Anarchist-Literature/books/ACriticalExaminationOfTheEconomyOfScale/Chapter3.txt

Chapter Three

State Policies That Promote Corporate Size and Centralization
Capitalism, if we take it in R.A. Wilson's sense of a political and economic system in
which the state intervenes in the market on behalf of capitalists, has been exploitative
since the beginning.
It was established at the outset by massive acts of state robbery and restrictions on
liberty: the so-called "primitive accumulation" by which the peasantry's property in the
land was expropriated, the Laws of Settlement which acted as an internal passport system
restricting movement of the working class, the Combination Laws which restricted the
bargaining power of labor, and the mercantilism and imperial aggression by which the socalled world market was created. These matters fall too far outside of our focus for
detailed examination. A summary of all the uses of force involved in the establishment of
capitalism can be found in Chapter Four of Studies in Mutualist Political Economy.1
Once established on this basis, the system was maintained through various stateenforced legal privileges. This, also, is too far outside the scope of the present chapter to
examine in depth. The main forms of privilege that existed before the rise of corporate
capitalism in the nineteenth century were the "Four Monopolies" summarized by
Benjamin Tucker in "State Socialism and Anarchism," and will be considered in greater
depth in our examination of privilege in Chapter Eleven.
Our main concern here is not with this earlier system of privilege, but more
specifically with the state's later role in the creation and development of the corporate
economy, the concentration of capital, and the centralization of production. We will
show what specific policies of the state have promoted the domination of the economy by
corporations grown far beyond the point of maximum efficiency.
Our focus in this chapter is primarily on the ways in which the state promotes large
corporate interests. But I should mention that in fact the symbiosis works very much both
ways: the large corporation tends to promote state interests. The state has a special
affinity for the large corporation because it is more "statelike" in structure and internal
culture, and it finds it more amenable as well as an instrument of state interests.
Benjamin Darrington puts it quite well:
Large centrally organized firms facilitate the government's task of maintaining its
hegemonic position in society. The ability of the government to effectively regulate
the economy depends on the existence of economic institutions with organizational
structures that can be easily monitored and controlled. The regulation of a large
number of small businesses requires greater duplication of effort to inspect financial

1

Kevin A. Carson, Studies in Mutualist Political Economy.

records, ensure regulatory compliance, and collect taxes. Small organizations are
harder to punish for not cooperating with the law because they have less total value to
seize and the owners are more likely to fight the government because it is their money
and business directly at stake, not to mention the fact that small business [sic] are
looked upon more favorably by the general population than seemingly faceless and
distant corporations. The equipment used by small enterprises does not lend itself to
certification, regulation, and safety testing, and the labor employed does not lend
itself to the effective enforcement of laws concerning things like labor negotiations,
minimum wage, minimum age, professional licensing, racial and sexual quotas,
citizenship requirements, maximum hours, etc. Informal and small scale economic
relationships are almost beyond the range of government efforts to enforce its
mandates and collect taxes. By making business an agent of policy the state also
creates a useful scapegoat for diverting the ire of the public towards the iniquity and
exploitation of existing economic relations and positions the state to act as "white
knight" to protect the public and avenge the evils and excesses of "private
enterprise."2
The latter is parallel to the way corporate apologists use "big government" as a
bogeyman. In fact the real relationship between big government and big business has
always been primarily mutually supportive, and the enmity between them has been
manufactured largely for the proles' consumption.
As we shall see below, to some extent it's meaningless even to draw a clear dividing
line between the centralized state and the centralized corporate economy. It makes more
sense, simultaneously, to see the state as an "executive committee" of the corporate ruling
class, largely instrumental to the corporate interests in control of the state apparatus, and
to see the corporation as a branch of the state. The latter is especially true in the case of
"private" businesses conducting surveillance of their customers on behalf of the state
(e.g., "know your customer" laws in the banking industry, hardware and drug stores
monitoring purchases of potential methamphetamine components, AT&T's cooperation
with warrantless wiretapping, etc.).
I. THE CORPORATE TRANSFORMATION OF CAPITALISM IN THE NINETEENTH
CENTURY
The regime of legal privilege described above, predating the corporate transformation
of capitalism, took the form primarily of unequal exchange on the individual level,
whether it was the sale of labor-power on disadvantageous terms in an unequal labor
market, or the purchase of goods on unequal terms because of patents, copyrights and
tariffs. The individualist anarchists, habituated to view exchange largely in such
individualistic terms, mostly neglected the structural changes in the American economy--

2

Benjamin Darrington (economics undergrad, Yale University), "Government Created Economies of Scale
and Capital Specificity" (2007), pp. 7-8. Paper presented at Austrian student conference.

the tendency toward the concentration of capital and the centralization of production--and
the ways that the tariff and intellectual property monopolies promoted these structural
changes. In addition, Tucker and the other individualists for the most part ignored the
organizational ties between the corporation and the state, the state's increasing assumption
of the corporation's operating expenses through direct subsidies, and the state's limitation
of competition between large corporations through its cartelizing regulations.
Later in life, when Tucker took note of the trusts, he became pessimistic about the
potential for reversing the concentration of economic power through the mere elimination
of privilege. He feared that the great trusts had grown so large, and the concentration of
wealth so great, that they might be self-perpetuating even without further state
intervention.
Forty years ago, when the foregoing essay was written, the denial of competition
had not yet effected the enormous concentration of wealth that now so gravely
threatens social order. It was not yet too late to stem the current of accumulation by a
reversal of the policy of monopoly. The Anarchistic remedy was still applicable.
Today the way is not so clear. The four monopolies, unhindered, have made
possible the modern development of the trust, and the trust is now a monster which I
fear, even the freest banking, could it be instituted, would be unable to destroy. As
long as the Standard Oil group controlled only fifty millions of dollars, the institution
of free competition would have crippled it hopelessly; it needed the money monopoly
for its sustenance and its growth. Now that it controls, directly and indirectly, perhaps
ten thousand millions, it sees in the money monopoly a convenience, to be sure, but
no longer a necessity. It can do without it. Were all restrictions upon banking to be
removed, concentrated capital could meet successfully the new situation by setting
aside annually for sacrifice a sum that would remove every competitor from the field.
If this be true, then monopoly, which can be controlled permanently only by
economic forces, has passed for the moment beyond their reach, and must be grappled
with for a time solely by forces political or revolutionary. Until measures of forcible
confiscation, through the State or in defiance of it, shall have abolished the
concentrations that monopoly has created, the economic solution proposed by
Anarchism and outlined in the forgoing pages – and there is no other solution – will
remain a thing to be taught to the rising generation, that conditions may be favorable
to its application after the great leveling. But education is a slow process, and may not
come too quickly. Anarchists who endeavor to hasten it by joining in the propaganda
of State Socialism or revolution make a sad mistake indeed. They help to so force the
march of events that the people will not have time to find out, by the study of their
experience, that their troubles have been due to the rejection of competition. If this
lesson shall not be learned in a season, the past will be repeated in the future....3

3

1926 "Postscript to State Socialism and Anarchism," in Individual Liberty

But even then, he seemingly viewed such concentration of wealth as the result of the
prior operation of the Four Monopolies, working on an individual level. So his
pessimism, arguably, reflected a failure to consider the extent to which the power of large
corporations depended on state intervention on a structural level, subsidizing and
protecting them as organizations. Perhaps, then, we need not be so pessimistic.
As we shall see later in this chapter, Gabriel Kolko showed that the large trusts at the
turn of the twentieth century were not able to maintain their market share against more
efficient smaller firms. The stabilization of most industries on an oligopoly pattern was
possible, in the end, only with the additional help of the "Progressive" Era's anticompetitive regulations. The fact that the trusts were so unstable, despite the cartelizing
effects of tariffs and patents, speaks volumes about the level of state intervention
necessary to maintain monopoly capitalism. But without the combined influence of
tariffs, patents, and railroad subsidies in creating the centralized corporate economy, there
would not have been any large corporations even to attempt trusts in the first place. The
corporate transformation of the economy in the late 19th century--made possible by the
government's role in railroad subsidies, protectionism, and patents--was a necessary
precondition for the full-blown state capitalism of the 20th century.
The corporate revolution, and the domination of the economy by firms operating on a
continental scale, followed the completion of the national railroad system. The corporate
economy was made possible by high industrial tariffs and the full-scale subsidy of
"internal improvements"--along with corporate personhood, "substantive due process,"
and the rest of the legal regime growing out of the Fourteenth Amendment. The creation
of the latter legal regime was analogous, on a smaller scale, to the legal regime of Bretton
Woods and GATT that provided a political structure for global capitalism after WWII.

A. The Nineteenth Century Corporate Legal Revolution.
The American legal framework was transformed in the mid-nineteenth century in
ways that made a more hospitable environment for large corporations. Among the
changes were the rise of a general federal commercial law, general incorporation laws,
and the status of the corporation as a person under the Fourteenth Amendment. The
cumulative effect of these changes on a national scale was comparable to the later effect,
on a global scale, of the Bretton Woods agencies and the GATT process: a centralized
legal order was created, prerequisite for their stable functioning, coextensive with the
market areas of large corporations.
The federalization of the legal regime is associated with the recognition of a general
body of federal commercial law in Swift v. Tyson (1842), and with the application of the
Fourteenth Amendment to corporate persons in Santa Clara County v. Southern Pacific

Railroad Company (1886).
It was originally held under American constitutional law that there was no general
body of federal commercial law--only case law developed pursuant to the specific and
limited delegated powers of Congress. The diversity of citizenship jurisdiction of the
federal courts--their jurisdiction over disputes between citizens of different states,
included in the grab-bag of comity provisions in Article IV--was not pursuant to the
federal government's power to regulate commerce, but was simply intended to promote
comity between the states. Cases in diversity jurisdiction were to be decided, not on the
basis of any general federal commercial law, but on the basis of the law of the state in
which the tort or contract took place. Until Swift v. Tyson, this state law was taken to
include the case law which explicated it. Swift v. Tyson held that the law of the state
consisted only of statute law; as Justice Story argued,
in the ordinary use of language, it will hardly be contended that the decision of courts
constituted laws. They are, at most, only evidence of what the laws are, and are not,
of themselves law.
The federal judiciary, therefore, was governed in its diversity jurisdiction only by state
statutes, and not state case law. The federal judiciary was free to develop its own body of
judge-made common law--to judge according to "the general principles of commercial
law"--in deciding diversity cases.4 The state courts, at best, were to be treated, as the
King's Bench and other royal courts had been in the early decades after independence: as
sister courts whose decisions deserved respect as learned explications of the common
law, but carried no binding authority. As Horwitz argued, Story's opinion was a
throwback to the understanding of the common law as "found, not made," a general body
of principles accessible to reason, which had almost entirely collapsed by that time in the
face of the modern understanding of positive law.5
The Santa Clara decision6 was followed by an era of federal judicial activism, in
which state laws were overturned on the basis of "substantive due process." The role of
the federal courts in the national economy was similar to that of the contemporary World
Trade Organization on a global scale, with an "international" tribunal having the power to
override the laws of local jurisdictions which were injurious to corporate interests. This
is not, please note, a defense of such local legislation when it interferes with legitimate
property rights and freedom of contract. But such libertarian centralism--an
"international" legal regime that spares private actors the transaction costs of negotiating
their own terms under the rules of local sovereignties, by superimposing an overarching

4

In Morton Horwitz, The Transformation of American Law 1780-1860 (Cambridge and London: Harvard
University Press, 1977), p. 245.
5
Ibid. p. 246.
6
118 U.S. 394 (1886),
http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=CASE&court=US&vol=118&page=394.

sovereignty--is of dubious legitimacy.
And in practice, the "due process" and "equal protection" rights of corporations as
"juristic persons" have been made the basis of protections against legal action aimed at
protecting the older common law rights of flesh and blood persons. For example local
ordinances to protect groundwater and local populations against toxic pollution and
contagion from hog farms, to protect property owners from undermining and land
subsidance caused by coal extraction--surely indistinguishable in practice from the tort
liability provisions of any just market anarchy's libertarian law code--have been
overturned as violations of the "equal protection" rights of hog factory farms and mining
companies.
Four years ago, Robertson and the other [Clarion County Pennsylvania]
supervisors were debating an ordinance to restrict the spreading of toxics-laden
sewage sludge on local fields—a major issue in an area that has become a destination
for waste from Pittsburgh. The supervisors knew that messing with big business could
come at a price: Three years earlier, another Pennsylvania township had passed an
anti-sludge ordinance, only to be sued by a sludge hauler called Synagro, which
argued that the township had infringed on its rights under the 14th Amendment,
passed after the Civil War to guarantee "equal protection" to all....
After Santa Clara, federal judges began granting more and more rights to
nonliving "persons." In 1922, the Supreme Court ruled that the Pennsylvania Coal Co.
was entitled to "just compensation" under the Fifth Amendment because a state law,
designed to keep houses from collapsing as mining companies tunneled under them,
limited how much coal it could extract....
BY THE LATE 1990S, fear and anger over sludge application in rural
Pennsylvania—fueled by the deaths of an 11-year-old who got sick after riding his
dirt bike through a sludge-treated field, and a 17-year-old who fell ill after exposure to
sludge at a farm—was running high. Thomas Linzey found himself fielding calls from
local officials desperate for ways to battle the "biosolids" applicators, as well as the
corporate hog farms whose stench sickened people for miles around. Municipalities
had been used to keeping those nuisances at bay with their own waste ordinances; but
in 1997, in response to agribusiness lobbying, the state began enforcing a law that
invalidated the local rules. Residents packed schools and fire stations to air their
grievances. "These are the people with the shitkickers and the John Deere hats,"
Linzey says. "These are the people who salt the roads in the wintertime and fix the
roads in the summertime. We had rural farmers coming to community meetings with
the Declaration of Independence in their back pockets."
In response to local regulation of toxic sludge, the Pennsylvania Chamber of Business
and Industry's newsletter sounded the alarm over a "stronger force than evil space
invaders: the radical agenda of militant environmentalists that seems to have taken
possession of the township supervisors." One corporation sued, claiming that the

township's restrictions violated its rights with regard to "equal protection, due process,
taking without just compensation, and rights guaranteed under the commerce clause."
Last year, agribusiness took the fight to the state Legislature, supporting a law under
which the state attorney general could sue any local government for passing an ordinance
that "prohibits or limits a normal agricultural operation."7
The phrase "normal agricultural operation," by the way, foreshadows a later theme in
this chapter: the ways in which the federal regulatory state has preempted and overriden
older common law standards of liability, replacing the potentially harsh damages imposed
by local juries with a least common denominator of regulatory standards based on "sound
science" as determined by industry.
More important than either of the above changes, however, is the general change in
corporate law: a move toward general incorporation laws at the state level, and the rise of
corporate entity status8 under both state and federal law.
Robert Hessen has argued that general incorporation under statute law provides no
benefits that could not be achieved by simple private contract.9
Piet-Hein Van Eeghen, however, raises the question of whether the entity status of the
corporation, distinct from any or all of the individual stockholders, could be established
solely by private contract.
While it is common to list various typical corporate features, such as entity status,
limited liability and perpetuity, there is really only one defining feature: entity status.
Entity status means that certain legal rights and duties are held by the corporation as a
separate, impersonal legal entity. In the case of the private business corporation, entity
status implies that title to the firm’s assets is held by the corporation in its own right,
separate from its shareholders.
Illustrative of the fact that the corporate form of private enterprise deviates from
traditional forms of private property, entity status renders the legal position of both
corporate shareholders and managers (directors) awkward and ambiguous. As for
corporate shareholders, they are commonly regarded as the owners of the corporation,
but they are owners only in a limited sense. Shareholders do not have title to the
assets of the corporate firm, but merely possess the right to appoint management and
to receive dividends as and when these are declared; title to the firm’s assets reverts

7

Barry Yeoman, "When Is a Corporation Like a Freed Slave?" Mother Jones, November-December 2006.
<http://www.motherjones.com/news/feature/2006/11/when_is_a_corporation_like_a_freed_slave.html>.
8
The evolution of legal theory regarding the corporate entity status is discussed at length by Morton
Horwitz in The Transformation of American Law, 1870-1960: The Crisis of Legal Orthodoxy (New York
and Oxford: Oxford University Press, 1992), pp. 65-107.
9
Robert Hessen. In Defense of the Corporation (Stanford, Calif.: Hoover Institution, 1979).

back to shareholders only when its corporate status is terminated. The lack of
ownership rights over assets is illustrated by the fact that, in contrast to partners in an
unincorporated partnership, corporate shareholders cannot lay claim to their share of
the assets of the corporate firm nor do they have the right to force their co-partners to
buy them out. Corporate shareholders can liquidate their investment only by selling
their shares to third parties. In short, the ambiguity in the legal position of
shareholders lies in the fact that, while certain traditional ownership rights rest with
them (profit accrual and power to appoint agents to manage the firm for them), other
traditional ownership rights are exercised by the corporation as a legal entity separate
from them (title to the firm’s assets).
As for corporate management, their legal position is equally ambiguous. Managers
are appointed by directors who are the representatives of shareholders. Ultimately,
management is thus the agent for shareholders, managing the corporation as their
representative. This, however, is only part of the picture. While management is the
agent for shareholders in the sense of being ultimately appointed by and accountable
to them, it is also the agent for the corporation itself. After all, in order to manage the
corporation’s assets, management must legally represent the corporation as the
titleholder to these assets. And because the corporation is an impersonal legal entity,
agency for the corporation lends a significant degree of autonomy to the position of
management, which is precisely why it has proved so difficult to make shareholder
control over management more effective, despite the many legislative measures aimed
at enhancing management accountability to shareholders. The significant degree of
autonomy inherent in the legal position of corporate management was, of course, the
main theme of Berle and Means’s (1932) seminal work on the corporation. To sum
up, the position of management is ambiguous because management acts as agent for
two principals, the shareholders and the corporation.
Other typical features of the corporation like limited liability and perpetuity are
not independent, original attributes, but are derived from its entity status.
Shareholders possess limited liability because they do not own the corporation’s
assets and are, consequently, also not liable for claims against these assets.
Responsibility for corporate debt rests with the corporation in its own right rather than
with them. Corporate creditors cannot, therefore, lay claim to the personal possessions
of corporate shareholders, as they can to the personal possessions of partners in an
unincorporated partnership. The most shareholders can lose is their initial investment
when buying the shares, which happens only when the corporation goes bankrupt and
the shares lose their value. Such is the origin of limited liability for shareholders.
The corporate feature of perpetuity can also be traced back to the corporation’s
entity status. It is because assets are owned by the corporation in its own right rather
than by shareholders that the death or departure of shareholders does not affect its
continued existence. While unincorporated partnerships need to be legally
reconstituted each time partners leave, die, or are added, corporations continue

irrespective of who holds their shares. The corporation’s entity status thus gives it a
life independent of the life of its shareholders, which is the sense in which it is
commonly said to possess perpetuity or immortality.10
Van Eeghen argues that general incorporation under statute law is a source of special
privilege, insofar as it confers what were previously considered the incidents of statehood,
and is therefore impermissible from a libertarian standpoint:
It has, in fact, always been foreign to common law principles to allow private
persons the unrestricted freedom to assign their assets to the ownership of impersonal,
and thus state-like, legal entities. As Roy (1997, p. 46) notes: “This feature [entity
status] conflicts with a basic tenet of the common law of property: it clouds the
distinction between personal rights (in personem) and rights in property (in rem).” In
spite of his defense of the corporation, a liberal legal scholar like Richard Epstein
(1995, p. 273) agrees that limited liability “deviates from the ordinary common law
principles of partnership and agency.”11
Originally only state institutions (central, regional, and local government)
possessed corporate status, which seems entirely natural and appropriate. If we wish
to escape Louis XIV’s infamous dictum “l’état c’est moi” (“I am the state”)..., the
state should indeed be given a legal entity separate from its officials. Only if such a
separation exists can state power be vested in the office rather than the person; and
only when state power is vested in the office can it be circumscribed by law....
If it is agreed that entity status is indeed a typical attribute of the state, then
anarchocapitalists who advocate a stateless society have even more reason to oppose
private firms taking on state-like attributes such as happens when they acquire
corporate status.12
Further, Van Eeghen argues, corporate entity status and all its incidents have had the
practical effect of enabling all the negative features commonly identified in critiques of
corporate power:
(a) Increased Speculative Instability
Because incorporation separates ownership from control, shares in a modern
corporation can be traded without necessarily affecting the management nor the

10

Piet-Hein van Eeghen. "The Corporation at Issue, Part I: The Clash of Classical Liberal Values and the
Negative Consequences for Capitalist Practice" Journal of Libertarian Studies Vol. 19 Num. 3 (Fall 2005),
pp. 52-54 <http://www.mises.org/journals/jls/19_3/19_3_3.pdf>.
11
Piet-Hein van Eeghen. "The Corporation at Issue, Part II: A Critique of Robert Hesson's In Defense of
the Corporation and Proposed Conditions for Private Incorporation" Journal of Libertarian Studies Vol. 19
Num. 4 (Fall 2005), p. 39 <http://www.mises.org/journals/jls/19_4/19_4_3.pdf>.
12
Van Eeghen, "The Corporation at Issue, Part I," pp. 54, 56.

capital position of the firm. As a result, an active market in such shares develops more
easily. By contrast, the shares in an unincorporated partnership are less marketable
because they are more strongly linked to the risks and responsibilities of managing the
firm, which old owners are more reluctant give up and new owners accept. Moreover,
partners normally have the right to consultation in ownership transfers, which also
reduces the marketability of ownership stakes in unincorporated businesses.
Unfortunately, marketability and the potential for speculative trading are
intimately linked. Since incorporation significantly increases the marketability of
ownership stakes, it thereby also enhances the opportunities for speculative activity in
share markets. In addition, many of the participants in speculative markets are
corporations themselves and thus enjoy a degree of risk protection in the form of
limited liability. Because the balance between risk and reward is tampered with,
speculative activity is artificially stimulated....
(b) Increased Market Concentration and Concentration of Control
Because the corporate form increases the average firm size, it will also ceteris
paribus increase the degree of concentration in any given market. Furthermore,
because incorporation enhances the marketability of shares as well as the ease with
which capital can be raised, it also creates better opportunities to gain market share by
mergers and take-overs.
Generally speaking, corporate capitalist practice has strayed far from the freeenterprise ideal of market decisions being taken at a decentralized level by countless
relatively small suppliers and demanders so that market outcomes are broadly
impersonal. The very invisibility and beneficence of the invisible hand is thus under
threat.
(c) Increased Strength of the Profit Motive
Since corporate shareholders are normally so diversified that they become an
amorphous mass, only the lowest common denominator of their wishes can be
attended to, which is to maximize return on investment—the wish which the greatest
number of shareholders have in common. Put differently, the profit motive is given
additional impetus, because it has to perform the additional function of bridging the
gap between management and an estranged ownership. The divorce of ownership
from control also stimulates the development of a large, impersonal market in
corporate control, which makes it even more difficult for management to moderate the
pursuit of profit, as they live under the constant threat of losing their position through
take-overs—and recall how take-overs are already made easier by the corporate form.
That is why corporate behavior tends to be more strongly profit-driven than people
tend to be when acting in their private capacity. An exaggerated materialist bias is

thus introduced into the liberal capitalist ethos.13
Although Hessen argued that entity status could be established solely by contract, van
Eeghen takes issue with that claim. Hessen, van Eeghen argues, "confuse[s] the jointstock principle with corporate status." Entity status does not consist merely, as Hessen
seemed to think, of the shareholders acting "as a unified collective in a court of law";
rather, entity status refers to the corporation as "a legal entity separate from shareholders."
First, the fact that shareholders have no legal title to the assets of the corporation,
even when they seek to exercise such rights collectively (provided the corporation is
not thereby broken up), clearly suggests that the corporation is a legal entity separate
from the collective of shareholders and that title to these assets rests with the former.
Second, if entity status refers to the collective of shareholders and it is the product of
private contracting, there should be private contracts between individual shareholders
in existence which stipulate their collective ownership in respect of the firm’s assets.
But these contracts are simply not there....
If it is agreed that the corporation is a legal entity separate from shareholders, then
Hessen’s claim that it can be the product of private contracting is obviously severely
weakened if not dismissed. It is clear that private contracting can achieve only joint
ownership of the contractors’ assets (a partnership); it cannot establish a legal entity
separate from the natural persons of the contractors themselves to which they assign
their assets.
The legal status of nonmanaging partners is obviously similar to that of corporate
shareholders, in that they can also obtain limited liability, have given up their control
over assets and no longer have the right to consultation in ownership transfers. For
Hessen this is evidence to suggest that there is a seamless continuum that starts with
the straight, unqualified partnership and ends with the corporation, while the modified
partnership is positioned somewhere between the two. But there does seem to be a
fundamental difference between partnerships and corporations. Whereas in the case of
modified partnerships the rights and responsibilities of ownership are rearranged
between nonmanaging and managing partners, these rights and responsibilities are
partially cancelled for all corporate shareholders. There are no longer any managing
shareholders in a corporation; instead all corporate shareholders are silent partners.
From a liberal point of view, such modified partnerships are perfectly in order (e.g.,
the limited partnership or the Italian commenda), provided that some partners carry
the full rights and responsibilities of ownership and that accountability towards third
parties is thus not compromised.14
I confess the argument that separate entity status could be established by private

