Do liberalism and capitalism really need a divorce?
A thought-provoking essay claims that capitalism and classical liberalism are headed for divorce.
Over at TechCentral, my friend Duncan McLeod (a great classical liberal himself) carried an essay by Adrian Wooldridge, the global business columnist at Bloomberg Opinion.
It claims that the perceived excesses of modern capitalism pose a genuine threat to classical liberalism, requiring that liberalism ‘reinvent itself while also saving capitalism’.
Go read that piece. I’ll wait.
Back? Great.
Wooldridge’s essay is well thought out, explains the close historical relationship between liberal values and capitalism, and raises some important issues.
It also misses the point, in my humble view.
Wooldridge is correct to point out that all liberal societies operate as capitalist economies, but that capitalism can and does operate in authoritarian societies.
He is correct to say that ‘we have assumed that the greatest threats to the liberal order come from organised labour or radical activists, [but] we need to pay much more attention to the threat coming from capitalism itself’.
He argues that classical liberals should welcome and support ‘state activism’ to combat this ‘threat coming from capitalism itself’.
Where he is wrong, however, is that the true threat is not merely wealthy oligarchs, or large corporations, or the market power they wield. The true threat is the government power these private individuals and companies wield.
Taking issue
Wooldridge takes issue with several things. A high level of market concentration, particularly in the technology sector, is a big one, which is related to another: the rise of a new oligarchy, especially among tech moguls.
He mentions, as symptoms of ‘the overweening power of companies’, that they are no longer content just with pressuring legislators, but ‘increasingly write the legislation themselves’. This leads to ‘insider deals’, and a ‘revolving door’ between ‘giant corporations’ and governments.
He deplores the fact that companies seek low-tax jurisdictions in which to conduct their business, and welcomes moves to impose a global minimum corporate tax by treaty.
He is concerned that, although ‘[p]lenty of rich people make their money through fair competition and use their wealth to create lifesaving and prosperity-spreading foundations’, not all rich people do so.
He appears to believe that corporate executives write their own contracts, which exposes them to the upside of their management, but insulates them from the downsides.
While he rightly defends consumer capitalism, calling it snobbery to peer down one’s nose at the shopping habits of low-income people, he declares himself deeply concerned about what he calls ‘information capitalism’.
He uses that as a catch-all term for what most modern companies do, namely collect data, sell that data, bombard people with little dopamine bullets of news, information and entertainment, and use all that data to manipulate them into buying their products.
‘Information capitalism embodies a serious threat to the liberal notion of a rational individual’, he writes. ‘It keeps us constantly exposed to “hidden persuaders” that beep and flash at us from our phones wherever we go. It reduces our sense of agency as employers watch our every move over our shoulders. It plays havoc with our powers of concentration, as we scroll through tiny bursts of information and entertainment.’
This, Wooldridge argues, even undermines the proper education of children.
Most of these concerns sound like a laundry-list of the whines of the anti-capitalist Occupy generation, to be honest.
Wooldridge assumes that coercive state intervention to combat the power of big business is the only possible solution, and argues that it should therefore be accepted by classical liberals, even though such intervention is clearly not liberal itself.
Precedents
He cites two precedents: the ‘New Liberalism’ at the turn of the 20th century, that led to the introduction of antitrust laws and the breakup of Standard Oil (which ironically made John D. Rockefeller even richer), and the Keynesian revolution of the 1940s, which gave governments theoretical cover to use monetary policy to intervene in the economy to, supposedly, reduce the amplitude of business cycles and combat unemployment.
In that vein, Wooldridge welcomes the EU’s willingness to fine technology giants or coercively dictate policies to them (though he cautions them against doing so just because those companies are American), and considers the recently-announced antitrust suit against Google to be a ‘welcome signs of a resumption of such policies’, those policies being trust-busting and combating the establishment of a hereditary oligarchy.
Both ‘New Liberalism’ and Keynesianism are departures from classical liberal principles, however. Competition law often fails at promoting actual competition, often punishes fairly-earned success, and often does more harm than good.
Inflationary monetary policy under Keynesian economics (or more accurately, the post-Keynesian neoclassical synthesis) essentially says that we should leave everything to the free market, except for the price of money. By that one lever, we have surrendered effective control over the economy to government.
