Mindless Markets, Private Taxes, & Liberalism's Failure Modes

Mindless Markets, Private Taxes, & Liberalism's Failure Modes Jag Bhalla

24 February 2024

That citizens are burdened by vast “private taxes” reveals just how diseased American democracy is. Private-sector predation is so bad that “economic cancers” can out-tax the state while weakening national security. This failure to protect vital national and public interests from malignant market forces contrasts instructively with China’s “state capitalism.” This essay X-rays the role of markets in under-theorized threats to liberty and security using insights from three recent books, alongside little-known wisdom from biology and engineering.

Philosopher John Gray’s The New Leviathans compares the capabilities of liberal and authoritarian states. His title invokes a founding proto-liberal text of modernity, Thomas Hobbes’s Leviathan, which in 1651 posited a rational “social contract” arising from an individualist fear-based politics. The state’s right role is to protect citizens from each other and from external enemies, but otherwise not to interfere. Unlike the non-interfering original, Gray says today’s “new Leviathans are engineers of souls.” Here he’s quoting Stalin who felt writers played that soul-shaping role in Russian culture. But let’s not forget the western equivalent: Margaret Thatcher while British Prime Minister said, “Economics are the method: the object is to change the soul.”

Gray writes that “in China market forces serve the objectives of government, while Western states have ceded power to corporations that obey imperatives of profit. Both systems are variants of state capitalism, but the relations between capital and state are reversed.” He argues that “systems in which market forces are directed by the state have an inherent advantage over ones in which government has been captured by corporations” (we’ll see examples shortly). Gray concludes that “in the competition with China Western capitalism is programmed to fail.” In a New Statesmanpiece Gray wrote that “a reassertion of the primacy of the state over the market is a precondition of any socially tolerable future.” He’s right, but the stakes are higher, rising to existential levels. We face threats unimaginable to Hobbes, that later liberal thinkers warned of. For instance, the much-misused Adam Smith wrote that rule by ”merchants is, perhaps, the worst of all governments.” And John Stuart Mill warned "the most serious danger to the future prospects of mankind is in the unbalanced influence of the commercial spirit,” (this juxtaposition is rich in ironies, Mill worked for the despotic East India Company for 35 years, an outfit that triggered Smith’s ire).

Similar issues and ills are diagnosed by Oren Cass in Rebuilding American Capitalism. He argues that our business elites aren’t constrained enough by law or norms or loyalties to prevent them from weakening or injuring the nation as a whole. Indeed, many profit prodigiously by precisely such harms — by vast personal and corporate tax evasion, by extensive extortion and gouging of public funds, and numerous other financial blood-sucking or societal-health-sapping schemes. These are in effect forms of private taxation adding to what could fairly be called onco-capitalism, wherein certain corporations act like economic cancers (more on this below). Their executives commit forms of financial tyranny and treason, cheating on America’s social contract. Cass notes that “If satisfying the [Chinese Communist Party] offers the highest rate of profit, American business leaders have shown they will eagerly do just that.” Hence the “principle that market incentives cannot be trusted.” And don’t forget our revolving door irrationalities have led to a White House chief of staff, Jeff Zeints, who believes “The social contract is never coming back.”

Evidence of pervasive non-state coercion is well-martialed in Sohrab Ahmari’s Tyranny, Inc. He writes that “freedom is… suffering a global funk,” due largely to the delusion that markets are bastions of liberty. He traces how “market utopianism has plunged us into a state of private tyranny,” and uses the amusing ruse of reporting repressive activities as if they occurred in China, Russia, and Iran, when in fact they’re US corporate practices used on workers here. Unlike the “socially managed capitalism” of the golden 30-year era of the New Deal, today’s conditions are so onerous, precarious and grinding for low-income workers that they live 15 fewer years than the rich. Meanwhile corporations that make huge shareholder payouts offer below living wages, forcing workers onto public benefits (with a taxpayer price tag of $150 billion a year, i.e., it costs about $900 per taxpayer per year to help rich investors and businesses to exploit workers).

