Home > Uncategorized > Carrier capitalism (or rule and law based vs. deal based capitalism)

Carrier capitalism (or rule and law based vs. deal based capitalism)

from David Ruccio

President-elect Donald Trump’s decision to bribe Carrier into keeping 800 manufacturing jobs in Indiana, instead of moving them to one of its Mexican plants, has met with opposition from mainstream economists, both liberal and conservative.

Clearly, it’s not about the size of the deal (although $7 million in incentives to keep less than one thousand jobs is a big deal). Carrier corporate parent United Technologies is still planning to outsource production that will eliminate 1300 jobs in Indiana. And 900 jobs make up a minuscule portion (0.17 percent, to be exact) of the total number of manufacturing jobs in that Midwestern state.*

No, mainstream economists’ opposition rests on other grounds. Justin Wolfers, for example, uses the silly analogy of a parking garage to defend the process of “creative destruction” and the idea that a “fluid labor market. . .is the secret of American dynamism.” 

Think of the American economy as a 10-level parking structure or garage, where each car represents an active firm, and the seats in the car are the jobs available. A well-managed business like this is usually pretty full. But it’s also in a state of constant flux, with new cars entering as some people arrive, and previously parked cars leaving as others head home. Every hour, around a tenth of the cars leave the lot, just as a tenth of existing business establishments close each year and leave the labor market.

The deal at Carrier is akin to Mr. Trump’s intercepting a driver on his way to his car, and trying to persuade him to stay parked a little longer — perhaps by pointing to the enticing Christmas specials at the nearby stores.

Tyler Cowen, for his part, is worried that under a Trump administration, a kind of “crony capitalism”—where companies that are good to a presidency are rewarded—will prevail.

But it’s the response by Larry Summers that interests me the most, since he sees the “the negotiation with Carrier is a small thing that is actually a very big thing—a change very much for the worse with regards to the operating assumptions of American capitalism.”

Central to Summers’s argument is the distinction between two kinds of capitalism. One is “rule and law based,” which he believes is how American capitalism operates now.

Courts enforce contracts and property rights in ways that are largely independent of just who it is who is before them. Taxes are calculable on the basis of an arithmetic algorithm. Companies and governments buy from the cheapest bidder. Regulation follows previously promulgated rules. In the economic arena, the state’s monopoly on the use of force is used to enforce contract and property rights and to enforce previously promulgated laws.

The other is “deals based,” which is the world of New York City under Tammany Hall, of Suharto’s Indonesia, and of Putin’s Russia—and, it seems, under Trump.

Economic actors assume that they have to protect their property and do their own contract enforcement.  Tax collectors use discretion in assessing taxes.  Companies and governments buy from their friends rather than seek low cost bids.  Regulators abuse their power. The state’s monopoly on the use of force is used to enrich and satisfy the desires of those who control the apparatus of the state.

So, what’s the difference? Clearly, Summers is referring to variations on a theme: both are forms of capitalism.

As I see it, the difference between “rule and law based” capitalism and “deals based” capitalism comes down to whether the capitalist class as a whole or individual capitalists are the beneficiaries of state policies. In the former, the rules and laws, backed with the state’s monopoly on the use of force, are such that the capitalist class as a whole—although not necessarily any individual capitalist—has the right to appropriate the surplus and decide privately how to distribute it. They, as a class, are the winners (even when some of the individual capitalists lose out in competitive battles with other capitalists). In the latter, when deals are made with the government, once again backed by the state’s monopoly on the use of force, individual capitalists are picked out to be winners (or, if they’re on the wrong side of the deals, losers). But it’s still the case, even when ad hoc decisions are made, that the capitalist class as a whole is allowed to capture and distribute the surplus.**

In the end, maybe Justin Wolfers’s parking-garage analogy is the appropriate one. Under “rule and law based” capitalism, garage owners compete with one another under a general set of rules and regulations—and some will win while others lose. Under a “deals based” system, individual owners find themselves negotiating concessions with the government, which can decide who the individual winners and losers will be.

So, there are differences. But in both cases, the rest of us are forced to have the freedom to park our cars in garages that we neither own nor have any say in operating.

