Law Professor Hoping Sanders Will “Save Capitalism”

Capitalism

What does the left-wing branch of corporate and antitrust law look like? Wayne State law professor Sanjukta Paul gives us a glimpse, and it’s a pretty strange world indeed.

You would think that capitalism and socialism would make strange bedfellows. Capitalism is based upon the combination of property rights and free exchange, where the law defends our rights to property and capitalism allows us to exchange property with others through mutual agreements.

Socialism, on the other hand, takes a more limited view of property rights, where they become subservient to collective goals as determined by socialist leaders in power. Socialism does permit capitalism, although only under the limitations of what political leaders deem to be in harmony with their understanding of promoting the greater good, which generally involves a form of redistribution, taking from those who have and giving it to those who they deem to be more worthy.

The two are certainly mutually compatible, and there is no system of government that isn’t socialist to some degree. Any time taxes are collected to promote common goals involves socialism, in comparison to libertarianism where any money collected by the state involves free exchanges or at least ones that are implied.

Libertarianism, in its pure form, is only justified in collecting money from people in proportion to the benefits that they receive or are assumed to receive that are truly necessary to be provided, for instance by having us contribute a percentage of our property value to protect it. Beyond that, the free market simply reigns.

Socialism goes well beyond that by basically forcing us to make charitable contributions under the force of law. This is of course an unnatural state, as we would never get to such an arrangement naturally and without coercion, although if your first principle starts with the collective having a natural interest in all property and then distributing wealth according to how we see fit, then we might end up being confused.

This all comes down to not the degree of property rights that are afforded to us, but the degree of the infringement of property that a state feels entitled to make. All governments infringe upon property ownership to some degree, some more than others of course. Western democracies actually fall somewhere in between on this continuum, even though we have been accustomed to these infringements so much that we may not even recognize them as such, and give away half of what we make or go to jail but somehow consider ourselves completely free.

Socialism in practice is a relative concept, with some countries being more socialist than others, and the United States being on the less socialist end of the socialism scale but still pretty socialist when we stop and think of this. We don’t just allow politicians to make whatever changes they wish though, as there are some real limitations to what we can do here, and rightly so lest we completely become a socialist dictatorship if desired.

While there is a continuum between libertarianism and socialism, there is also one between freedom and dictatorship, and governments, including the U.S., fall between them. Pure democracy is actually a pure form of dictatorship, just like an autocrat or an oligarchy or any other political structure that seeks to use the force of law to coerce by their will alone.

We do not have a pure democracy in the U.S., but we are closer to the dictatorship side of things than to the freedom side, although this is not something that we tend to be too aware of either. We equate democracy with freedom even though by its very structure limits individual freedom to whatever degree the collective wishes, and democracy isn’t freedom at all, it is a form of power designed to take away freedom.

To look to prevent this power from being abused too much, we rely on a system of principles that define what is appropriate. We can get together and decide to put people to death for murder, but we aren’t allowed to put groups of people to death like war criminals do.

Our power to seize property is also limited, and we can take away your property if the purpose is deemed to be important enough, but we can’t just jump in and take it because we don’t like you or think you too wealthy. We may increase the tax rate you pay, and even smack you with a wealth tax if we want to go that far, but we don’t go further because our pretending to be fair does at least need window dressing.

Assuming You Are Right Just Isn’t Enough

We need to well account for these limitations when we look to exercise our will with corporate structures or any form of voluntary commerce. Corporations are already under the same constraints as individuals within our legal and political system, where they have to pay their taxes and obey laws that are enforceable. There are some who want to constrain this so much more, and will even consider the existence of corporations to be at the pleasure of the state and even created by the state.

It is definitely easier to defend a system that simply assumes that all power resides in the state, where the state can then decide unilaterally how this is all to be structured, but this turns out to lack merit. If you are a fan of this sort of thing though, and especially if you have an emotional interest in the matter, it can be pretty easy to just pretend that freedom in this context simply does not exist and it is all subject to simple political will.

The problem with this is that this is just not factually correct. The reason why we have a judicial branch is that someone needs to limit political power, by way of a constitution to limit the way that this power may be used, or legal analysis to interpret how current laws may be rightfully applied.

Politicians aren’t just allowed to make up their own rules here, for instance with breaking up big companies just because they do not like them, favoring the little guy more and want to use the law to knock companies down to size. Thankfully, we need more justification to do these things than just some political candidate feeling that their personal beliefs are enough to justify it, or even if everyone in the country felt that way.