Ironically, a smallish case of America’s failure to protect citizens from private taxation, if evident in visible sore of the rigmarole of filing income taxes. Only 3 percent of taxpayers use free public filing while 87 million eligible others overspend by $13 billion. That’s due to decades of lobbying, exploitative practices, and misleading ads. Astonishingly, the TurboTax folks need spend only $2.3 million a year on federal lobbying to protect billions in parasitic revenue. Collectively tax prep firms impose an average of a $150 additional “private tax” on tens of millions of us. But that’s the merest molehill next to a mountainous private levy so vast it actually exceeds total federal income tax revenues. America’s healthcare system, which is surely the biggest single faith-in-markets financial blunder ever, burns 18.3 percent of GDP versus a peer-nation average 9.6 percent. Staggeringly, our stupendous 9-percent-of-GDP overspend delivers bad collective results (like a life expectancy 6.3 years shorter than rich nations enjoy). If our for-profit (greed-driven) health system matched peer-nation efficiency we’d save $2 trillion per year, or $16,000 per household. That’s more than the federal personal income taxes total of $1.7 trillion. Enough to double our K-12 education spend, or myriad other uses (it’s so vast it could fund two extra Pentagons).

While we lack the capacity to put the health of our body politic above the malignant monetary interests of powerful parts of our economy, the CCP is quick to curb the private sector whenever it hinders the party’s goals. For instance, central regulators recently disciplined China’s tech sector, curbing “the swagger — and societal influence — of tech billionaires,” and erasing “trillions of dollars in market value.” The CCP’s “common prosperity” policies explicitly warn against nation-harming rent seeking (aka “private taxes”). And they’re not shy about punishing even the richest citizens.

To be completely clear, this is in no sense to endorse authoritarianism. But the common liberty-lover’s resort to the personal perspective that it’s nicer to live in a freer, if dysfunctional, nation misses the point. It fails to face the import of Gray’s, Cass’s, and Ahmari’s critiques and ignores lessons from engineering, and biology, and the science of cooperation (which we’ll get to shortly). The issue I seek to draw attention to doesn’t boil down to the preferences of citizens. It’s about the minimal capacities any coherent pollical and economic system needs to maintain viability. Democracies that can’t prevent these sorts of market-driven harms are actively courting decline. China has shown that it has what could be called economic cancer-suppression systems that can constrain market excesses when collective health is imperiled. Conversely our leaders labor to help our economic tumors thrive. Our historic focus on limiting state power no longer coherently copes with today’s threats, foreign or domestic.

The concept of “economic cancers” arises from fruitful analogies with dangerous growth and greed in biology. While mush pop science has focused on the role of competition, “the evolution of cooperation is central to all living things,” as biologists Nicholas Davies, Kevin Foster and Arvid Ågren write. Their paper examines a central puzzle: “Why does evolution favor investment in cooperation rather than self-serving rebellion that would undermine a particular genome, organism or society?” They present “evidence that enforcement shapes cooperation across all levels of biology.” By enforcement they mean processes that “reduce selfish behavior within a cooperative.” The classic case of how greed is not good, of self-interest run amok, in biology, is of course, cancer. Tumors are a form of cell-level selfishness that all organisms must strenuously suppress to stay alive. As Athena Aktipis, author of “The Cheating Cell,” explains, a defining trait of traitorous cancer cells is that they gain and grow “at the expense of the organism” — they cheat on their body’s biological social contract. Death awaits all who fail to curtail such cheating. Every viable collective entity must enforce this rule: The health of the whole must trump the self-interest of any part (unregulated parts can kill their wholes). Both evolution and economics are in the productivity selection business. Both are ‘self-organizing’ or invisible hand systems that mix cooperation and competition. But billions of years of harsh field testing have taught biology which tricks work. Tumor cells are toxic “cheats” and there are analogous economic failure modes in our social metabolism (our collective material means of meeting life’s needs).

