Corporatism is Capitalism, You Morons

What makes the An-cap and Paulbot crowd so laughably pathetic is not the fact that they are economically illiterate buffoons, but the fact that they think that they are not.  Apparently reading some Rothbard and a view articles from the von Mises institute makes you a fucking economist in these circles.  They will try to lecture people on why they should throw away their money investing in gold and Bitcoin, or why Central Banks are evil, all the while displaying their ignorance in such matters.

This laughable cluelessness is no more apparent than in the common argument I hear that America is somehow “Corporatist” and not Capitalist.  I constantly hear comparisons between “true capitalism” and “corporatism” and how in a “true free market” we would not see the powerful corporations that seem to exist in our present economy.  They try to say that corporations as legal entities are the product of legislation, thus if you removed the government corporations would go away as well.  This of course is nonsense, Corporations exist for a reason, they are found in every economic model on earth from laissez faire to Stalinist Communism.  These clowns need an economics lesson to understand why corporations exist, and why they would most certainly be found in anarcho-capitalism and laissez faire.

Corporations exist for the purpose of pooling risk and pooling resources.  The first modern corporations emerged in the Netherlands in early modern era.  As the Age of Discovery unfolded, entrepreneurs saw opportunity in the vast trade networks that opened up in places like the Americas, Africa and Asia.  Demand for fur, tobacco, guns, spices and slaves created an international trade by sea.  Merchants tried tapping into markets far away from home.  However, it became apparent that there was risk involved as well.  One bad day at sea could sink a ship, and destroy the fortune of a merchant.  So, to hedge this risk, merchants got together and created joint stock corporations which allows them pool the risk and uncertainty that came from operating an enterprise that spanned across vast distances and risked stormy seas, pirates and the ups and downs of the market.  Thus a joint stock corporation could own 30 ships, if a few of them sank (the happening of which was all but inevitable) it would not bankrupt the company as they still owned many others that would be able to make up for the costs.

Let me put it a different way.  Say I want to drill for oil, it costs a few hundred grand to set up an oil well, if I strike oil I stand to make 10 times the investment I put into it.  However, there is a 70% chance that my oil well will strike nothing and all that money I invested in it will be for naught.  Say I am only worth a few hundred grand, should I risk my entire life savings on a venture that carries a 70% chance of failure?  But I have a plan, I find 9 of my friends and we decide to form a corporation, instead of one oil well we drill 10 different oil wells in 10 separate places.  As the potential return for striking oil is 10 times the capital investment, only one of the 10 wells has to strike oil for us to make a return on our investment. But statistically our chances are that at least three of the wells will strike oil, which means we will triple our investment, we may even get lucky and have 4 or 5 strike oil, in which case we get a windfall.  Thus the opportunity cost per well has decreased.  What my friends and I have created is called an economy of scale, which occurs when the cost per unit decreases as the scale of a business increases and evenly spreads the fixed costs over more units. 

By pooling our resources, we have decreased the opportunity cost of drilling for oil.  Instead of risking lots of money on a single well where my chances of failure are 70%, I have instead entered into a venture where my chances of tripling my investment, or at least doubling it are closer to 90%.  As we get bigger and drill more wells, the cost per well continues to decrease, we grow richer and the company grows larger.  Thus the opportunity cost of drilling for oil has decreased substantially; it’s cheaper and smarter for me to join my friends in a venture than to go out on my own.

Now I know it may hurt their little anarchist brains to envision such scenarios, but the fact is that envisioning scenarios like this is what economists do every day.  Real world opportunity costs such as the ones mentioned exist, incorporating lowers risk, and thus lowers the real costs of engaging in such ventures. Over time the economy of scale grows and the real costs continue to decrease, to the point where it becomes far more efficient and cheaper than a one man operation.  It makes perfect economic sense to form a corporation.  This is why corporations exist in all kinds of economic models, from communism to laissez faire.  There are many products, services and industries that simply wouldn’t exist if it hadn’t been for corporatism, the opportunity costs would make such ventures impracticable without Now it’s true that these corporations can become extremely powerful and influential, but that is to be expected when you have large economic institutions, it doesn’t mean that you can’t have some kinds of regulatory constraint to keep them from being overwhelming.

