Shakeouts in the Music Industry

The history of music industry concentration and the chronology of events provide general evidence against technology always being the direct cause of shakeouts. At the beginning of the industry’s life (1890-1900), there were three major firms producing the vast majority of audio products: Victor, Columbia, and Edison. This included both the machines- cylinder and record players- and the actual cylinders and records. Patents on these machines were a major barrier to entry, but major innovations from 1900-1910 and the expiration of important patents in 1914 resulted in industry deconcentration. Early record production required live-action recording to produce each record, requiring either multiple record writers present during a performance or multiple performances. From 1914 to 1919, the number of firms manufacturing records and record players grew on average by 44 percent annually. Demand was stimulated as a result of a new variety and quantity of available products on the market, and the period was characterized by heavy innovation in the music, particularly by small producers. However, from 1919 to 1925, the number of producers declined at an average annual rate of 14.4 percent. Larger firms were able to capitalize on the small producers’ innovations, resulting in imitation as well as several horizontal mergers. The onset of the Great Depression and World War II finalized the reconcentration of the music industry. Prior to 1948, Columbia, Decca, RCA Victor, and Capitol were responsible for three-fourths of record sales in America.

Following the war, a new innovation reshaped the industry: magnetic tape recordings. Previously, records were produced in a very tedious and unforgiving fashion. Errors in the performance for a recording would require the artists to execute the piece perfectly – start to finish – in order for the recording to be successful, but magnetic tape

allowed a particular section with an error to be spliced out and replaced by a re-recorded part. Magnetic tape machines were also much cheaper. By reducing the amount of studio time required and also lowering the costs of starting up a recording business, magnetic tape technology was followed by an increase in the number of companies producing LP (long-play) records from eleven to two thousand between 1949 and 1954 (Gelatt 1954).

By 1956 independent firms held around 52 percent of the music recording industry’s total market share, increasing to the industry’s peak in 1962, at which time independent firms accounted for 75 percent. Afterward, major firms began to reacquire market share, primarily through horizontal mergers, and the number of firms in the industry began to shrink.

Why did music industry shakeouts happen?

This prompts us to seek an alternative explanation to technological changes for the causes of the most recent extended music industry shakeout (1962-). Several technological improvements turned out to be exogenous (allowing universal adaptation) rather than endogenous (proprietary and thus concentration-inducing). The nature of the technologies Alexander cites tended to be scale-reducing, thus reducing barriers to entry. Developments in musical technology over the past 50 years have been consistently scale-reducing, though the trend for a large portion of that period has been toward consolidation. Magnetic tape and compact disc players became commercial and low-cost home appliances, and their respective means of creation grew as common (tape recorders, CD-burners, etc.). Computer-based music recording and playback has become more widespread. Still, the number of firms has been decreasing. Currently, the music market is dominated by six major firms: Time/Warner, Sony/CBS, Thorn/EMI, Philips-Polygram/PMG, Bertelsmann Music Group/BMG, and Matsushita/MCA.

One important factor stands above all other explanations for this consolidation: distribution. While prior to 1962 there were several strong and independent music distributors who provided an alternative to the major firms’ distribution networks, major firms began making significant buyouts in the 60s onward, creating a dominant market tendency toward the horizontal integration of distribution. Many independent distributors went bankrupt, and this tendency grew even more exaggerated in the 1980s. The six major firms mentioned above presently constitute almost the entirety of the industry’s market share at the distributor level.

In light of this evidence, one revised hypothesis is that technology can play a role in market concentration in as much as it augments scale economies. Technological innovations such as widespread personal computers with sound processing and recording capabilities, as well as advanced software for manipulating recordings, have reduced the necessary scale to begin producing consumable music recordings to anyone with or without talent, with just a $300 personal computer, a $30 microphone, and some small degree of sound engineering skills. The internet has also drastically reduced the scale required for significant levels of distribution, with peer-to-peer sharing networks, internet-based record stores, and social networking pages like MySpace.com.

On the other side of the story, some non-technological things may account for firm “lock-in” or other phenomena that lead to high industry concentration. Distribution strategy is one possible example of this, but it is likely that the dominance of particular firms that allowed them to construct their distribution networks shares a cause with their distribution strategies. Music is a very unique kind of product. Each new “product” (a song or album) also happens to be distinctly associated with a set of individuals. The quality of the music itself is controlled from a non-technological (in the physical sense) set of innovations relating to meter, pitch, tone, content, or overall theme. Some major firms may have the musical brainpower to “get it”- a group of experts, who manage bands and affect the musical product, that ultimately represents a stock of knowledge the firm has about stimulating and satisfying demand for music. Furthermore, labels fortunate enough to enlist legendary bands, perhaps by only good fortune, gain a long-lasting advantage, both from their experiences with a popular band (more concerts, albums, events, merchandising, etc.) as well as from the profits, which attract more expertise, which attracts and creates better bands, etc. There appear to be many opportunities for self-reinforcement in the industry. Overall, the technology-based shakeout story lacks explanatory power in music.

Source:

Alexander, Peter. New Technology and Market Structure:

Evidence from the Music Recording Industry. Journal of Cultural Economics, Volume 18, 113-123, 1994.

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Using an optimal contracting model, Franco and Mitchell compare their model’s predictions when CNCs are allowed and when they are prohibited. They conclude some important things: the model explains the higher turnover in places where CNCs are prohibited; enforcement of CNCs in a region encourages greater firm numbers in early industry stages, especially where innovation is a key factor, thus explaining the early advantage of Route 128 which was eventually overcome by Silicon Valley; and we should expect to see in the data that concentrated industries seek CNC-enforcing areas, while competitive industries should be less likely to seek out such protection.

Their model, however, makes two key assumptions: first, that wages can’t be “backloaded”- in other words, employees can’t agree to be paid less than they would in their alternative option (to form a spin-out) for one period, and then get paid more to compensate in a later period; and second, that the level of the employee’s knowledge of the production process is known only by the employee. These may be generous assumptions that, when changed, could possibly alter Franco and Mitchell’s results drastically. One way to test their “backloading” assumption is by exploring the ways in which companies (especially in CNC-prohibiting regions) create economic incentives to depress labor mobility, and how often they do so. If wage backloading plays a significant role in those companies’ hiring practices, Franco and Mitchell’s model may be leaving out an essential explanatory variable. Their information asymmetry assumption also requires testing. On one hand, its importance can be explored by relaxing it in their model and testing its implications; on the other, instances in which employers actually have information about what their employees know about the production process should also be helpful.

Substitutes for Non-Compete Contracts

If non-compete contracts are illegal, one alternative means of restricting labor mobility is by “backloading” wages. In order for a firm to keep its employees from moving to a competing firm, the firm may decide to backload the wages, often in the form of pensions, options, health insurance, and other benefits that could only be captured if the employee stays with the firm over a certain time period. Franco and Mitchell (2005) assume backloading as impossible in their model. Rebitzer (2006) overlooks it.

A non-compete contract can initially be helpful in the early stages of an industry. As described by Rebitzer (2006), if employees were to “hop” around to other firms, the likelihood that knowledge acquired in one firm would be employed in another firm increases. These knowledge spillovers can hurt innovation by reducing the rewards to investing in human capital. On the other hand, abolishing non-compete contracts can be more helpful to local firms in the long run. If non-compete contracts are unenforceable, their elimination can lead to more turnover and more competitive entrepreneurs, assisting local firms in competing with out of state industries. Comparing Silicon Valley to Massachusetts’ Route 128, Franco and Mitchell (2005) found that Massachusetts’ Route 128 was more productive initially, but was eventually overtaken by Silicon Valley.

If non-compete contracts were unenforceable in Silicon Valley, it would be interesting to see if firms in Silicon Valley tended to backload wages more than Massachusetts’ Route 128, since the non-compete contracts in Massachusetts’ Route 128 were enforceable. If this is the case, the results by Franco and Mitchell may not have come about because of different non-compete regulations.

Burdett and Coles (2003) model a similar scenario of non-compete contracts, but they instead use wage-tenure contracts that give employees an incentive to remain in the firm and not move to a competing firm. In their story, each firm offers a wage-tenure contract that implies any employee’s wage smoothly increases with tenure. We can also compare the tenure policies of firm in Silicon Valley and Massachusetts’ Route 128, and see if the results of the model by Burdett and Coles (2003) are consistent with the data.

