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Thursday, June 2, 2011

Power and the Market

Talking to the left.

A running theme of these columns over the last 18 months has been how we libertarians  communicate, particularly with the contemporary left.  We often talk past each other because we work from different analytical frameworks; the questions and issues we think  important do not always overlap. Libertarians have a long list of things that the American left should take more seriously, but it’s also true that our friends on the left have a similar list of their own.

Probably near the top of the left’s list is what they see as a failure by libertarians to take seriously the pervasiveness of power relationships in human interaction. By power, I mean the ability of one person to direct the activities of another, whether explicitly or subtly. One way of framing this criticism is that we only see power as political and are either blind to or dismissive of it in other arenas, especially the market.  One of my prized possessions is an autographed copy of Murray Rothbard’s book Power and Market.  He inscribed it with a little note that captures this view concisely:  “For the market and against Power.”  That inscription, as well as the very title of his book, suggests that there is a dichotomy between markets and power, with the latter being absent from the former and present only in politics.

Power Omnipresent

This view seems to me to fly in the face of the reality of the market, where power is also omnipresent.  It also ignores a variety of other realms of human interaction where power is present, for example, within the family and romantic relationships.  In the market the relationship between employer and employee certainly involves the exercise of power.  Libertarians look at situations where employees are unhappy yet don’t leave jobs (or where spouses are abused yet don’t leave their relationships) and often too quickly say, “Well, that’s their voluntary choice,” ignoring that the dynamics of the workplace or the family may involve exercises of power that lie outside the realms of politics or physical violence.

Rather than ignore non-State forms of power, libertarians should readily acknowledge those realities but then use the items on our list of what the left overlooks to ask what the implications are.  First, the existence of “private” power does not necessarily make “public” power the appropriate solution.  Many on the left might argue that firms exercising power undercompensate their employees and therefore government should pass minimum-wage and/or mandatory-benefits laws.  But does this exercise of public power solve the problem?  The standard economic analysis of such laws would suggest not, once we consider the unintended consequences, such as more unemployment or reduced hours (as well as reductions in noncovered benefits already provided) among the very people the law is supposed to help.

Monopoly Power

By its very nature political power is centralized and monopolized, and this makes it difficult to fine-tune.  By contrast the power at play in markets is decentralized and competitive, although no less real.  It’s true that firms exercise real power over their employees, but it is no less true that employees have alternatives, however weak, not to mention that competition among employers checks the power of any individual firm.  The left has to explain why employees are ever bid away if private power cannot be checked by the profit-seeking of other firms. Such competitive checks on power are far weaker in the political realm, even in a federalist system.

Moreover, to theorize that public power is a check on private power rather than its handmaiden ignores centuries of evidence of the role governments have played in serving the interests of the economically powerful.  As I have argued before, this is a feature not a bug of government intervention.  When John Kenneth Galbraith argued in the 1950s that government regulation could serve as a “countervailing power” against large corporations, he was either naïve or ignorant of the corporatist origins of much regulation already in existence.

The ultimate countervailing power is not the State but the combination of market competition and social activism.  In a free society unions can play a countervailing role as well, though not in partnership with the State.  Offering alternatives, organizing collectively, and using boycotts, ostracism, and other forms of social pressure are all ways of limiting power exercised problematically in the market. And as Ludwig von Mises argued, in a market economy it is consumers who hold the real power because their preferences direct the behavior of resource owners.

No society can ever be free of power.  The question for the left should be the comparative one: Under what set of institutions will private power do the least damage?  Asking that question recognizes the reality of private power and provides libertarians a way to respond to the left without dismissing their legitimate concerns.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.