13
14

Ibid., pp. 60-64.
"The Corporation at Issue, Part II," pp. .

contract is not entirely implausible. Van Eeghen's argument from the nonexistence of
such private contracts is not, in itself, very convincing. One might argue that the general
idea of free contract is quite recent, that it has been given even comparatively free rein
only in the past few centuries, and that, even so, the form it has taken in that time has
reflected the path dependencies created by a far more statist society. A great many
contractual arrangements might be conceivable without the state (see, for example, the
work of the Tannehills or of David Friedman)15 that have never yet come into existence
simply because the state still casts such a huge shadow. Arguably, the very availability of
statutory provisions for general incorporation has had the effect of crowding out private
contractual arrangements. There is nothing inherently nonsensical or repugnant in the
idea of a number of private individuals contracting to create a permanent corporate entity
separate from any or all of themselves as individuals, or of local free juries choosing to
recognize the standing of such entities under the body of libertarian law.
Even were we to stipulate such an argument, however, it would not get Hessen and
his partisans very far. Whether the corporation, as distinguished by its entity status from
an ordinary partnership, could come about through private contracting alone, is in my
opinion a question involving so much counterfactual speculation as to be unanswerable.
But even stipulating that it could doesn't get Hessen very far. He misses the point
entirely:
The actual procedure for creating a corporation consists of filing a registration document
with a state official (like recording the use of a fictitious business name), and the state's role
is purely formal and automatic. Moreover, to call incorporation a "privilege" implies that
individuals have no right to create a corporation. But why is governmental permission
needed? Who would be wronged if businesses adopted corporate features by contract?
Whose rights would be violated if a firm declared itself to be a unit for the purposes of suing
and being sued, holding and conveying title to property, or that it would continue in
existence despite the death or withdrawal of its officers or investors, that its shares are freely
transferable, or if it asserted limited liability for its debt obligations? ....If potential creditors
find any of these features objectionable, they can negotiate to exclude or modify them.16

They could negotiate to exclude or modify them a lot more effectively in a system
where corporations had to be established entirely by private contract, than they can under
a system where incorporation is "automatic," as Hessen himself admits. The fact that the
state makes the establishment of entity status and all its accidents so much easier, by
providing a ready-made and automatic venue for incorporation, surely results in a
considerable distortion of the market. General incorporation legislation creates a
standard procedure for setting up a corporation with entity status, with standard forms to
file and automatic recognition to anyone following the prescribed procedure. Thus, the
state intervenes to make the corporation the standard form of business organization, and

15
16

Robert Hessen, "Corporations," The Concise Encyclopedia of Economics (Library of Economics and
Liberty) <http://www.econlib.org/library/Enc/Corporations.html>

essentially removes the transaction costs of organizing it.
Leaving aside the broader question of entity status, both Murray Rothbard and
Stephan Kinsella have argued that the narrower principle of limited liability for debt
could be established by contract, simply by announcing ahead of time that individual
shareholders in a firm would be liable only for the amount of their investment. In that
case, it would be entirely the voluntary decision of creditors whether or not to accept such
terms, and if most creditors found such terms objectionable, the market would punish
firms attempting to limit liability by prior announcement in this way.17 But the very fact
that limited liability can be had, not by negotiating it in a private contract on a case by
case basis and persuading each group of creditors separately to accept such terms, but
merely by filing some standard papers under the general terms of the corporate form
provided by statute, distorts the market away from the voluntary nature of limited liability
as it would exist under a purely contractual regime. If, under the auspices of the state's
code of laws, the limited liability corporation becomes the dominant form of
organization, how "voluntary" can the choice of alternatives be from the standpoint of a
creditor? As Gregory White, a commenter on Kinsella's article, pointed out:
...if you can get a large immunity from debts just by the relatively smaller cost of
incorporating, why wouldn't a self-interested investor/owner do so?
So once every firm of any substantial size is incorporated, what real 'agreement'
(really choice) is there?....
Rothbard is saying people should be free to incorporate, and I agree. He's also
saying government should have nothing to do with it, including an explicit grant of
immunity from debts (by "privilege of limited liability" and charter grants), as I
originally said and you rejected.
With limited liability to debts granted by government charter, the "right of a free
individual" to effectively choose the contract is destroyed by implication. In practice
they have little choice but to accept the limited liability condition, since it is a
government granted privilege that any business person would quickly seize on.
...The legislation distorts the market by destroying some measure of bargaining
power on the part of creditors.
In response to Kinsella's claim that the government merely duplicates the effect of
private contract ("The government only helps hang a bright neon sign recognizing that the
shareholders are broadcasting to all third parties: if you deal with us, you can't come after
our personal assets"), White responded:

17

Stephan Kinsella "In Defense of the Corporation," Mises Economics Blog, October 27, 2005.
http://blog.mises.org/archives/004269.asp

...[The "sign hanging"] guarantees an immunity, destroying possible terms of
negotiation. Without government, the corporation can do no more than ask for
agreement (sure, they can "announce" their resolute terms as well as I can announce
the sky is green). If you were to say that many contracts, and maybe even most, would
end up the same way if it were solely private, I would probably agree. But that won't
be the limit. The government distorts the market here -- no question about it. And that
distortion plays into natural rights. Some will not be able to recover their own
property, where without the distortion, they could have otherwise formed a different
contract. It will distort bargaining power in some circumstances. No doubt about it. 18
Whether or not it could be established by mere contract in a hypothetical scenario, the
understanding of the corporate entity status that emerged from the late nineteenth century
on was a radical departure from the earlier understanding of the property rights of
individual shareholders in a joint-stock corporation. To that extent, the modern
corporation with separate entity status really is fundamentally different from the earlier
joint-stock corporation. As understood under the earlier doctrine, the property rights of
the individual shareholder really were analogous to those of a partner. The understanding
is exemplified by the majority opinion in the Dartmouth College case, in which any
amendment to a corporate charter, or indeed "any fundamental corporate change," was
considered a breach of the shareholder's contract, a "taking" of his property. All such
changes had to be consented to unanimously by shareholders, in exactly the same manner
as members would consent to the change in terms of a partnership. Under the modern
understanding, on the other hand, the corporation is an entity separate entirely from any or
all individual shareholders, and governed by a simple majority vote.19
In addition, many critics of the corporate form argue that the "corporate veil" dilutes
legal responsibility.
It is true that officers and shareholders are technically liable for criminal acts, and not
legally exempt for criminal behavior under the corporate form, as Kinsella argued.20
And as Joshua Holmes pointed out:
Limited Liability is not at all absolute, as many libertarian detractors seem to
imply. In cases of fraud, or where the corporate [sic] does not have sufficient
independence from its shareholders, courts will "pierce the veil". When courts pierce
the veil, plaintiffs against a corporation can indeed hold the shareholders directly
liable. This often happens when the corporation is undercapitalised, that is, when the
corporation obviously doesn't have enough assets to cover its liabilities. This happens
surprisingly frequently, and more often in torts cases than contracts cases.21

18

Ibid.
Horwitz, Transformation of American Law (1870-1960), pp. 87-89.
20
Ibid.
21
Comment under Kevin Carson, "Corporate Personhood" April 24, 2006.

19

But as van Eeghen said above, the corporate form is a departure from the common
law, in its attenuation of ownership and personal responsibility. Sheldon Richman made
a similar observation, raising the issue of
whether one is at all responsible for what happens with one's property. It's not a
matter of merely giving money to the company. Unlike creditors, shareholders
supposedly own the corporation, but if their "property" injures someone, they are out
of the liability picture altogether. This is a strange notion of property. The real owner
is a fictitious person, while the real persons are not real owners. If one has no liability,
one has no incentive to pay attention to how "one's property" is being used.22
With ordinary forms of property under the common law, the burden of monitoring
one's property and avoiding the criminal or tortious use of it by one's hired agents is
assumed to lie with the owner. With the corporate form, the owner may not be exempt
from liability, but the normal presumption is the reverse.
The corporate veil seems deliberately designed to dilute or obscure personal
responsibility. The corporate form provides shareholders with all the benefits of
ownership, while freeing them from the normal responsibilities associated with property
ownership under the common law. An ordinary property owner is expected to take
reasonable care in overseeing it, and exercise reasonable supervision over his hired
overseers, or risk being charged with negligence if the property is misused to someone
else's harm. The corporate form serves not only to absolve the owners of such
responsibility, but to make the exercise of responsible control impossible. It functions, in
many ways, as a form of "plausible deniability," increasing the difficulty of assigning
blame for malfeasance.
Corporate officers, under pressure from "the market for corporate control" to increase
profit margins (without overmuch scrupulosity on the investors' part as to what means
management uses to achieve the result), are put in a double bind. As "quasibill," an astute
commenter on my blog, remarked on my review of van Eeghen's articles:
The reality is that management does get directives from the shareholders, in the
form of a demand for greater dividends/share prices. Management does respond to
this directive, sometimes at the expense of innocent third parties. And management
does present this situation as a defense - "I would've been fired had I paid for a proper
truck driver for that route!" and often juries/factfinders will buy that defense implicitly finding that it was the shareholder's demands that caused the negligence.23

http://mutualist.blogspot.com/2006/04/corporate-personhood.html
Ibid.
23
Ibid.
22

"Who will rid me of this turbulent priest?" If anyone considers the expression "plausible
deniability" overblown, consider this bit of legal advice:
First, the corporate veil is always disregarded by courts for criminal acts of the
officers, shareholders, or directors of a corporation. Further, federal and state tax laws
generally impose personal liability on those individuals responsible for filing sales
and income tax returns for the corporation.
For most other matters, the corporate veil is most often pierced by courts in
situations where the shareholders of a corporation disregard the legal separateness of
the corporation and the corporation acts as nothing more than an alter ego for the
shareholders' own dealings...
It is essential that minutes be maintained of board and shareholder actions.
Corporate minutes are the first line of defense against the IRS, creditors, and other
parties making claims against the corporation, particularly if a claim is based on a
theory that the corporation should not be taxed as a corporation or afforded limited
liability (piercing the corporate veil). Minutes can be the written record of meetings or
the unanimous written actions of the directors or shareholders taken without a
meeting. Either is acceptable, if properly done. Many closely-held corporations fail to
keep even annual minutes, which greatly weakens the position of the corporation and
its shareholders, directors, and officers in many circumstances. Regular minutes can
also:
• Prevent IRS claims of unreasonable compensation of executives who are
shareholders
• Protect against IRS claims of excess accumulated earnings
• Create defenses against lawsuits attempting to establish personal liability of
directors or officers, by evidencing board business judgment and specific
authorization
• Protect against spurious lawsuits of minority shareholders
• Establish authority for corporate actions for the benefit of outside parties
Minutes of a meeting should be prepared by the Secretary of the Corporation,
signed, and then approved by the Board or shareholders, as the case may be, at the
next meeting or in the next action. This will minimize any claim that the written
minutes do not accurately reflect the action taken. Minutes should always reflect that
proper notice was given or waived, who was present and who was absent, and that a
quorum was present. Any abstentions or dissents on a vote should be noted for the
protection of the director abstaining or dissenting. In a closely-held corporation,
meetings are often held to create minutes rather than to make decisions, but holding
formal meetings with parliamentary procedures tends to result in more deliberate and
organized decision- making and is recommended if practical.

It is equally important that minutes be limited to material which helps and not
hurts the corporation. Resolutions should be set forth. The fact that a report was given
or a discussion held on a subject should be noted. Statements made by a director or
the actual content of a report or discussion, however, should generally not be
included, since these references tend to be damaging more often than not. Claimants
of a corporation will many times establish their case on the basis of minutes which
were too detailed. It is also important to maintain a climate in which each director
feels free to say anything during a board meeting and know that it will be strictly
confidential and not later show up in a written record describing the board's
deliberations. Generally, only formal resolutions adopted by the Board should be set
forth in minutes.
It is advisable to review any other detailed descriptions in minutes with legal
counsel before completing them.24
In other words, do the minimal amount of documentation to cover your posterior and pay
homage to the corporate form, but avoid potentially incriminating specific details as much
as possible, so that participants can distance themselves from the decision-making
process after the fact.
Although shareholders and corporate officers are liable in theory for malfeasance, in
practice the standard is applied far differently to the corporation, and the sole
proprietorship, respectively. As "quasibill" points out,
agency law is a major source of liability for sole proprietors, but is arbitrarily cut off
in the case of shareholders merely by invoking the statutory grant of incorporation.
One can argue that the corporate veil can be pierced, but the standards are not the
same; in essence, so long as the shareholder is extremely negligent in how the
business is run, he's insulated from responsibility. In contrast, agency law places a
burden on a sole proprietor to be responsible about his choice of agents.
[The shareholder is protected], so long as [he] can demonstrate that he "respected
the corporate identity." So, as long as he didn't mix and mingle assets, or fail to hold
corporate meetings, he's protected from liability. In fact, so long as he colludes with
his fellow shareholders, he can make it airtight by demonstrating that after all
corporate formalities were followed, they all voted for the same result. In this case,
they are all enforcing their own claim to having respected the corporate personality,
thereby benefitting all of them equally.
In contrast, a sole proprietor who turned the day to day operation of his business
over to a hired manager would be bound by the acts of his agent that were taken in the

24

"How to Avoid Piercing of Your Corporate Veil." Click&Inc. The Internet's Only Customized
Incorporation Service for Home & Small Business Owners.

scope of the agency, period. The sole proprietor is responsible for choosing that
person and imbuing him with authority. Especially if he didn't supervise the manager
very well and the manager uses the business to defraud customers. It doesn't take
much to see that a sole proprietor could be held liable for his negligence in such a
situation. In contrast, the shareholders are actually encouraged to take LESS care in
how the day to day manager is operating the business. The less care he takes, the more
he can claim he respected the corporate personality.
It doesn't mean that he will always be held liable when the agent acts negligently
in the scope of the agency, but he can be. And that is more than can be said about
shareholders, so long as they obey the rituals set forth in business incorporation
statutes.25
In countering the argument from the shareholders' moral responsibility, Kinsella is put
in the rather awkward position of repudiating much of what Mises said about the
entrepreneurial corporation, and giving a great deal of ground to Berle and Means on the
divorce of ownership from control. As we shall see in Chapter Seven, Mises repudiated
the idea of the managerial corporation, and made a clear distinction between the
bureaucratic and entrepreneurial organization. The entrepreneurial corporation, no
matter how large, is simply an agent of the owner's will; the owner's will is enforced by
the magic of double-entry bookkeeping.
Kinsella, on the other hand, was obliged to attenuate the ownership relationship as
much as possible, as theoretical owners, from the workings of the corporation:
It is bizarre that there is this notion that owners of property are automatically
liable for crimes done with their property... Moreover, property just means the right to
control. This right to control can be divided in varied and complex ways. If you think
shareholders are "owners" of corporate property just like they own their homes or
cars--well, just buy a share of Exxon stock and try to walk into the boardroom without
permission. Clearly, the complex contractual arrangements divide control in various
ways: the managers, etc., really have direct control; subject to oversight by the
directors... etc. But even here--to get a loan, the company has to agree to various
covenants w/ the bank, that condition its right to use property. Even though the law
would not call the bank an "owner" praxeologically it of course has a partial right to
control the property. If you have a contract allowing rentacops to patrol the building-hey, they are partial owners too. If you are leasing from a landlord--so do they. If you
allow the plumber in to fix the building--he has temporary right of control too. So
what?26
In a correspondence with Sean Gabb, Kinsella "raise[d] doubts about the effective

25

Comment under Stephan Kinsella, "Sean Gabb's Thoughts on Limited Liability," Mises Economics Blog,
September 26, 2006 http://blog.mises.org/archives/005679.asp
26
Comment under Carson, "Corporate Personhood."

control that shareholders have over their companies, and wonders if they should not
rather be placed in the same category as employees or lenders or contractors." The
answer, Gabb said, is that shareholders are "the natural owners of their companies. They
have not lent money to them. They are not providing paid services. They are the
owners."27
In a subsequent article, Kinsella took up the same question, albeit in somewhat milder
terms.
...it seems to me the default libertarian position is that an individual is responsible
for torts he commits. If you want to hold others liable for this too, you need to show
some kind of causal connection between something done by the third person, and the
tort committed by the direct tortfeasor. You seem to assume that this connection is
present in the case of a shareholder because he is the "true" or "natural" owner of the
company's assets. This I think is what troubles me the most--it seems too much of an
assertion to me.28
Now, at least in theory, there is a big difference between the shareholder, on the one
hand, and creditors, managers, and associated other parties, on the other. The shareholder
is the residual claimant, the owner of the firm, and the principal; the management are his
agents. The creditor's position, as opposed to that of the owner or residual claimant, is
only to a "contractually defined absolute return."29 It was of great importance to Mises to
demonstrate that the owner's control of the corporation was real, and that the management
were entirely his agents. Kinsella, on the other hand, is apparently so dead set on helping
the shareholder to evade the responsibilities of ownership, as to identify ownership with
"control," and to argue on that basis that since management is in the most direct position
of control, the "ownership" of the shareholders is ambiguous at best.
Kinsella ridiculed the common law concept of absolving an employer from respondat
superior, on the grounds that his employees were on a "folic."30 But that makes perfect
sense, given the way property ownership was treated under the common law. The
property owner was presumed responsible for how his property was used, under normal
circumstances, including the presumption of reasonable care in the supervision of those to
whom the management of his property was entrusted. A "frolic," as comical as the term
may sound to modern ears, was simply an exception to this strong presumption of
responsibility, a case in which the owner was held not to be responsible owing to
circumstances beyond his reasonable control.
But consider: the basis for respondeat superior (and I bring this up [because] it

27

Sean Gabb "Thoughts on Limited Liability" Free Life Commentary, Issue Number 152, 26th September
2006. http://www.seangabb.co.uk/flcomm/flc152.htm
28
Stephan Kinsella, "Sean Gabb's Thoughts on Limited Liability."
29
Quasibill comment under Ibid.
30
Ibid.

seems to me something along the lines of this principle must be employed to hold the
shareholder liable for acts of employees) has to do with the employer's practical right
or ability to control or direct the actions of the employee (this principle probably
underlies the "frolic" exception too). Can we assume that this control is present when
we move further back the chain of causation? Say, to the directors, who appoint the
managers? Or to the shareholders, who elect the directors? And if practical control is
one of the main relevant features that determines whether there is liability, again, why
couldn't lenders, employees, suppliers, customers, etc. at least potentially be held
liable? In some cases they exert more control and give more "aid and comfort" or "aid
and abet" in more visible and substantial ways than a mere shareholder....
....You conceive of a shareholder as the "natural" owner of the enterprise. I am
skeptical of relying on the conceptual classifications imposed by positive law. To me
a shareholder's nature or identity depends on what rights it has. What are the basic
rights of a shareholder? What is he "buying" when he buys the "share"? Well, he has
the right to vote--to elect directors, basically. He has the right to attend shareholder
meetings. He has the right to a certain share of the net remaining assets of the
company in the event it winds up or dissolves, after it pays off creditors etc. He has
the right to receive a certain share of dividends paid if the company decides to pay
dividends--that is, he has a right to be treated on some kind of equal footing with
other shareholders--he has no absolute right to get a dividend (even if the company
has profits), but only a conditional, relative one. He has (usually) the right to sell his
shares to someone else. Why assume this bundle of rights is tantamount to "natural
ownership"--of what? Of the company's assets? But he has no right to (directly)
control the assets. He has no right to use the corporate jet or even enter the company's
facilities, without permission of the management. Surely the right to attend meetings
is not all that relevant. Nor the right to receive part of the company's assets upon
winding up or upon payment of dividends--this could be characterized as the right a
type of lender or creditor has.31
Kinsella has come a long way from his initial argument that the corporation was
simply a contractual device for property owners to pool their property and appoint
managers for it as they saw fit, and there is little left of his trail of breadcrumbs. He
winds up, as quasibill comments, "intimat[ing] that there is no real owner of corporate
property - that an abstraction... [has] property rights."32
He does not seem clearly to grasp just how much baby he is throwing out with the
bathwater. In legal theory the shareholders are the owner, and corporate managers are the
appointed agents of their will, responsible to them in a way that they are not responsible
to lenders; so by arguing this Kinsella is in effect conceding much ground to those like
Berle and Means and Galbraith who argue that the "private" ownership is a legal fiction,

31
32

Ibid.
Comment under Ibid.

and that the corporation is a quasi-state institution controlled by managers with certain
contractually defined obligations--mostly usufructory--to shareholders. Mises' arguments
regarding calculation all assume an "entrepreneurial" corporation that is really an
extension of the owner's will and judgment; Mises saw the Berle/Means/Galbraith
argument as a challenge to be overcome, and his distinction between the bureaucratic and
the entrepreneurial large organization is central to his attempt to refute them.
Kinsella's defense of the shareholder based on the lack of control misses the point.
He wrote:
You [quasibill] see a sole proprietor as responsible for employees' torts; yet you think
there is an artificial exemption for "joint owners". If they just "stand in the shoes" of a
sole proprietor, why aren't they collectively liable?
But a sole proprietor is liable because he directs the actions of the negligent
employee, and actually runs the company--sets policies, controls is, manages it. In a
joint stock company, the shareholders don't do any of this. They elect the board,
which appoints managers. In my view, the managers are more analogous to the sole
proprietor than the shareholders are.
....Hessen here is making the same basic causation point I have made here: that
vicarious liability must be relied on to hold someone liable for the servant's actions-and in the case of a sole proprietorship, it is reasonable to do so because the
proprietor/master is hiring, training, supervising the servant/employee. But in the case
of a joint stock company, the same idea applies only to those sharehlolders who "play
an active role in managing an enterprise or in selecting and supervising its employees
and agents."
This makes sense to me. Merely being a shareholder is not sufficient. It's having
control. I believe most of the corporation opponents have some view that inherently
connects liability to property. I think this is confused and wrong. Liability flows from
one's actions--from control--from causing the harm to occur....33
But claiming the absence of control is not a defense, because it begs the question of
whether they should have exercised more control. The proper question is whether
property ownership ought to entail some minimal level of oversight and responsibility,
and whether one of the benefits of the corporate form (from the owners' perspective) is
that it enables the evasion of that responsibility. Arguably, doesn't the very act of
delegating control of property in a way that makes one's own direct oversight less
feasible, in itself make one liable for any resulting malfeasance by one's agent? Isn't the
absentee owner negligent precisely because he put himself in a position in which he
exercised little or no control over how his agents used his property? Isn't one of the

