Paul Krugman has written another column that expresses my basic concerns for our future. He comments that conservative economists (i.e., libertarians) worry about regulatory capture, i.e., that regulatory agencies will end up being captured by the industries they are supposed to regulate, but not about "plutocratic capture," i.e., that extreme concentration of wealth will lead to the one percent hijacking democratic institutions.
I don't think that is quite right. In my experience, libertarians are well aware of the dangers of plutocratic capture; they just differ from liberals on what to do about it. I confess I am not clear as to what liberals propose to do about regulatory capture. To libertarians the answer is easy -- no regulations, no regulatory capture. Just don't regulate and regulatory capture will be a non-issue.
I have a better sense of the liberal answer to plutocratic capture. It comes in two basic parts. One is to avoid extreme concentration of wealth, whether by redistributive taxation or otherwise. The other is to have other strong power centers in society to counter the strength of the plutocracy -- such as unions, consumer organization, home owner associates, or government. It is a bit glib to say that libertarians' approach to plutocratic capture is the same -- no government, no plutocratic capture. But that is more caricature than total misrepresentation. Libertarians tend to assume that the way to avoid plutocratic capture is to keep government as small and as weak as possible so that it won't be worth capturing. The unstated assumption here is that if plutocrats are not able to exercise power by capturing a strong government, then they will have no power and the rest of us will not have to fear its abuse.
I consider the libertarian viewpoint to be hopelessly naive. It is true, I agree, that the combination of a strong, active state and extreme concentration of wealth creates the danger of plutocratic capture -- of the rich treating the state as their private instrument. But there are two problems with the assumption that keeping the state small and weak will avoid these dangers.
First of all, just how small and weak does the state have to be? After all, the state was much smaller and weaker in the Gilded Age than it is today, yet powerful concentrations of wealth nonetheless thought it worth capturing. Some libertarians describe the state as a monopoly on violence and conclude that it exceeds its proper limits whenever it does anything other than violence. Well, powerful interests of the Gilded Age were entirely happy to use the state's monopoly on violence as an instrument on their behalf to crush unions. But I suppose a libertarian might argue that with today's increased mobility of capital, in the absence of artificial limitations, a company might simply fire any troublesome union organizers and, if this failed to work, relocate to somewhere without unions, so there would be no need to resort to brute force. Other libertarians want to limit the state to the criminal justice system and a civil court system. But the effect of this would simply be to shift the arena for contesting concentrations of economic power to the courts. For instance, if we end all environmental regulation, the best recourse for a victim of a polluting company would be a common law action enjoin a nuisance. But that would not so much shrink the power of the state as shift it to the courts, and thereby give the rich and powerful a strong interest in wanting to capture the process for choosing judges. Other libertarians allow a greater scope for the state, but in that case the state would clearly be worth capturing. In short, I do not think it possible to make the state too small and weak to be worth capturing.
But even assuming we can shrink the state to the point that it is not worth capturing, libertarians are quite wrong in assuming that this will prevent abuses of power by great concentrations of wealth. What actually happens when a society combines great inequality of wealth with a small and weak state is that the rich use their power to form their own state-within-a-state, which they use entirely for their private interests because there is no pretense of public accountability.
We are already seeing an early and relatively benign form of this in the form of gated communities. Gate communities hire their own private security guards -- and resist paying taxes for community police forces. Likewise, people who can afford to may send their children to private schools. They may resist paying taxes for public schools, but even if they do not, public schools lose important advocates and participants. Powerful companies are bypassing the courts by putting arbitration clauses into their contracts and assuring that any dispute under the contract will be arbitrated in a forum favorable to the company. Libertarians will probably defend all these things as appropriate exercises in self-interest, and as proof that the private sector does these things better than government. But to individuals who cannot afford their own private security guards, or private schools, or arbitration forums, the result is an undercutting of public services and access to the courts.
Nor does the state-within-a-state necessarily stop there. In many countries with strong concentration of wealth and a weak state, the rich invade the state's monopoly on violence to form their own private forces, like the Pinkerton Detectives or Latin American death squads. In its most extreme forms, the state can break down altogether and the rich and powerful become warlords.
All of which points up to the central error of libertarianism -- its assumption that the state has a monopoly on power and oppression, that if one eliminates the state, on eliminates power and its potential for abuse.