 

*As it turns out, Indiana is the state with the highest percentage of manufacturing jobs, at 16.8 percent. But the share of those jobs has fallen dramatically since 1990, when it was 24 percent.

in

**Another difference between the two systems is how the surplus is distributed and then spent. Under a “rule and law based” system, the state captures a portion of the surplus via taxes and then spends it to create the conditions under which the capitalism system as a whole is reproduced, while under a “deals based” system, individual capitalists can bribe the state with a portion of the surplus they appropriate from their workers and then receive concessions that pertain to them but not to other capitalists. In both cases, however, the surplus is used to protect capitalists’ property and enforce contracts—all the while backed by the state’s monopoly on the use of force.

  1. Buck
    December 8, 2016 at 5:37 pm

    The points are well taken except that judges, like other politicos, have not enforced contracts and laws since Reagan’s (Trump et al`s prototype) permitted judges to be shamelessly corrupt, while such “conservatives” sodomized us (and make that too a right) as they also rule that Attorneys Generals are also above the law e.g., immune from being treated like you are me)

  2. December 9, 2016 at 9:42 am

    As well as using the useful ‘deal based’ and ‘law based’ comparison, you could also use the objective v subjective labels? Although the actual achievement of perfect free trade has always been an aspiration rather than a reality, it must be admitted that the goal of perfect free trade, and free and open markets do provide a clear light house on the horizon with which to inform government’s behaviour. The problem with going down the industrial policy / protectionist route, is that there are many different arbitrary roads to take, in contrast to the clean, tidy and intellectually coherent banner of free trade. Put ten economists who support protectionism into a room, and likely they will have ten different approaches, and each will also have nine reasons why the alternatives of their nine compatriots are unwise.

    Any economics graduate could figure out a free traders stance towards a specific issue of potential job out-sourcing, but when and where to intervene takes a great deal of subjective discrimination and value judgements. With Trump’s intervention, Hayek’s spontainious order based on abstract or disinterested laws of economic conduct, has taken one step towards what he would have regarded as a socialist chaos, as he describes in his book, Law Legislation and Liberty:-

    “because we lack the knowledge of a common hierarchy of the importance of the particular ends of different individuals as because we lack the knowledge of particular facts, that the order of the Great Society must be brought about by the observance of abstract and end-independent rules.” p205

    “… socialism is based throughout on the atrocious idea that political power ought to determine the material position of the different individuals and groups … It was the great merit of the market order … that it deprived everyone of such power which can be used only in arbitrary fashion.” p260

    “The separation of powers has been supposed to mean that every coercive act of government required authorization by a universal rule of just conduct approved by a body not concerned with the particularly momentary ends of government.” p367

    “Legislation in the true sense ought always to be a commitment to act on stated principles rather than a decision how to act in a particular instance. It must, therefore, essentially aim at effects in the long run … helping unknown people for their equally unknown purposes.” p379

    Having noted all this, I still simpathize with the base protectionist impulses of working men and women who voted for Trump. This is the instinct which understands the basic supply and demand lessons regarding how much we can make each other pay for our own particular, sometimes modest, labours. Never mind the abstract laws of Hayek’s spontainious order, or the economist’s superstructure of consumption possibility curves, or the comparative advantage free trade ideal. What about the more instinctive, self preserving resistance to having your income competed downwards by the ‘efficiency’ of a globalized system that is not really reciprocating the dollar spending of American consumers on foreign goods in the proper way?

    Keynes could never be described as economically illiterate, and yet even he wavered in his support for free trade:-

    “Why, then, did I begin by saying that I sympathised with both sides? I will tell you. In spite of all that I have just said, there are some important respects in which those who are not afraid to use tariffs have a broader conception of the national economic life and truer feeling for the quality of it. Free traders, fortified into presumption by the essential truths-one might say truisms-of their cause, have greatly overvalued the social advantage of mere market cheapness, and have attributed excellences which do not exist to the mere operation of the methods of laissez-faire. The protectionist has often used bad economic arguments, but he has sometimes had a truer sense of the complicated balances and harmonies and qualities of a sound national economic life, and of the wisdom of not unduly sacrificing any part even to the whole.”