33

Comment under Ibid.

virtues of the corporate form, from the owners' perspective, precisely that it entitles them
to the profits resulting from management's shady behavior, and enables them to fire
managers for failing to produce an adequate level of profit by any means necessary, while
absolving them from responsibility for the actual means used by management--in short,
that it creates plausible deniability?
And as quasibill repeated, the standard of accountability for the actions of one's
agents is qualitatively different under a sole proprietorship and a corporation. The sole
proprietor is
the ultimate owner, who has the right to decide that someone else will run the
company.... But the manager ultimately derives his authority from the owner, who
has non-permanently delegated it to him. This delegation is, in itself, an act that has
consequences in the world. For this act, the sole proprietor can be held responsible,
including a situation where the sole proprietor hired a dangerous manager because
that manager was likely to yield higher profits.
As I've noted, the shareholder's decision to hire a director is, in fact, absolutely
immune as long as they follow some statutorily defined rituals. They are the ultimate
owner involved, and they are the one(s) that delegate the right to control to the
managers. This delegation is an action for which liability can possibly accrue, under a
libertarian theory. Under current law, it can't, unless the shareholder disregards a
fictitious concept.34
So there is an irresolvable contradiction in the Hessen-Kinsella understanding of
property rights in the corporation. Such defenders of the corporation start out by
defending it as a normal outgrowth of private property rights and the right, by free
contract, to make arrangements for governing one's property. But before they're done,
they wind up minimizing the property relations between individual shareholders and the
corporation. The overall effect is one of deliberate ambiguity, in which the corporation is
treated as property in the ordinary sense, or as an instrument of the shareholders' exercise
of property rights, only when convenient. There is a contradiction in saying the
corporation is merely a contractual arrangement for arranging property, like a partnership,
and then minimizing the property relationship or responsibility of any particular property
holder. Either the corporation is just another form of partnership, in which case
shareholders are the real legal actors, or the corporation is a state-created entity for
privatizing profit while attenuating responsibility. It can't be both ways.
Interestingly, some defenders of the corporation have been quite aware of the
contradiction. For example, Dwight Jones wrote:
....The main value of a corporate charter arises from the fact that powers and

34

Comment under Ibid.

privileges are thereby acquired which individuals do not possess. It is this that makes
the difference between a business corporation and a partnership. In the former there
is no individual liability.... There is no death.... It is not policy therefore for a
corporation to break down its own independent existence by burying its original
character in the common place privileges of the individual.... Any mingling of
corporate existence with the existence of the shareholders will weaken corporate
rights.35
Jones defended the attenuation of shareholder liability under the entity form, in terms
quite similar to Kinsella. But he perceived much more acutely than Kinsella that this
defense comes at a price: it completely rules out any defense of the corporation in which
the latter is an ordinary contractual expression of the property rights of the shareholders,
in the same sense as a partnership.
Even those defending entity status, like Hessen and Kinsella, as an outgrowth of
ordinary private contracting akin to the partnership, faced difficulties. The most notable
proponent of the "natural entity" doctrine (favored also by Hessen and Kinsella) was
Ernst Freund, author of The Legal Nature of Corporations (1897). Freund attempted to
reconcile the status of the corporation as a representative entity governed by corporate
rule, with an individualist understanding of it as the sum of its parts in the same sense as a
partnership. Nevertheless, he was somewhat put off by the fact that corporate powers
were vested directly in the board of directors. The practical effect, he was forced to
admit, was that
corporate capacity [was] thereby shifted from the members at large to the governing
body.... Such an organization reduces the personal cohesion between the
[shareholders] to a minimum, and allows us to see in a large railroad, banking or
insurance corporation rather an aggregation of capital than an association of persons.36
Henry Williams argued, in an 1899 American Law Register article, that shareholders
"possess[ed] no actual existing legal interest... whatever" in the corporation. They were
equivalent in law to "the heirs, or next of kin or residuary legatees of a living person"
(and I leave it to the reader to guess who the "living person" is). Their legal rights
accrued only at dissolution, and even then their rights were "entirely subsidiary" to those
of creditors.37
In the same regard, almost directly contrary to Mises' perception, the market for
corporate control, far from an instrument of the absolute property rights of the
entrepreneur, has been associated with the attenuation of shareholder property rights in
the corporation. As we saw above, the modern corporate entity status required a shift to

35

Dwight A. Jones, "A Corporation as 'A Distinct Entity,'" 2 Couns. 78, 81 (1892), in Horwitz, The
Transformation of American Law !870-1960, p. 91.
36
Quoted in Horwitz, The Transformation of American Law 1870-1960, pp. 102-103.
37
Ibid. p. 103.

majority shareholder control of the corporation, and an end to the earlier understanding
(reflected in Dartmouth) of the shareholder as possessing absolute property rights
analogous to those in a partnership. The result, by the early twentieth century, was a
common legal understanding in which "the modern stockholder is a negligible factor in...
management," and in which a sharp distinction was made between the status of "investor"
and "proprietor."38 The shift was encouraged by the rise of public securities markets.
Until the 1890s, public issues of stock were rare and public trading (outside of railroad
stock) almost unheard of. In an environment in which the issuance of stock was still
largely private and associated with the formation of joint-stock companies, it was more
plausible to regard investment in a corporation as equivalent to buying into a partnership.
The creation of public equity markets, in which shares were commonly acquired by those
with no direct role in the formation or governance of the firm, and bought on an
anonymous market rather than issued directly to the shareholder by the firm, made the
cultural holdover far less tenable. It became virtually impossible to maintain with a
straight face the earlier "trust fund" doctrine of Dartmouth and other decisions, in which
the shareholder was a partner with absolute property rights in the governance of the
corporation.39 By the turn of the century, the board of directors was clearly coming to be
seen as the agent, not of shareholders, but of the corporation as a separate entity.40
Incidentally, I can't resist pointing out that defending the status of corporate
management as agents for an imaginary collective entity, an entity with distinct property
rights of its own and capable of making contracts in its own name and otherwise acting as
principal, puts Austrian economists in a rather odd position, given their usual professions
of "methodological individualism."
To sum up, it may be true, as Hessen argued, that something like the corporate form-with entity status and limited liability--could be established by purely private contract.
But it's also true, as Gregory White said, that the state artificially lowered the transaction
costs of the corporate form compared to alternative models of firm organization, by
providing an established and virtually automatic mechanism to facilitate adoption of the
corporate form. What's more, it has promoted a particular model of the corporation out of
a number of possible alternative corporate models that might have been established by
contract. The standard corporate form, established under general incorporation laws, is
based on an amalgamation of capital which hires workers. The state artificially privileges
this form against, and crowds out, alternative corporate organizational models: for
instance, a model in which associated labor is the residual claimant and pays only fixed
contractual returns on borrowed capital.
B. Subsidies to Transportation and Communication Infrastructure.

38

Ibid. p. 93.
Ibid. pp. 96-98.
40
Ibid. p. 99.
39

"Internal improvements" had been a controversial issue throughout the nineteenth
century, and were a central part of the mercantilist agenda of the Whigs and the Gilded
Age GOP. Indeed, Lincoln announced the beginning of his career with a "short but
sweet" embrace of Henry Clay's program: a national bank, a high tariff, and internal
improvements. But the government's role in promoting a national railroad system
effected a revolution several orders of magnitude greater than anything that had occurred
before.
As we shall see below, the failure of the trust movement at the turn of the 20th
century reflected the insufficiency of railroad subsidies, tariffs and patents alone to
maintain stable monopoly power. But without the government-subsidized "internal
improvements" of the nineteenth century, it is doubtful that most national-scale industrial
firms would have existed, let alone been able even to attempt trustification. If the neoHamiltonianism of the 19th century was not a sufficient condition for the state capitalism
of the 20th, it was certainly a necessary one. As Coase pointed out, "[i]nventions which
tend to bring factors of production nearer together, by lessening spatial distribution, tend
to increase the size of the firm."41 This applies as well to inventions that lessen the cost
of spatial distribution by making transportation cheaper over longer distances. The effect
of transportation subsidies is to artificially enlarge market areas, and hence to artificially
increase firm size.
Adam Smith argued over two hundred years ago for the fairness of internalizing the
costs of transportation infrastructure through user fees.
It does not seem necessary that the expense of those public works should be
defrayed from that public revenue, as it is commonly called, of which the collection
and application is in most countries assigned to the executive power. The greater part
of such public works may easily be so managed as to afford a particular revenue
sufficient for defraying their own expense, without bringing any burden upon the
general revenue of society....
When the carriages which pass over a highway or a bridge, and the lighters which
sail upon a navigable canal, pay toll in proportion to their weight or their tonnage,
they pay for the maintenance of those public works exactly in proportion to the wear
and tear which they occasion of them. It seems scarce possible to invent a more
equitable way of maintaining such works. This tax or toll too, though it is advanced
by the carrier, is finally paid by the consumer, to whom it must always be charged in
the price of the goods....
It seems not unreasonable that the extraordinary expense which the protection of
any particular branch of commerce may occasion should be defrayed by a moderate
tax upon that particular branch; by a moderate fine, for example, to be paid by the

41

R.H. Coase, "The Nature of the Firm," 1937.

traders when they first enter into it, or, what is more equal, by a particular duty of so
much percent upon the goods which they either import into, or export out of, the
particular countries with which it is carried on.42
But that's not the way things work under what the neoliberals like to call "free market
capitalism." Spending on transportation and communications networks from general
revenues, rather than from taxes and user fees, allows big business to externalize its costs
on the public, and conceal its true operating expenses. Chomsky described this state
capitalist underwriting of shipping costs quite accurately:
One well-known fact about trade is that it's highly subsidized with huge marketdistorting factors.... The most obvious is that every form of transport is highly
subsidized.... Since trade naturally requires transport, the costs of transport enter into
the calculation of the efficiency of trade. But there are huge subsidies to reduce the
costs of transport, through manipulation of energy costs and all sorts of marketdistorting functions.43
Every wave of concentration of capital in the United States has followed a publicly
subsidized infrastructure system of some sort. The national railroad system, built largely
on free or below-cost land donated by the government, was followed by concentration in
heavy industry, petrochemicals, and finance. Albert Nock ridiculed the corporate liberals
of his time, who held up the corruption of the railroad companies as examples of the
failure of "rugged individualism" and "laissez-faire."
It is nowadays the fashion, even among those who ought to know better, to hold
"rugged individualism" and laissez-faire responsible for the riot of stock-waterings,
rebates, rate-cutting, fraudulent bankruptcies, and the like, which prevailed in our
railway-practice after the Civil War, but they had no more to do with it than they have
with the precession of the equinoxes. The fact is that our railways, with few
exceptions, did not grow up in response to any actual economic demand. They were
speculative enterprises enabled by State intervention, by allotment of the political
means in the form of land-grants and subsidies; and of all the evils alleged against our
railway-practice, there is not one but what is directly traceable to this primary
intervention.44
The federal railroad land grants, as Murray Rothbard described them, included not
only the rights-of-way for the actual railroads, "but fifteen-mile tracts on either side of the
line." As the lines were completed, these adjoining tracts became prime real estate and
skyrocketed in value. As new communities sprang up along the new routes, every house
and business in town was built on land that had to be bought from the railroads. The

42

Smith, Wealth of Nations pp. 315, 319.
Noam Chomsky, "How Free is the Free Market?" Resurgence no. 173
<http://www.oneworld.org/second_opinion/chomsky.html>.
44
Nock, Our Enemy, the State, p. 102.
43

tracts also included valuable timber land that was made even more valuable by
government reservation of potentially competing timber lands.45
As we have already seen in a previous chapter, it was the creation of the national
railroad system which made possible first national wholesale and retail markets, and then
large manufacturing firms serving the national market.
The next major transportation projects were the national highway system and the civil
aviation system. From the earliest days of the automobile-highway complex, when the
Model-T met the "good roads" movement in the state legislatures, a modern highway
network was synonymous in the public mind with "progress." Of course, as Eric Husman
has pointed out, that was just another example of a long-recurring phenomenon: the
public hailed subsidized highways as their "progressive" delivery from the monopoly
power of railroads; but the subsidized railroads, in their turn, had been celebrated by the
public as a force for liberation.
The same public who first wanted to give land grants and rights of way to railroads
and canals in order to get rid of private turnpikes, and then wanted to constrain
railroads because the average voter didn't understand the logic of the capital-intensive
industry they had spawned, and now didn't like the fact that their regulations created a
de jure cartel, wanted roads. They joined the Good Roads movement and fought for
public subsidies for bicycles and then cars.46
Over and over again, the public calls for a new subsidized infrastructure to liberate it
from the straitjacket imposed from the previous subsidized infrastructure, while never
seeing that it is locked into dependence on the previous infrastructure as the result of the
"progressive" policies it supported. But all along, the parties that actually stand to benefit
the most are the big business interests that can operate over larger and larger market areas
at lower and lower cost, while externalizing their costs on the poor taxpaying suckers who
cheer it on as "progress."
The "good roads" movement had had the backing of mercantilist interests from the
turn of the century.
One of the major barriers to the fledgling automobile industry at the turn of the
century was the poor state of the roads. One of the first highway lobbying groups was
the League of American Wheelmen, which founded "good roads" associations around
the country and, in 1891, began lobbying state legislatures.
Many of America's roads were private and funded by tolls. One such early road

45

Power & Market: Government and the Economy (Menlo Park, Calif.: Institute for Humane Studies, Inc.,
1970), p. 52.
46
Eric Husman, "Running on Glue and Tar," Grim Reader blog, June 3, 2007
<http://www.zianet.com/ehusman/weblog/2007/06/running-on-glue-and-tar.html>.

was the 45-mile Long Island Motor Parkway, built in 1908 and entirely financed by
the racing enthusiast William K. Vanderbilt, Jr. The toll collection plan fell short of
expectations, and he gave up his road in 1938 in lieu of back taxes.
The Federal Aid Roads Act of 1916 encouraged coast-to-coast construction of
paved roads, usually financed by gasoline taxes (a symbiotic relationship if ever there
was one). By 1930, the annual budget for federal road projects was $750 million.
After 1939, with a push from President Franklin Roosevelt, limited-access interstates
began to make rural areas accessible.47
It was this last, in the 1930s, that signified the most revolutionary change. From its
beginning, the movement for a national superhighway network was identified, first of all,
with the fascist industrial policy of Hitler, and second with the American automotive
industry.
The "most powerful pressure group in Washington" began in June, 1932, when GM
President, Alfred P. Sloan, created the National Highway Users Conference, inviting
oil and rubber firms to help GM bankroll a propaganda and lobbying effort that
continues to this day.48
One of the earliest depictions of the modern superhighway in America was the
Futurama exhibit at the 1939 World's Fair in New York, sponsored by (who else?) GM.
The exhibit, sponsored by General Motors and given dazzling miniaturized form by
set designer Norman Bel Geddes, provided a nation emerging from its darkest decade
since the Civil War a mesmerizing glimpse of the future--a future that involved lots
and lots of roads. Big roads. Fourteen-lane superhighways on which cars would travel
at 100 mph. Roads on which, a recorded narrator promised, Americans would
eventually be able to cross the nation in a day.49
The Interstate's association with General Motors didn't end there, of course. Its actual
construction took place under the supervision of DOD Secretary Charles Wilson,
formerly CEO of GM. During his 1953 confirmation hearings, when asked whether "he
could make a decision in the country’s interest that was contrary to GM’s interest,"
Wilson shot back with his famous comment, “I cannot conceive of one because for
years I thought what was good for our country was good for General Motors, and vice

47

Jim Motavalli, "Getting Out of Gridlock: Thanks to the Highway Lobby, Now We're Stuck in Traffic.
How Do We Escape?" E Magazine, March/April 2002 <http://www.emagazine.com/view/?534>.
48
Mike Ferner, "Taken for a Ride on the Interstate Highway System," MRZine (Monthly Review) June 28,
2006 <http://mrzine.monthlyreview.org/ferner280606.html>.
49
Justin Fox, "The Great Paving How the Interstate Highway System helped create the modern economy-and reshaped the FORTUNE 500." Reprinted from Fortune. CNNMoney.Com, January 26, 2004
<http://money.cnn.com/magazines/fortune/fortune_archive/2004/01/26/358835/index.htm>.

versa. The difference did not exist. Our company is too big.”50
Wilson's role in the Interstate program was hardly that of a mere disinterested technocrat.
From the time of his appointment to DOD, he "pushed relentlessly" for it. And the chief
administrator of the program was "Francis DuPont, whose family owned the largest share
of GM stock...."51 Corporate propaganda, as so often in the twentieth century, played an
active role in attempts to reshape the popular culture.
Helping to keep the driving spirit alive, Dow Chemical, producer of asphalt, entered
the PR campaign with a film featuring a staged testimonial from a grade school
teacher standing up to her anti-highway neighbors with quiet indignation. "Can't you
see this highway means a whole new way of life for the children?"52
The latest installment in this saga is the planned I-69, or so-called NAFTA
Superhighway running from Mexico to Canada, intended to be the largest trucking
corridor in North America. As is the case with most things with the term "NAFTA" in
their titles, most of the mercantilist interests in America have a finger in the I-69 pie-perhaps most notably Rudy Giuliani's law firm.
Whatever the political motivation behind it, the economic effect of the Interstate
system should hardly be controversial. Virtually 100% of the roadbed damage to
highways is caused by heavy trucks. And despite repeated liberalization of maximum
weight restrictions, far beyond the heaviest conceivable weight the Interstate roadbeds
were originally designed to support,
fuel taxes fail miserably at capturing from big-rig operators the cost of exponential
pavement damage caused by higher axle loads. Only weight-distance user charges arc
efficient, but truckers have been successful at scrapping them in all but a few western
states where the push for repeal continues.53
So only about half the revenue of the highway trust fund comes from fees or fuel taxes on
the trucking industry, and the rest is externalized on private automobiles. Even David S.
Lawyer, a skeptic on the general issue of highway subsidies, only questions whether
highways receive a net subsidy from general revenues over and above total user fees on
both trucks and cars; he effectively concedes the subsidy of heavy trucking by the
gasoline tax.54

50

Edwin Black, "Hitler's Carmaker: How Will Posterity Remember General Motors' Conduct? (Part 4)"
History News Network, May 14, 2007 <http://hnn.us/articles/38829.html>.
51
Ferner, op. cit.
52
Ibid.
53
Frank N. Wilner, "Give truckers an inch, they'll take a ton-mile: every liberalization has been a launching
pad for further increases - trucking wants long combination vehicle restrictions dropped,"Railway Age, May
1997 <http://findarticles.com/p/articles/mi_m1215/is_n5_v198/ai_19460645>.
54
David S. Lawyer, "Are Roads and Highways Subsidized ?" March 2004
<http://www.lafn.org/~dave/trans/econ/highway_subsidy.html>.

As for the civil aviation system, from the beginninbg it was a creature of the state.
The whole physical infrastructure was built, in its early decades, with tax money.
Since 1946, the federal government has poured billions of dollars into airport
development. In 1992, Prof. Stephen Paul Dempsey of the University of Denver
estimated that the current replacement value of the U.S. commercial airport systemvirtually all of it developed with federal grants and tax-free municipal bonds-at $1
trillion.
Not until 1971 did the federal government begin collecting user fees from airline
passengers and freight shippers to recoup this investment. In 1988 the Congressional
Budget Office found that in spite of user fees paid into the Airport and Airways Trust
Fund, the taxpayers still had to transfer $3 billion in subsidies per year to the FAA to
maintain its network of more than 400 control towers, 22 air traffic control centers,
1,000 radar-navigation aids, 250 long-range and terminal radar systems and its staff of
55,000 traffic controllers, technicians and bureaucrats.55
(And even aside from the inadequacy of user fees, eminent domain remains central to the
building of new airports and expansion of existing airports.)
Subsidies to the airport and air traffic control infrastructure of the civil aviation
system are only part of the picture. Equally important are the direct role of the state in
creating the heavy aircraft industry, whose heavy cargo and passenger jets revolutionized
civil aviation after WWII. As we shall see below, after the World War II demobilization
the aircraft industry was headed for bankruptcy. Without the Cold War heavy bomber
program to revive it from the late '40s on, it is questionable in what form the aircraft
industry would have survived at all; the growth of a civilian jumbo jet industry would
have been unthinkable. The civil aviation system is, many times over, a creature of the
state.
The result of the government-sponsored highway and civil aviation systems, taken
together, was massive concentration in retail, agriculture, and food processing. The
centralized corporate economy depends for its existence on a shipping price system which
is artificially distorted by government intervention. To fully grasp how dependent the
corporate economy is on socializing transportation costs, imagine what would happen if
truck and aircraft fuel were taxed enough to pay the full cost of maintenance and new
building costs on highways and airports; and if fossil fuels depletion allowances were
removed. The result would be a massive increase in shipping costs. Does anyone
seriously believe that Wal-Mart's national "warehouses on wheels" distribution system
would be feasible, or corporate agribusiness could outcompete the family farm?

55

James Coston, Amtrak Reform Council, 2001, in "America's long history of subsidizing transportation"
<http://www.trainweb.org/moksrail/advocacy/resources/subsidies/transport.htm>.

