The Left and Right Share a Common Enemy: Capitalists Who Corrupt Capitalism

The battle that should join progressives and free-market advocates

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By Lawrence Lessig

Theorists and principled souls on the Right are free-market advocates. They are convinced by Hayek and his followers that markets aggregate the will of the public better than governments do. This doesn’t mean that governments are unnecessary. As Rajan and Zingales put it in their very strong pro-free-market book, Saving Capitalism from the Capitalists, “Markets cannot flourish without the very visible hand of the government, which is needed to set up and maintain the infrastructure that enables participants to trade freely and with confidence.” But it does mean that a society should try to protect free markets, within that essential infrastructure, and ensure that those who would achieve their wealth by corrupting free markets don’t.

Yet often the biggest danger to free markets comes not so much from antimarket advocates (the Communists and worse!) as from strong and successful market players eager to protect themselves from the next round of strong and successful market players. As Rajan and Zingales describe:

Capitalism’s biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action.

The perpetual danger is that this competition will be “distorted by incumbents,” because of an obvious fact not about markets, but about humans: “Those in power… prefer to stay in power. They feel threatened by free markets”— even if it was free markets that gave them their power!

This is not a new point. Adam Smith, founding father of the modern free-market movement (even if, like most founding fathers, his work is only indirectly and partially understood by those who follow him most vigorously), famously condemned the very heroes of free-market wealth:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

It was from this recognition that Smith offered his rule for interpreting any proposal by successful incumbents for regulating the market. Such proposals, Smith said, “ought never to be adopted, till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”

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For such proposals “come… from an order of men, whose interest is never exactly the same with that of the public, who generally have an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

Thus, as an example, Rajan and Zingales point to Congress’s aid for the tourism industry after 9/11: “The terrorist attacks affected the entire tourism industry. But the first legislation was not relief for the hundreds of thousands of taxi drivers or restaurant and hotel workers, but for the airlines, which conducted an organized lobbying effort for taxpayer subsidies.”

Principled souls on the Right thus worry about how to protect, as Rajan and Zingales put it, capitalism from the capitalists. As Rajan writes in his own work, “The central problem of free-enterprise capitalism in a modern democracy has always been how to balance the role of the government and that of the market. While much intellectual energy has been focused on defining the appropriate activities of each, it is the interaction between the two that is a central source of fragility.”

This is a worry because there are only two things we can be certain of when talking of free markets: first, that new innovation will challenge old; and second, that old innovation will try to protect itself against the new. Again and again, across history and nations, the successful defend their success in whatever way they can. Principles— such as “I got here because of a free market; I shouldn’t interfere with others challenging me by interfering with a free market”— are good so long as they don’t actually constrain. Once they constrain, the principles disappear. And once they disappear, the previously successful use whatever means, including government, to protect against the new. This was one of the problems the Progressives fought against: “To destroy this invisible government, to dissolve the unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of the day.” This is one of the battles that should join progressives of the Left and free-market advocates on the Right.

James Bessen makes a similar point about how the way we fund campaigns affects innovation. In an essay published in Foreign Affairs, Bessen writes:

Government policies have, across the board, increasingly favored powerful interest groups at the expense of promising young start-ups, stifling technological innovation.

“The root of the problem,” Bessen writes:

is the corrosive influence of money in politics. As more intense lobbying and ever-greater campaign contributions become the norm, special interests are more able to sway public officials.

Bessen’s examples are many (followed up with even more evidence in a book published in 2015, Learning by Doing).

Defense Department procurement, for example, used to favor “a diverse group of private firms, including start-ups and university spinoffs.” Over the past few years, however, that has changed as “procurement has strayed from this successful formula. Instead of awarding contracts to start-ups and spinoffs, the Pentagon has favored traditional defense contractors.” The reason? “Large defense contractors have the money and influence to secure lucrative government contracts.”

Likewise, with patents. Start-ups have suffered, Bessen writes, because of the “proliferation of patent litigation.” That growth began after Congress (“ after persistent lobbying by patent lawyers”) created a special patent court to enforce patent claims. Since that change, patent litigation has surged: “A 2013 study by the Government Accountability Office found that the number of defendants in patent lawsuits more than doubled between 2007 and 2011; software patents accounted for 89 percent of the increase.”

Some of these suits defend appropriate rights appropriately. But many are the work of “patent trolls.” Bessen offers this extreme example:

In the early 1980s, for example, one inventor developed a kiosk for retail stores that could produce music tapes from digital downloads, filing a patent for an “information-manufacturing machine” at “a point of sale location.” A patent troll named E-Data later acquired the patent and interpreted it to cover all sorts of digital e-commerce, making millions of dollars from suits against more than 100 companies.

These lawsuits are expensive. Bessen calculates that in 2011, the roughly 5,000 “firms named as defendants… paid more than $ 29 billion out of pocket.”

That burden, in turn, led many to press for reform to the patent system. The culmination of that push was the America Invents Act of 2011. But despite high hopes, as Bessen describes, “The new law did little to deter patent trolls or to discourage the vague software patents that allow trolls to abuse the system. In fact, the law granted relief to only one industry: finance.” It’s no surprise that of the “more than 1,000 lobbyists [who] worked on the bill, including ten former members of Congress, 280 former congressional staffers, and more than 50 former government officials,” Wall Street had enough to get the one special favor of the law: relief!