So when they say that “corporatism” won’t exist in “true capitalism”, I really have to scratch my head.  What do they possibly mean?  Would there not be things like oil drilling and overseas shipping in a “true free market”?  Would people willfully forgo the advantages of risk pooling and economies of scale and engage in high risk and inefficient activities?  Would the fundamental laws of economics somehow change? 

No, the laws of economics wouldn’t change, that is why this anti-corporatism talk is such nonsense.  If you have the means of production privatized with a market economy the incentives for incorporating would still be there.  In fact, if you were to have an anarcho-capitalist society such an economy would have an even greater reliance on corporatism.  By removing the certainty and security of government and the services it provides, you would be shifting even more risk and uncertainty onto private individuals which will create even more incentives to incorporate and pool risk.  Anarcho-capitalism may be better described as anarcho-corporatism.

Now it’s true that corporations exist as legal entities recognized by the law and endowed with certain rights created by legislation.  But this does not mean corporations are products of government regulation, in fact it’s just the opposite.  Governments realize the advantages of corporatism, and how they would exist either way in a capitalist or socialist society, and that if one were to not recognize corporations they would be seriously harming their economies and thus the welfare of the people.  Corporations existed via contracts between private individuals before governments ever made any laws about them.  Governments are simply accommodating something that already exists, because they know it would be stupid to ban or inhibit them.

So there you have it, corporations form because of the law of economics, not because of the laws of governments.  They provide advantages and allow people to engage in industries that would be too risky or costly to engage in otherwise.  They provide many benefits to us and are the engines of our economy. Even the communists were smart enough to realize that.  So if you go around saying that in a “true free market” there wouldn’t be corporations, or that capitalism and corporatism are two mutually exclusive things, you are an idiot.  Of course it could be the case that you oppose corporatism on moral grounds, perhaps you don’t think people should have the right to engage in joint enterprises or that they should be prohibited from such ventures.  That’s ok if you believe that, but if that’s truly what you believe you should rethink your political positions because you are certainly not a capitalist or a libertarian, or even a socialist for that matter.  So the next time you hear some self-proclaimed “capitalist” lecturing about how corporatism is not true capitalism, make sure to smack that idiot upside the head and say “corporatism is capitalism, you moron”.  

Addendum: It appears that I have to insert an addendum here to clear some things up. Some people are complaining that by “corporatism” they are really complaining against the influence corporations have on government and crony capitalism, rather than the idea of corporations in and of themselves. First of all, the correct term for that kind of behavior is called corporatocracy, not corporatism. But regardless, this logic is still faulty. Corporations by their nature will be powerful and influential, they will seek to influence local authorities and have laws passed which benefit them and enable them to do business. This is part of the package of having a large enterprise that has more wealth and resources than any individual could possess. The government does not create this influence, the size of the corporation and its interests do. Even if government were removed they would find alternative means to gain influence and stifle competition. Even if government chose to back off from passing any economic legislation whatsoever corporations would still be influencing local authorities and using paid security to get their way. Such behaviors are inevitable to a degree. The worst abuses of this kind can be tampered by proper laws, but we shouldn’t expect corporations to become tame little sheep just because government refuses to listen to them or government goes away. In fact having a government which acts with no regard to their effect on existing firms is probably a bad thing as it could pass loss that ruin business opportunities. Shouldn’t a business have a right to speak up if a proposed law will hurt their enterprise? And of course if you had no government at all then there really is no way to stop a powerful corporation from doing what it wants. The point of this article is to illuminate what a corporation is and why they would form in a free market and to show that this is how capitalism is intended to work. The power and influence of the corporation are a part of that. And laissez faire and anarcho-capitalism would only increase the power and influence of corporations as government, law and lobbying are not where corporations get their power from. Unsurprisingly many people are still in denial about these basic facts.