Wage Structuring

Wage-based policies can also serve as an alternative to non-compete contracts for reducing labor mobility-based knowledge spillovers. During a training period, for example, a worker gets paid less than his outside option (moving to other firms). However, depending on the importance of the information and the enforceability of the non-compete contracts, promising satisfactorily high wages to workers after their training period will stop them from changing employers. This kind of policy seems to successfully prevent spillovers across companies in the industry, but it does not affect industry clustering or profitability. It may even be the case that these policies can be more efficient than enforcing a legal framework for non-compete contracts. Fosturi and Ronde (2002), in their study “High-tech clusters, technology spillovers, and trade secret laws” theoretically demonstrate that even though information spillovers caused by labor mobility are prevented, industry clusters and profitability remain undisturbed.

One avenue of investigation to pursue would be to find a data set including wages, labor mobility, and the density of cluster in a region to test the assumptions given above. There is an industry cluster of biotech companies in San Diego, which is also supported by educational system in the region; several education institutions provide education from the undergraduate to doctorate level in biotechnology, providing a local labor pool. There are a large number of high quality workers who are educated and trained by the companies, though labor mobility among firms is high in this industry.

Fringe Benefits

Different legal frameworks for labor mobility-reducing contracts in different states prompts a search for other strategies that might be undertaken by firms to prevent labor-related information leakages to competing firms. Facing a lack of legal framework (like non-compete contracts) that can prevent workers from quitting and working in competitor companies overnight, firms need to utilize economic incentives to reduce information spillovers. Though the spillovers have a second level benefit through clustering, they also may have first level costs manifested by forgone opportunities for new innovations, for example. For the workers, one of the costs of labor mobility is an income loss due to foregone fringe benefits (Mitchell, 1983).

Controlling for other variables like unionization (Freeman, 1981), market concentration, regulations setting minimum prices and restricting entry, and profit regulations (Long and Link, 1983), we find that a substantial amount of variation in individual wage and fringe benefits is accounted for by industry differences. Dickens and Katz (1987) argue that high wage industries have lower quit rates, high labor productivity, more educated workers, longer work weeks, a higher ratio of non-wage (fringe benefits) to wage compensation, high unionization rates, bigger initial sizes and bigger average size of firms, higher concentration ratios, and more profits. However, what the studies above do not address is the effect of specific industry characteristics on the endogenous choice of fringe benefit costs by firms. We would expect the industries with fast innovative processes – without a legal framework that restricts labor mobility -would reflect higher levels of fringe benefit-related costs, and likely have better-defined promotion structures that discourage labor turnover.

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“Variety” in one form or another can be predictive of an individual’s choice to pursue self-employment, whether it is preference for variety, actual experience of variety, or a combination of both. Variety in experiences can manifest itself in different ways. Sources of knowledge about entrepreneurship can appear in family history, among friends, in education, in the media, etc. It can also appear, most significantly, in an individual’s employment history. However, variety of this kind as a predictor for choosing self-employment can lead to very confusing results if not integrated into the context in which it actually plays a causal role. Sometimes, taste for variety causes varied work experiences; other times, varied work experiences can cause taste for variety. In other cases, taste does not even enter the picture except in the obvious case of “taste for subsistence”: some people hold different jobs only by necessity.

In light of this, Van Praag and Van Ophem (1995) wisely draw a distinction between influences on self-employment based on willingness versus opportunity. Their model’s estimation suggests that many young Americans possess the willingness to switch for self-employment, but lack the opportunities (primarily capital) to switch. More generally, they find that entrepreneurial abilities that compensate for lack of capital are rare. While taste for variety can be represented by variety in prior work experience, this potentially confuses issues of willingness with issues of opportunity even before we confront the same problem with regard to entrepreneurial choice.

One way of sidestepping this confusion is by actually modeling individuals’ decision-making processes instead of externally tracking their data over time to discover predictors of their choices. Its parameters can be found by observing directly what an individual values, both by questioning and by measuring business and non-business variables. Opportunity-related variables (e.g., wealth, credit access) can be integrated later in order to answer the actual broader question of who becomes a functioning entrepreneur. First, however, variety in taste or experience among other things must be used to ascertain willingness (or even predict attempts) for self-employment.

Summary of Katz (1992) Psychosocial Cognitive Model

Focusing solely on the choice to become self-employed or not (a simpler explanatory objective), variety of at least some kind certainly makes a difference. Katz (1992) proposes a psychosocial cognitive model (PCM) of employment status choice. It utilizes individuals’ psychology (through values and decision-making processes) as well as personal history and social context as factors having an effect upon decision-making.

The individual’s decision process begins with some kind internal discovery or external change (a changed awareness or dissonance) interacting with that person’s values. “Push” or “pull” effects can effectively describe this process (as explained in Vesper (1990)). The values likely to trigger an employment decision making process include desires for autonomy, creativity, material gain and power, and social integration.

The decision process consists of considering employment alternatives. The main source of these opportunities is one’s memories, and the heuristic of availability is a statistical means of representing the likelihood of retrieving information about opportunities as a function of its presence in the individual’s memory. The information, in turn, is determined by past exposure to such information. Katz (1992) specifically uses family, education, peers, prior work, and cohorts (age, racial, gender, ethnic, and geographic) as sources of experience about employment alternatives.

Once a set of alternatives is developed, it is evaluated against the initial dissonance. If the set is satisfactory, the individual begins the process of selection. If it is unsatisfactory, the individual either searches for more possibilities from memory (repeating the availability cycle), or constructs new possibilities. The most likely form of construction is the generalization of past work experiences to new ones, such as a former computer repairman considering building and selling new computers out of his home. Another, less likely form of construction is the creation of novel alternatives that directly solve the dissonance that caused the initial search. For example, if a strong force that caused someone to be unemployed was inflexible work hours, an alternative containing a satisfactory work schedule will be included in the set of alternatives.

Finally, the development of the set of alternatives completes and the agent must choose a course of action. The representativeness heuristic, from Tversky and Kahneman (1974), underlies this process. It refers to the individual’s assessment of the likelihood that an alternative will lead to a preferred outcome (like financial success). While maximization of likelihood is generally preferred, qualitatively rational processes play a large role. Alternatives are chosen on the basis of factors such as how well they fit the agent’s values or how familiar they are. Following that initial decision, the implementation of the alternative is constrained by environmental factors which can affect whether action will be taken or not. This can be compensated for by a second round of PCM; while the first round explores what the individual wants to do, the second round explores how he wants to do it.

Katz (1981)

In order to attempt the model, Katz (1981) drew 17 variables from the Panel Study of Income Dynamics, some of which he utilized as proxies for general breadth of work experience- exposure to variety- and some which were proxies for more direct exposures to work experiences through the individual’s own work, through family, or through membership in groups with above-average tendencies toward self-employment. Incorporating variables such as these should lead to much more reliable results than using the traditional handful of experience surrogates.

The 17 variables are as follows:

1. Father’s Self-Employment

2. Father’s Education

3. Employment Status of Respondent’s First Job

4. Number of Different Jobs Held

5. Age is Young (16-30) or Old (55-98)

6. Gender is Male

7. Ethnicity in High Self-employment Incidence Group

8. Own Education Less Than High School

9. Exposure to Variety: Reads newspaper

10. Exposure to Variety: Watches Television

11. Exposure to Variety: Goes to Religious Services

12. Exposure to Variety: Goes to Social Clubs or Organizations

13. Exposure to Variety: Goes to Bars or Taverns

14. Exposure to Variety: Belongs to Labor Union

15. Exposure to Variety: Known by Name to Neighbors

16. Exposure to Variety: Relatives Within Walking Distance

17. Exposure to Variety: Farm/Small Town Childhood

Outcomes were categorized in 5 possibilities: changes from wage-or-salaried work to self-employment, from one wage-or-salaried job to another, from self-employment to wage-or-salaried work, and no-change in status for the wage-or-salaried or the self-employed. This variable set mostly focuses on a “first-round” mode of thinking about self-employment (“what would he do if he could?”). Nonetheless, broadly speaking, a PCM approach fundamentally copes better with the problems that arise from one’s willingness to become self-employed in conflict with his opportunity to do so. Instead of considering variables of willingness and opportunity separately and then combining them to form a model, the PCM could potentially assess the actual point at which these variables interact: within the cognitive processes of the individual.

