From: Bryan Caplan <[EMAIL PROTECTED]>

Kevin Carson's remarks on Kolko reminded me that I recently reread Kolko and had some comments to share.

Just for background: Kolko's *Triumph of Conservatism* was written largely as a left-wing attack on mainstream liberalism. Kolko's message was that most of the regulations and government interventions of the Progressive Era that supposedly gave capitalism a human face merely made matters even worse for the common man. In his related volumes *Railroads and Regulation*, for example, Kolko argued that railroad regulation was designed by railroads themselves to keep rates UP under the fig leaf of consumer protection.

Kolko was subsequently dismayed that free-market economists from Stigler to Rothbard eagerly accepted his thesis, arguing that Kolko had shown that laissez-faire would have been better than what emerged. And indeed that is largely what Kolko showed, though it scarcely occured to him that anyone would actually take the laissez-faire option seriously. Kolko's goal, rather, was to show the futility of trying to tame capitalism, in order to push mainstream liberals towards socialism.

Chomsky has a similar blind spot today. He points out, rightly, that what neoliberals call "free trade" is really a form of corporate mercantilism that is heavily dependant on state intervention on a global scale. But then he turns around and says that "we" have to strengthen the state and act through it to break up concentrations of private power. It seems to me a pretty common sense conclusion that, if these concentrations of private power depend on the state for their existence, the solution is to *reduce* the power of the state.

But enough background. On my re-read, I noticed the following.

1. Kolko frequently fails to distinguish between government policies that directly helped business, as opposed to policies that directly hurt business, but reduced the risk of socialist revolution.

The whole idea of a government-enforced cartel, for example, is to raise profits above the laissez-faire level. This is rather different from business consenting to moderate welfare state policies that reduce profits below the laissez-faire level, but arguably reduce the risk of total elimination of the profit system.

They are indeed two entirely different cases. The latter case, of welfare state concessions, is productively examined in Piven and Cloward's *Regulating the Poor*. To a certain extent, the welfare state is something forced on the ruling class from above, rather than a positive good for it. The main "good" it provides is a negative one, that of keeping homelessness and starvation to a low enough level to prevent political instability. The point they make is that, even when political pressure from below is the main cause of a policy initiative, it is the ruling class that actually carries it out. And the ruling class implements it in a way that, as much as possible, produces side benefits for itself and is as harmless as possible to its interests.

The welfare state provides some second-order benefits for the state capitalists: it provides a system of social control for the underclass, similar to that of police/prisons/parole officers. It provides some minimal floor for aggregate demand, to the extent that the corporate elite still take a Keynesian view of such things. And (at the risk of being dismissed as "rather silly"), it partially cartelizes the portion of the wage package that goes to providing against absolute destitution and removes it as an issue of competition.

But these negative and positive benefits fade into each other to the extent that the "New Class" of social engineers have been incorporated as junior members of the corporate ruling class. If you take a Millsian power elite view (or even Christopher Lasch's neo-populism) of the parallel significance of Taylorism in industry, "progressive" paternalism in the welfare bureaucracy, the rise of the public educationist complex, and the "professionalization" of all aspects of life, it seems that big business depends on this New Class of managers, engineers and "helping professionals" to manage and plan society. As Mills put it, the capitalist class was "reorganized along corporate lines." To a large extent, our society is run by interlocking directorates of state and corporate oligarchies, with the lines between them blurring.

For these junior members of the corporatist elite, especially the ones in the state bureaucracy who live off of tax revenue, the welfare state is purely a positive benefit.

Now this point is important because if you take the risk of socialist revolution seriously, then ANY welfare state measure that falls short of expropriation could be said to "help business." This in turn makes Kolko's thesis rather trivial - or, more precisely, an expression of his deluded over-estimate of the risk of socialist revolution in the U.S.

2. Kolko frequently fails to distinguish businesses' desire for *standardized* regulation as opposed to *more* regulation. Very often, if you read Kolko carefully, it becomes apparent that businesses lobbied the federal government as a reaction to the costly patchwork of state-level regulation. In other words, while the naive reading of Kolko makes business preferences look like this:

federal regulation > state regulation > laissez-faire

His accounts are often perfectly compatible with:

laissez-faire > federal regulation > state regulation

His accounts, to me, imply that the ideal hierarchy for corporate interests would be:

federal regulation > laissez-faire > state regulation

To the extent that the corporate economy is made up of firms operating on a continental scale, state regulations can only reduce rationality, and serve no useful purpose of cartelization (except perhaps when one state's standards have nationwide influence on an industry, like Pennsylvania's baked goods standards or California auto emissions). Laissez-faire, in most instances, would be preferable to a patchwork of uncoordinated state regulations. But Kolko makes a strong case that national regulation was adopted precisely to solve the problems of competition and shrinking market share under the *comparatively* laissez-faire system that prevailed before.