It is fallacious to say that state-subsidized infrastructure "creates efficiencies" by
making possible large-scale production for a national market. The fact that a large,
centralized infrastructure system can only come about when the state subsidizes or
organizes it from above, or that such state action causes it to exist on a larger scale than it
otherwise would, indicates that the transaction costs are so high that the benefits are not
worth it to people spending their own money. There is no demand for it by consumers
willingly spending their own money, at the actual costs of providing the services, risks
and all, without state intervention.
If production on the scale promoted by infrastructure subsidies were actually efficient
enough to compensate for real distribution costs, the manufacturers would have presented
enough effective demand for such long-distance shipping at actual costs to pay for it
without government intervention. On the other hand, an apparent "efficiency" that
presents a positive ledger balance only by shifting and concealing real costs, is really no
"efficiency" at all. Costs cannot be destroyed. Shifting them does not make them any less
of a cost--it only means that, since they aren't being paid by the beneficiary of the service,
he profits at someone else's expense. There Ain't No Such Thing As A Free Lunch.
Intellectually honest free market advocates freely admit as much. For example, Tibor
Machan wrote in The Freeman that
Some people will say that stringent protection of rights [against eminent domain]
would lead to small airports, at best, and many constraints on construction. Of course-but what's so wrong with that?
Perhaps the worst thing about modern industrial life has been the power of
political authorities to grant special privileges to some enterprises to violate the rights
of third parties whose permission would be too expensive to obtain. The need to
obtain that permission would indeed seriously impede what most environmentalists
see as rampant--indeed reckless--industrialization.
The system of private property rights--in which... all... kinds of... human activity
must be conducted within one's own realm except where cooperation from others has
been gained voluntarily--is the greatest moderator of human aspirations.... In short,
people may reach goals they aren't able to reach with their own resources only by
convincing others, through arguments and fair exchanges, to cooperate.56
The state played a central role in creating the centralized communications
infrastructure of the twentieth century. The modern telecommunications system goes
back to the Bell Patent association, organized in 1875, which controlled a huge arsenal of

56

Tibor S. Machan, "On Airports and Individual Rights," The Freeman: Ideas on Liberty (February 1999),
p. 11.

government-enforced patents on virtually every aspect of telephony.57 Meanwhile, as the
Bell patents began to expire in the 1890s, AT&T turned to the "progressive" expedient of
becoming a regulated utility to protect itself from competition. Here's Mary Ruwart's
account:
Before 1894, Bell Telephone's patents protected it from competition by other
firms. Its growth averaged 16% per year; annual profits approached 40% of its capital.
Bell catered primarily to the business sector and the wealthy. When the patents
expired, other companies began providing affordable telephone service to the middle
class and rural areas. The independents charged less since customers could call only
those serviced by the same company. Consumers were evidently pleased to make such
a tradeoff; by 1907, some 20,000 independents controlled half of all the new
telephone installations. The number of phones zoomed from 266,000 in 1893 to 6.1
million in 1907. The independents matched Bell's monopoly market share in 14 short
years.
Competition from the independents had caused annual Bell profits to plummet
from 40% to 8% as many consumers chose the independents who served them best.
The marketplace ecosystem was again protecting consumers from monopoly profits.
As telephones went from a curiosity to a standard household utility, the
independents began developing a plan for sharing each other's lines to avoid
duplication and to increase the number of phones each customer could call. The
marketplace ecosystem was again working to promote cooperation for the benefit of
the consumer, without aggression. Service providers voluntarily sought to give the
customer better service because they would, in turn, be rewarded by more business
and the positive feedback of profit....
Theodore Vail, Bell's new chairman, was determined to regain a monopoly
market. He asked Americans to use the aggression of exclusive licensing against the
independents that had served them so well. He claimed that competition caused
duplication and penalized the customer (i.e., telephone service was a "natural"
monopoly). Had this been true, the independents would never have been able to lure
customers from the established Bell monopoly in the first place!
...Nevertheless, by 1910, Americans were persuaded to accept Bell's proposal. The
government of each local community would allow only one telephone company to
operate in that region. Other companies would be stopped-at gunpoint, if necessaryfrom providing service to willing customers. Since Bell was the largest single
company, it was in the best position to lobby the state utility commissions effectively
and was almost always chosen over the independents....58

57

David F. Noble, America by Design 91-2.
Mary Ruwart, Healing Our World: The Other Piece of the Puzzle (Kalamazoo, Michigan: SunStar
Press, 1992, 1993). "Chapter 7. Creating Monopolies that Control Us"
58

It's hard to say what form a national telephone network would have taken absent the
AT&T monopoly for most of the twentieth century, but it seems unlikely in the extreme
that the pattern of local cooperation and bottom-up federation Ruwart describes before
1910 could have led to a centralized system of trunk lines. Mumford's contrast of a loose
network of locally oriented light rail systems, as against the centralized national network
created by the federal land grant program, is probably a useful basis for comparison.
On a global scale, the physical backbone of the telecom network until the 1960s was
the transoceanic cable system, largely the creature of the British state. And as Edward
Herman describes, its successor--the communications satellite network--was an even
larger state capitalist project by the U.S. government:
...the research and development funds that led to the conception and production of
[the communications satellite network] were provided by an American militarycommercial alliance with very clear objectives in mind.... Satellite development,
from the beginning, represented the successful drive of private communications
corporations in the United States to dislodge the British from their domination of
international communications, exercised through their... control of intercontinental
submarine cables. In this effort monopolistic business acted closely with the U.S.
Armed Forces, whose interest in instantaneous global communications was
extraordinarily high.... In fact, the first communications satellite system in operation
was a military-controlled operation.
A decade later, in the early 1970s, an international consortium (called
INTELSAT) of (currently [as of 1976]) 91 nations uses the United States-developed
satellite system. The system has, from the start, been controlled by American Big
Business... working with the U.S. State Department at the intergovernmental level.59
[See also Nicholas Garnham," "Trojan Horses: Some Socio-Political Implications of
Communications Technology," paper presented at International Broadcast Institute
General Meeting, Mexico City, Sept. 1-5, 1974.]
The most recent such project was the infrastructure of the Internet, originally built by
the Pentagon. [Chandler material?]
The internet owes its very existence to the state and to state funding. The story
begins with ARPA, created in 1957 in response to the Soviets' launch of Sputnik and
established to research the efficient use of computers for civilian and military

http://www.ruwart.com/Healing/chap7.html.
59
Herbert Schiller, Communications and Cultural Domination (White Plains, N.Y.: M.E. Sharpe, Inc.,
1976), p. 59. Schiller discusses the history this project at length in Mass Communications and American
Empire (N.Y.: Augustus M. Kelley, 1969), pp. 127-146.

applications.
During the 1960s, the RAND Corporation had begun to think about how to design
a military communications network that would be invulnerable to a nuclear attack.
Paul Baran, a RAND researcher whose work was financed by the Air Force, produced
a classified report in 1964 proposing a radical solution to this communication
problem. Baran envisioned a decentralized network of different types of "host"
computers, without any central switchboard, designed to operate even if parts of it
were destroyed. The network would consist of several "nodes," each equal in
authority, each capable of sending and receiving pieces of data.
Each data fragment could thus travel one of several routes to its destination, such
that no one part of the network would be completely dependent on the existence of
another part. An experimental network of this type, funded by ARPA and thus known
as ARPANET, was established at four universities in 1969.
Researchers at any one of the four nodes could share information, and could
operate any one of the other machines remotely, over the new network. (Actually,
former ARPA head Charles Herzfeld says that distributing computing power over a
network, rather than creating a secure military command-and-control system, was the
ARPANET's original goal, though this is a minority view.)
By 1972, the number of host computers connected to the ARPANET had
increased to 37. Because it was so easy to send and retrieve data, within a few years
the ARPANET became less a network for shared computing than a high-speed,
federally subsidized, electronic post office. The main traffic on the ARPANET was
not long-distance computing, but news and personal messages.
As parts of the ARPANET were declassified, commercial networks began to be
connected to it. Any type of computer using a particular communications standard, or
"protocol," was capable of sending and receiving information across the network. The
design of these protocols was contracted out to private universities such as Stanford
and the University of London, and was financed by a variety of federal agencies. The
major thoroughfares or "trunk lines" continued to be financed by the Department of
Defense.
By the early 1980s, private use of the ARPA communications protocol — what is
now called "TCP/IP" — far exceeded military use. In 1984 the National Science
Foundation assumed the responsibility of building and maintaining the trunk lines or
"backbones." (ARPANET formally expired in 1989; by that time hardly anybody
noticed). The NSF's Office of Advanced Computing financed the internet's
infrastructure from 1984 until 1994, when the backbones were privatized.
In short, both the design and implementation of the internet have relied almost
exclusively on government dollars....

We must be very careful not to describe the internet as a "private" technology, a
spontaneous order, or a shining example of capitalistic ingenuity. It is none of these.
Of course, almost all of the internet's current applications — unforeseen by its
original designers — have been developed in the private sector.
(Unfortunately, the original web and the web browser are not among them, having
been designed by the state-funded European Laboratory for Particle Physics (CERN)
and the University of Illinois's NCSA.)
And today's internet would be impossible without the heroic efforts at Xerox
PARC and Apple to develop a useable graphical user interface (GUI), a lightweight
and durable mouse, and the Ethernet protocol. Still, none of these would have been
viable without the huge investment of public dollars that brought the network into
existence in the first place.
Now, it is easy to admire the technology of the internet. I marvel at it every day.
But technological value is not the same as economic value. That can only be
determined by the free choice of consumers to buy or not to buy. The ARPANET may
well have been technologically superior to any commercial networks that existed at
the time, just as Betamax may have been technologically superior to VHS, the MacOS
to MS-DOS, and Dvorak to QWERTY. (Actually Dvorak wasn't.) But the products
and features valued by engineers are not always the same as those valued by
consumers. Markets select for economic superiority, not technological superiority
(even in the presence of nefarious "network effects," as shown convincingly by
Liebowitz and Margolis)....
What kind of global computer network would the market have selected? We can
only guess. Maybe it would be more like the commercial online networks such as
Comcast or MSN, or the private bulletin boards of the 1980s. Most likely, it would
use some kind of pricing schedule, where different charges would be assessed for
different types of transmissions.60
Johan Soderberg provides some more detail for one of the items Klein mentions, the
Bulletin Board System (BBS):
The Internet was predated by a grassroots network, the Bulletin Board System (BBS). The
software and the hardware devices necessary to hike on to the telephone lines and to send
electronic text and code through it were largely developed by phone phreaks.61

60

Peter G. Klein, "Government Did Invent the Internet, But the Market Made It Glorious," Mises.Org, June
12, 2006 <http://www.mises.org/story/2211>.
61
Johan Soderberg, Hacking Capitalism: The Free and Open Source Software Movement (New York and
London: Routledge, 2008), p. 96.

The transition from NSF to private control in the early 1990s was described,
fascinatingly, by a contemporary participant who reminisced in a Mises Blog comment on
Klein's article:
I started working at NASA Ames Research Center in July, 1992. Prior to this I
had worked as a computer operator then network engineer for a large multinational,
and I'd been using network services starting with Compu$erve in 1983, Fido-net, Ilink, BBS's, etc.
Being about as close to the heart of things as one could get, and working the
graveyard and evening shifts, gave me a wonderful ring-side seat to watch as a Liberty
occurred.
Ames was the location of the Metropolitan Area Exchange, West. MAE-East was
located at Goddard Space Flight Center, also my responsibility to monitor and help
fix. This was where, if you were an "Internet" participant, your circuits were
connected so that your IP packets could be routed to other "Internet" participants.
Ames and Goddard also had two of the Root Name Servers, which I believe are still
being run from there.
The machines that held the look-up tables of participant addresses were owned
and operated by the National Science Foundation. I had to watch over all this and
make sure that the right people were notified if anything went wrong, so I was pretty
much on top of who-owned-what.
If you're old enough to remember, recall that AlGore had been promising the
"Information Superhighway" long before he became Vice President. HillaryCare was
in vogue, centralization not yet the boogyman in the press that it was to become. The
Information Superhighway would have been 6 peering points, connected to each
other, and everybody would have had to connect to one of these points by law in order
to talk to anyone else by computer.
Since I was working graveyard, then evening shift, I don't recall the exact date
(graveyard and I don't get along) the Liberty occurred, but here's what it was: The
NSF released control of the routing tables.
Until then, the NSF was who said exactly who could connect to the "Internet" and
how to get to them. That had also been the model of the Information Superhighway.
Now it was up to the company or organization who connected to the MAE "ring" to
maintain their own routing tables, their own equipment, to decide who they would
reach and who they would not reach.
The MAE-West, and -East, expanded to include other facilities because all the
people who wanted to connect couldn't fit. It wasn't explosive, it was evolutionary.
Only as experience and available capital increased could people be "good neighbors"

on the "rings". This and the MAE service contract also kept the growth problems as
much as possible to just technical ones.
Content could now be commercial, since that had been one of the restrictions of
the NSF. CNN.com came online, as did the AltaVista search engine nearby at Digital
Equipment. The HTTP protocol and "browser" were established, and the smart BBS
operators became dial-up real-time service providers, some of which morphed into
Netcom, AOL, JPS, a list too long and too variable for anyone to know.
The need for every content consumer to reach every content provider, or even just
for this email to be able to reach everyone on the list, created a market for those who
maintained routs to "everyone" to sell the service of being able to get from here to
there. People who didn't play nicely, like Alternet, didn't last long. Their own
customers demanded the ability to reach everyone, and the sovereign consumer
always wins in the end.
Everybody who had a clue knew that the MAE's couldn't handle the traffic, and
quickly there were other "public" peering locations. Some, like the beautiful PAIX in
Palo Alto, California, were computing facilities who created the same kind of
environment that the early MAE's had been. Others, such as Pacific Bell and AADSNAP Chicago, created virtual peering "points" which were actually just meshed
networks within their own telephone switches. People built facilities and others came
to use them, each free to offer desired services no matter what those may be. Freedom
of infrastructure had occurred.62
As Klein's reference to private bulletin boards suggests, it is quite plausible that some
sort of Internet would have come about through voluntary interaction and free
contributions. Universities and private firms might have built a less ambitious system of
trunk lines, and community bulletin boards might have linked together from the bottom
up. It would almost certainly have been more decentralized and lower in capacity than
the Internet we know today. One useful analogy might be Lewis Mumford's speculations
on the local light rail networks that might have developed in a decentralized eotechnic
economy, with the "national" system consisting largely of a loosely networked, low
capacity amalgamation of local systems, as opposed to the centralized system of trunk
lines actually created by the state. The Internet might, in that case, be a loose network of
community Internets, with the process of patching through to a distant community
bulletin board being comparable to that of making a long-distance call in the days before
direct dialing.
It permits, for the first time, direction of global operations in real time from a single
corporate headquarters, and is accelerating the concentration of capital on a global scale.

62

Curt Howland, comment to Peter G. Klein, "Government Did Invent the Internet, But the Market Made It
Glorious," Mises Economics Blog, June 12, 2006. http://blog.mises.org/archives/005174.asp.

To quote Chomsky again, "The telecommunications revolution... is... another state
component of the international economy that didn't develop through private capital, but
through the public paying to destroy themselves...."63
C. Patents and Copyrights
Although free market libertarians of all stripes are commonly stereotyped as
apologists for big business, it is hard to imagine a position more at odds with the interests
of big busines than the dominant libertarian view on patents. Certainly that is true of
Murray Rothbard, who was not shy about denouncing patents as a fundamental violation
of free market principles:
The man who has not bought a machine and who arrives at the same invention
independently, will, on the free market, be perfectly able to use and sell his invention.
Patents prevent a man from using his invention even though all the property is his and he has
not stolen the invention, either explicitly or implicitly, from the first inventor. Patents,
therefore, are grants of exclusive monopoly privilege by the State and are invasions of
property rights on the market.64

It is sometimes argued, in response to attacks on patents as monopolies, that "all
property is a monopoly." True, as far as it goes; but tangible property is a monopoly by
the nature of the case. A parcel of land can only be occupied and used by one owner at a
time, because it is finite. By nature, two people cannot occupy the same physical space at
the same time. "Intellectual property," in contrast, is an artificial monopoly on the right to
perform a certain action--to arrange material elements or symbols in a particular
configuration--which is not otherwise restricted of necessity to one person at a time. And
unlike property in tangible goods and land, the defense of which is a necessary outgrowth
of the attempt to maintain possession, enforcement of "property rights" in ideas requires
the invasion of someone else's space.
[E]veryone's property right is defended in libertarian law without a patent. If someone
has an idea or plan and constructs an invention, and it is stolen from his house, the stealing is
an act of theft illegal under general law. On the other hand, patents actually invade the
property rights of those independent discoverers of an idea or an invention who made the
discovery after the patentee…. Patents, therefore, invade rather than defend property
rights.65

Patents make an astronomical price difference. Until the early 1970s, for example,
Italy did not recognize drug patents. As a result, Roche Products charged the British

63

Noam Chomsky, Class Warfare: Interviews with David Barsamian (Monroe, Maine: Common Courage
Press, 1996), p. 40.
64
Rothbard, Man, Economy, and State. p. 5.
65
Rothbard, Power and Market, p. 71.

national health a price over 40 times greater for patented components of Librium and
Valium than charged by competitors in Italy.66
Patents suppress innovation as much as they encourage it. Chakravarthi Raghavan
pointed out that research scientists who actually do the work of inventing are required to
sign over patent rights as a condition of employment, while patents and industrial security
programs prevent sharing of information, and suppress competition in further
improvement of patented inventions.67 Rothbard likewise argued that patents eliminate
"the competitive spur for further research" because incremental innovation based on
others' patents is hindered, and because the holder can "rest on his laurels for the entire
period of the patent," with no fear of a competitor improving his invention. And they
hamper technical progress because "mechanical inventions are discoveries of natural law
rather than individual creations, and hence similar independent inventions occur all the
time. The simultaneity of inventions is a familiar historical fact.68
Patents are also a hindrance to progress because of the "shoulders of giants" effect.
Any new invention presupposes a wide variety of existing technologies that are combined
and reworked into a new configuration. Patents on existing technologies may or may not
marginally increase the incentives to new invention, but they also increase the cost of
doing so by levying a tariff on the aggregation of existing knowledge to serve as building
blocks of a new invention.69 James Watt's refusal to license his patent on the steam
engine, for example, prevented others from improving the design until the patent expired
in 1800. This delayed the introduction of locomotives and steamboats.70
And patents are not necessary as an incentive to innovate, which means that their
main practical effect is to cause economic inefficiency by levying a monopoly charge on
the use of existing technology without significantly promoting innovation. According to
Rothbard, invention is motivated not only by the quasi-rents accruing to the first firm to
introduce an innovation, but by the threat of being surpassed in product features or
productivity by its competitors. "In active competition... no business can afford to lag
behind its competitors. The reputation of a firm depends upon its ability to keep ahead, to
be the first in the market with new improvements in its products and new reductions in
their prices."71
This is borne out by F. M. Scherer's testimony before the Federal Trade Commission
in 1995.72 Scherer spoke of a survey of 91 companies in which only seven "accorded

66

Chakravarthi Raghavan, Recolonization: GATT, the Uruguay Round & the Third World (Penang,
Malaysia: Third World Network, 1990), p. 124.
67
Chakravarthi Raghavan, Recolonization: GATT, the Uruguay Round & the Third World (Penang,
Malaysia: Third World Network, 1990), p. 118.
68
Rothbard, Man, Economy, and State, pp. 655, 658-9.
69
Yochai Benkler, The Wealth of Networks, pp. 36-37.
70
Soderberg, Hacking Capitalism, p. 116.
71
Rothbard, Power and Market, p. 74.
72
Hearings on Global and Innovation-Based Competition. FTC, 29 November 1995.

high significance to patent protection as a factor in their R & D investments." Most of
them described patents as "the least important of considerations." Most companies
considered their chief motivation in R & D decisions to be "the necessity of remaining
competitive, the desire for efficient production, and the desire to expand and diversify
their sales." In another study, Scherer found no negative effect on R & D spending as a
result of compulsory licensing of patents. A survey of U.S. firms found that 86% of
inventions would have been developed without patents. In the case of automobiles, office
equipment, rubber products, and textiles, the figure was 100%.
The one exception was drugs, of which 60% supposedly would not have been
invented. Even this is doubtful, though. For one thing, drug companies get an unusually
high portion of their R & D funding from the government, and many of their most
lucrative products were developed entirely at government expense. And Scherer himself
cited evidence to the contrary. The reputation advantage for being the first into a market
is considerable. For example in the late 1970s, the structure of the industry and pricing
behavior was found to be very similar between drugs with and those without patents.
Being the first mover with a non-patented drug allowed a company to maintain a 30%
market share and to charge premium prices. We have already seen, in the previous
chapter, the extent to which the direction of innovation of skewed by considerations of
gaming the patent system and patent trolling the competition. The majority of R & D
expenditure is geared toward developing "me, too" drugs: in essence slightly different
versions of existing drugs, tweaked just enough to justify repatenting. And of the
enormous R & D expenditures which patents are allegedly necessary to allow the drug
companies to recoup, a majority goes not to developing the actual drug that goes to
market, but to securing patent lockdown on all the possible major variations of that drug.
The injustice of patent monopolies is exacerbated by government funding of research
and innovation, with private industry reaping monopoly profits from technology it spent
little or nothing to develop. In 1999, extending the research and experimentation tax
credit was, along with extensions of a number of other corporate tax preferences,
considered the most urgent business of the Congressional leadership. Hastert, when asked
if any elements of the tax bill were essential, said: "I think the [tax preference] extenders
are something we're going to have to work on." Ways and Means Chair Bill Archer
added, "before the year is out... we will do the extenders in a very stripped down bill that
doesn't include anything else." A five-year extension of the research and experimentation
credit (retroactive to 1 July 1999) was expected to cost $13.1 billion. (That credit makes
the effective tax rate on R & D spending less than zero).73
The Government Patent Policy Act of 1980, with 1984 and 1986 amendments,

<http://www.ftc.gov/opp/gc112195.pdf>.
73
Citizens for Tax Justice. "GOP Leaders Distill Essence of Tax Plan: Surprise! It's Corporate Welfare" 14
September 1999 <http://www.ctj.org/pdf/corp0999.pdf>.

allowed private industry to keep patents on products developed with government R & D
money--and then to charge ten, twenty, or forty times the cost of production. For
example, AZT was developed with government money and in the public domain since
1964. The patent was given away to Burroughs Wellcome Corp.74
As if the deck were not sufficiently stacked already, Congress has more than once
extended drug companies' patents beyond the expiration of their normal term under patent
law; as just one example, the pharmaceutical companies in 1999 lobbied Congress to
extend certain patents by two years by a special act of private law.75
So far we have considered patents mainly insofar as they resulted in unequal exchange
and higher prices at the individual level--essentially from Tucker's standpoint of the
nineteenth century. We have not yet examined their structural effects on the economy-the ways in which they promoted the corporate transformation of capitalism.
The patent privilege has been used on a massive scale to promote concentration of
capital, erect entry barriers, and maintain a monopoly of advanced technology in the
hands of western corporations. It is hard even to imagine how much more decentralized
the economy would be without it.
Patents played a large role in the creation of the corporate economy from the late
nineteenth century on. According to David Noble, they were "bought up in large numbers
to suppress competition," which also resulted in "the suppression of invention itself."76
Edwin Prindle, a corporate patent lawyer, wrote in 1906:
Patents are the best and most effective means of controlling competition. They
occasionally give absolute command of the market, enabling their owner to name the price
without regard to the cost of production.... Patents are the only legal form of absolute
monopoly.77

The exchange or pooling of patents between competitors, historically, has been a key
method for cartelizing industries. This was true especially of the electrical appliance,
communications, and chemical industries. G. E. and Westinghouse expanded to dominate
the electrical manufacturing market at the turn of the century largely through patent
control. In 1906 they curtailed the patent litigation between them by pooling their patents.
G.E., in turn (later to become the patriarchal see of Gerard Swope), had been formed in
1892 by consolidating the patents of the Edison and Thomson-Houston interests.78

74

Chris Lewis, "Public Assets, Private Profits," Multinational Monitor, in Project Censored Yearbook 1994
(New York: Seven Stories Press, 1994).
75
Benjamin Grove, "Gibbons Backs Drug Monopoly Bill," Las Vegas Sun 18 February 2000
<http://www.ahc.umn.edu/NewsAlert/Feb00/022100NewsAlert/44500.htm>.
76
David Noble, America by Design: Science, Technology, and the Rise of Corporate Capitalism (New
York: Alfred A. Knopf, 1977), pp. 84-109.
77
Ibid., p. 90.
78
Ibid., p. 92.