Unlike China, America seems to lack any coherent concept of “disciplining capital,” a great phrase economist Daniela Gabor uses in her research on the now fashionable field of industrial policy. She finds that centrally managed industrial policy worked in East Asia precisely “by disciplining capital accumulation through reciprocal obligations for the receivers of subsidies to minimize rent seeking.” But now in the market-loving West and much of the global south investors “dominate in the state‒capital relationship.” So much so that on most issues our political class’s reflex is to turn to capitalists and ask how high they should jump (the latest buzzword for this servility is “derisking” private profits). Our leaders (of both parties) have a ‘let-the-market-decide’ win-win mentality which means only all-carrots, no sticks, policies are ever brought to the table. Thus banking is more concentrated than in 2008 (and don’t forget “Bankers Reaped Lavish Bonuses During Bailouts” while millions lost their homes), and health costs have risen 30 percent since the comically ill-named Affordable Care Act (which only further fattens our two-trillion dollar tumor), and so on.

What Gabor calls the “bribe to capital” method leaves those who should be chastened and constrained, instead richer and stronger without requiring any restraint on rent-seeking. Consider the justified fears over misuse of Biden’s strategic industrial policy incentives under which chip makers are getting subsidies of $52 billion to manufacture here. That’s despite these same companies recently using five times that amount for stock buybacks (and on top of Intel’s prior incentive misuse, it paid zero federal income tax last year). The norms of our political class abet capitalists who are loyal to little beyond greed and the highest rate of return. A delusional dogma deeply baked into finance theory is that markets seeking the highest rate of return ensure the best use of resources. But there’s no earthly reason to expect that doing what’s collectively best (or what’s ethical, or even what’s required for national security) will deliver the highest rate of return. Quite the opposite, since cutting corners boosts profits, and markets without appropriate regulatory constraints risk becoming a race to the bottom against the baddest guys in the game. Our let-the-market-decide policy norms kneecap our ability to constrain capitalists for sake of the collective good. This glaring madness has Gray rightly decrying the West’s descent into “utter absurdity.”

It’s worth briefly noting two hyper-hazardous new breeds of unleashed private looting leviathans. First, our tech giants extort astronomical “algorithmic rents” (Apple, Microsoft, Amazon and Google each garner annual revenues over a trillion dollars). These purported freedom-loving titans operate a for-profit version of the CCP’s surveillance apparatus. Plus, they’re actively in the democracy-weakening business, wittingly or not. Online ads have gutted newspaper revenues (down 80 percent since 2000), throttling accountability journalism, aka democracy’s immune system, a vital organ of any healthy body politic. Unlike China’s our oncogenic tech-lord trillion-dollar swagger is uncurbed.

Second, innocuous-sounding “asset managers” constitute a “novel form of capitalism” and they’re a new kind of titanic trouble. Since they coordinate across an unprecedentedly large number of firms (see UK think tank Common Wealth). The big three, BlackRock, Vanguard, and State Street ”control 20 percent of the average S&P 500 company.” The biggest, BlackRock manages assets of $10 trillion. That’s larger than the GDP of 193 nations (all except America and China). Relatively few people even know the name of BlackRock’s CEO, but Larry Fink is surely the most powerful person on earth, financially speaking (he influences resources greater than any government budget). Billionaire George Soros has warned BlackRock's work in China could harm US national security. Can we rely on greed to get private-sector leviathans to do what’s in America’s interests? To my eye these titans are transnational tumors having escaped even what limited local loyalties and values they may have once paid lip service to.