“Politics,” Bessen concludes, “is about balancing competing interests. Opposing factions battle one another but ultimately compromise, each getting something it wants.” But in the lobbyist-driven battle that defines DC now, quoting Jim Cooper (D-Tenn.; 1983– 1995; 2003–), Bessen writes, “The future has no lobbyists.” And so the future will have less innovation.

One of the most striking examples— because so blatant— of this protectionism is the story of “Internet Radio.” If you’ve spent any time on the Net, you’ve experienced the magic of Internet Radio. Almost every terrestrial radio station has a mirror on the Internet. From your computer or iPhone you can “tune” into literally thousands of stations around the world.

But in the beginning of Internet Radio, it wasn’t just existing radio stations that had mirrors on the Net. It was literally hundreds of thousands of music enthusiasts who had launched their own “radio station.” These were wanna-be DJs, or experts in some remote domain of music— jazz from 1910 to 1915; the best baroque in Italy. You think of a theme, there was likely to be an Internet Radio station, and hobbyists and amateurs competed with the professional radio stations to serve a growing audience an amazing diversity of creative work.

Until the lawyers showed up. Because of course, broadcasting music triggers copyright law. And copyright law is a favorite tool of protectionists. So in 1995, Congress enacted a special copyright levy on Internet Radio that didn’t apply to ordinary radio. And then the government launched a royalty proceeding to determine how much money Internet Radio stations would have to pay.

No one should oppose fair rates for creative work. But the striking part of the Internet Radio story is that, at least for some, the whole purpose of the setting the rates was not to get a “fair” royalty for copyright owners. It was instead to shrink the competition in radio. As I described in my book Free Culture (2004), recounting an interview with Alex Alben, vice president for Public Policy at Real Networks:

The RIAA, which was representing the record labels, presented some testimony about what they thought a willing buyer would pay to a willing seller, and it was much higher. It was ten times higher than what radio stations pay to perform the same songs for the same period of time. And so the attorneys representing the webcasters asked the RIAA,…“ How do you come up with a rate that’s so much higher? Why is it worth more than radio? Because here we have hundreds of thousands of webcasters who want to pay, and that should establish the market rate, and if you set the rate so high, you’re going to drive the small webcasters out of business.…”

And the RIAA experts said, “Well, we don’t really model this as an industry with thousands of webcasters, we think it should be an industry with, you know, five or seven big players who can pay a high rate and it’s a stable, predictable market.

Translation: We want to use the law to knife the baby, so the future of radio (and hence music) is much like the past.

This is the dynamic that Zingales and Rajan were writing about: the incumbents protecting themselves against the challenger. Recognizing the threat of this dynamic is nothing new. Neither is it partisan. As Dean Post writes:

As early as 1894, the irreproachable Elihu Root, a “conservative of conservatives” [and Republican], had proposed amending the New York State Constitution to prohibit corporate campaign contributions and expenditures. “The idea,” Root said, “is to prevent the great moneyed corporations from furnishing the money with which to elect members of the legislature of this state, in order that those members of the legislature 5may vote to protect the corporations. It is to prevent the great railroad companies, the great insurance companies, the great telephone companies, the great aggregations of wealth, from using their corporate funds, directly or indirectly to send members of the legislature to these halls, in order to vote for their protection and the advancement of their interests as against those of the public.”

Rajan and Zingales offer a range of remedies to secure a free society from this type of market protection. The most interesting I’ve described: the notion of a political antitrust doctrine, a doctrine that aims at blocking not only inefficient economic behavior, but also concentrations in economic power that could too easily translate into political power. In this, their work echoes Louis Brandeis, who opposed “bigness” not just for (mistaken) economic reasons, but more important, because of the view that “in a democratic society the existence of large centers of private power is dangerous to the continuing vitality of a free people.” It also echoes the battles by Presidents Jefferson and Jackson centuries ago, who both fought the first Bank of the United States, because both “saw a powerful bank as a corrupting influence that could undermine the proper functioning of a democratic government.”

But the one point that Rajan and Zingales strangely leave aside is the role of money in politics on the capacity for capitalists to corrupt capitalism. So long as wealth can be used to leverage political power, wealth will be used to leverage political power to protect itself. This was Teddy Roosevelt’s view: “Corporate expenditures for political purposes… have supplied one of the principal sources of corruption in our political affairs.”

But however clever political antitrust might be, a more fundamental response would be to weaken the ability of wealth to leverage political power. Never completely. That would not be possible. But at least enough to weaken the return from rent seeking, perhaps enough to make ordinary innovation seem more profitable.

Any reform that would seek to weaken the ability of wealth to rent-seek would itself be resisted by wealth. So long as private money drives public elections, public officials will work hard to protect that private money. And if you doubt this, look to Wall Street: Never has an industry been filled with more rabid libertarians; but never has an industry more successfully engineered government handouts when the gambling of those libertarians went south. When threatened with our existence, none of us— including principled libertarians— will stand on principle. The Right needs to recognize this as well as the Left.