Wayne State law professor Sanjukta Paul recently wrote an op-ed piece on capitalism, the free market, corporate law, and in particular, how she is hoping that Bernie Sanders will take his socialistic ideas and seek to reform these areas. It is an interesting article to be sure, and you don’t have to be interested in corporate law at all to want to pay attention, as this sort of thing does have a real potential to impact our everyday lives if such things were ever to come to pass.

The title itself says a lot, speaking of how Bernie Sanders may be able to save capitalism. We wonder though why capitalism is even in need of saving or even in need of improvement, but apparently if you are already a socialist, these things are self-evident.

Economics influences how we understand and perceive the benefits of capitalism, where actors get together to exchange things of value and where the price is determined by agreement. We are generally allowed to do this, although this is subject to approval by being confined to exchanges that the collective or their agents deem appropriate, excluding those which do not, the buying and selling of illegal drugs for instance.

This all should be quite transparent, but Paul understands this differently and in a rather strikingly distorted way, believing that exchanges are not free but are instead an artificial structure created by political will, freeing us to use that collective will to simply make up different rules as we please.

This view is not unique, as some radical socialists believe that the concept of property exists because the law creates it and then protects it, but such an idea is untenable because there is their conception relies on property rights just as much, with the difference being that they have seized them much like Marx encouraged workers to seize the means of production.

Some even go as far as to assume that we can somehow force an idyllic economy where self-interest is just laid aside and everyone works for the common welfare like a hive of bees, but the moment that we realize we are not so much like bees, that puts an end to it.

Property is maintained by possession and exchange, and even in a complete state of anarchy we have property, held by either agreement or by force. If you shoot someone and take their house, and you also protect it by force, this is property as surely yours as deeded property is, it is just that it is obtained and retained by a different mechanism of force than the law.

Just having someone assert that there should be less individual property rights and that the state should do more to usurp this isn’t really remarkable, although this is not even something you can justify apart from just assuming you have the power to do it and then trying to put the plan into action. All we need is the principle that voluntary exchanges are preferable to unseat this completely, as their ideas are contrary to this.

Socialist Anti-Trust Law in Action

What makes Paul’s piece so interesting is that she takes this principle and applies it not to just property but to markets, the very exchanging of goods itself. She even tells us that “markets are constructed by law.” Surely, she does not mean “constructed” here, as regulated would be the proper word here, without question. A law professor should know the difference between constructed and regulated we would think, although perhaps not those whose political motives are strong enough to cause them to think erratically.

She defends this by telling us that “markets are always determined by background co-ordination rights, determined by law, who decide who…has the authority to manage economic activity.” This is like saying that whether you make it home from work alive rests in the power of the gun of a robber who may choose to take your life.

Your walk home is the natural state here, it is not created by anyone looking to interfere with it. Laws or anything else are not even required for market activity to occur, it instead happens naturally between those who wish to make an exchange.

This is the normal way that we view market activity, and even define it this way. We may want to interfere with this process, but no matter how strong our will may be to do so, we’re not constructing any of this by our interference, and the most we can do is to try to restrict it.

The idea that the law only applies to what it applies to is a pretty basic one, for instance there is no law that applies to virtually all of our activities, and there doesn’t have to be a law stating that it is OK to go to the bathroom in your own home for instance. The free market does not require laws to operate and is surely not created by them.

While this does not mean that this natural state of exchange automatically takes preference, as we may wish to argue that there are certain situations where we should override this, in cases of collusion or other practices that inhibit rather than promote free exchange. To pretend that we would never exchange anything unless there was a system of laws that would create the behavior involves a major mistake of fact.

She seems to have a special place in her heart for small players, similar to Elizabeth Warren, and claims that the fact that some are bigger than others is an arbitrary state created by our current system of laws. This is factually incorrect as well, as these things arise out of efficiency, one company providing more value than another and being given more money by people.

Any accusation of uncompetitive behavior needs to be justified and voluntary exchange and coercion are two separate things. The very term anti-trust is based upon a breach of trust among parties which interferes with free competition, and if the government does this, this breaches this trust as well.

This is a situation where we clearly do have a natural state that we seek to modify when it is justifiable to do so, and it is important to continue to recognize the mechanism of free exchange to provide a reference point for further actions, because this mechanism does exist and we are not entitled to pretend that it doesn’t.

It turns out that her objections to the free market are not so focused on competition after all, but on furthering her political goals. Political ideals are completely outside the scope of anti-trust law, apart from what is designed to remedy, interferences with free exchanges, and we have both the laws themselves and the jurisprudence to defend us from these political attacks being conducted under the guise of antitrust law, and this is not just all left to political whim.