Government uses that power to justify massive deficit spending, to offer ‘stimulus’ to preferred companies or industry sectors, and to slow down or speed up the entire economy, as if it were a monolithic whole amenable to such a simplistic control mechanism.
This has the effect of synchronising booms and busts across industry sectors, and because the government always does too little too late, it often prolongs economic swings, making bubbles bigger and making crashes last longer.
Market concentration
Let’s consider Wooldridge’s specific concerns, then.
Market concentration is not, in and of itself, problematic.
In a free market, apparent monopolies may simply reflect that one company does something better than anyone else, which is why everyone freely chooses to be a customer. It could also reflect the reality of the network effect, which says that a network’s value is proportional to the square of its number of users.
So-called ‘competition commissions’ or ‘anti-trust authorities’ view all monopolies, cartels or market concentration through the same lens. They argue that their market power inhibits competition.
In reality, the far greater inhibitor of competition is government regulation.
Monopolies or cartels only become problematic if it is hard for new competition to arise because the barriers to entry have been artificially raised by regulation, restricted licensing and other red tape.
This is why big companies often lobby for ‘consumer protection’ regulation. They couldn’t care less about consumers. They want to ‘protect’ consumers against would-be competitors’ products, which they claim to be inferior. That’s why they support product standards that are easy for them to meet, but hard for smaller rivals to match.
A competitive free market does not require actual competitors. It consists in the ability of new competitors to arise should incumbents prove to be inadequate in serving the needs and wants of their customers.
Slaying giants
The tech sector itself offers numerous illustrations that show that giants with massive market power can be slain by new competition.
In 1992, the only companies in the mobile phone market were Motorola and Nokia, with the market split about 60/40 between them.
By the mid-1990s, Sony and NEC made some inroads. In due course, Siemens, Sony and Samsung each earned small shares of the market. LG, Research in Motion (Blackberry) and Palm followed them.
In 2007, when Apple released the first iPhone, Nokia still controlled 35% of the market, and Motorola had 20%.
Ten years later, in 2017, Nokia had 3% of the market, and Motorola 2%. In their place now, with 33% and 20% respectively, were Samsung and Apple. Today, those two are neck-and-neck, with about 28% of the market each.
Nobody had to break up Nokia or Motorola to ensure their demise when they could no longer supply what customers wanted. The free market did that all by itself.
MySpace dominated social media until 2008, when YouTube and Facebook ganged up to stomp on its head.
In the 1990s, in the US at least, America OnLine (AOL) dominated the consumer internet. At its peak, it was worth $200 billion. Then its product offering was no longer good enough, because rivals invented internet service faster than dial-up. AOL got left behind. It tried, but failed, to buy YouTube, Facebook and a share in TenCent.
What is left of AOL, combined with Yahoo which was itself once a $120 billion company, was last seen passing hands for a mere $4 billion.
Kodak. Once dominant. Didn’t think digital photography would kill film. It did, and Kodak died.
Sony’s Walkman, which survived the change from cassette tape to CD to DVD, could not survive the rise of the MP3 player and music-playing smartphones.
Blockbuster. In 2001, the video rental store, then worth $6 billion, was offered Netflix on a silver platter for $50 million. It declined. Ten years later, it found itself bankrupt, and its last store closed in 2019. Netflix’s value peaked north of $300 billion in 2021, and it is worth $171 billion at the time of writing.
History is littered with tales of once-powerful monopolies brought to heel by new, innovative, fast-moving competition.
Low tax
Wooldridge’s other concerns also require some perspective.
That companies shop for low-tax jurisdictions is hardly the fault of capitalism. Nor is it illiberal.
Sovereign countries ought to be free to run their own economic policies, even if those conflict with the policies of their neighbours.
If a country believes it is best served by a low tax rate, why shouldn’t it be permitted to keep taxes low? If a country wants to use economic policy to attract foreign direct investment, why shouldn’t it be allowed to do so? And why shouldn’t people or companies move to places where the business climate is sunnier, as a result?