All three examples point to a step in arguments from the Right that too many too often overlook. I’ve been in the middle of hundreds of arguments in which someone on the Right (and I was that person for many years) invoked a common meme: something like, “This problem, too, would be solved if we simply didn’t have such a big/ invasive/ expensive government.”

Maybe. But the point these three examples emphasize is that you can’t simply assume the problem away. If you believe big or expensive government is the problem, then what are you going to do to change it? How are you going to shrink it? What political steps will you take toward the end that you seek?

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My sense is that too many on the Right make the same mistake as too many on the Left. They assume that change happens when you win enough votes in Congress. Elect a strong Republican majority, many in the Tea Party believe, and you will elect a government that will deliver the promise of smaller government and simpler taxes— just as activists on the Left thought that they could elect a strong Democratic majority and deliver on the promise of meaningful health care reform, or global warming legislation, or whatever other reform the Left thought it would get.

What both sides miss is that the machine we’ve evolved systematically thwarts the objectives of each side. The reason for the thwart is different on each side. Change on the Left gets stopped because a strong, powerful private interest uses its leverage to block changes in the status quo. Change on the Right gets stopped because strong, powerful public interests, Congress, work to block any change that would weaken their fund-raising machine.

The point is not that the Right agrees with the Left. They don’t. The ends that both sides aim for are different. But even if the Left and the Right don’t share common ends, they do share a common enemy. The current system of campaign funding radically benefits the status quo— the status quo for private interests and the status quo of the Fund-raising Congress.

The same dynamic will thus work against both types of reform. Private interests will flood DC with dollars to block change that affects them. And government interests, as in congressmen, will keep the grip tight on large, intrusive, complicated government, in part because it makes it easier to suck campaign dollars from the targets of regulation.

The existing system will always block the changes that both sides campaign for. Both sides should, therefore, have the same interest in changing this system.

This is not a new point, though it is strange how completely it gets forgotten. In 1999, Charles Kolb, a Republican and former George H. W. Bush administration official, led the Committee for Economic Development (CED) to take a major role in pushing for campaign finance reform. The CED describes itself as “a non-profit, non-partisan business led public policy organization.” Since 1942, the CED has pushed for “sustained economic growth.” It has been well known for pushing for that growth from a relatively conservative position.

Central to its mission since 1999 has been the argument that the existing system of campaign funding is broken. As it wrote in its first campaign financing report:

The vast majority of citizens feel that money threatens the basic fairness and integrity of our political system. Two out of three Americans think that money has an “excessive influence” on elections and government policy. Substantial majorities in poll after poll agree that “Congress is largely owned by the special interest groups,” or that special interests have “too much influence over elected officials.” Fully two-thirds of the public think that “their own representative in Congress would listen to the views of outsiders who made large political contributions before a constituent’s views.”

These findings, typical of the results of public opinion surveys conducted in recent years, indicate a deep cynicism regarding the role of money in politics. Many citizens have lost faith in the political process and doubt their ability as individuals to make a difference in our nation’s political life. Americans see rising campaign expenditures, highly publicized scandals and allegations regarding fundraising practices, and a dramatic growth in unregulated money flowing into elections.

The CED was “deeply concerned about these negative public attitudes toward government and the role of money in the political process.” It was “also concerned about the effects of the campaign finance system on the economy and business.” For “if public policy decisions are made— or appear to be made— on the basis of political contributions, not only will policy be suspect, but its uncertain and arbitrary character will make business planning less effective and the economy less productive.”

The solution, the CED argues, is for business to be less tied to campaign fund-raising. “We wish,” as the report states, “to compete in the marketplace, not in the political arena.”  Because, again, that competition doesn’t create wealth or produce new jobs. It just fuels the very rent seeking that all good conservatives should oppose.

The CED has continued its work in this field since the first edition of my book. The organization runs a “Money in Politics Project.” In 2013, it commissioned a bipartisan-run nationwide survey of 302 business leaders on money in politics. Here are its key findings— none surprising in light of everything we’ve seen so far:

  • 85 percent say that the campaign finance system is in poor shape or broken;
  • 87 percent say that the campaign finance system needs major reforms or a complete overhaul;
  • 71 percent believe that major contributors have too much influence on politicians;
  • 75 percent say that the U.S. campaign finance system is pay-to-play.

These are business leaders— the people most familiar with what Peter Schweizer calls the “extortion” of the system. Why is there any debate about the need for reform here at all?

This essay was adapted from Republic, Lost: Version 2.0 , with permission from the publisher Twelve Books.

2016 January 16

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  • W H

    This was the most articulate article I’ve read on here so far. You nailed it with describing exactly why the system is broken, and why we can’t agree on how to fix it.

  • mhodak

    It’s a lot easier to diagnose a disease than it is to treat it with the confidence that Mr. Lessig and many on the left have about the net effect of campaign finance reform, i.e., the particular vision of campaign finance reform that seeks to trade off infringement on speech (and, yes, money can unquestionably be a form of speech) against the imagined, but untested, results their reforms would produce.

