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The Nature of the Firm is Organic

Too much central planning and too few market signals are the pesticides.

Roderick Long at AotP explains the basics behind the Austrian theory of the firm, how the socialist calculation debate has ramifications for determining the optimal size of private corporations, an idea also explored by Ronald Coase in his seminal 1937 article, "The Nature of the Firm."

In 1920, Ludwig von Mises published an argument against the workability of “socialism” (by which he meant state ownership of the means of production), an argument subsequently elaborated by himself and his student Friedrich Hayek. [...]

The Mises-Hayek account of the limits of state centralisation was subsequently extended, by Mises’s student Murray Rothbard, to cover the limits of private cartelisation as well. [...]

Everyone knows about economies of scale; after all, that’s why we have firms in the first place. What Rothbard’s analysis shows is that there are also diseconomies of scale, and that these grow more severe as vertical integration increases.

What happens when a firm grows so large, its internal operations so insulated from the price system, that the diseconomies of scale begin to outweigh the economies? Well, that depends on the institutional context. In a free market, if the firm doesn’t catch wise and start scaling back, it will grow increasingly inefficient and so will lose customers to competitors; markets thus serve as an automatic check on the size of the firm.

But what if friendly politicians rig the game so that favoured companies can reap the benefits associated with economies of scale while socialising the costs associated with diseconomies of scale? Then we might just possibly end up with an economy dominated by those bloated, bureaucratic, hierarchical corporate behemoths we all know and love.

The final takeaway?

So long as the confusion between free markets and plutocracy persist – so long as libertarians allow their laudable attraction to free markets to fool them into defending plutocracy, and so long as those on the left allow their laudable opposition to plutocracy to fool them into opposing free markets – neither libertarians nor the left will achieve their goals, and the state-corporate partnership will continue to dominate the political scene.

I look forward to reading Long's next post, which will be an application of Austrian price theory to the current financial crisis.

The Nucular Option

Whenever Sarah Palin says "nucular weaponry," drink!

This message brought to you by Baroccoli Obama:

Channeling My Inner Boudreaux

I just sent the following letter to the New York Times:

Mark Buchanan informs us that "Financial crises may emerge naturally from the very makeup of markets", but the example he gives indicates that the current crisis emerged from government planning the economy, not from markets operating naturally ("This Economy Does Not Compute," October 1).

Buchanan correctly notes that "too much easy credit can be dangerous," a predictable result of central planning and mismanagement of the money supply and interest rates. He therefore calls on government to "exert broader control over the leverage," to counteract the speed and eventual breakdown of the economy.

But this is like saying that if my foot is stuck on the gas pedal, I should balance this out by getting my other foot stuck on the brake. A wiser strategy might be to remove my foot from the gas pedal entirely, and then hand over driving to someone else. Driving the economy apparently isn't the government's forte.

Micha Ghertner

Friends don't let friends manage the economy. Pass it on!

Non-Married Lifestyles

An odd choice of banner ad appeared along this post at AotP.

The Timothy Plan® is a family of mutual funds offering individuals, like yourself, a biblical choice when it comes to investing. If you are concerned with the moral issues (abortion, pornography, anti-family entertainment, non-married lifestyles, alcohol, tobacco and gambling) that are destroying children and families you have come to the right place.

"Non-married lifestyles" is an interesting phrase, in the same way a slap to the face tends to spark interest. Deny gay couples access to marriage and then complain about their single lifestyle. It's a win-win for those who prefer the biblical choice and what passes for "moral issues" these days.

Also note how the banner ad attracts the salacious reader with the implication of porn - a prominent placement of "X-Rated Investment" relative to the "G-Rated Choice." I've seen the same bush league psyche-out stuff used on the The O'Reilly Factor. Complain about the media's use of sexual imagery to sell products by... using sexual imagery to sell an anti-sex product. Laughable.

Secession And Enforcement

Rad Geek:

People have this idea nowadays that secession is just inconceivable, and sure to be followed by massive reprisal, in light of the Civil War. But it’s easy to forget how close a call the Civil War was — there was an awful lot of Northern opposition to it, especially prior to the battle at Fort Sumter. Even those who profoundly disagreed with secessionism as a matter of legal principle were often very uncomfortable with the idea of suppressing it by force. And all of this was for quite natural reasons, many of which still persist — bayonet-point Unionism is really a hard thing to defend, when put to it, and it’s also really hard to blind people to the ruinous and murderous nature of war when the war would be happening without the numbing distance of geographical, cultural, linguistic, racial, or religious differences.