    J.M. Keynes, The Listener, 30 November 1932. Collected Writings vol XXI p204-210

  3. December 9, 2016 at 1:09 pm

    All this is disgusting, but does not address the reality that laws based on false principles guide action in counter-productive ways, and the need to enforce laws is evidence of their educational failure to be unambiguous and self-evidently necessary conventions, like telling the truth, which side of the road to drive on and who is to give way.

    The capitalist principle of motivating people to work by fear of deprivation of food led to enforcement of the 1830’s Poor Law, counter-productively continuing to deprive of food those who had become unable to work for lack of food. The spawning and non-judicial enforcement of capitalist Contract Law counter-productively holds to account those actually trying to do something rather than self-serving financiers able to cut off and steal the “fuel” they need to do it.

    May I offer a more inspiring alternative from a “thought for the day” I came across this morning. It opened with a quote from Pope Francis’s essay on ‘The Joy of Love’. “Beauty – that ‘great worth’ which is other than physical or psychological appeal – enables us to appreciate the sacredness of a person without feeling the need to possess it”. Noting that Wisdom is proved right by her actions, it went on with this very moving story.

    “In the film “Babette’s Feast”, Babette, the heroine, is warmly embraced for her generosity. She spent every penny of her lottery win on treating others to a sumptuous banquet. The film ends with Babette being warmly praised with the words: ‘Ah, how you will delight the angels’.

    “The film captures the idea of how beautiful it is to give generously, to enjoy and relish the enjoyment, happiness and pleasure of others. … Our faith invites us to be other-centred and not self-centred, and herein lies the beauty of love”.

    [From “Walk with Me”, Advent 2016, Alive Publishing [.co.uk], p.25.

  4. Craig
    December 10, 2016 at 5:43 pm

    Does not the unworkability of orthodoxies on both the left and right make an integrative third alternative philosophy and policies the wise direction for economic theory?

  5. December 11, 2016 at 5:25 am

    If markets, trade, and even global trade are chosen, many alternatives for them are possible. But first they must be chosen. Economists of various versions like to pretend that whatever theory of economic life they support is obvious, self-evident, and beyond discussion. If all economists assume this how are we ordinary mortals to choose which economist and which economic theory to follow? This choice can’t be based on the economics, since the conflicts there cannot be settled. The choice must therefore be made based on cultural and political criteria. We make the choice that we believe supports the cultural and political values we accept as correct. For democracies this must be economics that supports democratic decision making and institutions. The US and Europe are ostensively democratic societies. Yet both continue to implement economic arrangements that undermine their democracies. How long can they continue this before either the tensions this creates or the policies that implement it tear the societies apart?

  6. Craig
    December 12, 2016 at 4:47 am

    “How long can they continue this before either the tensions this creates or the policies that implement it tear the societies apart?”

    Short answer, not long, especially seeings how “the signs” are mostly bad and geo-political brinksmanship wed to continuing economic downturn rhymes so well with chaos and war.

    All the more reason to consult and integrate not only science but also Wisdom in our search for economic cures. “Upping our game” in such a manner could remedy and reverse these trends. But we have to be willing to look at and utilize both.

    • December 12, 2016 at 6:27 am

      Unfortunately, modern humans have shown themselves much better at war and killing than at wisdom. And science has manged to weaponize the entire world. But I still hope you are correct in the goal you set.

      • Craig
        December 12, 2016 at 6:54 pm

        I don’t disagree with that historically, but I think an awful lot of that was the result of economic scarcity, enforced financial austerity and a politics focused on power while lacking actual wisdom.

        Technology has capably eliminated the first for many and solving the problem of distribution via policies that broke up the second would enable modern economies to be stable and underdeveloped ones to create the abundance we have. As for politics, if we had a prep school for all political candidates that educated them about the policies that thoroughly rectified the financial austerity above for both the individual and enterprise and how history looks kindly upon leaders who integrate prosperity and peacefulness, perhaps we’d get better leaders….or at least ones that had the input of such wisdom and concern.

      • December 13, 2016 at 12:55 pm

        As I’ve posted elsewhere the first step in getting where you say humans need to go is punishment for group members who exploit and cheat the other members of the groups in which they are members. Nothing destroys group communications and cooperation like exploitation of some group members by other members. Like what’s been happening in the US for the last 50 years.

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