    There is a grain to their proposals. They want to reduce the influence of those intimately affected by the reach of government while continuing to expand that reach. Here is the proof. It’s impossible to create a law forbidding hundreds millions of people, including those people organized within tens of thousands of corporations without infringing on their free speech rights. It is much simpler to restrict the freedom of 535 congressmen with regards to the money they receive. How about if campaign finance reform was directed at the incumbent recipients of money rather than the advocates of policy. Restricting the actions of congressmen would not require amending the Constitution.

    Alas, it’s easy to see why the wrath of progressives is limited to the millions who give the money rather than the hundreds who receive it. It’s also easy to understand that the hundreds who make policy would rather burden the millions who spend on campaigns, and the non-incumbents who might challenge them, than bear the regulations entirely on their own public shoulders.

    • familyguy

      I’d go for limiting the money that incumbents receive… that’s as good as the other, as you point out. So what is the method for implementing that if it doesn’t require amending the Constitution? Congress must pass a law restricting it’s own limitations on fund raising. Not very likely. So we’re back to the same conundrum.

      • mhodak

        I agree that no solution will be easy. I was reacting to the author’s final statement that the need for campaign finance reform is obvious, and saying that just because the problem is obvious doesn’t mean the solution is. And a solution requring restrictions on our first amendment rights, which seems obvious to many in the left, is not only obnoxious to me, but not at all guaranteed to solve the underlying problem, while highly likely to create other problems besides, just like all attempts at campaign finance reform so far.

        • Swami

          I concur.

  • Larry Garfield

    One common response I hear from my far-Right colleagues when discussing this issue is that they acknowledge the problem, but don’t like any solution that involves public funds. “I don’t want my money going to [pick any candidate they don’t like]”. Despite the clear benefits of giving Congressmen a better source of campaign funds than large donors, they still bristle at the idea of even a dime of their tax money ending up supporting a candidate they don’t support.

    I have so far been unable to break through that wall with them, but that’s one of the reasons reform doesn’t happen. Because too many (and I see this more on the Right than the Left) view public financing as “more government doing things with my money I don’t like”. There’s no sense of “I’m funding a fair system”, only “I’m funding that evil [candidate].”

    How do we break through that wall?

    • David Whitlock

      A major reason it is so expensive to campaign is because ads cost money. Bring back the “fairness doctrine” (which media outlets will hate and fight tooth-and-nail) and the cost of ads becomes a non-issue. Media outlets would need to offer equal time independent of ability to pay.

      • Larry Garfield

        That’s one reason, but not the only. There’s also staff, social media advertising, social media staffing, research, etc.

        Plus, the media is more diversified now so major media outlets (those who would be subject to the fairness doctrine) are not the only game in town. One reason the fairness doctrine collapsed is because it was based on the broadcast networks’ rental of public airwaves. There’s no such leverage with cable companies. Today, there’s no such leverage with Twitter, or Facebook, or YouTube, or Doubleclick ads, or… Advertising is far more diverse and fragmented, making such a rule considerably harder to enforce. And that’s even before the same free-market advocates get into the picture, arguing against “my government forcing private businesses to let that evil [insert candidate here] have air time.”

        • David Whitlock

          Cable companies such as Comcast have a monopoly. Cable companies use public right-of-way to run their cables. Cable companies could be compelled to follow a type of “fairness doctrine”.

          If Comcast can insert their own ads onto the internet feeds of individuals who are using their own privately owned servers instead of Comcast rented servers, then Comcast could be forced to follow a type of “fairness doctrine”.

          A straightforward way to do it would be to tax all “political” ad revenues at 50%, where the “tax” can be paid in “cash”, or “in kind”.

    • mhodak

      You break through it by convincing skeptics that public financing would actually result in a fair system, instead of devolving into yet another incumbent protection device, as most all other campaign finance reform has turned out to be.

  • Samantha Atkins

    The danger Lessig presents is principally the danger of the rich buying government favors including distortions of the market. But the rich can only buy such distortions in a markedly not free market (deep government market manipulation accepted).

    Lessig goes on to make it about power. But the only power of a successful business in a free market is its reputation which is from consistently offering a good product enough people want and can afford in a free market.

    I agree that some successful business people DO NOT want free markets. Very much so.

    Adam Smith was not the founder of the modern free market movement. He was an early free market (although not completely so) advocate.

    If a successful business attempts to charge less than costs to drive out a competitor they can only do so for a limited time. They may defeat some competitors this way but they cannot do so indefinitely without ruining their own business. Nor having no competitor currently can they long charge whatever they like without inviting those that notice they can produce the same or better for less back into the market. So without the power of government to back an anti free market move such as this these sorts of things are self correcting. A government of course may create and perpetuate a monopoly as long as it likes.

    The public is also just other humans, quite like the business folk. So are those in government. So neither of the other parts can be trusted with arbitrary power over those that happen to be in business. The consumers don’t have much power. The business does not have arbitrary power but power only as long as they are successful in a free market at producing goods and services and prices enough people are willing to pay. So the arbitrary power is in the hands of those mere humans who are in government. This is why it is so important to carefully limit its use.

    A anti free market government favor buying business person is not a “capitalist”.

    • David Whitlock

      There is the power of legacy wealth.

      Removing legacy wealth (as in 100% estate tax) would help remove the power of legacy wealth, but 100% estate tax is not enough. So long as infant health, nutrition, education, safety and opportunity depends on parental resources, the power of parental wealth does get transmitted to the next generation in terms of health, education and opportunities.