Evidence of our corporate elite’s unreliable loyalties isn’t hard to find. For instance, Apple TV cancelled its popular John Stewart show over his criticisms of China. In effect a fancy for-profit Pravda courtesy of the ever-elegant liberty-loving Apple. As Julius Krein editor of American Affairs notes “parts of the US defense industrial base… are dependent upon the production capacities of geopolitical rivals.” The lure of Chinese markets or supply chains has made “American big business… Xi Jinping’s most important ally in DC.” He chides executives seeking “subsidies… while publicly eschewing any obligations to support US national interests.” This open farce has Elon Musk affirming China’s “core socialist values”

Against the obvious dictates of elementary prudence, we actually invite our corporate cancers to sit at all our most important decision-making tables. We let them run our economy (a BlackRock alum architected Biden’s industrial policy). Plus they’ve bought influence over nearly all the other decision maker seats (including the Supreme Court and regulators, why work the refs when you can just buy them, or their loyalty?). Their greedocratic mindset has metastasized widely in our society’s institutional bones. Including “academic capitalism,“ where corporations steer and skew the research and values of the colleges that educate our professional class, too often away from “the public good.” This worsens our politically damaging ”diploma divide,” whereby our educated elite pursues different interests than “the people.” It also weakens journalism’s immune-system function. Our “acade-media” hybrid is now staffed by degreed elites who presume and preach “greed is good’ and faith in let-the-market-decide as “rationality.” All of this amounts to constantly asking your tumors what treatment they’d like, then paying for their spa days. In a cozy insider New York Times podcast economic historian Adam Tooze said the quiet part out loud: “folks who are making money don’t want competent, aggressive regulators in those jobs, and make damn-well sure that they’re not.“ Another win for the tumors.

What philosopher Lisa Herzog critiques in “The Epistemic Seduction of Markets” creates a flood of follies. Here I’ll focus on two highly attractive but deeply dubious ideas. First, the widely held faith that markets allocate resources efficiently is bizarrely and delusionally incoherent. As used in economics “efficiency” is what translators call a “false friend,” it looks like a word you know, but it doesn’t mean what you think it means. Efficiency is always good in engineering, but as legal scholar Zachary Liscow finds “efficient policy-making places a heavy thumb on the scale in favor of the rich.” Meanwhile, mindlessly profit-maximizing markets make $600 million superyachts, $18 million “billionaire watches” and musical toilets while 6.7 billion people (84 percent of humanity) live in poverty (according to the famously market-loving folks at Our World in Data) and 150 million kids are stunted by hunger. It’s absurd and cruel to cast such market outcomes as “efficient” or rational, never mind ethical or sustainable.

Second, a key justification for “letting the market decide” depends on Friedrich Hayek’s notion that price signals in “free markets” use more information than “central planners” ever could. While that’s an important truth, its fans tend to miss a vital countervailing factor. Howsoever much Hayekians desperately want to avoid any kind of central control, certain sorts of survival-critical information, and the decision making it enables, are inherently and necessarily suited for centralization (and ill-suited or impossible for the distributed decisions that well-regulated markets can be good at). But this isn’t about externalities or other known “market failures.” Engineering and evolution both indicate the incompleteness of the Hayekian view. Evolution by its widespread use of central nervous systems and brains. Creatures above a certain level of complexity inevitably need the control functions of centralized nervous systems and brains to enable richer signaling and coordination logic and non-local tradeoffs. This organism-level top-down control is essential to survival. That control structure rhymes with the well-established wisdom of engineers. A “whole system can’t be optimized by separately optimizing the parts” as Guru Madhavan of the National Academy of Engineering puts it. Free-market “logic” effectively presumes precisely the opposite, each center of economic power optimizes its own gains without regard for wider system impacts (as Milton Friedman’s religiously observed shareholder primacy doctrine has preached for decades). That wholly un-centralized approach typically fails in engineering and evolution. There’s no good reason to expect a different result in economies.