3. Kolko frequently fails to distinguish the "do something" motive from the cartelization motive. In many cases, he explains that legislators were under public pressure to "do something" about a perceived problem - say business abuses. Given these circumstances, businesses would naturally lobby to contain the damage - to push for cosmetic rather than substantive changes. Again, this does not mean that business "wanted" regulation. They could easily have had the preference ordering:

laissez-faire > cosmetic regulation > substantive regulation

But in several cases he demonstrates that the goo-goo desire to "do something" coincided with the big business desire to cartelize industry (notably the role of the meat packing industry pushing for a federal inspection regime in the export trade), and that the former made the latter an easier sell.

4. While Kolko discusses trends in concentration ratios and the like, rarely does he come close to replicating his results for railroads. There we have a clear mechanism for increasing railroad profits - rate regulation - along with a smoking gun - railroads lobbying for precisely that.

When Kolko moves to things like the FTC, however, he has nothing comparable. What did the FTC actually DO to reduce competition? Launch some politically-motivated antitrust cases? That is hardly a plausible *mechanism* for setting up a sustainable cartel.

As I recall Kolko's argument, it was the FTC's attempts to reduce "unfair competition" and make price wars less likely that made prices stickier and oligopoly market shares more stable.

5. Kolko fails to consider (excusable, perhaps, given that his work predates modern information economics) some plausible market failure rationales for how regulation would indirectly help the public BY directly helping business. He goes over meat regulation in detail, for example, and shows how the meat industry lobbied heavily for federal meat regulation. The main debate, says Kolko, was over who would foot the bill for meat inspections.

Now if this were a standard asymmetric information story, the meat inspections would raise demand for meat, initially benefiting the meat suppliers. But this would attract entry, and ultimately it would be consumers who would benefit. Tax versus business finance for inspectors would ultimately be an issue not of public-to-meat interest redistribution, but meat-eating public versus non-meating-eating public.

It was arguably not beneficial to consumers who would rather make their own cost-benefit decision about cheaper small packers serving the domestic market, with less stringent safety standards. At the risk of trivializing the matter, it's like going to a student barber because the low price is worth the risk of a cheap haircut. And by creating an indefectable, state-enforced inspection cartel, it ended the competitive advantage of smaller packers and helped to preserve the market shares of the export-oriented packers to whom the earlier inspection regime applied.

Now Kolko gives a number of facts that cut against this story. But the idea that consumers might indirectly benefit from measures that directly benefit business is not on his radar.

But because state coercion is involved, it is by definition not Pareto-optimal. It benefits those who want stringently inspected meat at the lowest possible price, at the expense of those who want even cheaper alternatives.

6. I still like Kolko's discussion of turn-of-the-century deconcencentration trends, but the rest of his work makes me wonder how trustworthy it is. And the book has other great stuff that I strongly suspect is accurate, like his revisionist account of the hysteria surrounding Upton Sinclair's *The Jungle*. But overall, it has all of the flaws you would expect in a work of economic history by an economically semi-literate socialist.

What fascinates me is that the state capitalist corporations and the state bureaucracy have a common interest in preserving the "received version" of history that these were "idealistic" measures forced on business against its will (i.e., what is still found in most publick skool American History texts: the Meat Inspection Act was passed in response to "The Jungle," TR was the "Great Trust-Buster," ad nauseam). It conceals, on the one hand, the extent to which the present system is a corporatist one in which all these "progressive" regulations actually increase the profits of big business. And more importantly, it indoctrinates the sheeple in viewing the government as their savior against the robber barons.

                        Prof. Bryan Caplan
       Department of Economics      George Mason University      [EMAIL PROTECTED]

              "The game of just supposing
               Is the sweetest game I know...

               And if the things we dream about
               Don't happen to be so,
               That's just an unimportant technicality."

Jerome Kern and Oscar Hammerstein, *Showboat*

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