      The only solution I see is to have sufficient funding of prenatal health care, nutrition, and also sufficient funding of health care, nutrition and education of minors (that is children until they are “adults”) for everyone to have as much health care, nutrition and education as they can effectively utilize. Until you have done that, you have not removed the power of legacy wealth.

      • Swami Cat

        This seems to imply that you believe the optimal state of affairs is one where there is extreme equality of outcomes. Please do correct me if wrong….

        If someone else believes the optimal state of affairs is a system where the average expected outcome over time is superior to your system, do you support that person’s freedom to choose their system and ignore yours?

        In other words, from behind a veil, some would probably choose guaranteed equality of outcome. I respect that. Others would choose average expected outcomes, especially if safety nets were funded to pull up the minimum from the output of the higher average. Thoughts?

        • David Whitlock

          The ultimate outcome is that we are all dead. It isn’t ultimate outcomes that are important, it is the process by which those outcomes (what ever they are) are arrived at. I am perfectly willing to have non-uniformity of outcomes.

          In other words, it isn’t that I want uniformity of outcomes, I don’t want BS, gratuitous nonsense that harms people to determine outcomes.

          In Flint, the municipal water is contaminated with lead. Children consuming lead will reduce IQ, stunt intellectual growth, and will make high intellectual demand activities not achievable. Stunting a generation’s intellectual capacity to save a few dollars on water treatment is nonsense. It is a “gratuitous harm” that does (relatively) benefit everyone who doesn’t get their drinking water from the Flint municipal system.

          If you intellectually stunt the children that your children will “compete” with, by feeding them lead contaminated water, you “privilege” your children over them. The “leaders” who made the decisions to not prevent the lead contamination of the Flint water supply don’t live in Flint. The children of those “leaders” don’t drink the Flint water. The “leaders” have used their authority over the Flint water supply to privilege their own children over the children of Flint residents.

          How much of the under funding of public education is to relatively privilege the children of those who can afford private schools over those who cannot and who must rely on under funded public schools?

          Another recent example is that when BoA foreclosed on a grocery store, they loaded all the food (which was still good) into dumpsters and took it, under guard, to a landfill, even as there were hundreds of people in the parking lot ready and willing to put that food to good use. Giving the food away would have been cheaper than paying to have it landfilled. It would have been more environmentally benign to have the food eaten instead of landfilled. So why did the BoA destroy that food, at a cost, instead of give it away? The only plausible explanation I have is to privilege BoA employees and other “haves” (who do have enough to eat and don’t need to scrounge food) over those who “have not” by making them scrounge harder for food.

          All “outcomes” depend on a variety of inputs. What we should want is for the “outcome” to depend on the “inputs” in such a way that human flourishing is maximized. A large aspect of human flourishing is self-determination and the minimization of suffering.

          • Swami

            Thanks, David

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  • David Whitlock

    I completely agree with Professor Lessig’s analysis, however I disagree with his proposal as to how to fix it. The “problem” is that our various economies (social, financial, political) are not operating as stable systems. You can’t “sprinkle” stability onto systems at the end, they need to be designed as stable systems from the beginning.

    Complex, non-linear, coupled systems of many variables (weather, ecosystems, organisms, economies) are chaotic and exhibit the “butterfly effect”. The only way such systems can be “stable” is as a self-organizing criticality. Stability needs to be an emergent property, and stability of a scale-invariant system can only emerge via a scale-invariant control system.

    They cannot be controlled from the “top-down” because the “top” doesn’t have the degrees of freedom, the information, or the bandwidth to control all of the non-linear, coupled things that are going on at the “bottom”. If you could control all butterfly-level atmospheric perturbations, you could control the direction of hurricanes months in advance; but you would need the degrees of freedom, control levers, and bandwidth to measure and control all butterfly-level perturbations across the entire system for those months (not going to happen from a single point).

    For a system to exhibit “stability”, all “perturbations” must damp out and eventually go to zero.

    In other words, dP/dS (derivative of system Property with respect to Stress) must be positive. In other words, as a “system” is “stressed”, the important system Properties (that is all important system Properties) must become more resistant to that “stress”. If dP/dS is allowed to go negative, then the system becomes weaker as it is “stressed” and that weakness accelerates until the system fails.

    In natural systems (such as ecosystems) commensal relationship stability results from “costs” being proportional to “benefits”. Plants generate sufficient nectar and pollen to nourish and maintain a sufficient bee population for the bee population to maintain pollen transfer. Plants generate sufficient nuts of sufficient nutritional value to maintain a stable squirrel population to distribute those nuts. Herbivores generate sufficient old, weak, and sick individuals for carnivores to cull, so as to maintain a stable gene pool of herbivores. Remove the carnivores and the herbivores become extinct.

    Organisms that extract resources disproportional to the benefits they provide are parasites and can drive the population they are parasitizing extinct, particularly if those extracted resources can be used to generate exponential growth of the parasite.