This is reflected by the advantages to the model cited by Katz. A PCM approach strongly favors the incorporation of a vaster scope of qualitative data to accommodate consistent qualitative findings, such as the self-employment choices of children of self-employed parents. The model, by virtue of the fact that it avoids pure econometric analysis, also demonstrates robustness when provided with non-ideal data sets. Katz claims that after operationalizing about one-half of the Katz (1981) model, almost 42% of cases’ placements were predicted correctly (out of 5 choices, with which a random selection would yield 20% correct prediction). Ultimately, constructing a cognitive model that models decision-making can yield different and new insights compared to traditional, occupational tracking models.

Citations:

Jerome A. Katz. A psychosocial cognitive model of employment status choice. Entrepreneurship: Theory and Practice 17.n1 (Fall 1992): pp29(8).

C. Mirjam Van Praag, Hans Van Ophem (1995)
Determinants of Willingness and Opportunity to Start as an Entrepreneur
Kyklos 48 (4), 513–540.

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Lobbying can be generally defined as the expenditure of resources by a firm or group of firms in order to secure a favorable political or legal environment for their activities. Though lobbying actions are most frequently geared toward achieving preferable domestic policies, larger governments with regional or international influence can be petitioned for favorable foreign policies. Domestic interest groups attempt to gain, often indirectly, economic benefits through a government’s exclusive diplomatic channels. Governments often hold a great deal of information unknown to the private sector, as well as direct contacts with officials and lawmakers of foreign countries. As monopolists of force, states also reserve the threat of war as a means to their ends. Economic interest groups can, instead of expending resources on adjusting their business to market conditions, expend those resources on adjusting market conditions to their business (“rent-seeking”).

For markets, lobbying has profound implications. The law has nearly limitless potential to interfere in the economy. Where there is this capability, laws become a commodity to be bought and sold. A fundamental error to make is to think that politics are non-quantifiable and non-economic. To quite the contrary, political structures are simply markets in which the rules are different (albeit radically at times). “Political entrepreneurship” becomes as much a skill as innovation in one’s industry: if the principal goal is profit for a group of people, then a dollar earned productively or coercively is, other things equal, the same.

The United States is the prime example of a powerful nation whose foreign dealings and economic policies are highly responsive to special interests. Both the structures of the electoral system and the government’s coercive powers grant a significant level of policymaking access to private organizations. A thorough examination of the government’s scope of powers, the structure of policymaking institutions, and the long-term trend of increasing reported lobbying expenditure reveals considerable evidence that political proficiency is part of an essential set of skills for the modern U.S. multinational corporation.

A Model of Multinationals and Lobbying

The political sphere is even more immensely complicated in the absence of the premises upon which the free market functions. Political structures frequently alienate the agent from the results of his actions (or inaction) in some way. The chief structure that causes this alienation is bureaucracy, partly via “diffusion of responsibility” effect. While this phenomenon occurs to some degree in free markets with large firms,[2] it is less of a problem, because productive deficiencies are more quickly answered by declines in profits and labor market adjustments. The obstacle is most often described as the principal-agent problem, which is especially pronounced in government. Whereas in the private sector, the “principal” at hand is concerned with easily quantifiable profits, the objectives of government institutions are much more specific, varied, and difficult to measure. On one hand, firms are naturally controlled by productivity, and in turn, profits; on the other, governments are validated simply by force and by the cost inefficiency of rapid change (revolution). Though democracies require input from the entire population, their input is channeled through a central decision-making and enforcement process; this should not be mistaken for the kind of integration of dispersed information that markets have. The end-state of a market is the product of an aggregation of many individuals associating in ways that benefit them individually, each person possessing a small amount of resources (relative to the rest of the economy). Alternatively, the end-state of government is the product of a pre-established institutional structure (e.g., a constitution) determining how to allocate a large amount of resources.
That the agents involved in government seek the maximization of their individual utility should not be ignored. In fact, this is the core assumption that does not differ between private and public activity. The agent does not change; only his constraints do. Though this view may appear to some as cynical, the basic intuition behind it is that while the costs of some kinds of choices may differs, an agent’s preferences generally do not change upon attaining public office. As might be argued, a sense of duty or responsibility (conscience?) may develop, altering the agent’s utility function. Nevertheless, it is clearly too limited to overcome the bureaucratic risk-reward gap.

For purposes of simplicity, we will assume that firms as a whole attempt to maximize their profits, without the risk of individual actors in the firm placing their own individual benefit above the firm’s profit (e.g. no corrupt CEOs trying to swindle shareholders). The objective of this investigation is to examine the specific nature of the relationship between rational market actors and government institutions.
It was stated earlier that laws are a commodity to be bought and sold. Beyond mere metaphor, we can construct a model that recognizes that political institutions are entities that possess the ability to, ceteris paribus, exogenously impose any desired condition of operation on market processes. Because these institutions are operated by individuals who are factually no different than market actors, the result is that these individuals possess some degree of that exogenous power for use at their own discretion. They are liable for what they do with it, but not completely. It is this discrepancy that subjects policymaking to a certain level of autonomy, and thus subjects it to market forces. From these assumptions, we can model the lobby-subsidy process.

The interaction between firms and the government can be summarized by the following model, beginning with a firm’s basic profit function:

p_d = p_m + s – E_L                                                                                                    (1)

A domestic firm’s profit, p_d, is a linear function of the firm’s exogenous market profit (p_m), plus subsidies (s), minus lobbying expenditure (E_L). Prior to any government assistance, a firm makes a certain level of profit; they can then receive more profits via subsidy from the government, but must count their expenditure in attaining those subsidies against them. E_L is not only meant to contain formalized lobbying spending conducted through institutions established for that purpose, but any expenditure of resources on attempting to influence political outcomes (the primary means being appeals to officeholders’ individual interests). E_L includes election campaign contributions to candidates who promise to reflect their contributors’ interests and any promises of special employment or other benefits after a policymaker’s term in office. It also consists of the payment of lawyers to assist policymakers in drafting the language of policies and experts to assist in implementation.

Next, we must consider the interests of the policymaker, and his obligation to the public:

U_g = rE_L – f(C_p)^a                                                                                                    (2)

The government policymaker’s utility, U_g, is the difference between the benefits received from private interests and a penalty caused by institutional mechanisms for public accountability. The first component is the product of some proportion r times the firm’s lobbying expenditure E_L, representing the amount of E_L that government agents “capture” for their own gain. Lower values for r tend to indicate more reliable institutional structures separating private from public interests. If r had a value of one, lobbying expenditure would essentially be direct bribery in exchange for arbitrary decree. The more that a firm has to spend in figuring out how the law works, what kind of law would benefit them the most, and other institutional intricacies, the lower r is.

The second component constitutes the role of the public in holding policymakers accountable for their decisions. It is the product of some proportion f times the perceived cost (to the public) of a policy, raised to an exponent a. a can be taken to represent the level of public attentiveness and responsiveness to how their tax dollars are used, and it is assumed that a ≥ 1 (if it were otherwise, the public would penalize the government marginally less for each extra dollar it spends- an absurd outcome). f represents the institutional manifestation of the public’s attitude: the higher it is, the more sensitive policymaking must be to public opinion. We also constrain this parameter between 0 and 1, for practical purposes.

Thus far, we only defined public opinion as a function of the perceived cost of a subsidy, which is actually defined by the actual cost of the subsidy minus some error:

C_p = C_s – u_i                                                                                                                                                (3)

Moreover, the cost of a subsidy is the quotient of the subsidy’s value over some efficiency proportion F > 0:

s = F*Cs                                                                                                                (4)

Thus, substituting (4) into (3) and then into (2), we have

U_g = rE_L – f(S/F – u_i)^a                                                                                             (5)

F represents how cost-effectively the government can perform the policy at hand. u_i indicates the level of misinformation the public has about the cost of a subsidy.

