It seems like forever ago, but it was only 2010. That year I wrote about the Citizens United case, in which the Supreme Court established that corporations–like individuals–had speech rights. The post responded to criticisms of the decision, notably in the Stevens dissent, that cited the Founders trenchant criticism of corporations. I noted that the corporations that the Founders–and Adam Smith–criticized were a far different thing than the modern corporation. They were established by the crown–political favors to the politically connected. They were a part of a “closed order” in which only a select few had access to power and wealth. I further noted that as John Wallis has pointed out (in his work with North and Weingast on the natural state), the idea of the corporation was fundamentally transformed in the mid-19th century. In particular, states ceased making corporations special privileges awarded to the few. Instead, states created an “open order” in which anybody could incorporate. Corporations in an open access system are fundamentally different than those in a closed access one.
I agree with Professor Bainbridge that in the open order system, corporations have become incredible engines for the creation of wealth. But that very success has had perverse political economy consequences. Large, powerful, and wealthy corporations can undermine the open order, and use their wealth and influence to receive benefits like those conferred by crowns on the corporations they created. That is, a true open order may be unsustainable. It bears within it the seeds of its own destruction.
Andrei Shleifer argues that regulation was adopted in the late-19th and 20th centuries precisely because the power of corporations had undermined the independence and impartiality of the courts. Large corporations could suborn justice, and Progressives believed that the countervailing power of the regulatory state could restrain this process: the view was that the state was harder to suborn than a judge.
But regulation is not immune from being suborned. Indeed this is the essence of the Chicago/Friedman/Stigler critique of regulation: regardless of its original or stated intentions, regulation typically confers a benefit on a powerful entity, more often than not a corporation or group of corporations. Progressive intentions to tame corporations led to an expansion of government power that was used to benefit them. The master became servant.
This classical liberal (libertarian) critique is all the more compelling today: corporatism has grown apace with the growth of the power of the state that began in the Progressive era. The classical liberal/libertarian response to the suborning of the regulatory state is quite straightforward: sharply limit the power of the government to regulate, thereby constraining its ability to confer rewards on the powerful. As I said in the previous Occupy This post, corporatism requires two to play: corporations and the government. The libertarian remedy for corporatism is not to constrain corporations in the economic sphere, but to constrain government in its ability to aid corporations (often in the guise of “public interest”). In the classical liberal/libertarian view, this preserves the open access order, and permits corporations to achieve the economic benefits that Professor Bainbridge lays out so nicely.
But there is a nagging question: are constraints on the power of the state to confer rewards credible? The economic benefits to concentrated interests from government intervention can be immense. How is it possible to constrain credibility the ability of these interests to “buy” these benefits from politicians and regulators? They are willing to pay so much, and the diffuse interests who are victimized cannot outbid them: politicians go to the highest bidder. Is it possible to prevent the auction from occurring at all?
A Stigler, or a Mancur Olson, would probably say no: it is like trying to prevent water from flowing downhill. It will work relentlessly, and eventually erode or circumvent anything in its way. There is not a political system that empowers the government to provide public goods or to exercise police powers that is immune to having those powers seized by rent seekers.
So what is the alternative? Increasing government powers–the Progressive/progressive/Occupy This prescription–is completely counterproductive. The idea of the state as countervailing power is completely chimerical, because the state is suborned by private interest: increasing its powers will only exacerbate the problems of corporatism. A Constitution of Liberty (to appropriate Hayek’s phrase) is attractive, but likely unsustainable.
So what is a practical political program? Perhaps the only real alternative is to wage a continuing war against the ceaseless action of the waves, like the Dutch battling the seas with their dykes and dams, knowing that some water will seep through, and that sometimes the dykes will give way. A Constitution of Liberty is a leaky bulwark, but it is better than the alternative: to follow the progressive prescription would be to open the sluices, unleashing the deluge.
Not a happy conclusion, but methinks a soberly realistic one.
Update. Here’s another way to state this. I pretty much agree with Mark Pennington’s defense of classical liberalism against “market failure” arguments, communitarianism, and egalitarianism. I am skeptical, however, about the real prospects for a “robust political economy” (the title of his book) on classical liberal lines.