    The financial sector is an example of parasitic extraction of wealth disproportionate to the value the financial sector provides. The financial sector doesn’t “produce” anything. What the financial sector does is the efficient allocation of capital. If the financial sector does “efficiently” allocate capital to the rest of the economy, the financial sector should receive appropriate profits. With efficiently allocated capital, the rest of the economy should be doing at least as well as the financial sector, both in terms of profit and share of GDP. What we are observing is profits and share of GDP in the financial sector that are both larger and growing faster than any other part of the economy.

    This this faster growth of financial sector share of GDP and profit can only occur through parasitic extraction from the rest of the economy. That growth is exponential. Unless that exponential parasitic growth is stopped, the financial sector will drive the rest of the economy extinct.

    • Swami Cat

      Another question here David…

      Obviously the financial markets accomplish a great deal of value in a complex network. I suspect you would agree that they are a necessary part of making the system work.

      I am not sure how you are evaluating how much value they are adding, or how great a cost that value is coming at, or what the optimal cost to benefit ratio is at any given time.

      I certainly agree there is rent seeking and gaming in finance, just as in most human systems. And I agree that this gaming can be considered parasitical and detrimental to the system.

      However, I do not see how you are establishing what share of market returns going to finance is appropriate as opposed to inappropriate, or what the share of an optimal functioning market returns to finance should be short term (long term I would suggest it should approach the risk adjusted necessary return on capital).

      Said another way, I agree that parasitic behavior is counterproductive. I agree there is sure to be some parasitic activity in finance. But I am not sure what that level is, nor would I think that temporary higher returns in finance is proof of such paraditic behavior.

  • Swami Cat

    Smith and Hayek and pretty much every serious student of markets have always said that the biggest threat to free enterprise has always been incumbents and rent seekers.

    What I fail to get is what people “who advocate for free market competition” has anything to do with rent seeking and incumbent protection. These are polar opposite positions. Right?

    Is the point that some people arguing for free markets when convenient, and regulation and incumbency protection when convenient are probably liars? OK. Agreed. People often lie, and I for one am against it!

    But this doesn’t mean that those who advocate for competition are the problem. It means that liars and cheats are the problem. And I assure you that liars and cheats are a problem in other categories too.

    Does everyone agree with me here?

    Another concern is that I do not believe the largest contributions to politics come from those “who advocate for free market competition”. I believe the biggest donors are unions and government service organizations. Are they considered elites “who advocate for free market competition”? If not, then why are they not part of the problem? And are these groups more or less honest than the “elites” of Wall Street?

    I would suggest that campaign finance reform is as useless as spitting on a house fire. As long as the government has an active and partial role in determining outcomes in the realm of markets, then it is absolutely guaranteed that the path to success will be through government. Those who stick with real competition will be suckers, guaranteed to be taken advantage of by those getting political influence. This can be influence in campaign contributions, it can be influence in grass root support, influence in who one knows, influence in the status of one’s voice (like having well read opinions on influential newspapers or pulpit in a church) and even influence in getting people out to vote.

    Yes, I agree politics should not determine winners and losers in the economic realm without extremely good and rare exception. I also agree that campaign financing is FUBAR. But campaign financing is absolutely the tip of the iceberg. Solving this problem just increases the size of the influence and problem in other domains of political influence. In other words, we are just picking who gets to influence politics to pick winners and losers. We are just playing political favorites.

    The only real solution is to get the government back out of determining market winners and losers. This is not going to come about by regulatory reform. It will only come about by reforming what people expect government to do and not do.

    I am not holding my breath on people reforming their beliefs and expectations. Indeed, I bet I can’t even convince a minority of people reading this comment. So be it. In the end, some places will probably solve the issue better than we do, and when that happens they will be the economic leaders, and they will be the society that the laggards need to emulate.

    Evolution is the universal acid, and this applies to cultural evolution as well. Better cooperative societies will likely dominate the future, and true free competition (rather than rent seeking and cronyism) is the path to long term economic success. Choose wisely.

    • David Whitlock

      You can’t have free markets if there are any unpriced externalities. If there are any unpriced externalities, then those who refuse to pay them will “out-compete” those who do pay for them.

      The “problem” of global warming is because there is no “cost” to dumping CO2 into the atmosphere. As a society we have determined that fossil fuels will “win” because the cost of the effects of dumping CO2 into the atmosphere has been externalized from the benefits of burning fossil fuels.

      If you want to breathe clean air, then the cost of air pollution controls needs to be paid for. Who ever you allow to not pay those costs is going to be able to “out-compete” anyone who does pay those costs. Same for feeding starving children, providing health care, paying for police protection, paying for roads, paying for old people to not die in the gutter. People who opt out of paying for these things will “out-compete” people who do pay for them.

      If you want a society, then the “cost” of raising and educating the next generation needs to be covered. Infants and children require care by adults for 24/7 for the first few years. The capability of the adults those children develop into depends a lot on how they are nourished, nurtured, protected, and educated during their first few decades of life.

      If you want to have competent adult workers to hire, the externality of turning infants into capable adults has to be paid for.

      If you want doctors to care for you when you are 80, you need to fund the care and education of those doctors when they are infants, children, teenagers, undergraduates, med students and residents.

      • Swami Cat

        Well said David! I agree of course. Question, though…. Were you assuming I would not agree?