Taking the first-order conditions of each equation (i.e. optimizing firm profits and government utility with respect to the choice variables, s and E_L), we attain an equilibrium level of s:

s = ((r*F/a*f)^1/(a-1) + ui)*F                                                                                      (6)

From this, general intuition can be drawn about how each parameter affects the equilibrium subsidy value- in more plain language, how institutional, economic, and political environments determine the incentive structure for policymakers’ behavior. In short, differentiating with respect to each parameter individually yields the following results: greater government efficiency increases subsidies (dF/ds > 0); structural corruption increases s (dr/ds > 0); misinformation increases s (du_i/ds > 0); Public responsiveness decreases s (da/ds < 0); and strong public institutions decrease s (df/ds < 0).

The model operates on a short-run, ad hoc basis; the equilibrium value reflects optimization from a single firm’s perspective at a particular point in time. Appropriately, the parameters differ depending on the specific firm’s (or industry’s) case, the institutional nature of the policy in question, the public attitude toward the symbolic issues, etc. For the most part, this is concordant with the reality of the assumed profit-maximizing firms: they are willing to gain at anyone else’s expense. Overall, the model given above is not intended to deal with quantitative specifics, but to create an overarching cost-benefit analysis of one method of altering a firm’s profits: exploiting politics. It is sufficiently abstract to accommodate any form of government which allows for some degree of private property, whether it is a dictatorship or a modern liberal democracy; the parameters are what change, but not the logic.

Symbolic vs. Instrumental Policy as tools for economic gain

With quantitative reasoning in mind, we can begin to examine the qualitative aspects of the lobby-subsidy process. The distinction between “symbolic” and “instrumental” policy, a concept outlined by Murray Edelman in The Symbolic Uses of Politics (1964), is critical to fully understanding how MNCs (or any special interests, for that matter) can successfully have their private interests supported by government policies, even when those policies are detrimental to the public as a whole. He discusses the reality of the gap between the symbols invoked when policy decisions are being made and the actual instrumental, material status of such policies (i.e. what kinds of resource transfers the policy entails). These symbols are aimed at triggering conditioned responses, and are meant to be a substitute for the actual things they represent. For example, “the elimination of poverty” is supposed to trigger a positive response in favor of a policy, but its implementation may in fact be a tax break for the wealthy.

In accordance with that idea, important lobbying strategy lies in promoting favorable ideas to support firm or industry-specific goals. The aim is to achieve ideological or empirical consensus in policymakers and in, more importantly, the public. While some expenditure for this objective is through private organizations, the end result when it is successful is a favorable alteration of the law.[3]

Besides the standard range of direct government benefits which multinational corporations seek for their domestic markets (direct subsidies, tax breaks, etc.), MNCs often pursue policies that positively affect their standing as international companies (or negatively affect their competitors’). This could mean, for example, arguing for a tariff that may not be necessarily to inhibit a rival’s trade, but to make its production inputs more expensive if it depends heavily on outsourced components. MNCs can lobby for direct negotiations or even the use of force between its home country and a potential host country in order to increase its stock of investment abroad. These are but two examples of the many ways in which MNCs can attain indirect subsidies, whose legislative elements frequently obscure their ultimate beneficiaries who, in public discussion, are supplanted by symbolic language.

U.S. MNC Lobbying in the 90s to the Present

American institutions have a long history of lobbying, beginning in essence with the first amendment of the Constitution: “[Congress shall make no law abridging] the right of the people peaceably to assemble, and to petition the government for a redress of grievances.” Increasing demand for lobbyists in the late 1980s led to a growth in popularity of the practice, and the “Washington Game” began to perpetuate itself. The high demand also changed the traditional viewpoint that it was inappropriate for former elected officials to become lobbyists. Since 1998, 43 percent of the 198 members of Congress who are no longer in any elected office have registered as lobbyists at least once.[4] The overall result of this evolution is the ever-increasing presence of private money circulating in public affairs. The bottom line is that to the American politician, money matters greatly. In the 2002 midterm elections, candidates who spent more money than their opponents won 95% of all contested House seats and 75% of all Senate seats.[5]

In context of the model provided, there are many examples of the significant influence of multinational corporations on economic policy. America, despite being considered the most laissez-faire major power, is a massive provider of corporate welfare. A symbolic and instrumental assessment of most recent U.S. policy relating to multinationals bears very strong explanatory power. Partisan politics serve as a major front for symbolic stratification of policy. Generally, at least some semblance of connection between the larger stated ideological issues and the actual policies must exist. Though members of both the Democrat and Republican parties regardless receive immense contributions from multinationals, the prime political actors on behalf of large MNCs usually consist of Republicans, likely due to their ideological platforms which usually involve deregulation, trade liberalization, belief in the strength of entrepreneurship, and so forth. These beliefs, ironically, are used as the symbols to mask the economic interventionism of subsidizing large MNCs.

Given the general claims stated up to this point, the next inquiry must be into their actual historical relevance: what contemporary examples are there of MNCs demonstrating a palpable influence on U.S. policy? The difficulty of finding information on the topic is testament to the transparency that MNCs often enjoy in their lobbying activities, at least in regards to the general public. To discover the appropriate connections, one must integrate diffuse pieces of information from diverse sources in order to draw the connection between a particular firm’s action and how a government policy was determined. Furthermore, lobbying disclosure law is only relatively new, with the Lobbying Disclosure Act having been only passed in 1995. Besides the fact that lobbying activities falling under the guidelines of the law were sometimes underreported (especially during the first few years), there are still many methods of lobbying that have no legal disclosure requirements. These include “revolving door” offers, personal favors, insider information, and other transactions that frequently have no official paper trail. Discovering these obscure relationships beyond mere speculation is a matter of intensive research, including investigative reporting across many sources that only provide small amounts of information individually. For now, we will briefly explore two major and well-known contemporary examples of multinational industries that engage in and profit from abundant political activity: pharmaceuticals and petroleum.

The pharmaceuticals and health products industry constituted the largest portion of reported political contributions in 1998-2006, spending over $1 million. Their critical policy objectives focus on international recognition of “intellectual property” rights to their drugs, in order to undermine cheaper competitive drugs which cut into their market shares, and the elimination of price controls caused by growing desires for healthcare guarantees.[6]

The pharmaceutical industry deals primarily with products that prolong or improve the bodily well-being of humans. In most societies, the act of “saving lives” is a moral priority, or at least a noble deed. It is no surprise, then, that all related policies are couched in strongly symbolic terms. Their public claims are broadly reflected by statements such as “without [assistance on this issue] from government, expensive research on important drugs will stop and many life-saving implements will not be available.”

The industry’s influence on international trade is very palpable and significant. Its trade association, Pharmaceutical Research and Manufacturers of America (PhRMA) includes Pfizer Inc., GlaxoSmithKline Plc, Merck & Co Inc., primarily functioning as a means to increase transparency of individual companies’ political influence. PhRMA has filed 59 lobbying reports concerning the Office of the U.S. Trade Representative, more than any other organization historically. Drafts of the Dominican Republic-Central American Free Trade Agreement echo the pharmaceutical industry’s sentiments about price controls and intellectual property. Under its provisions, member nations will be required to comply with deregulated pricing and international patent laws. An examination of the voting record for implementing DR-CAFTA demonstrates almost unanimous votes along party lines: only 15 Democrats voted for the measure, and only 27 Republicans voted against it.[7] Furthermore, in light of CAFTA in 2005, Guatemala was pressured to repeal a law that would allow for increased marketing of generic drugs as long as the drugs were demonstrated to behave like approved drugs. The U.S. ambassador to Guatemala issued presented an ultimatum: Guatemala had to change its law to provide the clinical study data exclusivity mandated by CAFTA, or the U.S. Congress would not allow them membership.[8]

The oil industry, especially in extraction and transportation, is the beneficiary of a large amount of both direct and indirect subsidies. Two of the most significant (relating to their international position) are in the use of government resources in protecting their assets abroad as well as expanding their potential asset base, and in their lack of responsibility for environmental externalities caused by the consumption of fossil fuels.

The physical security of oil drills, pipelines, and shipping lanes constitutes billions of dollars of U.S. government services. Friendly diplomatic relations must be maintained with major exporter countries, especially those with U.S.-owned holdings. Likewise, military force must be readily available to combat any attempt to seize or otherwise disrupt oil supplies by foreign aggressors. Besides maintaining existing American assets and relationships, the government has also engaged in policies in seeking out new sources of oil. One need only imagine a world that did not need petroleum, and aptly ask: “would our foreign policy be the same if that were the case?” It is misleading, of course, to characterize the government’s heavy interest in maintaining and expanding oil supplies as only a resource transfer to large oil companies, as much income in America is authentically dependent on the energy generated by oil. Nonetheless, it is still a subsidy that discourages substitutes and conservation.

