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Professor Richard Epstein

The Road to Stagnation

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It is a regrettable truth about political discourse that no bad lesson ever gets unlearned. The climate of political opinion in the United States , and probably in much of New Zealand , offers somber confirmation of that melancholy truth.  At issue in both nations, and everywhere else around the world, is a struggle two models of economic organization.  One is market driven.  The other is corporatist. 

The Market Model  The market model, which received its clearest articulation in Adam Smith’s The Wealth of Nations, believes that competition in labor, product and capital markets is the surest road to economic prosperity.  The purpose of the state is to provide a stable platform on which these private activities can take place.  Its function includes the maintenance of law and order, the provision of a social infrastructure, the preservation of a stable currency, the enforcement of property rights and contracts, and the control of private monopoly. 

That system in turn has two key areas in which the state should not intervene.  First, it should not interfere in international trade.  Neither tariff barriers or domestic subsidies are any part of a sound programme.  Second, the state should not in domestic affairs attempt to divide markets among dominant firms, or regulate price or wages of any good or service sold in competitive markets.  

The upshot of the market regime is a steady improvement in human wealth and happiness.  The proposition does not mean, of course, that everyone benefits uniformly from all innovation and exchange.  Quite the opposite, the market model accepts as both inevitable and desirable the proposition that some successful firms will outlive their usefulness and go into bankruptcy or be acquired by new and savvier upstarts.  Of course, as some firms go under, workers will be left to fend for themselves, often at considerable personal dislocation.  These costs, however, have to be paid to keep the economic system from falling into a permanent state of decrepitude, for the old and inefficient can be propped up only by imposing taxes or barriers to entry on newer and more efficient rivals.

The Corporatist Vision  The corporatist vision fights the dislocation and disruption that the market model embraces as the mark of progress.  Its grand plan is to entrench the status quo by creating an economic order in which dynamic competitive change is displaced by the corporatist model that envisions long-term alliances among government agencies, large firms, and labor unions.  This agenda controlled American New Deal policies from the 1930s through the 1960s.  It has three key components. 

First, high tariff and other import barriers.  These are paired with efforts to impede the outsourcing of American jobs overseas, which are denounced, courtesy of John Kerry, as the fiendish efforts of “Benedict Arnold CEOs”.  (For New Zealanders who do not know this particular bit of American revolutionary folklore, Benedict Arnold was an American general who turned traitor).  In a perverse sense, these restrictive measures make sense.  Corporatism requires the monopoly profits that competition from overseas whittles away.  The rise of companies like Toyota and Nissan in the United States comes of course at the expense of the old line American car companies and their unionized workforce. 

Second, the corporatist vision requires strengthening the legal position of labor unions, which today represent no more than eight percent of the private US workforce – which still leaves them with ample political clout.  The key step is a Democratic initiative that has already passed the House of Representatives, which removes the need for secret elections before unions are certified as collective bargaining agents.  Instead, the union gets its monopoly position solely by acquiring requisite number of signed authorization cards from individual workers – opening the door wide to manipulation, bullying and fraud. 

Third, the corporatist strategy imposes barriers to entry by outside entries, for which the increases in the minimum wage and the imposing of zoning restrictions – both tried against Wal-Mart’s – are two key components. 

What is so dismaying about the resurgent Democratic Left in American politics is that its desperate effort to preserve and divvy up monopoly power will eventually collapse from its own inherent inefficiencies.  But in the interim the programme causes massive dislocations.  The remaining union workers at the Ford Motor Company, for example, have had to make major concessions at the eleventh hour in order to stave off impending bankruptcy.  But all the while, the rest of the world moves further ahead because its workers and firms are not trapped in these corporatist fetters. 

I am confident that the new grand corporatist alliance will fail.  The new tech industries don’t fit the pattern, and too many people of all political persuasions sense the ultimate futility of pursuing this bygone strategy.  But in the interim, the current leftward push absorbs intellectual and political energies better spent on other issues.  To modify a phrase from Hayek, why at this late date must we travel once more down the road to stagnation.