        • David Whitlock

          No, I rarely assume anything. I was pretty sure you would agree, I was simply articulating a different argument leading to the same conclusions and raising examples that many so-called Libertarians would object to (feeding of other people’s children, paying for roads, pollution controls).

          The “problem” with competition is that the system of identifying winners and losers can be “gamed”. It is the “gaming” of competition that renders it non-competitive and makes success or failure critically dependent on unpriced externalities (such as cronyism).

          To have free markets you need to have symmetrical information because asymmetric information is an unpriced externality.

          Once all unpriced externalities are eliminated, it is not clear to me what the “competition” would be based on?

          • Swami Cat

            Please tell me more, David.

            I have similar thoughts on gaming competition (I usually refer to it as privileging the competition but I suspect our thoughts may overlap somewhat).

            But please do expound. I am interested in your thoughts.

          • Emmef

            Once all unpriced externalities are eliminated, it is not clear to me what the “competition” would be based on?

            Would “being able to innovate relatively better under the same circumstances” be something? Doesn’t feel like an unpriced externality.

            Edit: Hm. Just noticed the age of this discussion…

      • X-7

        Yes, and think as complexity increases, so do the externalities.
        Think one fundamental problem is our use of the archaic equation code that attempts to rep complex relationship-value information.
        World culture’s dominant information processing mechanism: human beings deploying monetary code to calibrate relationship-value in / across geo eco bio cultural & tech networks, and across time. Think that mechanism lacks reach, lacks processing speed, accuracy and power; hence the externalities accrue and threaten our survival.
        How off is our culture code? Well, it yields Sky Die, a killer sky.
        Maybe too late, not talking about planned economy, talking about complexity and code being relationship infrastructure, Your coding infrastructure needs to have the reach to try to match the complexity of its environs, like this in the bio network:
        “The rule of thumb is that the complexity of the organism has to match the complexity of the environment at all scales in order to increase the likelihood of
        survival.” Yaneer Bar-Yam “Making Things Work”

        Quantum computers using software code, algorithmic code, processing big data from ubiquitous network sensors and bots in rivers, forests, oceans, sky, cities, sewers, etc.; add data from an internet of things. That information processing mechanism is faster, more powerful, has more real-time reach, etc., greater predictive capacity across time, more fluid error detection, error correction capability.
        We don’t need code for parking on Mars. We don’t have a parking relationship with Mars, the degree of relationship complexity doesn’t require infrastructure.
        We don’t have adequate culture code for our relatively new and more complex sky / carbon / methane / energy relationships (the sky is also welcoming drones; then nano drones …).
        Humans using monetary code to try to generate functional relationships?
        Already not working.

    • VIsForMe

      “I believe the biggest donors are unions and government service organizations.”

      The data contradicts this assertion.


      With this candidate, mostly funded by unions and government service organizations:

      Do the dollar amounts seem at all analogous?

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  • Emmef

    There is one extra factor, which is knowledge. A free market only operates well if actors have enough knowledge (there must be a balance between knowledge of seller and buyer).

    The people that elect the politicians in the end, however, often depend on mainstream media for their information. Mainstream media often has a corporate agenda, because of funding dependencies or ownership.

    • Subhendu Sekhar Padhi

      Absolutely right. Corporate media, paid channels, paid news and doctored visions are the order of the day in the developing economies too.

  • Patrick Barnes

    Elizabeth Warren agrees:

    (I’m a fan of Elizabeth because she’s one of the few politicians on either side who actually tries to make life better for the average person. I don’t vote for either party.)

  • ari9999

    “Common enemy” reminds me of Sam Levenson (1911-80): “Grandparents and grandchildren get along so well because they have a common enemy.” 🙂

  • David Brin

    Larry nails so many powerful points. Indeed, some of us have been urging for a decade that Adam Smith be rediscovered as an archetype and founder of “neo-liberalism” but of what we call Liberalism, itself. The Evonomics site now invokes Smith in almost every-other article and I have hopes that this rediscovery will overflow into the nation’s bitter discourse, as well.

    Hayek, too, can be rediscovered and re-interpreted. While he despised government-socialist intervention, the _reason he hated it was the limitation of the number of economic players and choosers. But that limitation process can be far worse than say 100,000 diverse and accountable and transparent civil servants, when it gets reduced to an incestuous, conniving clade of 5000 CEO caste golf buddies. Which leads us to the Bigger Picture…

    The one aspect that Lessig (and apparently everyone else) leaves out is the great context of large scale history. For 6000 years, the typical social pattern was a pyramid of inherited hierarchy, loosely called feudalism. Big men with swords found it appealing to arrange that they would get no competition from those below, and that their sons would inherit ownership of other folks sons and daughters. The pattern replicated everywhere, reinforced by darwinian reproductive advantage. And it boiled down to the word that anyone would understand — cheating. The temptation will always be there.

    Our brief, 240 year miracle – dated not just from the Declaration of Independence but also the publication of Wealth of Nations – has been based upon dividing power so that cheating can be limited by competitive accountability. By opponents pointing out and staunching cheat before they get so large that they become self-reinforcing. The result has been the world’s first DIAMOND-shaped society, with an empowered middle class that fizzes forth new competitors at rates that should pleas Smith or Hayek and that delivers real goods. Alas, a diamond is unstable and last year’s winners will try to prevent new competition, so they can become next year’s lords.