AT&T also expanded "primarily through strategies of patent monopoly." The American
chemical industry was marginal until 1917, when Attorney-General Mitchell Palmer
seized German patents and distributed them among the major American chemical
companies. Du Pont got licenses on 300 of the 735 patents.79
As Benjamin Darrington points out, "intellectual property" promotes large scale
organization in another way. It
promotes time and investment intensive forms of development and research with high
potential payoffs at the expense of the incremental, tinkering sort of innovation that would
prevail in the absence of these "rights," which tilts the market for the development of new
technology and techniques in favor of centralized institutions and high-tech solutions.80

The rise of the global economy in recent decades has been associated with a severe
upward ratcheting of copyright protections.
In the contemporary global economy, "intellectual property" plays the same
protectionist role for TNCs that tariffs performed in the old national economies.
Bill Gates "Halloween Memo"
Darl McBride, of the software company SCO, warned Congress that "the unchecked
spread of Open Source software, under the GPL, is a much more serious threat to the
spread of our capitalist system than U.S. corporations realize."81
The new digital copyright regime has done away with many traditional limitations on
copyright from the days when it affected mainly the print medium, like the fair use
exception. We can thank the traditional exceptions to copyright, for example, for the
public library and for free access to photocopiers.
Charles Johnson gives, as an example of the fair use exception, the common
university practice of making course reserves available for photocopying, rather than
expecting every student to buy a scholarly book at the academic publishing houses' steep
rates. (I myself have numerous photocopies of books ordered through Interlibrary Loan,
which would otherwise have cost me $70 or more, often for slim volumes of under two
hundred pages.) But, he says,
as soon as the University eliminates the paper medium, and facilitates exactly the same thing
through an non-commercial, internal University course pack website — which does nothing
at all more than what the xerox packets did, except that it delivers the information to pixels

79

Ibid., pp. 10, 16.
Darington, op. cit., p. 18.
81
<http://www.osaia.org/letters/sco_hill.pdf>, in Johan Soderberg, Hacking Capitalism: The Free and
Open Source Software Movement (New York and London: Routledge, 2008), p. 31.
80

on a monitor instead of toner on a page — the publishers’ racket can run to court, throw up
its arms, and start hollering Computers! Internet!, send their lawyers to try to shake down
have a discussion with the University administration for new tribute to their monopoly
business model, and then, failing that, utterly uncontroversial decades-old practices of
sharing knowledge among colleagues and students suddenly become a legal case raising core
issues like the future of the business model for academic publishers, while even the most
absurd protectionist arguments are dutifully repeated by legal flacks on behalf of sustaining
the racket. (Thus: It’s difficult to argue that this is a truly noncommercial use [even though
Georgia State receives no money from students for the course packs]. Georgia State may be a
nonprofit institution, but its students pay a lot of money for course materials, and would
presumably pay money for the materials being provided to them by the university.)82

Indeed, if copyright law for print media were governed by the same principles as the
WIPO Copyright Treaty and the DMCA, photocopiers would either be considered an
illegal technical means of circumventing copyright (with even the dissemination of
technical information on how to build a photocopier being treated as criminal speech), or
could be legally built only with mandated "DRM" safeguards to prevent the photocopying
of copyrighted material.
D. Tariffs
As with patents, we are interested here in the aspects of tariffs that Tucker neglected:
their effect in promoting the cartelization of industry. In the next chapter, on the rise of
monopoly capitalism, we will see the full-blown effects of what Schumpeter called
"export-dependent monopoly capitalism." That term refers to an economic system in
which industry cartelizes behind the protection of tarriff barriers; sells its output
domestically for a monopoly price significantly higher than market-clearing level, in
order to obtain super-profits at the consumer's expense; and disposes of its unsellable
product abroad, by dumping it below cost if necessary.
Brandeis referred to the tariff as "the mother of trusts" because of the way it facilitated
collusion between large domestic producers and the creation of oligopolies. Mises, in
Human Action, described the dependence of cartels on tariff barriers (especially
interacting with other state-enforced monopolies like patents). Of course, in keeping with
his usual "pro-business" emphasis, Mises treated the large industrial firms, at worst, as
passive beneficiaries of a state protectionist policy aimed primarily at raising the wages of
labor. This parallels his view of the early industrial capitalists, and their non-implication
in the primitive accumulation process, in the previous chapter.
II. 20TH CENTURY STATE CAPITALISM

82

Charles Johnson, "How Intellectual Protectionism promotes the progress of science and the useful arts,"
Rad Geek People's Daily, May 28, 2008 <http://radgeek.com/gt/2008/05/28/how_intellectual/>.

The state capitalism of the twentieth century differed fundamentally from the
misnamed "laissez-faire" capitalism of the nineteenth century in two regards: 1) the
growth of direct organizational ties between corporations and the state, and the circulation
of managerial personnel between them; and 2) the eclipse of surplus value extraction
from the worker through the production process (as described by classical Marxism), by
the extraction of "super-profits" a) from the consumer through the exchange process and
b) from the taxpayer through the fiscal process.
Although microeconomics texts generally describe the functioning of supply and
demand curves as though the nature of the market actors were unchanged since Adam
Smith's day, in fact the rise of the large corporation as the dominant type of economic
actor has been a revolution as profound as any in history. It occurred parallel to the rise of
the "positive" state (i.e., the omnicompetent, centralized regulatory state) in the
nineteenth and early twentieth century. And, vitally important to remember, the two
phenomena were mutually reinforcing. The state's subsidies, privileges and other
interventions in the market were the major force behind the centralization of the economy
and the concentration of productive power. In turn, the corporate economy's need for
stability and rationality, and for state-guaranteed profits, has been the central force behind
the continuing growth of the leviathan state.
The rise of the centralized state and the centralized corporation has created a system
in which the two are organizationally connected, and run by essentially the same
recirculating elites (a study of the careers of David Rockefeller, Averell Harriman, and
Robert McNamara should be instructive on the last point). This phenomenon has been
most ably described by the "power elite" school of sociologists, particularly C. Wright
Mills and G. William Domhoff.
It is interesting, in this regard, to compare the effect of antitrust legislation in the U.S.
to that of nationalization in European "social democracies." In most cases, the firms
affected by both policies involve centrally important infrastructures or resources, on
which the corporate economy as a whole depends. Nationalization in the Old World is
used primarily in the case of energy, transportation and communication. In the U.S., the
most famous antitrust cases have been against Standard Oil, AT&T, and Microsoft: all
cases in which excessive prices in one firm were perceived as a threat to the interests of
monopoly capital as a whole. And recent "deregulation," as it has been applied to the
trucking and airline industries, has likewise been in the service of those general corporate
interests harmed by monopoly transportation prices. In all these cases, the state has on
occasion acted as an executive committee on behalf of the entire corporate economy, by
thwarting the mendacity of a few powerful corporations.
Rothbard treated the "war collectivism" of World War I as a prototype for twentieth
century state capitalism. He described it as
a new order marked by strong government, and extensive and pervasive government
intervention and planning, for the purpose of providing a network of subsidies and

monopolistic privileges to business, and especially to large business, interests. In
particular, the economy could be cartelized under the aegis of government, with prices
raised and production fixed and restricted, in the classic pattern of monopoly; and
military and other government contracts could be channeled into the hands of favored
corporate producers. Labor, which had been becoming increasingly rambunctious,
could be tamed and bridled into the service of this new, state monopoly-capitalist
order, through the device of promoting a suitably cooperative trade unionism, and by
bringing the willing union leaders into the planning system as junior partners.83
The International Socialist Review in 1912, for example, warned workers not to be
fooled into identifying social insurance or the nationalization of industry with
"socialism." Such state programs as workers' compensation, old age and health insurance,
were only measures to strengthen and stabilize capitalism. And nationalization simply
reflected the capitalist's realization "that he can carry on certain portions of the production
process more efficiently through his government than through private corporations.....
Some muddleheads find that will be Socialism, but the capitalist knows better."84
Friedrich Engels had taken the same view of public ownership:
At a further stage of evolution this form [the joint-stock company] also becomes
insufficient: the official representative of capitalist society--the state--will ultimately
have to undertake the direction of production. This necessity for conversion into state
property is felt first in the great institutions for intercourse and communication--the
post office, the telegraphs, the railways.85
Kolko used the term "political capitalism" to describe the general objectives big
business pursued through the "Progressive" state:
Political capitalism is the utilization of political outlets to attain conditions of
stability, predictability, and security--to attain rationalization--in the economy.
Stability is the elimination of internecine competition and erratic fluctuations in the
economy. Predictability is the ability, on the basis of politically stabilized and secured
means, to plan future economic action on the basis of fairly calculable expectations.
By security I mean protection from the political attacks latent in any formally
democratic political structure. I do not give to rationalization its frequent definition as
the improvement of efficiency, output, or internal organization of a company; I mean
by the term, rather, the organization of the economy and the larger political and social

83

Murray Rothbard, "War Collectivism in World War I," in Murray Rothbard and Ronald Radosh, eds., A
New History of Leviathan: Essays on the Rise of the American Corporate State (New York: E. P. Dutton &
Co., Inc., 1972), pp. 66-7.
84
Robert Rives La Monte, "You and Your Vote," International Socialist Review XIII, No. 2 (August 1912);
"Editorial," International Socialist Review XIII, No. 6 (December 1912).
85
Friedrich Engels, Anti-Dühring, vol. 25 of Marx and Engels Collected Works (New York: International
Publishers, 1987) 265.

spheres in a manner that will allow corporations to function in a predictable and
secure environment permitting reasonable profits over the long run.86
A. Cartelizing Regulations
From the turn of the twentieth century on, there was a series of attempts by corporate
leaders to create some institutional structure by which price competition could be
regulated and their respective market shares stabilized. "It was then," Paul Sweezy wrote,
that U.S. businessmen learned the self-defeating nature of price-cutting as a
competitive weapon and started the process of banning it through a complex network
of laws (corporate and regulatory), institutions (e.g., trade associations), and
conventions (e.g., price leadership) from normal business practice.87
But merely private attempts at cartelization (i.e., collusive price stabilization) before
the Progressive Era--namely the so-called "trusts"--were miserable failures, according to
Kolko. The dominant trend at the turn of the century--despite the effects of tariffs,
patents, railroad subsidies, and other existing forms of statism--was competition. The
trust movement was an attempt to cartelize the economy through such voluntary and
private means as mergers, acquisitions, and price collusion. But the over-leveraged and
over-capitalized trusts were even less efficient than before, and steadily lost market share
at the hands of their smaller, more efficient competitors. Standard Oil and U.S. Steel,
immediately after their formation, began a process of eroding market share. In the face of
this resounding failure, big business acted through the state to cartelize itself--hence, the
Progressive regulatory agenda. "Ironically, contrary to the consensus of historians, it was
not the existence of monopoly that caused the federal government to intervene in the
economy, but the lack of it."88
The FTC and Clayton Acts reversed this long trend toward competition and loss of
market share and made stability possible.
The provisions of the new laws attacking unfair competitors and price
discrimination meant that the government would now make it possible for many trade
associations to stabilize, for the first time, prices within their industries, and to make
effective oligopoly a new phase of the economy.89
The Federal Trade Commission created a hospitable atmosphere for trade associations

86

Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History 1900-1916 (New
York: The Free Press of Glencoe, 1963) 3.
87
Paul M. Sweezy, "Competition and Monopoly," Monthly Review (May 1981), pp. 1-16.
88
Kolko, Triumph of Conservatism, p. 5.
89
Ibid., p. 268.

and their efforts to prevent price cutting.90 The two pieces of legislation accomplished
what the trusts had been unable to: it enabled a handful of firms in each industry to
stabilize their market share and to maintain an oligopoly structure between them. This
oligopoly pattern has remained stable ever since.
It was during the war [i.e. WWI] that effective, working oligopoly and price and
market agreements became operational in the dominant sectors of the American
economy. The rapid diffusion of power in the economy and relatively easy entry [i.e.,
the conditions the trust movement failed to suppress] virtually ceased. Despite the
cessation of important new legislative enactments, the unity of business and the
federal government continued throughout the 1920s and thereafter, using the
foundations laid in the Progressive Era to stabilize and consolidate conditions within
various industries. And, on the same progressive foundations and exploiting the
experience with the war agencies, Herbert Hoover and Franklin Roosevelt later
formulated programs for saving American capitalism. The principle of utilizing the
federal government to stabilize the economy, established in the context of modern
industrialism during the Progressive Era, became the basis of political capitalism in
its many later ramifications.91
Frank Dobbin, The New Economic Sociology: A Reader (Princeton, N.J.: Princeton
University Press, 2004).
In addition, the various safety and quality regulations introduced during this period
likewise had the effect of cartelizing the market. They served essentially the same
purpose as the later attempts in the Wilson war economy to reduce the variety of styles
and features available in product lines, in the name of "efficiency." Any action by the
state to impose a uniform standard of quality (e.g. safety), across the board, necessarily
eliminates that feature as a competitive issue between firms. As Butler Shaffer put it, the
purpose of "wage, working condition, or product standards" is to "universalize cost
factors and thus restrict price competition."92 Thus, the industry is partially cartelized, to
the very same extent that would have happened had all the firms in it adopted a uniform
level of quality standards, and agreed to stop competing in that area. A regulation, in
essence, is a state-enforced cartel in which the members agree to cease competing in a
particular area of quality or safety, and instead agree on a uniform standard which they
establish through the state. And unlike non-state-enforced cartels, which are unstable, no
member can seek an advantage by defecting.
Although theoretically the regulations might simply put a floor on quality competition
and leave firms free to compete by exceeding the standard, corporations often take a
harsh view of competitors who exceed regulatory safety or quality requirements:

90

Ibid., p. 275.
Ibid., p. 287.
92
Butler Shaffer, Calculated Chaos: Institutional Threats to Peace and Human Survival (San Francisco:
Alchemy Books, 1985), p. 143.
91

The Bush administration said Tuesday it will fight to keep meatpackers from
testing all their animals for mad cow disease.
The Agriculture Department tests fewer than 1 percent of slaughtered cows for the
disease, which can be fatal to humans who eat tainted beef. A beef producer in the
western state of Kansas, Creekstone Farms Premium Beef, wants to test all of its
cows.
Larger meat companies feared that move because, if Creekstone should test its
meat and advertised it as safe, they might have to perform the expensive tests on their
larger herds as well.
The Agriculture Department regulates the test and argued that widespread testing
could lead to a false positive that would harm the meat industry.93
In other words, exceeding government safety standards unfairly implies that products
which merely meet the ordinary USDA standard are less than adequate. Likewise,
government minimum labeling requirements sometimes become a de facto maximum,
with restraints the voluntary provision of additional information not required by law: e.g.
Monsanto's legal thuggery against competitors which label their products as free from
recombinant bovine growth hormone (rBGH), and similar use of "food libel" laws to
constrain commercial free speech:
FEDERAL AGENCIES ADVISED OF MISLEADING MILK LABELS AND
ADVERTISING....
ST LOUIS (April 3, 2007) - Monsanto Company announced today that letters
from more than 500 concerned individuals and Monsanto have been submitted to the
U.S. Food and Drug Administration (FDA) and Federal Trade Commission (FTC)
requesting action to stop deceptive milk labeling and advertising. The two letters
outline how certain milk labels and promotions that differentiate milk based on
farmer use of POSILAC bovine somatotropin (bST) are misleading to consumers and
do not meet the standards set by laws and regulations for either the Federal Trade
Commission or the Food and Drug Administration.
"The people who signed these letters are dairy producers, industry professionals
and consumers from across the country who have expressed concerns about specific
labels they find to be false or misleading," said Kevin Holloway, president of
Monsanto Dairy Business. "In many cases, they came to Monsanto to find out what
could be done about milk marketing tactics that disparage milk and deny farmers a

93

Associated Press, "U.S. government fights to keep meatpackers from testing all slaughtered cattle for mad
cow," International Herald-Tribune, May 29, 2007
<http://www.iht.com/articles/ap/2007/05/29/america/NA-GEN-US-Mad-Cow.php>.

choice in using approved technologies. We believe FDA and FTC are the correct
agencies to address the matter with the companies who employ misleading labels or
promotions."
The letter to the FDA highlights deceptive milk labels and calls for clear guidance
and enforcement by FDA to address labeling that disparages milk from cows
supplemented with POSILAC....
"This is of great concern to dairy producers" said Dennis Areias, a Los Banos,
Calif., dairy producer who signed the letters. "Deceptive labels suggest to consumers
that there is something wrong with the milk they have been drinking for the past 13
years. Even though the companies that print these labels know this is not true, they
choose to mislead consumers in an effort to charge more money for the same milk...."
"Deceptive labels and ads are not only damaging to dairy producers who are
forced to give up technology that helps them make a living, they hurt consumers" said
John Vrieze, an Emerald, Wisc., dairy producer who also signed the letters to the
FDA and FTC.
"The misleading language clearly aims to scare people into paying more for the
same milk. These ill-gotten gains are not shared with farmers and shame on us if we
would seek to profit by disparaging the image of milk that we have invested heavily
in promoting as a safe, healthy product."
POSILAC is an FDA-approved supplement used by U.S. dairy farmers to increase
productivity. Since it was first sold in 1994, POSILAC has become one of the leading
dairy animal supplements in the United States.94
So once the FDA approves POSILAC, it is forbidden to advertise any product
differentiation based on a more stringent safety standard than that of the FDA. Merely
telling the consumer whether or not you choose to use FDA-approved additives
constitutes disparagement of those who follow the government-established industry
standard.
In one jurisdiction, the issue is no longer in doubt. Pennsylvania, in November 2007,
officially prohibited dairies from labeling their milk growth hormone-free.
State Agriculture Secretary Dennis C. Wolff said advertising one brand of milk as free
from artificial hormones implies that competitors' milk is not safe, and it often comes with
what he said is an unjustified higher price.
"It's kind of like a nuclear arms race," Wolff said. "One dairy does it and the next tries to

94

"Monsanto Declares War on 'rBGH-free' Dairies," April 3, 2007 (reprint of Monsanto press release by
Organic Consumers Association) <http://www.organicconsumers.org/articles/article_4698.cfm>.

outdo them. It's absolutely crazy."...
Monsanto spokesman Michael Doane said the hormone-free label "implies to consumers,
who may or may not be informed on these issues, that there's a health-and-safety difference
between these two milks, that there's 'good' milk and 'bad' milk, and we know that's not the
case."
Rick North of the Oregon Physicians for Social Responsibility, a leading critic of the
artificial growth hormone, said the Pennsylvania rules amounted to censorship.
"This is a clear example of Monsanto's influence," he said. "They're getting clobbered in
the marketplace by consumers everywhere wanting rBGH-free products."
Acting on a recommendation of an advisory panel, the Pennsylvania Agriculture
Department has notified 16 dairies in Pennsylvania, New York, New Jersey, Connecticut and
Massachusetts that their labels were false or misleading and had to be changed by the end of
December.95

Every time I think the morally repellant filth at Monsanto have gone as far as humanly
possible in trampling normal standards of decency underfoot, they manage to outdo
themselves.
Nobody who's read the material above should be surprised to learn that Monsanto
actually lobbied to preserve the regulatory state. When Congressman James Walsh, a
New York Republican, tried in 1995 to repeal of GMO regulations, Monsanto and other
leaders in the industry lobbied against the repeal.96
Similarly, the provision of services by the state (R&D funding, for example) removes
them as components of price in cost competition between firms, and places them in the
realm of guaranteed income to all firms in a market alike. Whether through regulations or
direct state subsidies to various forms of accumulation, the corporations act through the
state to carry out some activities jointly, and to restrict competition to selected areas.
Kolko provided abundant evidence that the main force behind this entire legislative
agenda was big business. The Meat Inspection Act, for instance, was passed primarily at
the behest of the big meat packers. In the 1880s, repeated scandals involving tainted meat
had resulted in U.S. firms being shut out of several European markets. The big packers
had turned to the U.S. government to conduct inspections on exported meat. By carrying
out this function jointly, through the state, they removed quality inspection as a
competitive issue between them, and the U.S. government provided a seal of approval in
much the same way a trade association would--but at public expense. The problem with

95

"Pa. bars hormone-free milk labels," USA Today, November 13, 2007
<http://www.usatoday.com/news/nation/2007-11-13-milk-labels_N.htm>.
96
Charlers Derber, Corporation Nation: How Corporations are Taking Over Our Lives and What We Can
Do About It (New York: St. Martin's Griffin, 1998), p. 150.

this early inspection regime was that only the largest packers were involved in the export
trade; mandatory inspections therefore gave a competitive advantage to the small firms
that supplied only the domestic market. The main effect of Roosevelt's Meat Inspection
Act was to bring the small packers into the inspection regime, and thereby end the
competitive disability it imposed on large firms. Upton Sinclair simply served as an
unwitting shill for the meat-packing industry.97 This pattern was repeated, in its essential
form, in virtually every component of the "Progressive" regulatory agenda.
Within the cartelizing framework of the regulatory state, it's a stretch to call the
relationship between industries in an oligopoly market "competitive."
The corporate web of today is a byzantine mix of interlocking board directorships,
strategic alliances, and contracting networks that link virtually every Fortune 500 corporation
with every other. John Malone, CEO of TCI, one of the great cable and media giants,
describes his relationship to Rupert Murdoch as that of variously "competitors or partners or
co-schemers."98

B. Central Banking Policy
Austrian theory of malinvestment. Monetary inflation lengthens the structure of
production by making more roundabout forms of production seem artificially profitable,
and thereby causing malinvestment--namely, the misdirection of resources into excessive
amounts of higher order goods.
C. Tax Policy
Coase argued that the differential treatment, for sales tax purposes, of transactions
organized through the market and transactions organized internally, gave a competitive
advantage to the firm over the market: "...it is clear that [the sales tax] is a tax on market
transactions and not on the same transactions organized within the firm." The sales tax,
therefore, would not only "furnish a reason for the emergence of a firm in a specialized
exchange economy," but "tend to make [firms] larger than they would otherwise be."99
Schumpeter on double taxation of dividends as a force for concentration. Hellwig on
centralizing effects of funding primarily from retained earnings. Firms in the monopoly
capital sector with retained earnings that exceed opportunities for rational investment will
tend toward overaccumulation, while firms in the competitive sector will be starved for
investment funds.