It is no surprise that Republicans advocate the very symbolic policy goal of an aggressive outward foreign policy. According to the Center for Reponsive Politics, in the 2006 election cycle, Republicans received 84% of all campaign contributions from the oil industry. While oil interests may not be the sole explanation of their foreign policy goals, they stand as part of a wider variety of interests that share common goals, such as defense contractors. A glimpse at the news today reveals that the price of oil per gallon to the customer is as much a leading economic statistic as the stock indexes. The “price at the pump” has become a highly symbolic issue, and many Americans often complain that gas prices have been allowed to become too high and that something ought to be done about it. To some, this means moving to alternative fuel sources. To oil companies, it is an opportunity to continue arguing for the necessity of oil on the basis of economic growth, appealing to the average American’s lifestyle.

The issue of global climate change has particularly in the last decade led to political gamesmanship from major corporate interests in the oil industry. The Kyoto protocols, negotiated and signed by the Clinton administration in 1997, were drafted with the objective of “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”[9] This would entail the reduction of emissions, either via increased automobile efficiency among other conservation measures, or even possibly the development of permanent alternative fuel sources- a clear threat to the oil industry’s many sunken capital costs. Exxon-Mobil, the largest oil company in the world and contributor of the greatest amount of U.S. lobbying dollars in its industry, has undertaken a strong anti-global-warming campaign, funding private think-tanks to promote uncertainty over global warming and the economic danger of environmental regulations. Not surprisingly, their business model is suited primarily for research and development in oil extraction and refinement, and they hold several oil assets abroad, including major pipelines in Siberia and Africa.

Oil companies like Exxon-Mobil had quickly realized that they needed to win the war against the Kyoto protocols and all other climate control policies, and doing so would require the scientific agreement of the public, and in turn Congress. In 1998, the New York Times revealed a leaked American Petroleum Institute (an organization whose membership includes Exxon-Mobil) memo aimed at addressing the ubiquitous presence of global climate concerns. Its proposed organization, the Global Climate Science Data Center, would serve several useful functions, among them, “identifying and establishing cooperative relationships with all major scientists whose research in this field supports our position,” and “developing opportunities to maximize the impact of scientific views consistent with ours with Congress, the media and other key audiences.” It is quite clear that no matter where the evidence lies for global warming phenomena, money is pushed into politics in a manner concurrent with partisanship over science. [10]

In Opensecrets.org’s special election report, “President Bush’s First 100 Days: A Look at How the Special Interests Have Fared,” the section subtitled “Energy” begins bluntly: “If there were any doubt that President Bush and Vice President Cheney, two former oil executives, would be sympathetic to the interests of energy companies, it has been put to rest in the first 100 days of the new administration.”[11] Evidence of a “revolving door”-style administration is abundant with respect to the petroleum industry. In 2001, Exxon-Mobil lobbyist Randy Randol sent a memo to the White House requesting that Intergovernmental Panel on Climate Change (IPCC) chairman Robert Watson resign. Though he did not resign, his reelection was blocked one year later.[12] In 2003, the Bush administration officially denounced the Kyoto protocols. Presently, the administration shows few signs of substantively addressing the global warming issue, and the “lame-duck” period will likely prolong that trend until 2009.

Conclusions

The omnipresence of private interests bearing significant influence on governmental policy is not unknown or surprising to most people. However, an understanding of the process of how these interests come to affect government policies is important for the MNC strategy theorist, for the foundations that underlie it must be considered as new developments in globalization world governance begin to surface. Greater empirical study of the effects of political dollars on profits can yield great insight into the causes MNC decision-making, along with possible reforms to counteract the exploitation of political systems for subsidies, but it is ultimately limited by the obscure nature of the interpersonal dealings and complexity of publicized procedures that constitute the lobbying-subsidy process. More exploration of the broad spectrum of powers such as multilateral institutions that can be tapped for MNC benefit can also explain how government intervention is still not out of the question in a rapidly globalizing economy.

[1] Lobbying Database, Center for Responsive Politics. http://www.opensecrets.org/lobbyists/index.asp (Accessed April 3, 2007)

[2] These large firms, because of their size, require bureaucracy-like institutions in order to effectively manage their vast resources.

[3] This is a quasi-political function of corporations that is captured exogenously in u_i in order to keep the lobbying-subsidy model simple.

[4] “Lobbying in the United States.” Wikipedia. http://en.wikipedia.org/wiki/Lobbying_in_the_United_States

[5] Compiled from Opensecrets.org.

[6] “Pharmaceutical Industry Spent $800M on Lobbying Over 7 Years, Report States.” Medical News Today. http://www.medicalnewstoday.com/medicalnews.php?newsid=27125

[7] “The U.S. Congress Votes Database.” The Washington Post. http://projects.washingtonpost.com/congress/109/house/1/votes/443/

[8] “CAFTA, Data Protection and Generic Drugs.” Embassy of the United States: Guatemala. http://guatemala.usembassy.gov/factsheetcaftagenerics.html

[9] The United Nations Framework Convention on Climate Change. http://unfccc.int/essential_background/convention/background/items/1353.php.

[10] Global Climate Science Communications: Action Plan. The American Petroleum Institute. http://www.euronet.nl/users/e_wesker/ew@shell/API-prop.html

[11]“President Bush’s First 100 Days: A Look at How the Special Interests Have Fared,” Center for Responsive Politics. http://www.opensecrets.org/bush/100days/energy.asp

[12] Mooney, Chris. “Some Like it Hot.” Mother Jones. http://www.motherjones.com/news/feature/2005/05/some_like_it_hot.html

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The general problem with these plans is that they lack generality over time and space. They fail the test of universality. The following will be my random walk through some of the problems with rationalist institutional construction and the subsequent problems of central planning.

Social planning is vulnerable to real-world changes

Most people would recognize that a particular building design or architecture can become obsolete. Many would laugh if there were an actual plan to actually construct Campanella’s City of the Sun or Fourier’s phalanxes in the present day. Their reasoning would be obvious: those things were designed in an entirely different time, under different circumstances. This is not to say that those authors and many like them put forth their ideas as timeless and never requiring change (some occasionally have had the delusion of technological growth simply stopping at one point), but a large degree of universality is frequently attached to more abstract kinds of social planning.

Some examples of central design are much more concrete than others, but central planning when it involves a particular kind of physical engineering is not the only instance in which central design encounters severe problems. It can also include institutional design. For a long time, it was thought to be sound business strategy to always have a middle-man for many kinds of transactions. With changes in technology, the middle-man has frequently been cut out, and with good reason: he’s no longer needed. Yet what would happen if, in my ideal construction of a society, there were always a middle man between wholesale and retail? What if I claimed that this middle man led to the greatest well-being of my society’s members? Economics would most certainly stand against me.

Institutions are not universal

Despite that, all kinds of social manifestos, utopias, and even national constitutions establish permanent institutions as a feature of the society. It can be a ruling council of Thirteen, a Guardian class, or a president, a 480-member congress, and a 11-member judiciary. They make the mistake of integrating information available at the current time and creating a set of concrete institutions that are to be held as universal, but are not in fact universal. This is symptomatic of a general problem with leftist thought, which is that it is often too concrete-bound in its approach to society. Those contingent concretes – such as the current distribution of income and power in society – are then used as premises from which “universal principles” are derived, like: there’s always the class of the rich and the class of the poor, and the former always oppress the latter. The problem is that those supposedly universal principles only apply in narrowly contingent cases, which makes them not universal (not even considering whether the derivation of those principles is valid). They ignore changing circumstances and technology (never mind all the other fallacies, like the total fabrication of principles of justice, ignorance of actual factors that cause poverty, etc.)