[Emphasis mine]

What better time to revive secessionism than when the system is headed toward collapse?

Is This What The New Deal Felt Like?

Matthew Yglesias: Nationalize Everything

At this point, I would say that the government should probably be taking over just about everything that’s available for taking over.

Brad DeLong: Time Not for a Bailout, But for Nationalization

There are three options:

  • Do nothing.
  • Bailout (a la Paulson)
  • Nationalization (a la Sweden 1992)

Do nothing was last tried in 1929-1932. The result was called the Great Depression. Let's not do that again. Let's decide between bailout and nationalization.

Nationalization has the best chance of avoiding large losses and possibly even making money for the taxpayer.

How long before we see self-described libertarians advocating nationalization on chicken-little grounds? After all, the same arguments self-described libertarians give for defending bailouts apply just as much to nationalization. Actually, nationalization makes much more sense than a temporary bailout: if certain businesses are "too big to fail," then they are too big to be run privately, and we should be honest about nationalizing them instead of erroneously pretending that there is still such a thing as a free market.

The argument, for the record, is that a depression is even worse, so anything and everything that would prevent a depression is therefore advised. I wonder if these same people were upset to see the former Soviet Union collapse, hoping that massive government intervention could keep the charade going on in perpetuity - the alternative of system failure being too horrifying to contemplate.

(Of course, system failure is exactly what libertarianism predicts. The end of the USSR was about as peaceful as anyone could have hoped; I certainly don't expect the U.S. to vote itself out of this mess any better than the Russians commanded and controlled themselves into prosperity.)

I'm no big fan of libertarian litmus tests, but at some point the term begins to lose all meaning. This is one of those points. If you feel like jumping off the bandwagon now, go right on ahead, but please don't take the term along with you when you go. There are indeed consequentialist arguments in favor of bailouts and nationalizations, but this kind of consequentialism ceases to be libertarian in any recognizable form.

The Ultimate End of Enforcing the Law

Brian Macker asks regarding the violence behind legal restrictions on immigration:

Do you also believe that enforcing laws against shoplifting candy is not possible without the use of deadly force?

The answer is a pretty straightforward yes - an obvious outcome of both the libertarian theory of justice as well as a positive description of the current legal system we live under. Interestingly, Randy Barnett uses the exact same scenario described by Brian to address the ultimate end of legal enforcement:

Assuming that one has identified a system of compossible rights - namely, property rights - what may properly be done if these rights are violated? Within the Liberty Approach there is no dispute that one may use force to defend one’s rights from being violated and one may enlist the aid of others in such a defense. The alternative is to have no genuinely legal rights at all. Some disagreement may exist among adherents to the Liberty Approach, however, about the amount of force that can be legitimately used in self-defense.

The best answer, I think, is that the use of force in self-defense must be proportionate, in some rough sense, to the threat posed by the rights invasion, but with a heavy presumption favoring the victim in any such calculation. Further, it would not be impermissible, in my view, for deadly force to be used to defend against even the most trivial of rights violations, provided that an escalation of self-defense was necessitated by an escalation of aggression by the rights violator. For example, if when attempting to retrieve a shoplifted package of chewing gum, the victim is met with forcible resistance by the shoplifter, then a proportionately forcible response to this resistance is legitimate. If the shoplifter further escalates and puts the victim’s life in danger, then the victim may justifiably use deadly force in self-defense. In other words, there is no obligation for a victim to back down in defense of even the smallest of his rights simply because the rights violator has raised the ante.

Of course, Brian knows the answer to his own question, as he indicates when he writes:

Surely the implicit threat of deadly force is the same for enforcing laws against jay walking as it is for any other crime, no matter how minor. Why is that? It’s because the criminal can always escalate. If someone jaywalks and then resists arrest with a gun then, yes, there is a good chance that person will end up shot or dead.

An unjust law is no law at all, so violating an unjust law is not "criminal" in any important moral sense. The moral crime here is committed by those who would attempt to enforce injustice, not by those who forcefully resist it.

Vulgar Libertarians Of The World Unite!