97

Kolko, Triumph of Conservatism, pp. 98-108.
Derber, Corporation Nation, p. 18.
99
Coase, "The Nature of the Firm," 1937.
98

Other tax policies also encourage the concentration of capital. Stock transactions
involved in mergers and acquisitions are exempted from the capital gains tax, for example
(Henry Manne referred to stock swaps as "one of the most important 'get-rich-quick'
opportunities in our economy today").100 And the interest on corporate debt is a
significant deduction from the corporate income tax. A study of hostile takeovers in the
'80s found that the tax savings from increased indebtedness was one of the chief
benefits.101
Tax credits and deductions for research and development and for capital depreciation,
along with state-subsidized technical education, tend to increase the capital- and
technology-intensiveness of the predominant firm--thereby increasing the firm size and
capitalization necessary to enter the market, and promoting cartelization.
D. The Corporate Liberal Pact With Labor
The old Progressive leitmotif of Big Business-Big Government collusion reappeared
in the New Deal, along with another Crolyite theme: coopting labor into the corporatist
system. The core of business support for the New Deal was, as Ronald Radosh described
it, "leading moderate big businessmen and liberal-minded lawyers from large corporate
enterprises."102 Thomas Ferguson and Joel Rogers described them more specifically as "a
new power bloc of capital-intensive industries, investment banks, and internationally
oriented commercial banks."103 (This is also the bloc of industries which, as Joseph
Stromberg points out, is most heavily dependent on government promotion of exports and
other action to absorb its surplus output; likewise, according to the Austrian class theory
of Walter Grinder and John Hagel, it is the bloc of industry that profits directly from
credit inflation by the central banking system, which promotes artificially roundabout
forms of production.)
Labor was a relatively minor part of the total cost package of such businesses; at the
same time, capital-intensive industry, as Galbraith pointed out in his analysis of the
"technostructure," depended on long-term stability and predictability for planning.
Therefore, this segment of big business was willing to trade higher wages for social peace

100

Henry Manne, "Mergers and the Market for Corporate Control," p. 113. [110-119]
Sanjai Bhagat, Andrei Shleifer and Robert W. Vishny, "Hostile Takeovers in the 1980s: The Return to
Corporate Specialization," Brookings Papers on Economic Activity: Microeconomics (1990), pp. 1-85.
Quoted in Doug Henwood, Wall Street: How it Works and for Whom (London and New York: Verso,
1997), p. 280.
102
Ronald Radosh, "The Myth of the New Deal," in Rothbard and Radosh, eds., A New History of
Leviathan, pp. 154-5.
103
Thomas Ferguson and Joel Rogers. Right Turn (New York: Hill and Wang, 1986), p. 46; this line of
analysis is pursued more intensively in Thomas Ferguson, Golden Rule: The Investment Theory of Party
Competition and the Logic of Money-Driven Political Systems (Chicago: University of Chicago Press,
1995).
101

in the workplace.104 The roots of this faction can be traced to the relatively "progressive"
employers described by James Weinstein in his account of the National Civic Federation
at the turn of the century, who were willing to engage in collective bargaining over wages
and working conditions in return for uncontested management control of the workplace.105
This attitude was at the root of the Taylorist/Fordist social contract, in which the labor
bureaucrats agreed to let management manage, so long as labor got an adequate share of
the pie.106 Such an understanding was most emphatically in the interests of large
corporations. The sitdown movement in the auto industry and the organizing strikes
among West coast longshoremen were virtual revolutions among rank and file workers on
the shop floor. In many cases, they were turning into regional general strikes. The Wagner
Act domesticated this revolution and brought it under the control of professional labor
bureaucrats.
Industrial unionism, from the employer's viewpoint, had the advantage over craft
unionism of providing a single bargaining agent with which management could deal. One
of the reasons for the popularity of "company unions" among large corporations, besides
the obvious advantages in pliability, was the fact that they were an alternative to the host
of separate craft unions of the AFL. Even in terms of pliability, the industrial unions of
the Thirties had some of the advantages of company unions. By bringing collective
bargaining under the aegis of federal labor law, corporate management was able to use
union leadership to discipline their own rank and file, and to use the federal courts as a
mechanism of enforcement.
The New Dealers devised... a means to integrate big labor into the corporate state.
But only unions that were industrially organized, and which paralleled in their
structure the organization of industry itself, could play the appropriate role. A
successful corporate state required a safe industrial-union movement to work. It also
required a union leadership that shared the desire to operate the economy from the top
in formal conferences with the leaders of the other functional economic groups,
particularly the corporate leaders. The CIO unions... provided such a union
leadership.107
Moderate members of the corporate elite also gained reassurance from the earlier
British experience in accepting collective bargaining. Collective bargaining did not affect
the distribution of wealth, for one thing: "Labor gains were made due to the general
growth in wealth and at the expense of the consumer, which would mean small
businessmen, pensioners, farmers, and nonunionized white collar employees." (Not to
mention a large contingent of unskilled laborers and lumpenproles without bargaining

104

Ferguson, Golden Rule pp. 117 et seq.; John Kenneth Galbraith, The New Industrial State (New York:
Signet Books, 1967), pp. 25-37, 258-9, 274, 287-9.
105
Weinstein, Corporate Ideal in the Liberal State, esp. the first two chapters.
106
Montgomery, Workers’ Control in America, pp. 49-57.
107
Radosh, "The Myth of the New Deal," pp. 178-9, 181.

leverage against the employing classes). And the British found that firms in a position of
oligopoly, with a relatively inelastic demand, were able to pass increased labor costs on to
the consumer at virtually no cost to themselves.108
The Wagner Act served the central purposes of the corporate elite. To some extent it
was a response to mass pressure from below. But the decision on whether and how to
respond, the form of the response, and the implementation of the response, were all firmly
in the hands of the corporate elite. According to Domhoff (writing in The Higher
Circles), "The benefits to capital were several: greater efficiency and productivity from
labor, less labor turnover, the disciplining of the labor force by labor unions, the
possibility of planning labor costs over the long run, and the dampening of radical
doctrines."109 James O'Connor described it this way: "From the standpoint of monopoly
capital the main function of unions was... to inhibit disruptive, spontaneous rank-and-file
activity (e.g., wildcat strikes and slowdowns) and to maintain labor discipline in general.
In other words, unions were... the guarantors of 'managerial prerogatives.'"110 The
objectives of stability and productivity were more likely to be met by such a limited
Taylorist social compact than by a return to the labor violence and state repression of the
late nineteenth century.
In The Power Elite and the State, Domhoff put forth a slightly more nuanced thesis
than in The Higher Circles.111 It was true, he admitted, that a majority of large
corporations opposed the Wagner Act in its final form. But the basic principles of
collective bargaining embodied in it had been the outcome of decades of corporate liberal
theory and practice, worked out through policy networks in which "progressive" large
corporations had played a leading role; the National Civic Federation, as Weinstein
described its career, was a typical example of such networks. The motives of those in the
Roosevelt administration who framed the Wagner Act were very much in the mainstream
of corporate liberalism. Although they may have been ambivalent about the specific form
of FDR's labor legislation, Swope and his corporate fellow travelers had played the major
role in formulating the principles behind it. Whatever individual business leaders thought
of Wagner, it was drafted by mainstream corporate lawyers who were products of the
intellectual climate created by those same business leaders; and it was drafted with a view
to their interests. Although it was not accepted by big business as a whole, it was largely
the creation of representatives of big business interests whose understanding of the Act's
purpose was largely the same as those outlined in Domhoff's quote above from The
Higher Circles. At the same time, although it was designed to contain the threat of
working class power, it enjoyed broad working class support as the best deal they were
likely to get. The class nature of the legislation was further complicated by the fact that
the southern segment of the Democratic Party establishment, largely made up of large

108

Domhoff, Higher Circles, p. 223.
Domhoff, Higher Circles, p. 225.
110
James O’Connor, The Fiscal Crisis of the State (New York: St. Martin’s Press, 1973).
111
G. William Domhoff, The Power Elite and the State: How Policy is Made in America (New York:
Aldine de Gruyter, 1990), pp. 65-105.
109

agricultural capitalists, used its veto power to limit the corporate liberal agenda of the big
industrialists: the southern wing was willing to go along with Wagner because it
specifically exempted agricultural laborers.
Another major aspect of American labor policy, which perhaps began with
Cleveland's response to the Pullman strike, was continued in the Railway Labor Relations
Act and Taft-Hartley (which, in James O'Connor's words, "included a ban on secondary
boycotts and hence tried to 'illegalize' class solidarity...",112 and Truman's and Bush's
threats to use soldiers as scabs in, respectively, the steelworkers' and longshoremen's
strikes. Taft-Hartley's "cooling off" and arbitration provisions enable the government to
intervene in any case where transport workers threaten to turn a local dispute into a
general strike.
Of course, the facts of the case are an almost complete reversal of the vulgar
libertarian critique of organized labor, which commonly asserts that unions depend
entirely on force (or the implicit threat of force), backed by the state, against non-union
laborers. They assume, in so arguing, that the strike as it is known today has always been
the primary method of labor struggle. Any of Thomas DiLorenzo's articles on the subject
at Mises.Org can be taken as a proxy for this ideological tendency. I quote the following
as an example:
Historically, the main "weapon" that unions have employed to try to push wages
above the levels that employees could get by bargaining for themselves on the free
market without a union has been the strike. But in order for the strike to work, and for
unions to have any significance at all, some form of coercion or violence must be
used to keep competing workers out of the labor market.113
This betrays a profound ignorance of the history of the labor movement outside the sterile
bubble of the Wagner Act.
First of all, when the strike was chosen as a weapon, it relied more on the threat of
imposing costs on the employer than on the forcible exclusion of scabs. You wouldn't
think it so hard for the Misoids to understand that the replacement of a major portion of
the workforce, especially when the supply of replacement workers is limited by moral
sympathy with the strike, might entail considerable transaction costs and disruption of
production. The idiosyncratic knowledge of the existing workforce, the time and cost of
bringing replacement workers to an equivalent level of productivity, and the damage
short-term disruption of production may do to customer relations, together constitute a
rent that invests the threat of walking out with a considerable deterrent value. And the
cost and disruption is greatly intensified when the strike is backed by sympathy strikes at
other stages of production.

112

James O’Connor, Accumulation Crisis (Oxford: Basil Blackwell Ltd, 1984) p. 75.
Thomas DiLorenzo, "The Myth of Voluntary Unions," Mises.Org, September 14, 2004
<http://www.mises.org/story/1604>.
113

Wagner and Taft-Hartley greatly reduced the effectiveness of strikes at individual
plants by transforming them into declared wars fought by Queensbury rules, and likewise
reduced their effectiveness by prohibiting the coordination of actions across multiple
plants or industries. Taft-Hartley's cooling off periods, in addition, gave employers time
to prepare ahead of time for such disruptions and greatly reduced the informational rents
embodied in the training of the existing workforce. Were not such restrictions in place,
today's "just-in-time" economy would likely be far more vulnerable to such disruption
than that of the 1930s.
More importantly, though, unionism was historically less about strikes or excluding
non-union workers from the workplace than about what workers did inside the workplace
to strengthen their bargaining power against the boss.
The Wagner Act, along with the rest of the corporate liberal legal regime, had as its
central goal the redirection of labor resistance away from the successful asymmetric
warfare model, toward a formalized, bureaucratic system centered on labor contracts
enforced by the state and the union hierarchies. As Karl Hess suggested in a 1976
Playboy interview,
one crucial similarity between those two fascists [Hitler and FDR] is that both
successfully destroyed the trade unions. Roosevelt did it by passing exactly the
reforms that would ensure the creation of a trade-union bureaucracy. Since F.D.R.,
the unions have become the protectors of contracts rather than the spearhead of
worker demands. And the Roosevelt era brought the "no strike" clause, the notion
that your rights are limited by the needs of the state.114
The federal labor law regime criminalizes many forms of resistance, like sympathy
and boycott strikes up and down the production chain from raw materials to retail, that
made the mass and general strikes of the early 1930s so formidable. The Railway Labor
Relations Act, which has since been applied to airlines, was specifically designed to
prevent transport workers from turning local strikes into general strikes. Taft-Hartley's
cooling off period can be used for similar purposes in other strategic sectors, as
demonstrated by Bush's invocation of it against the longshoremen's union.
E. The Socialization of Cost
The common thread in all these lines of analysis is that an ever-growing portion of the
functions of the capitalist economy have been carried out through the state. According to
James O'Connor, state expenditures under monopoly capitalism can be divided into

114

I'm indebted to the blogger freeman, libertarian critter for scanning it in online: "More From Hess,"
freeman, libertarian critter, June 9, 2005 <http://freemanlc.blogspot.com/2005/06/more-fromhess.html>.

"social capital" and "social expenses."
Social capital is expenditures required for profitable private accumulation; it is
indirectly productive (in Marxist terms, social capital indirectly expands surplus
value). There are two kinds of social capital: social investment and social
consumption (in Marxist terms, social constant capital and social variable capital)....
Social investment consist of projects and services that increase the productivity of a
given amount of laborpower and, other factors being equal, increase the rate of
profit.... Social consumption consists of projects and services that lower the
reproduction costs of labor and, other factors being equal, increase the rate of profit.
An example of this is social insurance, which expands the productive powers of the
work force while simultaneously lowering labor costs. The second category, social
expenses, consists of projects and services which are required to maintain social
harmony--to fulfill the state's "legitimization" function.... The best example is the
welfare system, which is designed chiefly to keep social peace among unemployed
workers.115
According to O'Connor, such state expenditures counteract the falling general rate of
profit that Marx predicted. Monopoly capital is able to externalize many of its operating
expenses on the state; and since the state's expenditures indirectly increase the
productivity of labor and capital at taxpayer expense, the apparent rate of profit is
increased.
Unquestionably, monopoly sector growth depends on the continuous expansion of
social investment and social consumption projects that in part or in whole indirectly
increase productivity from the standpoint of monopoly capital. In short, monopoly
capital socializes more and more costs of production.116
O'Connor listed several of the main ways in which monopoly capital externalizes its
operating costs on the political system:
Capitalist production has become more interdependent--more dependent on
science and technology, labor functions more specialized, and the division of labor
more extensive. Consequently, the monopoly sector (and to a much lesser degree the
competitive sector) requires increasing numbers of technical and administrative
workers. It also requires increasing amounts of infrastructure (physical overhead
capital)--transportation, communication, R&D, education, and other facilities. In
short, the monopoly sector requires more and more social investment in relation to
private capital.... The costs of social investment (or social constant capital) are not
borne by monopoly capital but rather are socialized and fall on the state.117

115

O’Connor, Fiscal Crisis of the State, pp. 6-7.
Ibid., p. 24.
117
Ibid., p. 24.

116

As suggested already by our reference above to O'Connor, these forms of state
expenditure have the practical effect of promoting several of the "counteracting
influences" to the declining rate of profit that Marx described in Volume 3 of Capital.
The second such influence Marx listed, for example, was the "depression of wages below
the value of labor power." Through welfare, taxpayer-funded education, and other means
of subsidizing the reproduction cost of labor-power, the state reduces the minimum
sustainable cost of labor-power that must be paid by employers. Regarding education, in
particular, the Austrian economists Walter Grinder and John Hagel commented from a
free market perspective:
A distinct institutional framework, benefitting from extensive socialization of costs,
supplies the economy with a highly skilled and literate labor force inculated with
"technocratic" values. The evolution of the state-financed educational system has been
profoundly influenced by the changing needs of the corporate economy and this itimate, if
somewhat inefficient, relationship has been a prominent characteristic of state capitalist
societies. Compulsory education also inculates a value system encouraging subservience and
docility among unskilled labor and the lower strata of society.118

This is true, likewise, of Marx's third influence: the "cheapening of the elements of
constant capital." The state, by subsidizing many of the operating costs of large
corporations, artificially shifts their balance sheet further into the black. The fourth
influence listed, "relative overpopulation," is promoted by state subsidies to the adoption
of capital-intensive forms of production and to the education of technically skilled
manpower at government expense--with the effect of artificially increasing the supply of
labor relative to demand, and thus reducing its bargaining power in the labor market.119
According to Samuel Bowles and Herbert Gintis, the formal right of the employer to hire
and fire
is effective... only when the cost to workers is high; that is, when there is a large pool
of labor with the appropriate skills available in the larger society, into which workers
are threatened to be pushed. Indeed, ...the maintenance of such a "reserve army" of
skilled labor has been a major, and not unintended, effect of U.S. education through
the years.120
We should briefly recall here our examination above of how such socialization of
expenditures serves to cartelize industry. By externalizing such costs on the state, through
the general tax system, monopoly capital removes these expenditures as an issue of cost
competition between individual firms. It is as if all the firms in an industry formed a

118

Walter E. Grinder and John Hagel, "Toward a Theory of State Capitalism: Ultimate Decision-Making
and Class Structure," Journal of Libertarian Studies 1:1 (Spring 1977), p. 73
<http://www.mises.org/journals/jls/1_1/1_1_7.pdf>.
119
Karl Marx and Friedrich Engels, Capital vol. 3, vol. 37 of Marx and Engels Collected Works (New
York: International Publishers, 1998), pp. 234-5.
120
Samuel Bowles and Herbert Gintis, Schooling in Capitalist America: Educational Reform and the
Contradictions of Economic Life (New York: Basic Books, Inc., Publishers, 1976), p. 55.

cartel to administer these costs in common, and agreed not to include them in their price
competition. The costs and benefits are applied uniformly to the entire industry, removing
it as a competitive disadvantage for some firms.
Although it flies in the face of "progressive" myth, big business is by no means
uniformly opposed to national health insurance and other forms of social insurance.
Currently, giant corporations in the monopoly capital sector are the most likely to provide
private insurance to their employees; and such insurance is one of the fastest-rising
components of labor costs. Consequently, firms that are already providing this service at
their own expense are the logical beneficiaries of a nationalized system. The effect of
such a national health system would be to remove the cost of this benefit as a competitive
disadvantage for the companies that provided it. Even if the state requires only large
corporations in the monopoly sector to provide health insurance, it is an improvement of
the current situation, from the monopoly capital point of view: health insurance ceases to
be a component of price competition among the largest firms. A national health system
provides a competitive advantage to a nation's firms at the expense of their foreign
competitors, who have to fund their own employee health benefits--hence, American
capital's hostility to the Canadian national health, and its repeated attempts to combat it
through the WTO. The cartelizing effects of socializing the costs of social insurance,
likewise, was one reason a significant segment of monopoly capital supported FDR's
Social Security agenda.
Daniel Gross, although erroneously viewing it as a departure from big business's
supposed hostility to the welfare state, has made the same point about more recent big
business support of government health insurance.121 Large American corporations, by
shouldering the burden of health insurance and other employee benefits borne by the state
in Europe and Japan, is at a competitive disadvantage both against companies there and
against smaller firms here.
Democratic presidential candidate Dick Gephart, or rather his spokesman Jim
English, admitted to a corporate liberal motivation for state-funded health insurance in his
2003 Labor Day address. Gephart's proposed mandatory employer coverage, with a 60%
tax credit for the cost, would (he said) eliminate competition from companies that don't
currently provide health insurance as an employee benefit. It would also reduce
competition from firms in countries with a single-payer system.122
The level of technical training necessary to keep the existing corporate system
running, the current level of capital intensiveness of production, and the current level of
R&D efforts on which it depends, would none of them pay for themselves on a free
market. The state's education system provides a technical labor force at public expense,
and whenever possible overproduces technical specialists on the level needed to ensure

121

Daniel Gross, "Socialism, American Style: Why American CEOs covet a massive European-style socialwelfare state" Slate Aug. 1, 2003 <http://slate.msn.com/id/2086511/>.
122
C-SPAN, September 1, 2003.

that technical workers are willing to take work on the employers' terms. On this count,
O'Connor quoted Veblen: the state answers capital's "need of a free supply of trained
subordinates at reasonable wages...."123 Starting with the Morrill Act of 1862, which
subsidized agricultural and mechanical colleges, the federal government has underwritten
a major part of the reproduction costs of technical labor.124 In research and development,
likewise, federal support goes back at least to the agricultural and experiment stations of
the late nineteenth century, created pursuant to the Hatch Act of 1887.125
The state's cartelization and socialization of the cost of reproducing a technically
sophisticated labor force, and its subsidies to R&D, make possible a far higher technical
level of production than would support itself in a free market. The G.I. Bill was an
integral part of the unprecedentedly high scale of state capitalism created during and after
WWII.
Technical-administrative knowledge and skills, unlike other forms of capital over
which private capitalists claim ownership, cannot be monopolized by any one or a few
industrial-finance interests. The discoveries of science and technology spill over the
boundaries of particular corporations and industries, especially in the epoch of mass
communications, electronic information processing, and international labor mobility.
Capital in the form of knowledge resides in the specialized skills and abilities of the
working class itself. In the context of a free market for laborpower... no one
corporation or industry or industrial-finance interest group can afford to train its own
labor force or channel profits into the requisite amount of R&D. Patents afford some
protection, but there is no guarantee that a particular corporation's key employees will
not seek positions with other corporations or industries. The cost of losing trained
laborpower is especially high in companies that employ technical workers whose
skills are specific to particular industrial process--skills paid for by the company in
question. Thus, on-the-job training (OJT) is little used not because it is technically
inefficient... but because it does not pay.
Nor can any one corporation or industrial-finance interest afford to develop its own R&D
or train the administrative personnel increasingly needed to plan, coordinate, and control
the production and distribution process. In the last analysis, the state is required to
coordinate R&D because of the high costs and uncertainty of getting utilizable results.126
At best, from the point of view of the employer, the state creates a "reserve army" of
scientific and technical labor--as William Appleman Williams described it, the elite has
"seen to it that experts are a glut on the market."127 At worst, when there is a shortage of

123

O’Connor, Fiscal Crisis of the State, p. 111.
Noble, America by Design, pp. 24 et seq.
125
Ibid., p. 132.
126
O’Connor, Fiscal Crisis of the State, p. 112.
127
William Appleman Williams, "A Profile of the Corporate Elite," in Rothbard and Radosh, eds., New
History of Leviathan, p. 5.
124

such labor-power, the state at least absorbs the cost of reproducing it and removes it as a
component of private industry's operating costs. In either case, "the greater the
socialization of the costs of variable capital, the lower will be the level of money wages,
and... the higher the rate of profit in the monopoly sector."128 And since the monopoly
capital sector is able to pass its taxes onto the consumer or to the competitive capital
sector, the effect is that "the costs of training technical laborpower are met by taxes paid
by competitive sector capital and labor."129
The "public" schools' curriculum can much more justly be described as servile than
liberal education. Its objective is a human product which is capable of fulfilling the
technical needs of corporate capital and the state, but at the same time docile and
compliant, and incapable of any critical analysis of the system of power it serves. The
public educationist movement and the creation of the first state school systems,
remember, coincided with the rising factory system's need for a work force that was
trained in obedience, punctuality, and regular habits. Technical competence and a "good
attitude" toward authority, combined with twelve years of conditioning in not standing
out or making waves, were the goal of the public educationists.
Even welfare expenses, although O'Connor classed them as a completely
unproductive expenditure, are in fact another example of the state underwriting variable
capital costs. Some socialists love to speculate that, if it were possible, capitalists would
lower the prevailing rate of subsistence pay to that required to keep workers alive only
when they were employed. But since that would entail starvation during periods of
unemployment, the prevailing wage must cover contingencies of unemployment;
otherwise, wages would be less than the minimum cost of reproducing labor. Under the
welfare state, however, the state itself absorbs the cost of providing for such
contingencies of unemployment, so that the uncertainty premium is removed as a
component of wages in Adam Smith's "higgling of the market."
And leaving this aside, even as a pure "social expense," the welfare system acts
primarily (in O'Connor's words) to "control the surplus population politically."130 The
state's subsidies to the accumulation of constant capital and to the reproduction of
scientific-technical labor provide an incentive for much more capital-intensive forms of
production than would have come about in a free market, and thus contribute to the
growth of a permanent underclass of surplus labor;131 the state steps in and undertakes
the minimum cost necessary to prevent large-scale homelessness and starvation, which
would destabilize the system, and to maintain close supervision of the underclass through
the human services bureaucracy.132

128

O’Connor, Fiscal Crisis of the State, p. 124.
Ibid., p.160.
130
Ibid., p. 69.
131
Ibid., p. 161.
132
Piven and Cloward, Regulating the Poor.

