Corporatism is not the free market

Think of the USA and you think of "unbridled capitalism", "the harmful excesses of the free market" and "neoliberalism". But is that really what's going on? Isn't the American system far more an oligarchy, a perversion of capitalism at the expense of everyone else?

Europe is also controlled by the power of big corporations, but in the USA this has gone further. Here we can fairly speak of a corporate dictatorship. It has nothing to do with genuine entrepreneurship.

In the USA, the state seems to serve not its citizens but above all the interests of corporations. And it makes no difference whether Democrats or Republicans are in power. When it counts, both parties close ranks to protect the corporations.

1What is corporatism?

2Corporatism

When a Republican presidential candidate said on camera in 2012 that, thanks to Barack Obama, the USA was "inches away from no longer having a free market economy", all you could do was shake your head. That makes it all the more refreshing when a well-known economist, a Nobel laureate no less, spells out what corporatism (also called corporativism) really means:

"The administrative state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system... is... an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism."

Corporatism is, at heart, a political science term describing the involvement of organized social groups in political decision-making. Examples include the corporatism of fascism under Mussolini in Italy and the social neo-corporatism of the Federal Republic of Germany.

Edmund S. Phelps, a Columbia University professor who won the Nobel Prize in Economics in 2006, and his co-author Saifedean Ammous, an assistant professor of economics at the Lebanese American University, write that the US economy has not been a free market for some time, and yet the free market gets the blame for the economic crisis. (In truth, you have to wonder whether it was ever free at all.)

Phelps and Ammous condemn corporatism in no uncertain terms:

"Corporatism chokes off, in various ways, the dynamism that drives engaging work, faster economic growth, and greater opportunity and inclusiveness. As a result, lethargic, wasteful, unproductive and well-connected firms are kept going at the expense of dynamic newcomers and outsiders.

On top of that, declared goals such as industrialization, economic development and national greatness are placed above the economic freedom and responsibility of individuals.

Today, airlines, automakers, agribusiness, the media, investment banks and hedge funds are considered too important to face the free market on their own, and so they receive government help 'for the common good'."

3Goals chosen by the state

The crux of what the two scholars are saying is their point about state control of the market. Too many people are willing to accept goals set by the government (such as energy independence) as long as the "private sector" is willing to deliver them. When it doesn't matter how the goals are reached and all that counts is that the government sets them, that is nationalization.

The costs of corporatism are high, and Phelps and Ammous list some of the problems:

Dysfunctional companies that survive despite their gross inability to serve their customers; stagnant economies with slow productivity growth, a lack of engaging work and too few opportunities for young people; governments driven to bankruptcy by their efforts to paper over these problems; and wealth concentrated in the hands of those well-connected enough to be on the right side of corporatism.

The economically damaging concentration of wealth in the hands of the top 1% is a direct result of corporatism. The corporate-controlled state is, in the end, a form of exploitation whose victims are workers and consumers, who would be better off (in absolute and relative terms) without the anti-competitive privileges for well-connected bosses and the recessions the state causes.

The authors are optimistic that time is against corporate rule. Young people coming of age in the decentralized, wide-open marketplace of ideas and goods that is the internet can hardly be expected to get excited about a system that shields established companies from competition.

What's more, "corporatism's legitimacy is waning along with the financial health of the governments that have relied on it. If politicians cannot do away with corporatism, it will bury itself in debt and defaults …"

4Capitalism versus the free market

What bothers me most about the Phelps and Ammous essay is their use of "capitalism" to name the economic system that corporatism has corrupted. Like many others, they believe the word once "stood" for the free market. It was certainly used that way in the mid-twentieth century.

But there was an older usage (especially of "capitalist"), coined by free-market liberals such as Thomas Hodgskin, who predates Marx, that linked it to government privileges for the capital-owning class. That undertone never fully disappeared.

It's tempting to dismiss this as mere semantics. But we are trying to communicate something here, aren't we? Libertarian theorist Roderick Long shows that this is about more than semantics. For Long, capitalism is an anti-concept, a term that muddies things rather than clarifying them. One kind of anti-concept is the package deal, which "refers to any term whose meaning conceals an implicit assumption that certain things go together that in actuality do not."

By "capitalism", most people mean neither just the free market nor the prevailing neo-mercantilist system. Most people, when they say "capitalism", mean this free-market system that currently prevails in the Western world.

In short, the term "capitalism", as generally used, conceals an assumption that the prevailing system is a free market. And since the prevailing system is in fact one of government favoritism toward business, the common use of the term carries with it the assumption that the free market is government favoritism toward business.

Long writes that socialism works much the same way. In his view, most people mean nothing more by it than "the opposite of capitalism".

If "capitalism" is a package-deal term, then so is "socialism". It conveys opposition to the free market and opposition to neo-mercantilism, as though they were one and the same.

And I suspect that is the whole point of these terms: to blur the line between the free market and neo-mercantilism. Such confusion prevails because it works in favor of the state establishment: those who want to defend the free market can more easily be led into defending neo-mercantilism, and those who want to fight neo-mercantilism can more easily be led into fighting the free market. Either way, the state is safe.

To sum up: corporatism is the system that most directly threatens individual freedom (with its militaristic components), and the word capitalism is too closely tied to corporatism in people's minds to be of any use to advocates of the freed market.

You'll find more opinion pieces and insights into the country in our Life in the USA section, such as Why I'm no longer a conservative and the rant about Americans.

In short

• In the USA, the state serves above all the interests of corporations, whether Democrats or Republicans are in power.
• Corporatism is a political science term for the involvement of organized social groups in political decision-making, with roots in Bismarck and Mussolini.
• Edmund S. Phelps and Saifedean Ammous show how corporatism stifles dynamism, growth and opportunity and concentrates wealth among the well-connected.
• The word capitalism blurs the line between the free market and neo-mercantilism, and so serves the state establishment.

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