Only governments, greedy for maximum tax revenue, and their statist supporters, would object. There is no liberal argument to be made to legitimise government or supra-national intervention to prevent countries setting whatever tax rates they wish.
Rich people
Wooldridge admires rich people who use their wealth ‘to create lifesaving and prosperity-spreading foundations’, but not those who don’t.
Frankly, it is none of our business what rich people do with their wealth. In a free market, they would have made it by providing goods or services that people wanted or needed. That was their contribution to society.
Having profited from that contribution to society, whether they start a foundation to care for orphans with cancer or blow it all on a superyacht with strippers and booze is none of our concern.
Even the most hedonistic billionaire still contributes to the economy indirectly, through the investments they hold, the savings they keep in the bank, and the jobs they create for people who make all the toys that rich people buy.
I’m not sure what sort of intervention he envisages here, and what that would achieve.
He is clearly opposed to inheritance, as opposed to merit, as a means of obtaining wealth, but again, it is hard to see the liberal argument for such a position.
What a parent does with their wealth is entirely up to them. That wealth doesn’t belong to us, or the state, for us to be making decisions about it. They can leave it to their children, an AIDS orphanage, a university endowment, or their cat, and in a classical liberal society, we would have no basis for violating that person’s rights to dispose of their property in any way they see fit.
On executive pay, that is also none of our business. What executives are paid, and how their contracts are written, is of interest only to shareholders of a company. Wooldridge might have provided a good cause for some vigorous shareholder activism, but not for state intervention.
‘Information capitalism’
The same arguments that Wooldridge makes about what he calls ‘information capitalism’, could be, and have been, applied to the ability of common people to print pamphlets containing radical rhetoric, or to the rise of advertising in the early 20th century, or to radio, or to television.
Every generation is worried that we’re just passive consumers of whatever corporate interests want to blast us with, but in every generation, we also have a choice.
We can block ads, get off social media, tailor our media feeds, limit our kids’ screen time, and exercise some classical liberal self-discipline.
In fact, unlike in the past, we have more freedom with modern media. We are no longer tied to scheduled programming, or the propaganda of state-owned broadcasters, or at the mercy of whatever movie the networks decided to show us on Saturday night.
We now have a cornucopia of choice on demand. I don’t see any need for the state to restrict this.
The true problem
All of that said, modern capitalism certainly does pose a serious threat to classical liberal societies.
That threat is the ability of big companies to improperly influence governments. Wooldridge mentions it – that companies even write legislation nowadays – but doesn’t point to this as the core problem.
The problem isn’t big business. And the solution isn’t big government. The problem is the insidious relationship between the two.
The more power a government has, the more power there is to corrupt. The more power there is to corrupt, the more wealthy people and big corporations will corrupt that power.
That big companies get to write laws: that is the problem. The problem is that politicians gladly go along with big business when they lobby for regulations designed to raise barriers to entry for smaller or would-be competitors.
The problem isn’t that the state is not sufficiently activist, and should intervene in the market more vigorously. The problem is that the state is already far too enmeshed with big business.
The problem is that politicians legislate in favour of special interests, and those special interests are businesses big enough to scratch the politicians’ backs.
Corporatism
The ‘threat coming from capitalism itself’ that Wooldridge sees is the threat of crony-capitalism. It’s the threat of corporatism.
Corporatism is a collectivist and fascist ideology that harnesses the power of the state in the interests of big business, as opposed to the interest of the general citizenry.
Corporatism is what directly violates classical liberal principles of individualism and free markets. It is a direct threat to liberal democracy.
Benito Mussolini said: ‘Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power.’
The world isn’t split on a single axis between capitalism and socialism. Corporatism forms one corner of a triangle, opposing both socialism and free markets.
Another way to look at it is to place free market capitalism on the liberal end of the spectrum, and both corporatism and socialism on the authoritarian end.
Wooldridge fails to draw a distinction between corporatism and free-market capitalism, and therefore attributes the ills of the former to the latter. The problems he identifies would either not be problems at all in a truly free market, or they are the result of private interests hijacking the coercive power of the state.
Classical liberals ought to be fighting for free markets, and against both socialism and the equally authoritarian cronyism, corporatism and corruption on the other.
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