see how corporatism is likely to expand in the future. The privatization of Social Security is off for now, but remains inevitable, simply because there is no sustainable way to provide for a future income stream other than saving money now. But the stock market decline of the past few years has destroyed public trust that this market will always provide a reliable store of value, meaning that people will inevitably turn to government to make it provide one. What form this will take, cannot be predicted, but any privatization of Social Security will be accompanied by some governmental mechanism to stabilize investments. At best, this may mean diversification requirements. At worst, it may mean some horrible politicization of the capital markets.

The concept of corporatism provides a good way to analyze the failure of HillaryCare. With its attempt to involve private insurance companies, this plan clearly made a (clumsy) attempt to conform to the corporatist model. It was supported by big companies like GM, which saw it as a way to offload its huge health-care costs. Fundamentally, I think it would have worked if it hadn't been such an arrogant, secretive, heavy-handed, all-at-once undertaking. We are gradually getting the corporatist equivalent of socialized medicine in this country anyway. Corporatized medicine will mean nominally private health plans for the employed that are so heavily regulated in what they can charge and what they must provide that they might as well be run by government. It will mean requirements for all businesses to give their employees health coverage (something big business will love because it will destroy a lot of their small-business competitors.) It will mean regulation of drug prices, which will eventually make drug companies wards of the state. Lastly, Medicare and Medicaid will expand, with the help of state plans, to cover whomever is left, with a tacit subsidy to emergency rooms to cover the last dregs.

As I said, all these can be viewed as ways in which the corporatist state buys people's cooperation. But one cannot play this game without becoming susceptible to it, so that people buy the state's cooperation, too. Naturally, this produces the partly-valid complaint that we have a government for sale to the highest bidder. But in a society where people, institutions, and social groups are politically for sale to the highest bidder, what else could one possibly expect?

Both Right and Left like corporatism in practice and are very cozy with it. But they are also ambivalent about it in theory, because it contradicts many of their cherished ideological beliefs.6 At the level of ideological self-characterization, neither side has fully grasped what corporatism is nor can quite bring itself to admit that it endorses it. Thus in its utterances, the intellectual Left is still reflexively anti-corporate and the Right anti-government. Part of the twisted genius of Bill Clinton was that he came closer to admitting we live in a corporatist society than any previous president. Bush, who made his personal fortune off a public-private deal concerning a stadium, is just as good at playing the game in practice, but on the ideological plane he mistakenly thinks that what the corporatist synthesis takes from socialism is "compassion." Hence his painfully sincere efforts to be politically correct and nice about everybody, since he intuitively grasps that Americans will not accept the rhetoric of pure capitalism.

Realizing that our society is corporatist is the key to undoing many conservative misunderstandings. For example, we tend to be puzzled when the rich support the Left, which under classical capitalism they generally didn't. But in a society where government takes care of business, they often have a lot to gain from big government. Not to mention the fact that whole classes of the wealthy, i.e. lawyers, doctors, lobbyists, environmental consultants, defense contractors and others, make their money either helping people deal with government or are indirectly funded by government. Ownership of property used to make people conservative because they intuitively grasped that the means of the conservation of property were bound up with the means of the conservation of everything else: religious orthodoxy to social mores to cultural tradition to the Constitution. But now that corporatism has co-opted threats to property ownership, they don't feel the need for these things anymore.

I consider it highly unlikely that corporatism can be overthrown, though objectionable parts of it can certainly be fought. I will discuss what it means to be conservative in a corporatist environment in a future article. The key thing for us to understand is that many of our assumptions about what furthers our cause and what doesn't were derived under the conditions of a more capitalist society and increasingly no longer hold.

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1 This is not to say that government is necessarily the most efficient owner of infrastructure; I am well aware of the arguments for private toll roads and investor-owned utilities. It's just that, compared with the state-owned steel mills and supermarkets of pre-Thatcher Europe or the Soviet Union, they are not obvious failures. The quality, cost and productivity of publicly-owned utilities compares acceptably to privately-owned ones. And privatization of natural monopolies has problems of its own, as we saw in the California electricity crisis, even if these problems are caused by politics and do not refute the free-market ideal itself.
2 The final irony of corporatism is that it represents the triumph of the one 20th-Century ideology that is considered so utterly discredited that most educated people don't even bother to learn what it believed about economics: fascism. The exact means by which the end was carried out were very different in Mussolini's Italy, Franco's Spain, Hitler's Germany, or Tojo's Japan, and the manner was occluded by a lot of violence caused by other things, but the fundamental dynamic is the same as here: government assumed responsibility for guaranteeing the flow of material goods by private means after public confidence in the market's ability to do this collapsed. The fascists did it to avert communism. We did it for less desperate reasons, but the idea is similar. (The German and Japanese Nazis were not fascists, strictly speaking, but the core of their economics, separate from their use of plunder, was similar. See my article on what the Nazis were really about.)
3 See my review of BoBos in Paradise. The Republican share of the rich vote is declining.
4 The political class loves corporatism because it enables them to establish themselves in stable, profitable brokerage-relationships in which they manage the exchange of favors between government and the public in exchange for political support. This is a much easier way to stay in office than focusing their efforts on contentious issues and the public's fickle opinions about them.
5 This responsibility devolved in practice onto the Morgan Bank on Wall Street, which organized ad-hoc groups of banks to stabilize markets and enforce standards when needed. See the fascinating account in Ron Chernow's The House of Morgan.
6 The recently faddish book Empire is an attempt to understand global corporatism from a neo-Marxist point of view. Although rich in hit-or-miss insights, its Marxist assumptions prevent it from getting it right. Marxists have been observing the emergence of corporatism, and desperately trying to update Marxism to acco