129

The general effect of the state's intervention in the economy, then, is to remove ever
increasing spheres of economic activity from the realm of competition in price or quality,
and to organize them collectively through organized capital as a whole.
Through the military-industrial complex, the state has socialized a major share-probably the majority--of the cost of "private" business's research and development. If
anything the role of the state as purchaser of surplus economic output is eclipsed by its
role as subsidizer of research cost, as Charles Nathanson pointed out. The research and
development process was heavily militarized by the Cold War "military-R&D complex."
Military R&D often results in basic, general use technologies with broad civilian
applications. Technologies originally developed for the Pentagon have often become the
basis for entire categories of consumer goods.133 The general effect has been to
"substantially [eliminate] the major risk area of capitalism: the development of and
experimentation with new processes of production and new products."134
This is the case in electronics especially, where many products originally developed
by military R&D "have become the new commercial growth areas of the economy."135
Transistors and other forms of miniaturized circuitry were developed primarily with
Pentagon research money. The federal government was the primary market for large
mainframe computers in the early days of the industry; without government contracts, the
industry might never have had sufficient production runs to adopt mass production and
reduce unit costs low enough to enter the private market. And the infrastructure for the
worldwide web itself was created by the Pentagon's DARPA, originally as a redundant
global communications system that could survive a nuclear war. Any implied
commentary on the career of Bill Gates is, of course, unintended.
Overall, Nathanson estimated, industry depended on military funding for around 60%
of its research and development spending; but this figure is considerably understated by
the fact that a significant part of nominally civilian R&D spending is aimed at developing
civilian applications for military technology.136 It is also understated by the fact that
military R&D is often used for developing production technologies (like automated
control systems in the machine tool industry) that become the basis for production
methods throughout the civilian sector.
F. State Action to Absorb Surplus Output
The roots of the corporate state in the U.S., more than anything else, lie in the crisis of
overproduction as perceived by corporate and state elites--especially the traumatic
Depression of the 1890s--and the requirement, also as perveived by them, for state

133

Nathanson, p. 208.
Ibid., p. 230.
135
Ibid., p. 230.
136
Ibid., pp. 222-25.
134

intervention to absorb surplus output or otherwise deal with the problems of
overproduction, underconsumption, and overaccumulation.
William Appleman Williams summarized the lesson of the 1890s in this way:
"Because of its dramatic and extensive nature, the Crisis of the 1890's raised in many
sections of American society the specter of chaos and revolution."137 American economic
elites saw it as the result of overproduction and surplus capital, and believed it could be
resolved only through access to a "new frontier." Without state-guaranteed access to
foreign markets, output would be too far below capacity, unit costs would be driven up,
and unemployment would reach dangerous levels.
The seriousness of the last threat was underscored by the radicalism of the Nineties.
The Pullman Strike, Homestead, and the formation of the Western Federation of Miners
(in many ways the precursor organization to the IWW) were signs of dangerous levels of
labor unrest and class consciousness. Coxey's Army marched on Washington, a small
foretaste of the kinds of radicalism that could be produced by unemployment. The labor,
socialist, and anarchist movements had a growing foreign component, more radical than
the older native faction, and the People's Party seemed to have a serious chance of
winning national elections. At one point Jay Gould, the mouthpiece of the robber barons,
was threatening a capital strike (much like those in Venezuela recently) if the populists
came to power. In 1894 businessman F. L. Stetson warned, "We are on the edge of a very
dark night, unless a return of commercial prosperity relieves popular discontent."138 Both
business and government resounded with claims that U.S. productive capacity had
outstripped the domestic market's ability to consume, and that the government had to take
active measures to obtain outlets.
This perception is often ridiculed by Austrians on the grounds that overproduction
and underconsumption simply cannot happen: "J.B. Say said it, I believe it, that settles
it." They ignore the fact that Say's law only applies to a free market. One might just as
well airily dismiss Mises' theories of malinvestment and the crackup boom on the
grounds that "such things cannot happen in the free market." Both assurances would
doubtless be comforting--if only we had a free market. But as it is, we have a corporatist
system in which the state subsidizes overaccumulation and the cartelization of industry,
so that overbuilt industry cannot dispose of its entire product when operating at full
capacity--especially not at cartel prices. Neo-Marxist theories of overproduction and
imperialism, and New Left revisionist treatments of American foreign policy, both lend
themselves quite well to thoughful Austrian analysis. Joseph Stromberg's essay, "The
Role of State Monopoly Capitalism in the American Empire,"139 is an excellent example
of such an approach.

137

William Appleman Williams, The Tragedy of American Diplomacy (New York: Dell Publishing
Company, 1959, 1962) 21-2.
138
Ibid., p. 26.
139
Journal of Libertarian Studies Volume 15, no. 3 (Summer 2001)
http://www.mises.org/journals/jls/15_3/15_3_3.pdf.

The theoretical justification for state intervention was found in the work of John
Maynard Keynes, and the corporate state of the New Deal was justified in large part as
the practical implementation of Keynesian thought. The abortive NRA was an attempt to
solve the problem of overproduction by government-sponsored industrial cartels: by that
means, corporations would be able to set prices and apportion shares of output among
themselves so as to maximize income through monopoly pricing, thus guaranteeing them
a minimum rate of profit even while operating far below capacity. Besides this
unsuccessful attempt, thwarted by the Supreme Court, FDR also attempted to mobilize
idle manpower and spending power through deficit-funded spending programs, with
mixed results at best.
The crowning achievement of FDR's state capitalism, of course, was the militaryindustrial complex which arose from World War II, and has continued ever since. It has
since been described, variously, as "military Keynesianism," or a "perpetual war
economy." A first step in realizing the monumental scale of the war economy's effect is to
consider that the total value of plant and equipment in the United States increased by
about two-thirds (from $40 to $66 billion) between 1939 and 1945, most of it a taxpayer
"gift" of forced investment funds provided to the country's largest corporations.140 Profit
was virtually guaranteed on war production through "cost-plus" contracts.141 In addition,
some two-thirds of federal R&D spending was channeled through the 68 largest private
laboratories (40% of it to the ten largest), and the resulting patents given away to the
companies that carried out the research under government contract.142
Demobilization of the war economy after 1945 very nearly threw the overbuilt and
government-dependent industrial sector into a renewed depression. For example, in Harry
Truman and the War Scare of 1948, Frank Kofsky described the aircraft industry as
spiraling into red ink after the end of the war, and on the verge of bankruptcy when it was
rescued by Truman's new bout of Cold War spending on heavy bombers.143
The Cold War restored the corporate economy's heavy reliance on the state as a
source of guaranteed sales. Charles Nathanson argued that "one conclusion is
inescapable: major firms with huge aggregations of corporate capital owe their survival
after World War II to the Cold War...."144 For example, David Noble pointed out that
civilian jumbo jets would never have existed without the government's heavy bomber
contracts. The production runs for the civilian market alone were too small to pay for the
complex and expensive machinery. The 747 is essentially a spinoff of military

140

C. Wright Mills, The Power Elite (Oxford and New York: Oxford University Press, 1956, 2000), p. 101.
David W. Eakins, "Business Planners and America’s Postwar Expansion," in David Horowitz, ed.,
Corporations and the Cold War (New York and London: Monthly Review Press, 1969), p. 148.
142
G. William Domhoff, Who Rules America? (Englewood Cliffs, N.J.: Prentice-Hall, 1967), p. 121.
143
Frank Kofsky, Harry S. Truman and the War Scare of 1948 (New York: St. Martin’s Press, 1993).
144
Charles E. Nathanson, "The Militarization of the American Economy," in Horowitz, ed., Corporations
and the Cold War, p. 214.
141

production.145
The heavy industrial and high tech sectors were given a virtually guaranteed outlet,
not only by U.S. military procurement, but by grants and loan guarantees for foreign
military sales under the Military Assistance Program. Although apologists for the
military-industrial complex have tried to stress the relatively small fraction of total
production represented by military goods, it makes more sense to compare the volume of
military procurement to the amount of idle capacity. Military production runs amounting
to a minor percentage of total production might absorb a major part of total excess
production capacity, and have a huge effect on reducing unit costs. Besides, the rate of
profit on military contracts tends to be quite a bit higher, given the fact that military
goods have no "standard" market price, and the fact that prices are set by political means
(as periodic Pentagon budget scandals should tell us).146 So military contracts, small
though they might be as a portion of a firm's total output, might well make the difference
between profit and loss.
Seymour Melman described the "permanent war economy" as a privately-owned,
centrally-planned economy that included most heavy manufacturing and high tech
industry. This "state-controlled economy" was based on the principles of "maximization
of costs and of government subsidies."147
It can draw on the federal budget for virtually unlimited capital. It operates in an
insulated, monopoly market that makes the state-capitalist firms, singly and jointly,
impervious to inflation, to poor productivity performance, to poor product design and
poor production managing. The subsidy pattern has made the state-capitalist firms
failure-proof. That is the state-capitalist replacement for the classic self-correcting
mechanisms of the competitive, cost-minimizing, profit-maximizing firm.148
The chief virtue of the military economy is its utter unproductivity. That is, it does
not compete with private industry to supply any good for which there is consumer
demand. But military production is not the only such area of unproductive government
spending. Neo-Marxist Paul Mattick elaborated on the theme in a 1956 article. The
overbuilt corporate economy, he wrote, ran up against the problem that "[p]rivate capital
formation... finds its limitation in diminishing market-demand." The State had to absorb
part of the surplus output; but it had to do so without competing with corporations in the
private market. Instead, "[g]overnment-induced production is channeled into non-market
fields--the production of non-competitive public-works, armaments, superfluities and
waste.149 As a necessary result of this state of affairs,

145

Noble, America by Design, pp. 6-7.
Nathanson, "The Militarization of the American Economy," p. 208.
147
Seymour Melman, The Permanent War Economy: American Capitalism in Decline (New York: Simon
and Schuster, 1974), p. 11.
148
Ibid., p. 21.
149
Paul Mattick, "The Economics of War and Peace," Dissent (Fall 1956), p. 377.
146

so long as the principle of competitive capital production prevails, steadily growing
production will in increasing measure be a "production for the sake of production,"
benefiting neither private capital nor the population at large.
This process is somewhat obscured, it is true, by the apparent profitability of
capital and the lack of large-scale unemployment. Like the state of prosperity,
profitability, too, is now largely government manipulated. Government spending and
taxation are managed so as to strengthen big business at the expense of the economy
as a whole....
In order to increase the scale of production and to accummulate [sic] capital,
government creates "demand" by ordering the production of non-marketable goods,
financed by government borrowings. This means that the government avails itself of
productive resources belonging to private capital which would otherwise be idle.150
Such consumption of output, while not always directly profitable to private industry,
serves a function analogous to foreign "dumping" below cost, in enabling industry to
operate at full capacity despite the insufficiency of private demand to absorb the entire
product at the cost of production.
It's interesting to consider how many segments of the economy have a guaranteed
market for their output, or a "conscript clientele" in place of willing consumers. The
"military-industrial complex" is well known. But how about the state's education and
penal systems? How about the automobile-trucking-highway complex, or the civil
aviation complex? Foreign surplus disposal ("export dependant monopoly capitalism")
and domestic surplus disposal (government purchases) are different forms of the same
phenomenon.
Finally, as Marx pointed out in Volume Three of Capital, the rise of major new forms
of industry could serve as a countervailing influence against the falling direct rate of
profit" resulting from overaccumulation. Baran and Sweezy, likewise, considered
"epoch-making inventions" as partial counterbalances to the ever-increasing surplus.
Their chief example of such a phenomenon was the rise of the automobile industry in the
1920s, which (along with the highway program) was to define the American economy for
most of the mid-20th century.151 The high tech boom of the 1990s was a similarly
revolutionary event. It is revealing to consider the extent to which both the automobile
and computer industries, far more than most industries, were direct products of state
capitalism. And as we shall see in the next section of this chapter, the dominant and
most profitable sectors of the new global economy are those most heavily reliant on state
protection or subsidy.

150

Ibid., pp. 378-9.
Paul Baran and Paul Sweezy, Monopoly Capitalism: An Essay in the American Economic and Social
Order (New York: Monthly Review Press, 1966), p. 220.
151

G. Neoliberal Foreign Policy
Neoliberal foreign policy, in large measure, is a subset of the broader category of state
action to absorb surplus output and surplus capital.
The central theme of American foreign policy, from the 1890s until today, was what
William Appleman Williams called "Open Door imperialism";152 it consisted of using
U.S. political power to guarantee access to foreign markets and resources on terms
favorable to American corporate interests, without relying on direct political rule. Its
central goal was to obtain for U.S. merchandise, in each national market, treatment equal
to that afforded any other industrial nation. Most importantly, this entailed active
engagement by the U.S. government in breaking down the imperial powers' existing
spheres of economic influence or preference. The result, in most cases, was to treat as
hostile to U.S. security interests any large-scale attempt at autarky, or any other policy
whose effect was to withdraw a major area of the world from the disposal of the U.S.
corporate economy. When the power attempting such policies was an equal, like the
British Empire, the U.S. reaction was merely one of measured coolness. When it was
perceived as an inferior, like Japan, the U.S. resorted to more forceful measures, as events
of the late 1930s indicate. And whatever the degree of equality between advanced nations
in their access to Third World markets, it was clear that Third World nations were still to
be subordinated to the industrialized West in a collective sense.
This Open Door system was the direct ancestor of today's neoliberal system, which is
falsely called "free trade" in the apologetics of court intellectuals. It depended on active
management of the world economy by dominant states, and continuing intervention to
police the international economic order and enforce sanctions against states which did not
cooperate.
The Breton Woods System, created on the initiative of FDR and Truman in the latter
part of World War II, was the culmination of Open Door Empire. The second
Roosevelt's administration saw the guarantee of American access to foreign markets as
vital to ending the Depression and the threat of internal upheaval that went along with it.
FDR's ongoing policy of Open Door Empire, faced with the withdrawal of major areas
from the world market by the autarkic policies of the Greater East Asia Co-Prosperity
Sphere and Fortress Europe, led to American entry into World War II, and culminated in
the postwar establishment of what Samuel Huntington called a "system of world order"
guaranteed both by global institutions of economic governance like the IMF, and by a
hegemonic political and military superpower.
Beginning in the summer of 1940, the CFR and State Department undertook a joint

152

William Appleman Williams, The Contours of American History (Cleveland and New York: The World
Publishing Company, 1961).

study to determine the minimum portion of the world the U.S. would have to integrate
with its own economy, in order to provide sufficient resources and markets for economic
stability; it also explored policy options for reconstructing the postwar world. They found
that the U.S. economy could not survive in its existing form without access to the
resources and markets not only of the Western Hemisphere, but of the British Empire and
the Far East (together called the Grand Area). But the latter region was rapidly being
incorporated into Japan's economic sphere of influence. And the fall of France and the
Low Countries , and the ongoing Battle of Britain, raised the possibility that the fall of
Britain might be followed by the Royal Navy (and with it some portion of the Empire)
falling into German hands. FDR made the political decision to contest Japanese power in
the Far East, and if necessary to initiate war.153 In the end, however, he successfully
maneuvered Japan into firing the first shot.
The American policy that emerged from these struggles was one of securing control
over the markets and resources of the global "Grand Area" through institutions of global
economic governance, reflected in the postwar Bretton Woods system.
The problem of access to foreign markets and resources was central to U.S. policy
planning for a postwar world. Given the structural imperatives of what Schumpeter called
"export dependent monopoly capitalism,"154 the fear of a postwar depression was a real
one. The original drive toward foreign expansion at the end of the nineteenth century
reflected the fact that industry, with state capitalist encouragement, had expanded far
beyond the ability of the domestic market to consume its output. Even before World War
II, the state capitalist economy had serious trouble operating at the level of output needed
for full utilization of capacity and cost control. Military-industrial policy during the war
greatly exacerbated the problem of over-accumulation, increasing the value of plant and
equipment by two-thirds at taxpayer expense. The end of the war, if followed by the
traditional pattern of demobilization, would result in a drastic reduction in orders to that
same overbuilt industry just as over ten million workers were being dumped back into the

153

Laurence H. Shoup and William Minter, "Shaping a New World Order: The Council on Foreign
Relations' Blueprint for World Hegemony, 1939-1945," in Holly Sklar, ed., Trilateralism: The Trilateral
Commission and Elite Planning for World Management (Boston: South End Press, 1980), pp. 135-56
154
"Union in a cartel or trust confers various benefits on the entrepreneur--a saving in costs, a stronger
position as against the workers--but none of these compares with this one advantage: a monopolistic price
policy, possible to any considerable degree only behind an adequate protective tariff. Now the price that
bings the maximum monopoly profit is generally far above the price that would be fixed by fluctuating
competitive costs, and the volume that can be marketed at that maximum price is generally far below the
output that would be technically and economically feasible. Under free competition that output would be
produced and offered, but a trust cannot offer it, for it could be sold only at a competitive price. Yet the
trust must produce it--or approximately as much--otherwise the advantages of large-scale enterprise remain
unexploited and unit costs are likely to be uneconomically high.... [The trust] extricates itself from this
dilemma by producing the full output that is economically feasible, thus securing low costs, and offering in
the protected domestic market only the quantity corresponding to the monopoly price--insofar as the tariff
permits; while the rest is sold, or "dumped," abroad at a lower price.... "
--Joseph Schumpeter, "Imperialism," in Imperialism, Social Classes: Two Essays by Joseph Schumpeter.
Translated by Heinz Norden. Introduction by Hert Hoselitz (New York: Meridian Books, 1955) 79-80.

civilian labor force.
A central facet of postwar economic policy, as reflected in the Bretton Woods
agencies, was state intervention to guarantee markets for the full output of U.S. industry
and profitable outlets for surplus capital. The World Bank was designed to subsidize the
export of capital to the Third World, by financing the infrastructure without which
Western-owned production facilities could not be established there. According to
Gabriel Kolko's 1988 estimate, almost two thirds of the World Bank's loans since its
inception had gone to transportation and power infrastructure.155 A laudatory Treasury
Department report referred to such infrastructure projects (comprising some 48% of
lending in FY 1980) as "externalities" to business, and spoke glowingly of the benefits of
such projects in promoting the expansion of business into large market areas and the
consolidation and commercialization of agriculture.156
A good example is the Volta River power project, built with American loans (at high
interest). The primary beneficiary was Kaiser aluminum, which got electricity at very low
rates.157
An anecdote from E. F. Schumacher, in Good Work, illustrates the dependence of
large centralized enterprise on subsidized transportation. The Zambian government
encouraged production of eggs as a way of augmenting protein consumption.
Unfortunately, farmers lacked adequate means of packaging eggs for transport to market.
Schumacher's Intermediate Technology Development Group approached the primary
manufacturer of egg trays, a TNC, about the possibility of creating small egg tray
factories in Zambia. The response, from the European division:
Forget it. The smallest machine makes a million a month. So, unless you can
somehow organize an All-African Common Market for Egg Trays, and build the
roads for the lorries all coming out of Lusaka, to distribute the egg trays to the rural
areas....
The corporation's engineers were confident that production on a smaller scale would
be "completely uneconomical." Schumacher, however, approached the Engineering
Department of the University of Reading; its designers worked out a process for smallscale manufacture of egg trays. The prototype plant, which operated at roughly two
percent the output of the TNC's mega-factories, with two percent of the capital outlay,
found it entirely economical.158

155

Gabriel Kolko, Confronting the Third World: United States Foreign Policy 1945-1980 (New York:
Pantheon Books, 1988), p. 120.
156
United States Participation in the Multilateral Development Banks in the 1980s. Department of the
Treasury (Washingon, DC: 1982), p. 9.
157
Stavrianos, Promise of the Coming Dark Age, p. 42.
158
E.F. Schumacher, Good Work, pp. 58-60.

More recently, companies engaged in the supposedly "free market" activity of
offshoring work notified host governments of their requirements for corporate welfare:
SUNIL RAMAN, BBC - The Indian city of Bangalore must improve its
infrastructure if it wants to hold on to vital IT business, company executives have
warned. The heads of some of the biggest companies in India's IT industry have
asked the government of the southern Indian state of Karnataka to improve
infrastructure in Bangalore, or they will move their businesses to other states. The
high-profile delegation included bosses of top Indian IT companies Wipro and
Infosys, as well as representatives from Dell, IBM, Intel, and Texas Instruments
among others.159
Besides the benefit of building "an internal infrastructure which is a vital prerequisite
for the development of resources and direct United States private investments," such
banks (because they must be repaid in U.S. dollars) require the borrowing nations "to
export goods capable of earning them, which is to say, raw materials...."160
The International Monetary Fund was created to facilitate the purchase of American
goods abroad, by preventing temporary lapses in purchasing power as a result of foreign
exchange shortages. It was "a very large international currency exchange and creditgranting institution that could be drawn upon relatively easily by any country that was
temporarily short of any given foreign currency due to trade imbalances."161
The Bretton Woods system by itself, however, was not nearly sufficient to ensure the
levels of output needed to keep production facilities running at full capacity, or to absorb
excess investment funds. First the Marshall Plan, and then the permanent war economy
of the Cold War, came to the rescue.
The Marshall Plan was devised in reaction to the impending economic slump
predicted by the Council of Economic advisers in early 1947 and the failure of Western
Europe "to recover from the war and take its place in the American scheme of things."
Undersecretary of State for Economic Affairs Clayton declared that the central problem
confronting the United States was the disposal of its "great surplus."162
One New Deal partisan implicitly compared foreign economic expansion to domestic
state capitalism as analogous forms of surplus disposal: "it is as if we were building a
TVA every Tuesday."163

159

"Now Bangalore Faces Outsourcing" <http://news.bbc.co.uk/1/low/business/3553156.stm>.
Gabriel Kolko, The Roots of American Foreign Policy: An Analysis of Power and Purpose (Boston:
Beacon Press, 1969), p. 72.
161
G. William Domhoff, The Power Elite and the State: How Policy is Made in America (New York:
Aldine de Gruyter, 1990), p. 166.
162
Williams, Tragedy of American Diplomacy, p. 271.
163
Ibid., p. 272.
160

The permanent war economy, however, had another advantage over projects like the
TVA that produced use-value for the civilian population: since it did not produce
consumer goods, it did not add to the undisposable surplus or compete with the output of
private capital in consumer markets. In the apt words of Immanuel Goldstein: "Even
when weapons of war are not actually destroyed, their manufacture is still a convenient
way of expending labor power without producing anything that can be consumed." War
is a way of "shattering to pieces, or pouring into the stratosphere, or sinking in the depths
of the sea," excess output and capital.164
Besides facilitating the export of goods and capital, the Bretton Woods agencies play
a central role in the discipline of recalcitrant regimes. There is a considerable body of
radical literature on the Left on the use of debt as a political weapon to impose procorporate policies (e.g., the infamous "structural adjustment program") on Third World
governments, analogous to the historic function of debt in keeping miners and
sharecroppers in their place.165 As David Korten argued,
The very process of the borrowing that created the indebtedness that gave the World
Bank and the IMF the power to dictate the policies of borrowing countries represented
an egregious assault on the principles of democratic accountability. Loan agreements,
whether with the World Bank, the IMF, other official lending institutions, or
commercial banks, are routinely negotiated in secret between banking officials and a
handful of government officials--who in many instances are themselves unelected and
unaccountable to the people on whose behalf they are obligating the national treasury
to foreign lenders. Even in democracies, the borrowing procedures generally bypass
the normal appropriation processes of democratically elected legislative bodies.
Thus, government agencies are able to increase their own budgets without legislative
approval, even though the legislative body will have to come up with the revenues to
cover repayment. Foreign loans also enable governments to increase current
expenditures without the need to raise current taxes--a feature that is especially
popular with wealthy decision makers. The same officials who approve the loans
often benefit directly through participation in contracts and "commissions" from
grateful contractors. The system creates a powerful incentive to over-borrow.166
Another way the Bretton Woods agencies exercise political power over recalcitrant
regimes is the punitive withholding of aid. This powerful political weapon has been used

164

George Orwell, 1984. Signet Classics reprint (New York: Harcourt Brace Jovanovich, 1949, 1981), p.
157.
165
Cheryl Payer, The Debt Trap: The International Monetary Fund and the Third World (New York:
Monthly Review Press, 1974); Walden Bello, "Structural Adjustment Programs: 'Success' for Whom?" in
Jerry Mander and Edward Goldsmith, eds., The Case Against the Global Economy (San Francisco: Sierra
Club Books, 1996); Bruce Franklin. "Debt Peonage: The Highest Form of Imperialism?" Monthly Review
33:10 (March 1982) 15-31.
166
David Korten, When Corporations Rule the World (West Hartford, Conn.: Kumarian Press, 1995; San
Francisco, Calif.: Berrett-Koehler, Publishers, Inc., 1995) 166.