More "batshit insanity" and "wackjob blathering about how the 'entrenched political class' screws over the helpless little guy" from Donald Boudreaux, chairman of the economics department at George Mason University:

More likely, though, this call for industrial policy is a ploy by business executives to escape competition. By trying to plan the economic future, any such policy necessarily tramples innovation and consumer sovereignty. Anything at odds with the policy - such as an unforeseen new product, a creative new technique of production, or simply a change in consumers' tastes - must be squelched, for otherwise the policy falls apart. Many existing firms (especially large ones such as GM and Dow Chemical, who have the resources to influence government) will benefit from industrial policy - but only because such policy inverts the economy from one in which producers exist to satisfy consumers to one in which consumers (and taxpayers) exist to satisfy producers.

Positively leftist! Someone should tell Donald Boudreaux that if he is worried about GM and Dow Chemical taking over "industrial policy", for as low as $8 a trade, all he has to do is buy stock in GM and Dow Chemical. Then, vicariously, Boudreax would be in charge of industrial policy too.

The War On The Economy

Congress should never again send the nation on a mission without a measurable and sustainable objective, whether the threat is a mushroom cloud or a meltdown.

Excerpted from a Letter to the Editor of the New York Times

Bizarro Capitalism

When nationalized industries profit, taxpayers win!

Some one's gonna buy the paper at 25 cents on the dollar, work it out, ride the economy and housing recovery up, then sell the paper for a handsome profit. Most of that profit will go to the government, aka the taxpayer.

Here's an idea: we could cover the $700 billion bailout AND pay down the national debt if we just nationalize a few more industries in addition to finance. Once the government gets those industries under control and commands them to operate at greater efficiency and greater profitability than the private market ever could, the additional profits gained will be a net boon to taxpayers. Who could complain? It's a win-win for everyone. The only question remaining is: why didn't anyone think of doing this earlier?

via IOZ, who asks:

What fucking mechanism is supposed to drive up the market value of debt-backed pseudoassets that were written off without loss because the government airdropped suitcases of cash?

Making Stuff Up As We Go Along


In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

"It's not based on any particular data point," a Treasury spokeswoman told Tuesday. "We just wanted to choose a really large number."

Have we discovered The Green Lantern Theory of Economics?

Skim-milk Crypto-rebels

IOZ confuses Naomi Wolf with Naomi Klein; hilarity ensues.

Here's the comment I left:

This isn't 'Nam, IOZ. There are RULES. I did not watch my buddies die face down in the muck so that you could go out and blawg all over the place.

The pretty lefty Jewish girls are not the issue here, IOZ. You are, you human paraquat! You figured 'Oh, here's a loser. A deadbeat, someone the square community won't give a shit about. You're not wrong, IOZ. You're just an asshole.

Kleiman Responds

Mark Kleiman responds to my criticisms in Drug Dealers Have Rights Too.

On Greed

Larry White of Division of Labor by way of Steve Horwitz:

On greed, let me repeat: If unusually many airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. And let me add: This isn’t a morality play. What we’re seeing are the consequences of monetary-policy distortions of interest rates and regulatory distortions of incentives, amplified in some degree by private imprudence, not the consequences of blackheartedness.

Julian Sanchez:

I’m bemused at the way we’re perpetually told the fundamental cause of the ongoing meltdown is Wall Street “greed,” as though that somehow counted as an explanation. How, pray, would we describe it if mortgage lenders had rejected many more applications from lower-income folks, on the grounds that they were poor risks? Well, greed, of course. Pretty much whatever they did, they’d be doing because they expected it to maximize their profit; the issue is their judgement, not their motives. Or put another way: The problem isn’t that people were greedy, it’s that they weren’t very good at being greedy.

Me, responding to one of his commenters, while channeling Larry White:

It seems to me that if the banking system was set up such that individuals on Wall Street and in the City of London could make huge gains by endangering the stability of that system, then the blame should be properly placed on the system and those who set it up that way, and not on the participants who acted as we would expect.

Greed appears to be a constant, like water running downhill: you don’t blame the water for leaking through the cup - you blame the holes in the cup.

On Avoiding Pirates

Peter Leeson on Google's proposed water-based data centers:

What’s interesting, then, is what Google’s proposal tells us about the kinds of pirates the company sees as posing the greatest threat to its profit. Apparently “political pirates” pose a greater threat to Google’s property than the seafaring kind do. If not, the company wouldn’t be willing to trade an increased chance of plunder by sea bandits for a reduced chance of plunder by government.