It is very easy to set aside concerns such as smaller competitors not being able to compete due to natural causes because the goal of competition law is to promote free competition, not interfere with it. When we choose to interfere, this runs completely counter to the purpose of these laws and in themselves seek to violate their principles.

It turns out that Paul has some other fish to fry, which turns out to be basically the same kettle of fish that Sanders and Warren are hoping to cook up, which all boils down to wishing to promote what they consider to be economic equality.

This has nothing to do with anti-trust concerns though, as the trust here involves being free of coercion in the marketplace, and does not lead in any way to our somehow having the power to redistribute wealth as we please.

This is exactly what she is seeking, in spite of her attempt to pretend that this as anti-trust reform. Since mergers and acquisitions put money in shareholders’ pockets, as well as employ a lot of lawyers, this somehow is deemed to be in need of remediation. If these shareholders were getting their profits by way of restricted competition, like Rockefeller used to do it with Standard Oil, this would be a problem, but we have to demonstrate this first prior to even having a semblance of justification to step in on anti-trust grounds.

Surely Professor Paul has a better understanding of what legitimate anti-trust grounds would be than this, looking at a neutral act in itself and just assuming that the very fact that people are making money could constitute grounds for this.

This fits Sanders’ plan pretty well though, but his hopes of interfering with business doesn’t need to be independently justified with his believers because they already believe. His hope is that enough people will prefer this as well to create more political support, where he hopes to decide on the size of companies by using his vision of “dominant positions in the markets.”

Perhaps Professor Paul and Sen. Sanders could get together on this, in the hope that she might explain to the Senator that while anti-trust law does maintain standards of excessive dominance, they won’t just be replacing them with his just because he says so, even if he does become president. On the other hand, we’re not at all sure if Paul really understands anti-trust law enough to be able to do it, if her article is any indication.

Somehow, people get confused about degrees of competition and market participants. The goal here is not to seek more over less participants, and this isn’t even a meaningful consideration when measuring levels of competition, and especially isn’t in terms of anti-trust law.

If there is only one competitor, we do have a monopoly, but as long as there is more than one, we have competition provided that there is no collusion involved. If there are only two huge companies, and they are so good at what they do that no one else can enter the market because they are not competitive, that’s some serious competition happening indeed.

Understanding just this one thing puts an end to arguments such as Sanders and Paul wish to make, that this is even a bad thing, and it’s actually ideal because as long as this all happens honestly, we have reached a higher state of efficiency than if there was more potential for new entrants to succeed.

Paul also speaks to her desire to end what she sees as “using speculative benefits to justify corporate power.” This statement particularly marks where the left the road of reason, as why we would ever need to justify corporate power has escaped her. Using the term corporate power reveals more confusion, thinking that it makes sense to use the word power in a derogatory manner to describe efficiency.

The only power that corporations have is the power to provide real benefits to end users, and money happily flows to them to mark these agreements. We could call this a power, but she uses it to insinuate some sort of coercion which she wants to then attack with anti-trust law, when this instead describes free exchanges.

She then moves on to some other things that bother her, such as her claim that companies shut down operations to pad the pockets of shareholders. This really is far away from anti-trust law as this law only addresses concerns of competition. These job losses are as a result of simply not being competitive enough, of one’s business failing, and any time you improve by cutting back, you have become more efficient, not less.

This is mostly Sanders talking though, with Paul alongside to provide some legal insights that don’t correspond to either the law or common sense. Paul tells us that “corporations are creatures of the state” because the law allows for their creation. She can make that claim, but needs to realize that the structure of a company is not really pertinent to its operation, where it may be owned by partners instead and this would not materially affect what they object to.

She hands this ball off to Sanders who doesn’t get any of this either and wants to proclaim himself king over the corporations where they would need to bow to his wishes, permitting him to ram socialist goals into their charters.

This would of course serve to dissuade companies from remaining incorporated in the United States, among other things. Sanders didn’t bother thinking about step two with his wealth tax either, so it’s just not in his nature.

All of this is so far off the main road that we can set aside any concerns we may have, although there is a movement in the Democratic party to seek to disrupt competition in some manner. We do have the judiciary as a backstop here though, thankfully.

We are the ones that lose when governments seek to interfere with competition, because this reduces efficiency every time and that means less value for everyone. Such a thing would not only be very wrong in principle, and totally out of alignment with legal precedent, it would also serve to both make things cost more and raise less tax money. No one wins with these things, as much as we may want to pretend otherwise.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.