The general empirical principle underlying this is that no mind or group of minds can ever gather, process, and coordinate all of the information necessary to perfectly govern complex human conduct. Even without any normative principles relating to individual autonomy, the idea of governance – especially economic governance – by few over the many is riddled with problems, in theory and as it has been demonstrated in practice. Every economic agent has a delicately unique and complex set of circumstances and preferences, and has direct access to his own set. Supposing that someone trying to make economic decisions for this person was acting totally altruistically (another very generous premise, again as demonstrated in practice), he would require a means of translating that agent’s changing circumstances and preferences (closely related to subjective experiences of pain, pleasure, etc.) into usable information which he then must process to prescribe a course of action which must be then executed correctly. Multiply this process over thousands or millions of people, and there is quite a huge problem. It is wishful thinking already that one person can make decisions for another effectively (people already have enough problems making decisions for themselves), so it must be even more wishful to think that some people can do it for many others, even suspending for a moment the selfish interests of those decision makers.

Only the free market (which is run by, precisely, nobody) is capable of coordinating the largely diffuse information spread among economic agents into forming an optimum output. This is not just an optimum regarding maximal manufacturing output for the lowest possible cost, a common straw man constructed against the free market to paint it as a cutthroat institution of total efficiency. That notion is just a Platonic hangover – as if goods are produced for the goods’ sake – which ignores why those goods are created in the first place: to enhance an individual’s well-being. The free market forms an optimum output with respect to the amount of resources available, and, more importantly, to the totality of the individual preferences of all market participants.

Weaknesses in central planning

Very closely related to the information problem of central planning is pricing or, more broadly, valuation of goods, services, or virtually everything whose control and consumption can be transferred from one individual to another. Valuation by demand is self-defining: what someone is willing to pay for something is what it’s worth. No Platonism necessary, no intrinsicism, just pure empirical fact. In a centrally planned system that prohibits free association, value must be decided; otherwise, there is no meaningful way of allocating produced goods among the members of society. Again, suspending the selfish interests of the appraisers, this leads to bizarre information problems and to the humorous possibility of the “value” contributed by producers exceeding the amount of goods and services available in an economy, resulting in people deserving more than is possible to provide.

Another problem with central planning is, in brief, the actual presence of human beings. Markets can’t be avoided; the free market is all about incentives. Proof in practice of markets is the responsiveness to incentives embedded in human nature, no matter what system prevails. Black markets develop in response to government prohibitions; defying the law becomes a business, where risks are taken but large profits are reaped. In totalitarian systems (especially those with distributive wealth patterns, like in communism) individuals use their positions as or connections with bureaucrats and politicians in order to gain a bigger share of the pie. Even in our purportedly “free” economy in which the government intervenes to harness the “dangers” of the free market, interest groups spend billions of dollars yearly lobbying federal, state, and local governments getting laws passed in their favor to the detriment of others and electing politicians and bureaucrats who use the force of the law to increase business profits.

(Incidentally, the few errant cases in which people’s preferences are static and minimized do not undermine this universality of the human condition, for the reason that incentives can be structured to shun accumulation of material possessions or other conventional measures of well-being. Some tribes have a social value of personal prestige over wealth, and thus individual members will often spend all of their wealth on extravagant feasts for the tribe or on constructing large memorial edifices.)

Up to this point I’ve freely switched back and forth between central institutional design and central planning. Though there is a distinction between the two, they ultimately suffer from the same problems. First, even in a static environment, central design and planning simply lack the coordination of information necessary to achieve anything close to efficiency. Gathering the information is either next to impossible or is so costly to achieve that it defeats the purpose of establishing any institutions in the first place. Then, not only must the institution measure up to the circumstances of the time, it must be resilient and adaptable to the rapidly changing and non-ergodic world. The environment changes. Technology changes. People change. If the institution itself entails an active form of intervention (such as value arbitration, as in Marxism), the central planners constantly face the problem of incomplete and changing information.

Any societal plans that establish hard-and-fixed institutions and that rely on constant governance are prone to disaster, especially when abuse of power is considered. Up to this point, I’ve neglected to address that fact, which is the most important of all: much of the preceding discussion generously takes for granted that those involved in the central planning have no interest but doing their job the best they can. For the most part, that means that I’ve ignored an even more fundamental flaw in central planning. Yet even with that, it still had problems, didn’t it?

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Let’s take a look at some of the philosophy of anti-laissez-faire, particularly in its heyday: just before the first World War. There is little doubt the explosive growth of America’s economy was the result of the great human effort, the application of knowledge to production to create technology and capital, and the vast land and natural resources at its disposal. The framework of classical liberal (in full form, laissez-faire) economics pioneered by Great Britain gave great incentive for this process. A century of liberalism arose from thousands of years before of dysfunctional human civilization, growing the population and standard of living of human beings far larger than ever before in any century.

However, following the Civil War and the Second Industrial Revolution, class divisions had grown and fresh voices bemoaned the supposedly unjust distribution of wealth in society, calling into question the validity of the free market. Though lacking true ideological conformity, changes in attitude toward laissez-faire capitalism[1] since the Founding have been generally defined by any or all of three major shifts: most importantly, the replacement of liberal political rights with economic entitlements; closely connected, a new emphasis on collective instead of individual good; and in effect, the belief in the use of government as a valuable tool for bettering those collectives.

Of course, some important qualifications must be made. Firstly, not all objections made to the state of the nation under capitalism in the late 19^th– and early 20^th– centuries were necessarily at odds with traditional liberal principles. Truly consistent advocates of laissez-faire capitalism such as William Graham Sumner believed that government obstruction of trade unions and other forms of collective bargaining[2], for example, interfered with the individual’s right to freedom of association and self-determination. Broadly speaking, the political environment that permitted wealth to buy power in government was an essential threat to traditional liberty. Furthermore, it would be disingenuous to attempt to collectivize the entire spectrum of objections to liberal society, as they can be vastly different in their moral values, justifications for their principles, and the nature and practical execution of their policies.[3] Overall, the following breakdown is only a brief approximation of the characteristics of those opposed to laissez-faire economics, with a select few of several possible examples.

The Rise of “Economic Freedom” As a Standard of Living

The issues of most profound significance to any attitude toward economic and legal systems are the moral concepts that underlie them. Almost universally, opponents of capitalism believed that wrong-doing necessarily occurred from its implementation, whether in its means or in its ends. Previously, most of an individual’s rights in America were defined by a Lockean theory of natural law. Freedom of contract (and a right to a fulfillment of those contracts) permitted one the ability to freely associate with others economically. However, great disparities in wealth concentration led critics of capitalism to denounce the status quo, which was allegedly caused by the consistent legal enactment of these principles. Factions such as the Populist movement, the Progressive movement, and the Socialist Party of America formed in the antebellum period as a response.[4] The introduction of a new kind of right pervaded these new alternatives to laissez-faire capitalism: the economic freedom.

Karl Marx’s famous maxim, “from each according to his ability, and to each according to his need,” was one widely accepted economic substitute for property rights. Looking Backward (1888), a novel by Edward Bellamy, details a futuristic society that has supplanted competition with economic rights and duties in line with Marx’s axiom. “The reward of any service depended not upon its difficulty, danger or hardship, for throughout the world it seems that the most perilous, severe, and repulsive labor was done by the worst paid classes…,” states Dr. Leete, a knowledgeable member of the society.[5] Indeed, this was not the case in 1887; the natural system of economic rewards resulting from liberal rights is, first and foremost, based on the mutual exchange of desired values, i.e. supply and demand. “Wage slavery” became a popular phrase to describe status of the common laborer. In The Living Wage (1906), John A. Ryan argues that the “American standard of living” is a “natural and absolute right” of citizenship. Though he argued it as a dictum of Christian values, many other leftists embraced a similar belief, and an ends-oriented theory of economic freedom gained popularity. No longer would individual autonomy provided by rights determine one’s economic freedom, but the level of wages would.[6]

Collectivism vs. Individualism

Logically entailed by the change in moral principles was an insistence that the good of the collective trumps the good of the individual. Since the notion of the fairness of market-defined wages was fully rejected, the market was replaced by newly-found social and moral considerations. Henry Demarest Lloyd, one of the foremost antagonists of Social Darwinism, placed great emphasis on collective governance and production. “Our liberties and our wealth are from the people and by the people,” he contends, “and both must be for the people.” His use of “the people” is not merely political euphemism, but imperative: “wealth, like government, is the product of the co-operation of all, and, like government, must be the property of all its creators.”[7]

Historically, a principal element of collectivization derived from stressing the importance of labor, in contrast to the capital-focused Industrial Revolutions of the 1800s. In 1914, Congress announced via the Clayton Act, “The labor of a human being is not a commodity.”[8] There is no better example of American labor-class activism than the writings of Socialist Party figurehead Eugene V. Debs. In Revolutionary Unionism (1905), Debs argues for the unity of the working class and, in Marxist form, condemns the purported separation of the worker from the rightful fruits of his labor. He repudiates the validity and effectiveness of craft unions- usually selective organizations of skilled workers- underscoring that “infinitely greater than [their] loyalty to their craft is their loyalty to the working class as a whole.”[9] He fiercely criticizes the structure that denies the struggling laborer his desires, but fervently protects “the product of [the worker’s] labor, the property of the capitalist.” Then, when the dissatisfied become agitated and unrest begins, the government arrives to silence the menace: “If you… have made more steel than your master can sell, and you are locked out and get hungry, and the soldiers are called out, it is to protect the steel and shoot you who made the steel…”[10] Debs’ arguments reflected common sentiments of outrage toward a society in which a vast majority of people, though they were a necessary part of production, toiled heavily and possessed little while a tiny group reaped gigantic rewards.