at times to undermine elective democracies whose policies fell afoul of corporate
interests, and to reward compliant dictatorships. For example, the World Bank refused to
lend to the Goulart government in Brazil; but following the installation of a military
dictatorship by the 1964 coup, the Bank's lending averaged $73 million a year for the rest
of the decade, and reached almost a half-billion by the mid-70s. Chile, before and after
the Pinochet coup, followed a similar pattern.167 Or as Ambassador Korry warned, in the
latter-day equivalent of a papal interdict, "Not a nut or bolt shall reach Chile under
Allende. Once Allende comes to power we shall do all within our power to condemn
Chile and all Chileans to utmost deprivation and poverty."168
Cheryl Payer's The Debt Trap is an excellent historical survey of the use of debt crises
to force countries into standby arrangements, precipitate coups, or provoke military
crackdowns. In addition to their use against Goulart and Allende, as mentioned above,
she provides case studies of the Suharto coup in Indonesia and Marcos' declaration of
martial law in the Philippines.
Among the many features of the so-called structural adjustment program, mentioned
above, the policy of "privatization" (by selling state assets to "latter-day
Reconstructionists," as Sean Corrigan says below) stands out. Joseph Stromberg
described the process, as it has been used by the Iraq Provisional Authority, as "funny
auctions, that amounted to new expropriations by domestic and foreign investors...."
Such auctions of state properties will "likely lead... to a massive alienation of resources
into the hands of select foreign interests."169
The promotion of unaccountable, technocratic Third World governments, insulated
from popular pressure and closely tied to international financial elites, has been a central
goal of Bretton Woods agencies since World War II.
From the 1950s onwards, a primary focus of [World] Bank policy was "institutionbuilding", most often taking the form of promoting the creation of autonomous
agencies within governments that would be continual World Bank borrowers. Such
agencies were intentionally established to be independent financially from their host
governments, as well as minimally accountable politically--except, of course, to the
Bank.170
The World Bank created the Economic Development Institute in 1956 specifically to
enculture Third World elites into the values of the Bretton Woods system. It offered a

167

Bruce Rich, "The Cuckoo in the Nest: Fifty Years of Political Meddling by the World Bank," The
Ecologist (January/February 1994), p. 10.
168
Holly Sklar, "Overview," in Holly Sklar, ed., Trilateralism: The Trilateral Commission and Elite
Planning for World Management (Boston: South End Press, 1980), p. 28-9.
169
Joseph R. Stromberg, "Experimental Economics, Indeed" Ludwig von Mises Institute, January 6, 2004
<http://www.mises.org/fullstory.asp?control=1409>.
170
Rich, "Cuckoo in the Nest," p. 9.

six-month course in "the theory and practice of development," whose 1300 alumni by
1971 included prime ministers, ministers of planning, and ministers of finance.171
The creation of such patronage networks has been one of the World Bank's most
important strategies for inserting itself in the political economies of Third World
countries. Operating according to their own charters and rules (frequently drafted in
response to Bank suggestions), and staffed with rising technocrats sympathetic, even
beholden, to the Bank, the agencies it has funded have served to create a steady,
reliable source of what the Bank needs most--bankable loan proposals. They have
also provided the Bank with critical power bases through which it has been able to
transform national economies, indeed whole societies, without the bothersome
procedures of democratic review and discussion of the alternatives.172
Despite the vast body of scholarly literature on the issues discussed in this passage,
perhaps the most apt description of it was a pithy comment by a free market libertarian,
Sean Corrigan:
Does he [Treasury Secretary O'Neill] not know that the whole IMF-US Treasury
carpet-bagging strategy of full-spectrum dominance is based on promoting
unproductive government-led indebtedness abroad, at increasingly usurious rates of
interest, and then--either before or, more often these days, after, the point of default-bailing out the Western banks who have been the agents provocateurs of this financial
Operation Overlord, with newly-minted dollars, to the detriment of the citizenry at
home?
Is he not aware that, subsequent to the collapse, these latter-day Reconstructionists
must be allowed to swoop and to buy controlling ownership stakes in resources and
productive capital made ludicrously cheap by devaluation, or outright monetary
collapse?
Does he not understand that he must simultaneously coerce the target nation into
sweating its people to churn out export goods in order to service the newly refinanced
debt, in addition to piling up excess dollar reserves as a supposed bulwark against
future speculative attacks (usually financed by the same Western banks’ lending to
their Special Forces colleagues at the macro hedge funds) - thus ensuring the reverse
mercantilism of Rubinomics is maintained?173
What the American elite means by "free markets" and "free trade" has been ably
stated by Thomas Friedman in one of his lapses into frankness:

171

Ibid., pp. 9-10.
Ibid., p. 10.
173
Sean Corrigan, "You Can't Say That!" August 6, 2002, LewRockwell.Com
<http://www.lewrockwell.com/corrigan/corrigan13.html>.

172

For globalism to work, America can't be afraid to act like the almighty superpower it
is.... The hidden hand of the market will never work without a hidden fist-McDonald's cannot flourish without McDonnell Douglas, the designer of the F-15.
And the hidden fist that keeps the world safe for Silicon Valley's technologies is
called the United States Army, Air Force, Navy and Marine Corps.174
The "system of world order" enforced by the U.S. since World War II, and so
celebrated by Friedman, is nearly the reverse of the classical liberal notion of free trade.
This new version of "free trade" is aptly characterized in a passage by Christopher Layne
and Benjamin Schwarz:
The view that economic interdependence compels American global strategic
engagement puts an ironic twist on liberal internationalist arguments about the virtues
of free trade, which held that removing the state from international transactions would
be an antidote to war and imperialism....
....Instead of subscribing to the classical liberal view that free trade leads to peace,
the foreign policy community looks to American military power to impose harmony
so that free trade can take place. Thus, U.S. security commitments are viewed as the
indispensable precondition for economic interdependence.175
Oliver MacDonagh pointed out that the modern neoliberal conception, far from
agreeing with Cobden's idea of free trade, resembled the "Palmerstonian system" that the
Cobdenites so despised. Cobden objected, among other things, to the "dispatch of a fleet
'to protect British interests' in Portugal," to the "loan-mongering and debt-collecting
operations in which our Government engaged either as principal or agent," and generally,
all "intervention on behalf of British creditors overseas." Cobden favored the "natural"
growth of free trade, as opposed to the forcible opening of markets. Genuine free traders
opposed the confusion of "free trade" with "mere increases of commerce or with the
forcible 'opening up' of markets."176
The neoliberal understanding of "How to Have Free Trade" was lampooned quite
effectively by Joseph Stromberg:
For many in the US political and foreign policy Establishment, the formula for
having free trade would go something like this: 1) Find yourself a global superpower;
2) have this superpower knock together the heads of all opponents and skeptics until
everyone is playing by the same rules; 3) refer to this new imperial order as "free
trade;" 4) talk quite a bit about "democracy." This is the end of the story except for

174

Thomas Friedman, "What the World Needs Now," New York Times, March 28, 1999.
Christopher Layne and Benjamin Shwartz, "American Hegemony Without an Enemy," Foreign Policy
(Fall 1993), pp. 12-3.
176
Oliver MacDonough, "The Anti-Imperialism of Free Trade," The Economic History Review (Second
Series) 14:3 (1962).
175

such possible corollaries as 1) never allow rival claimants to arise which might aspire
to co-manage the system of "free trade"; 2) the global superpower rightfully in charge
of world order must also control the world monetary system....
The formula outlined above was decidedly not the 18th and 19th-century liberal
view of free trade. Free traders like Richard Cobden, John Bright, Frederic Bastiat,
and Condy Raguet believed that free trade is the absence of barriers to goods crossing
borders, most particularly the absence of special taxes--tariffs--which made imported
goods artificially dear, often for the benefit of special interests wrapped in the flag
under slogans of economic nationalism....
This sea-change in the accepted meaning of free trade neatly parallels other
characteristically 20th-century re-definitions of concepts like "war," "peace,"
"freedom," and "democracy," to name just a few. In the case of free trade I think we
can deduce that when, from 1932 on, the Democratic Party-- with its traditional
rhetoric about free trade in the older sense--took over the Republicans project of neomercantilism and economic empire, it was natural for them to carry it forward under
the "free trade" slogan. They were not wedded to tariffs, which, in their view, got in
the way of implementing Open Door Empire. Like an 18th-century Spanish Bourbon
government, they stood for freer trade within an existing or projected mercantilist
system. They would have agreed, as well, with Lord Palmerston, who said in 1841, "It
is the business of Government to open and secure the roads of the merchant." ....
Here, John A. Hobson... was directly in the line of real free-trade thought. Hobson
wrote that businessmen ought to take their own risks in investing overseas. They had
no right to call on their home governments to "open and secure" their markets.177
And by the way, it's doubtful that superpower competition with the Soviets had much
to do with the role of the U.S. in shaping the postwar "system of world order," or in
acting as "hegemonic power" in maintaining that system of order. Layne and Schwarz
cited NSC-68 to the effect that the policy of "attempting to develop a healthy
international community" was "a policy which we would probably pursue even if there
were no Soviet threat."
Underpinning U.S. world order strategy is the belief that America must maintain
what is in essence a military protectorate in economically critical regions to ensure
that America's vital trade and financial relations will not be disrupted by political
upheaval. This kind of economically determined strategy articulated by the foreign
policy elite ironically (perhaps unwittingly) embraces a quasi-Marxist or, more
correctly, a Leninist interpretation of American foreign relations.178

177

Joseph R. Stromberg, "Free Trade, Mercantilism and Empire," February 28, 2000
<http://www.antiwar.com/stromberg/s022800.html>.
178
Layne and Shwartz, "American Hegemony Without an Enemy," pp. 5, 12.

The policy planners who designed the Bretton Woods system and the rest of the
postwar framework of world order, apparently, paid little or no mind to the issue of
Soviet Russia's prospective role in the world. The record that appears, rather, in Shoup
and Minter's heavily documented account, is full of references to the U.S. as a successor
to Great Britain as guarantor of a global political and economic order, and to U.S. global
hegemony as a war aim (even before the U.S. entered the war). As early as 1942, when
Soviet Russia's continued existence was very much in doubt, U.S. policy makers were
referring to "domination after the war," "Pax Americana," and "world control." To quote
G. William Domhoff, "the definition of the national interest that led to these interventions
was conceived in the years 1940-42 by corporate planners in terms of what they saw as
the needs of the American capitalist system, well before communism was their primary
concern."179
The central feature of the post-Axis world, as envisioned by American planners, was
the replacement of a world order under British by one under American hegemony. If
anything, the Cold War with the Soviet Union appears almost as an afterthought to
American planning for a postwar order. Far from being the cause of the U.S. role as
guarantor of a system of world order, the Soviet Empire acted as a spoiler to preexisting
U.S. plans for acting as sole global superpower.
Historically, any rival power which has refused to be incorporated into the Grand
Area, or which has encouraged other countries (by "defection from within") to withdraw
from the Grand Area, has been viewed as an "aggressor." Quoting Domhoff once again,
....I believe that anticommunism became a key aspect of foreign policy only after the
Soviet Union, China, and their Communist party allies became the challengers to the
Grand Area conception of the national interest. In a certain sense..., they merely
replaced the fascists of Germany and Japan as the enemies of the international
economic and political system regarded as essential by American leaders.180
Likewise, as Domhoff's last sentence in the above quote suggests, any country which
has interfered with U.S. attempts to integrate the markets and resources of any region of
the world into its international economic order has been viewed as a "threat." The
Economic and Financial Group of the CFR/State Department postwar planning project,
produced, on July 24, 1941, a document (E-B34), warning of the need for the United
States to "defend the Grand Area," not only against external attack by Germany, but
against "defection from within," particularly against countries like Japan (which, along
with the rest of east Asia, was regarded as part of the Grand Area) bent on "destroying the
area for its own political reasons."181 The centrality of this consideration is illustrated by
the report of a 1955 study group of the Woodrow Wilson Center, which pointed to the
threat of "a serious reduction in the potential resource base and market opportunities of

179

Domhoff, The Power Elite and the State, p. 113.
Ibid., p. 145.
181
Ibid., pp. 160-1.

180

the West owing to the subtraction of the communist areas and their economic
transformation in ways that reduce their willingness and ability to complement the
industrial economies of the West."182
One way of defending against "defection from within" is to ensure that Third World
countries have the right kind of government. That can be done either by supporting
authoritarian regimes, or what neoconservatives call "democracy." The key quality for
Third World elites, in either case, is an orientation toward what Thomas Barnett calls
"connectivity." The chief danger presented by "outlaw regimes," according to Barnett,
lies in their being disconnected "from the globalizing world, from its rule sets, its norms,
and all the ties that bind countries together in mutually assured dependence."183
The neoconservative version of democracy is more or less what Noam Chomsky
means by "spectator democracy": a system in which the public engages in periodic
legitimation rituals called "elections," choosing from a narrow range of candidates all
representing the same elite. Having thus done its democratic duty, the public returns to
bowling leagues and church socials, and other praiseworthy manifestations of "civil
society," and leaves the mechanics of policy to its technocratic betters--who immediately
proceed to take orders from the World Bank and IMF. This form of democracy is nearly
synonymous with what neocons call "the Rule of Law," which entails a healthy dose of
Weberian bureaucratic rationality. The stability and predictability associated with such
"democracies" is, from the business standpoint, greatly preferable to the messiness of
dictatorship or death squads.
American "pro-democratic" policy in the Third World, traditionally, has identified
"democracy" with electoralism, and little else. In Central America, for example, a
country is viewed as a "democracy" if its government "came to power through free and
fair elections." But this policy ignores the vital dimension of popular participation,
"including the free expression of opinions, day-to-day interaction between the
government and the citizenry, the mobilization of interest groups," etc. The "underlying
objective" of pro-democracy policies is "to maintain the basic order of what... are quite
undemocratic societies." Democracy is a means of "relieving pressure for more radical
change," but only through "limited, top-down forms of democratic change that [do] not
risk upsetting the traditional structures of power with which the United States has been
allied."184 Democracy policy in El Salvador, more specifically, promoted a form of
"democracy" through the Duarte regime that did not touch the power of the military or the
landed elite.185

182

William Yandell Elliot, ed., The Political Economy of American Foreign Policy (Holt, Rinehart &
Winston, 1955), p. 42.
183
Thomas Barnett, "The Pentagon's New Map," Esquire March 2003
<http://www.thomaspmbarnett.com/published/pentagonsnewmap.htm>.
184
Thomas Carothers, "The Reagan Years: The 1980s," in Abraham F. Lowenthal, ed., Exporting
Democracy (Baltimore: Johns Hopkins, 1991), pp. 117-8.
185
Ibid., pp. 96-7.

American elites prefer "democracy" whenever possible, but will resort to dictatorship
in a pinch. The many, many cases in which the U.S. Assistance Program, the School of
the Americas, the CIA, the World Bank and IMF, and others from the list of usual
suspects have collaborated in just this expedient are recounted, in brutal detail, by
William Blum in Killing Hope.186
Had anti-Sovietism or anti-communism been the U.S. government's main
preoccupation, its policy would have been much different.
While there were many varieties of capitalism consistent with the anti-Communist
politics the United States... sought to advance, what was axiomatic in the American
credo was that the form of capitalism it advocated for the world was to be integrated
in such a way that its businessmen played an essential part in it. Time and again it
was ready to sacrifice the most effective way of opposing Communism in order to
advance its own national interests. In this vital sense its world role was not simply
one of resisting the left but primarily of imposing its own domination....
....[I]t was its clash with nationalist elements, as diverse as they were, that
revealed most about the U.S. global crusade, for had fear of Communism alone been
the motivation of its behavior, the number of obstacles to its goals would have been
immeasurably smaller.187
This postwar global system suffered a series of perceived challenges in the 1970s.
The fall of Saigon, the increasing ability of the Soviet Union to act as spoiler against
American intervention, the nonaligned movement, the New International Economic
Order, etc., were taken as signs that the corporate world order was losing control.
Reagan's escalating intervention in Central America, the military buildup, and the
partial resumption of Cold War were all responses to this perception. In addition, the
collapse of the rival Soviet superpower, the Uruguay Round of GATT, NAFTA, and
similar "free trade" [sic] agreements (particularly their draconian "intellectual property"
provisions, symbiotically related to domestic counterparts like the Digital Millennium
Copyright Act), together achieved a total end run against the perceived challenges of the
1970s. The neoliberal revolution of the '80s and '90s, coming as it did directly on the
heels of diminished American power in the '70s, snatched total victory from the jaws of
defeat; it ended all barriers to TNCs buying up entire economies, locked the west into
monopoly control of modern technology, and created a "de facto world government" on
behalf of global corporations. The '90s were the era of the G8, Davos, and Tom
Friedman.

186

William Blum. Killing Hope: U.S. Military and CIA Interventions Since World War II (Monroe,
Maine: Common Courage Press, 1995).
187
Kolko, Confronting the Third World, pp. 117, 123.

The draconian "intellectual property" lockdown we've experienced since the 1980s is
mind-boggling in its extent. The first brick in the wall was the intellectual property
regime under the Uruguay Round of GATT. It went far beyond traditional patent law in
suppressing innovation. One benefit of traditional patent law, at least, was that it required
an invention under patent to be published. Under U.S. pressure, however, "trade secrets"
were included in GATT. As a result, governments will be required to help suppress
information not formally protected by patents.188
Patents are also being used on a global scale to lock the transnational corporations
into a permanent monopoly of productive technology. The single most totalitarian
provision of the Uruguay Round is probably the Trade-Related aspects of Intellectual
Property rights (TRIPS) agreement of 1995. It has extended both the scope and duration
of patents far beyond anything ever envisioned in original patent law. In England, patents
were originally for fourteen years--the time needed to train two journeymen in succession
(and by analogy, the time necessary to go into production and reap the initial profit for
originality). By that standard, given the shorter training times required today, and the
shorter lifespan of technology, the period of monopoly should be shorter. Instead, the
U.S. seeks to extend them to fifty years.189 According to Martin Khor Kok Peng, the
U.S. is by far the most absolutist of the participants in the Uruguay Round. Unlike the
European Community, and for biological processes for animal and plant protection.190
Another key escalation of international "intellectual property" law was the World
Intellectual Property Organization (WIPO) Copyright Treaty of 1996. The Digital
Millennium Copyright Act (DMCA), was passed in 1998 pursuant to the U.S.
government's obligations under that treaty. The DMCA is a fundamental departure from
traditional copyright doctrines, like fair use and first sale. The legislation does not only
punish strictly defined copyright violations after the fact. It prohibits the production of
any hardware features which can circumvent digital locks, even when the purchaser is
simply attempting what would have been considered fair use under the old regime. For
example, it is illegal to circumvent DRM to copy content one has purchased from one
medium to another, for one's own convenience. Jon Johanssen, for example, was
proscecuted for distributing DeCSS, which circumvents the content scrambling system on
DVDs.191 The Sonny Bono Copyright Term Extension Act of 1998 extended copyright
to seventy years after the death of the author. Similar legal mandates against DRM
circumvention were introduced in the EU by the EU Copyright Directive in 2001 and the
EU Directive on the Enforcement of Intellectual Property Rights in 2004.192
Another radical innovation is the extension of patent law into areas traditionally

188

Raghavan, Recolonization, p. 122.
Ibid., pp. 119-20.
190
Martin Khor Kok Peng, The Uruguay Round and Third World Sovereignty (Penang, Malaysia: Third
World Network, 1990), p. 28.
191
Soderberg, Hacking Capitalism, p. 87.
192
Soderberg, Hacking Capitalism, p. 83.
189

covered by copyright. This is especially true of software. Copyright law only protects an
actual work, not the general idea behind it. Patents, on the other hand, cover the idea
itself. In the case of software, this means that rather than simply copyrighting the code
itself, a software proprietor can charge competitors with patent violations for even
attempting to write code to deal with the same problem. Software patents are a powerful
weapon against open-source software, since it is a roadblock to open-source developers
attempting to develop software to perform the same functions as existing proprietary
software.193
Another prospective treaty in its planning stages in the WIPO is a Broadcasting Treaty
which will give "cable networks, broadcasters, and, possibly, Internet portals, a fifty year
monopoly over the material which they are transmitting."194
In addition, the Western consumer corporations that tend to thrive in the global
economy are those in the sectors most heavily dependent on the international "intellectual
property" regime: entertainment, software, and biotech.
[Susan Sell. Private Power, Public Law--The Globalization of Intellectual Property
Rights (Cambridge: Cambridge University Press, 2003).
Michael Perelman. "The Political Economy of Intellectual Property" Monthly Review
(January 2003).
Julian Dibbell. "We Pledge Allegiance to the Penguin" Wired (November 2004).]
The provisions for biotech are really a way of increasing trade barriers, and forcing
consumers to subsidize the TNCs engaged in agribusiness. The U.S. seeks to apply
patents to genetically-modified organisms, effectively pirating the work of generations of
Third World breeders by isolating beneficial genes in traditional varieties and
incorporating them in new GMOs--and maybe even enforcing patent rights against the
traditional variety which was the source of the genetic material. For example Monsanto
has attempted to use the presence of their DNA in a crop as prima facie evidence of
pirating--when it is much more likely that their variety cross-pollinated and contaminated
the farmer's crop against his will. The Pinkerton agency, by the way, plays a leading role
in investigating such charges--that's right, the same folks who have been breaking strikes
and kicking organizers down stairs for the past century. Even jack-booted thugs have to
diversify to make it in the global economy.
The developed world has pushed particularly hard to protect industries relying on or
producing "generic technologies," and to restrict diffusion of "dual use" technologies. The
U. S.-Japanese trade agreement on semi-conductors, for example, is a "cartel-like,
'managed trade' agreement." So much for "free trade."195

193

Ibid., pp. 83-84.
Ibid., p. 84.
195
Dieter Ernst, Technology, Economic Security and Latecomer Industrialization, in Raghavan,
Recolonization, pp. 39-40.
194

Patent law traditionally required a holder to work the invention in a country in order
to receive patent protection. U.K. law allowed compulsory licensing after three years if an
invention was not being worked, or being worked fully, and demand was being met "to a
substantial extent" by importation; or where the export market was not being supplied
because of the patentee's refusal to grant licenses on reasonable terms.196
The central motivation in the GATT intellectual property regime, however, is to
permanently lock in the collective monopoly of advanced technology by TNCs, and
prevent independent competition from ever arising in the Third World. It would, as
Martin Khor Kok Peng writes, "effectively prevent the diffusion of technology to the
Third World, and would tremendously increase monopoly royalties of the TNCs whilst
curbing the potential development of Third World technology." Only one percent of
patents worldwide are owned in the Third World. Of patents granted in the 1970s by
Third World countries, 84% were foreign-owned. But fewer than 5% of foreign-owned
patents were actually used in production. As we have already seen, the purpose of owning
a patent is not necessarily to use it, but to prevent anyone else from using it.197
Raghavan summed up nicely the effect on the Third World:
Given the vast outlays in R and D and investments, as well as the short life cycle
of some of these products, the leading Industrial Nations are trying to prevent
emergence of competition by controlling... the flows of technology to others. The
Uruguay round is being sought to be used to create export monopolies for the
products of Industrial Nations, and block or slow down the rise of competitive rivals,
particularly in the newly industrializing Third World countries. At the same time the
technologies of senescent industries of the north are sought to be exported to the
South under conditions of assured rentier income.198
Corporate propagandists piously denounce anti-globalists as enemies of the Third
World, seeking to use trade barriers to maintain an affluent Western lifestyle at the
expense of the poor nations. The above measures--trade barriers--to permanently suppress
Third World technology and keep the South as one big sweatshop, give the lie to this
"humanitarian" concern. This is not a case of differing opinions, or of sincerely mistaken
understanding of the facts. Setting aside false subtleties, what we see here is pure evil at
work--Orwell's "boot stamping on a human face forever." If any architects of this policy
believe it to be for general human well-being, it only shows the capacity of ideology to
justify the oppressor to himself and enable him to sleep at night.

196

Raghavan, Recolonizatinon, pp. 120, 138
Martin Khor Kok Peng, The Uruguay Round and Third World Sovereignty, pp. 29-30.
198
Raghavan, Recolonization, p. 96.

197