The limits of local market logic can be seen in the typically misconstrued “tragedy of the commons.” Contrary to its popular framing, the scenarios was originally meant as a clear cut case where local incentives don’t result in collective material prudence or sound priorities or even a coherent capacity to survive. But as the Nobel-winning Elinor Ostrom documented, cultures not captive to think-like-an-economist greed-is-good myths readily avoid the supposedly rational incentives for predictably collectively self-ruining behaviors. Not harming what you need to survive should be an obvious constraint on any thinking rightly worthy of the label rational. Allowing liberties enough to compromise your commonwealth’s health is unwise. Permitting the powerful to profit by such harms is systemically stupider still.

The reason-restoring logic we need can be put into just 15 words: Know your needs. Don’t damage what supplies them. Don’t let others either — or you’re doomed. Cultures either heed that logic of “needism,” or they die out. As just one sign of how far off our priorities are from rational coherence, consider that America spends twice as much per year on cosmetics, $80 billion, as on the clean energy transition $37 billion. That’s despite Biden calling the climate crisis an “existential threat… more frightening than a nuclear war,” while he incoherently issues licenses for more of the sources of those worse-than-nukes woes (our market-driven priorities are lipstick on a planet-scale pig). We act as if "free market choice is more important than the maintenance of a viable biosphere," as Chris Shaw writes in Liberalism and the Challenge of Climate Change. These systemic stupidities must end.

The science of biological cooperation shows that constraining actions of parts to prioritize the interests of the health of the whole isn’t optional. Because markets just aren’t built to do that, governments must enact collectively-rational survival-consistent constraints. Though we’ve used fancy recent thinking, these types of insights have many ancient precursors. Loyalty to community interests was classically paramount. Aristotle catalogued 158 constitutions and described their foreseeable political failure modes, noting that a self-interested elite inevitably leads to oligarchy and then tyranny (do rightwing Plato-quoters recall that philosopher kings couldn’t own private property or gain from their reign?). Though now often presented as just human nature, “individualism” wasn’t even coined until the 1830s (e.g., Chapter 8 of Alexis de Tocqueville’s Democracy in America is called “How the Americans combat individualism by the principle of self-interest rightly understood”). Today’s (hyper) liberal, or libertarian, idea of freedom as total noninterference—casting any curb as reprehensible “repression”—wasn’t fully theorized until 1958 in Isaiah Berlin’s Two Concepts of Liberty, as ‘negative liberty’. Again, don’t forget, Thatcher felt the need to engineer more individualistic souls in the 1980s, famously asserting “there's no such thing as society.” But no empirical human has ever thrived without a tribe or society (our need for others is biologically and economically built in). Older forms of ‘positive liberty’ were largely the antonyms of slavery and typically entailed duties to your commonwealth or republic or society. Synonyms for such duties are loyalty or love (as the song goes “freedom's just another word for nothing left to lose”).

Gray writes that the hyper-liberal West “is possessed by” an extreme logic of “limitless freedom” that as Ahmari shows paradoxically contorts into a cacophony of all kinds of coercions. In finding that the freedoms afforded by markets can’t be trusted Gray, Cass, and Ahmari echo a George Orwell insight. In his review of Hayek’s Road to Serfdom, Orwell wrote that free markets were “a tyranny probably worse, because more irresponsible, than that of the State." Aren’t irresponsible market actors tyrannizing us? To the point of national incoherence? In the same year as that review, Franklin Roosevelt declared a Second Bill of Rights deeming it self-evident that "Necessitous men are not free men." Sadly, neither his nor Orwell’s words won out. Our freedom-loving state instead of shielding us from predatory private leviathans, helps them tyrannize and plunder us. We are now very far from having “accepted as self-evident” Roosevelt’s idea that economic security is a precondition for freedom. In fact, widespread wage insecurity enriches elites and feeds a for-profit parasite load that weakens our commonwealth and jeopardizes our national security. Because personal and corporate greed now operate as all-trumping loyalties, our unwholesome liberalism courts incoherence. China’s amalgam of autocracy and capitalism is far from problem free (e.g., “China's Age of Malaise”) but it at least can leash its market malignancies. That’s a trick we must learn to mimic. Our political coherence and survival depend on it.