A different form of collectivism, nationalism- in the spirit of the times- also was a popular source of ideological opposition to the free market. Similar opinions had already a large presence during the Founding in the form of the Federalist Party and Alexander Hamilton, who argued for state intervention as a means of furthering the nation’s economic goals. Bellamy’s Looking Backward, which cued a short-lived but large nationalist movement, extolled the replacement of self-interest with a higher cause: “Now that industry of whatever sort is no longer self service, but service of the nation, patriotism, passion for humanity, impel the worker as in your day they did the soldier,” says Dr. Leete. Another thinker, Herbert Croly, believed nationalism belonged hand-in-hand with democracy, stating “the first duty of a good democrat would be that of rendering to his country loyal patriotic service.”

The Role of the State in the Capitalist Economy

Government would be the primary tool in executing these policies, with force as the only way to guarantee Americans their social and economic rights. As German sociologist Max Weber explained, “The rise of modern freedom presupposed unique constellations which will never repeat themselves.” These “unique constellations” likely refer to the vast expanses of land and resources in North America, among other contingent facts, which gave rise to the harmony provided by decentralization. Otherwise, freedom must be centrally planned to be had beyond its occurrence through plain luck. Bellamy comments that Americans in the nineteenth century possessed a “galling personal dependence upon others as to the very means of life.”[11] The founder of the American Economic Association, leader of an organization created to battle laissez-faire economics, wrote “we regard the state as an educational and ethical agency whose positive assistance is one of the indispensable conditions of human progress.”[12]

Woodrow Wilson, in fulfillment of many of Herbert Croly’s ideas, advocated a “New Freedom.” In The Meaning of Democracy (1912), he claims that while laissez-faire Jeffersonian ideals furnished “a government of free citizens and of equal opportunity,” the contemporary physical characteristics of the nation were suited to it; families each lived in separate households, employers were closer to their employees, and so forth (arguments very much similar to Weber’s “unique constellations”). Using Glasgow as an example, Wilson draws a metaphorical parallel between the Scottish city’s common hallways in residential buildings being defined as public streets and the “corridors” of large corporations being regulated as part of the public domain. In this, he claims he is fighting against “monopolistic control,” and in turn “fighting for the liberty of every man in America, and fighting for the liberty of American industry.” [13]  Not coincidentally, the Wilson administration heralded the introduction of the discretionary federal income tax through the Sixteenth Amendment in 1913.

Is true capitalism dead?

Clearly, attitudes toward laissez-faire capitalism have turned significantly against it since the Founding. This is not to suggest that there was unanimity over the issue during America’s formative years, but major policy battles accompanied by successful movements have led to aggregate changes in economic viewpoints. The prominent influences of the postbellum period, such as the Progressives, have nearly eradicated belief in the functionality and morality of absolute laissez-faire­ governance. Likewise, the public institutions established in the wake of those movements have furthermore ingrained the permanent, expanded role of government in the national consciousness (euphemistically speaking). Even “right-wing” politicians who profess the values of capitalism take their cues from business interests in exchange for financial and political support. Few candidates can plausibly survive electorally on a genuine non-interventionist policy platform. For America, the unabridged free market is dead.

[1] To clarify, any mention of “capitalism” alone still is referring to unlimited, absolute laissez-faire capitalism with the proper host of necessary political rights. Likewise, “liberal” refers to the host of values associated with it.

[2] This is, obviously, supposing that these trade unions are behaving by legitimate and economic means. In the “Forgotten Man,” Sumner attacks unions which restrict the free flow of labor, by limiting the pool of tradesmen in order to artificially raise wages.

[3] Some thinkers were nationalistic, like Bellamy; others were religious, like Ryan; and so forth.

[4] For space considerations, this analysis will not go past the Wilson administration.

[5] Edward Bellamy. “Looking Backwards.” In American Political Thought, ed. Kenneth Dolbeare and Michael S. Cummings, 293 (Washington, D.C.: CQ Press, 2004).

[6] Eric Foner, The Story of American Freedom, 144 (New York: W.W. Norton & Company, Inc., 2004.)

[7] Henry Demarest Lloyd. “Revolution: The Evolution of Socialism.” In APT, 304-305.

[8] Foner, 144.

[9] Debs, “Revolutionary Unionism.” In APT, 359.

[10] Eugene V. Debs, “Revolutionary Unionism.” In APT, 355.

[11] Foner, 129.

[12] Foner, 130.

[13] Wilson, Woodrow. “The Meaning of Democracy.” In APT, 393-395.

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When globalization is looked at as a force that creates a tide of incentives against the artificial levies of national borders, it indeed becomes very much like gravity. Trade, capital flows, and most notably labor flows constantly shift to meet new opportunities and press against old-world barriers. Goods are smuggled to avoid taxes, quotas, or prohibition; money is cleverly managed and maneuvered to also avoid taxes, as well as investment restrictions; millions of illegal immigrants pour across borders each year, eluding patrols and immigration bureaucrats, to work for what seem like pittances. The fact of the matter is that the gains to be realized from international trade, investment, and migration are so great that people pay the costs of overcoming massive edifices of coercive economic protection (on both sides of a border).

What is it about this strange phenomenon of international economics that is so great? It is nothing special or strange at all. It’s just regular economics. Globalization is not a special kind of economic, political, or social system (unless what is meant by the term is one global government); it is, ultimately, the economic recognition of the essential similarity of human beings. Concepts such as nation, race, and religion have long dominated geographically localized societies’ dealings with others. One set of rules applied to those in the group, and another set applied to those outside. The modern manifestation of government has simply formalized and enforced those rules: only some manners of economic exchange are permissible with those persons who lie outside our geographic border. The only differences between economic exchanges within the group and between groups are caused by issues that arise solely when there is a concept of “group.”

Whether Kofi Annan meant the analogy to be as deep or not, globalization is very much like gravity. The “laws” of globalization, like the laws of gravity, apply universally. Other things equal, if a rock falls on Tuesday, it must also fall on Friday; if a 500g steel mass falls, then a 600g mass must also fall; and so forth. In the case of globalization, if greater competition between local producers drives down prices, greater competition between local producers and foreign producers must also drive down prices. If firms benefit from an increase in the labor supply of American citizens, firms must benefit from an increase in the labor supply from equally-skilled immigrants. Goods, capital, and labor do not suddenly have a radical change in their nature because they have been stamped with a nation’s name.

Globalization merely represents the logical extension of economic principles beyond national borders, like gravity is a logical extension of the broader phenomena of physics. Ignoring all the government intervention that makes it so (taxes, tariffs, export/import restrictions, etc.), to argue that trade between the U.S. and Canada is intrinsically different from trade within the U.S. is like arguing that a rock in Canada falls differently than one in the U.S. To confirm this hypothesis, one need only examine any case in which a border has become irrelevant with relation to an economic transaction. Prior to their unification under the U.S. Constitution, the former American colonies were able to place tariffs on goods coming from other colonies. The U.S. Constitution, however, established a free trade zone between the states (under the commerce clause). Today, nothing seems foreign about a woman in Georgia buying oranges from a man in Florida. There is no talk of protecting Nebraska corn producers from Wisconsin corn producers. Yet on the international level, we must be concerned with purchasing goods from other human beings (who are to be economically categorized differently) and maintaining our producers in a particular industry against theirs.