    Our parents in the Greatest Generation knew this better than we do, because – like all other generations – they knew what class war was. Desperately, with help of fellows like FDR – they sought a solution other than the one best-known at the time, Marxian revolution. Their Rooseveltean reset was so successful that we boomers grew up imagining that class war was quaint, a worry far below other injustices like racism or sexism. But human nature hasn’t changed and today’s wealth disparities are nearing 1930s levels. An oligarchic putsch is underway, and Lessig’s clarion calls are vital, if we are to perform another moderate, reasonable “reset” that saves and enhances and renews both capitalism and freedom.

    Larry’s Evonomics missive makes this all very clear (except the history-feudalism part.) His quotations are vivid ammo. And I can only add one of my own, from Will and Ariel Durant’s The Lessons of History:

    “In progressive societies the concentration[of wealth] may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.”

  • 1marthaa

    Lawrence Lessig has conflated
    capitalism with Privatism —- I suspect that this was intentional and
    not an oversight. The topic should properly read: THE LEFT AND THE

  • bean spout

    Outside of a trial for bribery or extortion, it is impossible to know if a legislator is bribed and in bad faith, or just stupid. There are TOO MANY laws and regulations. Too much intricate—and inconsistently prosecuted—involvement in business affairs. Excessive regulation by formulae tends to release and diminish a sense of personal responsibility and fiduciary duty.

  • Lexi Mize

    #28th29th30th Amendments
    28th: Corporations are not People
    29th: Non-sequential terms for Congress
    30th: Campaign donations limited to 1/365th avg yearly wage, per candidate, per citizen

  • Worthy subject. It’s a pity that the solution of rule-based and -bound competition is not well known in the heartland of economic theory … wait … but maybe that heartland is Scotlan, rather than the US?
    Remember what Adam Smith really wrote?

  • Edwin Subijano

    Marx has been right all the time. Capitalism will always lead to monopoly capitalism or complete monopoly itself. And then it develops into imperialism which is the highest stage of capitalism.

  • M A J Jeyaseelan

    There is no denying the fact that governments are failing to represent the will of the people since the reins of the politicians are always in the hands of those who fund their campaigns.

    At the same time, how can we be so sure of the capacity of markets to aggregate the will of the public better? How would the market aggregate the will of any jobless person? Markets aggregate the will of the people only in proportion to the purchasing power they possess and in that sense are no different from the political system.

    What we should never forget is the fact that markets are even more manipulatable than elections. Both use massive advertisement campaigns to swing things in their favour. Companies con consumers into paying an undeserved price or even buying an undeserved item in the same way as politicians con voters into electing an undeserved.

    We must be also aware of the sleight of hand that the free market advocates invariably use to hoodwink the gullible. They never make the much needed distinction between the real markets and the speculative markets. Speculative markets are the mechanisms that the rich use for siphoning away all the cream that the real economy produces. It is a legitimised swindling mechanism, which does not in anyway aggregate the will of the people. They use arguments derived from the real economy to buttress their justifications for the speculative markets.

    The market mechanism and speculative markets are the two major causes of the growing economic inequalities in most countries. Markets as these are designed in extant economics give enormous powers to the rich to manipulate markets in their favour. Companies and traders with deep pockets always manipulate supplies and create artificial shortages that result in unfair prices – transferring in this process, more economic values to the sellers than what their products or services are worth by themselves.

    How bad are speculative markets? With the money borrowed from the banks at atrociously low rates of interest, the rich keep manipulating stock prices with the help of orchestrated bulk purchases or sales. All speculative market transactions involve only transfer of values. All profits made in the stock market are a kind of legitimised looting. There are also other stock market instruments such as the buy back arrangements that result in double whammies. Usually buybacks are thrust upon companies at unreasonably high prices . In order to make up for the lost profits, such companies often raise the prices of their products and services unfairly

    The worst thing that is common to both electoral politics and free markets is their utter disregard for morals. Free market theory says, if water is in short supply, it should go to the rich who would pay the highest price and not to the most thirsty. The same thing happens in politics. The will of the rich campaign funders scores over the will of the poor and the needy. Moral considerations are as irrelevant in markets as it is in politics.

    So here is the all important question. Why should people be forced to choose between the frying pan and the fire? Are there no better solutions.

    The choice in economics is not between governments and business because neither knows nor practices good economics. Economics has a different set of goals and that is to secure livelihoods and promote quality of life for all.

    Capitalism is not economics. Capitalism is an ideology but, economics is a science. Capitalism can survive only by obeying the laws of fundamental economics. It would also go down the drain like all other ideologies, if it continues to flout economic imperatives.

    Fair exchange and not free market is the soul of good economics. Free markets as these exist these days are nothing but legitimised looting mechanisms in the hands of the rich and the street smart. At the same time, none of the current economic problems can be solved without enforcing fair exchanges. Facilitating fair exchanges is a function of good economics and not governments or businesses.

    There is no way to solve the current economic problems without re-writing economics from the scratch based on a proper understanding of the economic phenomenon. If you would like to know more about this urgent please do read my article hyper linked below.