The idea of international trade above and beyond “trade with typically higher transport costs” is only supported by national mythology and by government economic policies that isolate markets from each other. For all intents and purposes a transaction between someone in Washington and someone in British Columbia is more culturally similar and much cheaper in terms of transportation than someone in Florida buying from Wisconsin, but there is always that supposedly fundamental difference: one’s international trade, the other is a domestic purchase. If Canada became a part of the U.S. tomorrow, though, the first transaction would become a domestic purchase with virtually the flip of a switch. What this example illustrates is that the only thing that makes globalization different from regular economics are the barriers we erect between economies, much like the only thing that makes gravity cease to make an object move is an application of force against it. The treatment of “domestic economics” as a phenomenon separate from “international economics” is, ultimately, like discriminating between “gravity acting upon an object” and “gravity acting upon an object with something in the way.”

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Internet gambling[1] is blessed, having essentially “hopped on” pre-existing, well-developed technologies and infrastructures that constitute a majority of its business necessities. Though the industry relies on the independent, rapidly-expanding internet; the well-developed, low-cost financial system available to the consumer; and the large global markets created by the widespread cultural phenomenon of gambling, these favorable circumstances are ultimately constrained by legal issues. Regardless, internet gambling in its current state is inherently international, with greater possibilities to be made available by the destruction of those legal barriers.

The Nature of Gambling as a Business

In most respects, internet gaming is an unconventional international industry. Its first defining characteristic lies in the character of the service provided by gambling, whether by traditional means or internet. A casino (“the house”) has several different outward manifestations its ways to make money, but its methods reduce to two basic concepts: rake and house edge.

Rake is primarily used only in games such as poker and sports betting, where wagers are made against other players and the house has no stake in the outcome. At some stage in each wager, a “fee” is collected for the services provided by the casino for the game (tables, cards, dealers, video screens, security, etc.) This allows for a gambling environment that permits skilled players to become consistent winners, meanwhile not affecting the casino’s profits.

House edge, undoubtedly the most popular method used in Brick & Mortar[2] casinos, is incorporated into slot machines, bingo, “dealer” games, etc., which are the indicated preference of the average gambler. In such games, one wagers against the house, some randomized selection occurs, and the wager is either lost or the appropriate payout is given. The randomization process can occur through dice, a deck of cards, or computerized machines, but how these games are designed is ultimately governed by the principle of expected value: in short, the sum of the products of each payoff and the probability of it occurring, which equals the house edge.[3] Thus, if a house edge for a given slot machine game is 2%, in the long run each pull of the lever with a $1 wager should yield on average $0.02. Conversely, the player’s edge is -2%, losing $0.02 per $1.

By definition, a negative expectation is a losing proposition and should be avoided. However, casinos understand this and always investigate how their customers will treat it as well. Any casino’s profit-maximizing objectives can be generally summarized as a function of the number of wagers made in a given time-frame (quantity supplied), the size of the house edge or rake (price per wager), non-monetary value for the customer (entertainment, social interaction, etc.), and the costs of meeting those goals.

The Speed, Power, and Expansiveness of Internet Technology

The internet is, quite obviously, as important to online gambling as roads are important to automobiles. Barring some disanalogies, both industries have largely been the beneficiaries of massive subsidies: common and widespread means for their customers to consume their products.

By far, the internet has become the supreme technology of commerce. The exponentially growing power and applicability of computers combined with lightning-fast transmission of data over long distances has- beyond its obvious contributions to production itself- lowered transaction costs while uniting buyers with sellers unlike ever before. By employing the tremendous strength of computers to achieve the casino’s profit-maximizing objectives, internet businesses have attained new-found efficiency in the service of gamblers.
Computers have reduced the physical limits of wagering itself. In traditional casinos, games like poker and blackjack are constrained by the ability of a human dealer to shuffle and distribute cards, count and appropriately pay bets, and determine outcomes- each with the possibility of human error at any stage. These obstacles are eliminated in the virtual world, thus allowing for the rapid, error-free execution of all games. For example, the average 10-player B&M Texas Hold’em[4] game plays about 30 hands per hour (thus rake is collected 30 times), but an online game of the same type plays between 60 and 80. Players also have the option of playing in multiple games at once (some experts play up to 12) since the games can be centralized and sorted conveniently on a single screen.[iii] In the same amount of time, the result is much more enjoyment of the game itself for the player and greater profitability for the casino.

To the consumer, the principal advantage offered by internet gambling is the increased comfort level of enjoying entertainment in one’s own home. Driving, parking, waiting in line, and breathing second-hand smoke among all the other costs of visiting a B&M casino vanish. Getting into a game is nearly as fast as leaving a game; with two clicks players can quit for the day or just for a restroom break. Also, for communal games like poker, all sites have a chat feature for communicating with other players. Although the social experience is incomparable to that of a traditional casino, the difference may help as much as it hurts. Internet poker provides a non-committal, anonymous environment to play and interact with others (and for the sadistic, to take their money). These factors are likely to attract latent markets of individuals greatly discouraged by the prospects of visiting a local casino.

The products supplied by the casino can be understood in terms of the different games in which one can wager. B&M establishments, to add one new game, must allocate floor-space for it, pay for the table or machine, and hire staff to operate and oversee it. On the other hand, computer software only needs to be designed once to be replicated infinitely; it only occupies abundant, cheap memory and processing power; and it requires a minimal fraction of the oversight. This has allowed a wide variety of games and stakes to be available instantly when there is a demand for them. Expenditure on the construction of massive buildings, their aesthetics, and their infrastructure is no longer needed. Meanwhile, internet servers can support numbers that would conventionally require an entire stadium: in 2005, PartyGaming Plc often hosted over 60,000 players at one time. Hosting is so cost-effective that most sites offer an amount of “play money” games identical to real ones. This has the added benefit of letting customers get comfortable enough with the games and software interface to make the transfer to real wagers.

Relative ease of physical set-up is also a great boon of efficiency. Unlike in most material goods and services industries, infrastructural concerns including electricity, water, and mass/rapid/heavy transportation are not troublesome. Internet server housing facilities can be built practically anywhere, while only needing one or two landlines to a web source or a satellite uplink. Electricity and power demands can be met by autonomous sources. Transportation only needs the capability to support individual commuters. Most importantly, internet infrastructural technology has become so advancedthat, especially for activities demanding as little bandwidth as online gambling, almost any two places on the globe can be seamlessly connected.

The Importance of Financial Transactions

It can be said that automobiles benefited from prior development of the petroleum industry. Similarly, internet gambling has profited tremendously from the well-developed financial system that preceded it, though this analogy does not do justice to the critical dependence of the former on the latter. The modern, advanced international financial system provides a strong foundation for the rapid and convenient placement of bets. The popularity of electronic, low-cost bank transactions goes hand-in-hand with an industry that is inherently monetary in its end product: money flows in for wagers, and money flows out for winnings. Inconveniences or long wait periods at either stage result in lost profits, by slowing down the wagering process and alienating casual consumers.

As it is in the B&M business model, the average user is potentially the source of greatest revenue. Millions of users around the world are already acquainted with using credit cards, and EFT-funded “e-cash” accounts such as Paypal to purchase goods on Amazon, eBay, and major retail stores’ websites. These stores have brought interstate and international trade closer to the average consumer by making him a direct participant. As buyers’ comfort with purchasing on the internet increases, so increases their likelihood of gambling online.

Internet gaming has even caused some minor new developments in the financial system. U.S. prohibition of credit card use for e-gaming transactions has itself produced an evolution of payment methods. Several offshore “e-wallets” and other accounts out of the reach of U.S. regulators sprung into existence to meet demand for legal and safe transfer points for gambling funds. International phone card balances became legal tender for some sites.Exchange rates play a major role in allowing individual sites to unite markets. Some sites, such as those hosted by Cryptologic, Inc., allow users to keep their accounts and even wager in different denominations.

In the past four years, investment has reached online betting. Explicit legalization and effective regulation has made the U.K. the de facto capital of online gambling, and the London Stock Exchange is host to all major publicly-traded gaming sites. The introduction of new cash reserves was originally part of an expansionary plan that shifted to consolidation via acquisition, following U.S. legislation in 2006 that prevented American financial institutions from dealing with online gaming sites, yielding devastating effects on revenue.[iv]

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