Friday, May 12, 2006

The Conservative Nanny State

Okay, so I finished Dean Baker's book last night, and it's good. Really good. You should all read it, if you can bear 100+ pages of economics literature. On the plus side, it's surprisingly clear and accessible. So download it here (PDF) and read it.

There's too much good stuff in there to pick one example of, but one of the things that's been bothering me lately is the leftish and greenish fetish for small enterprises. When Republicans talk about "small businesses", we should all keep our hands on our wallets. But I worry about the left version of this fantasy, too. There's this vision out there - one I've shared, on occasion - that we can rebuild the economy in a way where the market is dominated by small producers and open distribution networks. This would, the plan goes, eliminate the monstrous, gigantic corporation, clearing the way for the worker/environment (take your pick) to flourish. Call this vision the world without Wal-Mart.

Now, like I said, I've shared this vision on occasion. But the more I think about it, the less convinced I am of its viability in the real world. Economies of scale are real things, and it's hard to imagine a world where basic economic laws didn't apply. Food is just one example - the economies of scale from massive farms are obvious. Yes, this is an unsustainable form of agriculture. But we have to ask: is the next agricultural paradigm (hopefully, a sustainable one) going to succeed without the same economies of scale? I don't see it.

(Like everything on this blog, I welcome correction.)

Now, there are counter-examples. Energy is one area where it might be possible for a substantial fraction to be generated locally, via solar or small wind. If advanced batteries take off, a person or small business could conceivably make and store enough energy for their home or office. But there's still going to be a need for large generation in one form or another for the foreseeable future.

But what we're unlikely to see - unless fabbing takes off, I suppose - is small business industry taking the place of large enterprises. That being the case, progressives need to think of ways for us to arrange large enterprises in ways that don't inevitably lead to the kind of destructive tendencies we see everyday from the McDonalds and Walmarts of the world.

Fortunately, a lot of people have already been thinking about this stuff. My suggestions: Read up on the Mondragon Cooperatives and other alternate corporate forms. If you're more inclined towards fiction, read the Mars Trilogy by Kim Stanley Robinson, or his earlier book Pacific Edge.


Battlepanda said...

Of course, economies of scale dictates that some industries are closed to enterpreneurs...Bob's Bait, Tackle and oil refinery, anyone? But I would not underestimate the extent to which small businesses are desirable -- they bring vitality to the economy because they're more nimble and likely to be innovative, and obviously, they better the circumstances of their owners. I live in Taiwan, which fairly hums with enterpreneurship. You can't get stuck in traffic without somebody trying to hawk you something. There's no doubt that it's a real engine for growth and the way a lot of people managed to hoist themselves up into a more comfortable existance.

Having said that, I think it is wrongheaded to use tax incentives or other special breaks to artificially encourage small-business formation. It's something that either happens, or it won't. What the government can do is to make it as easy and hassle-free to start a small business as possible, that is, to register as a corporation. It's already pretty easy, IIRC. The other thing it can do is not to give big business an unfair advantage, like municipalities falling over themselves to offer walmart better incentives to build in their town.

A more radical way to help small businesses would be to get rid of the tax on businesses alltogether -- this will level the playing field because really small businesses can't afford to do all the tricks that big businesses do to help them get out of the tax, like the corporate headquarters in Bermuda. Instead, tax as income at a proper, progressive rate.

Now, onto farming. You are wrong. Yes, economies of scale apply, but only to a certain point -- we'll never go back to farming without tractors in North America, but there's no reason a 150 acre wheat farm should be more productive than a 300 acre or a 3000 acre farm. The humungo farms simply operates as a block of consisting of smaller (but still big) farms in parallel. Now, in the third-world, where labor imput is cheap, it is easy for small family farms to far outproduce factory farms on a calories per acre basis. You talk about the economy of scale making big factory farms inevitable, but there's another economy of scale that favors the small producer -- above a certain scale, it is impractical to let the chickens scratch among the crops to eat the pests, necessitating more imputs in terms of pesticides. Above a certain scale, it is no longer profitable to haul waste from the pigpen onto the fields, so instead we get gross, methane-belching lakes of pigpoo. Now obviously big farms are going to be more profitable than family farms in terms of dollars generated because they grow nothing but the cash crop, but profitability is not the same as productivity.

Robespierre said...

Thanks for the link to the "Conservative Nanny State" book. What a great read!

battlepanda, I don't agree that eliminating tax on small businesses is a good idea. First, as the book points out, nobody forces you to use a corporation to do business. If you don't want to pay corporate tax, organize the business as a sole proprietorship or partnership, and insure yourself against lawsuits. Organizing as a corporation allows proprietors to limit their liabilities to creditors and people hurt by their business activities. Corporate tax is a way for the state to recover some of the costs of allowing people to operate with little liability for their actions.

Second, the fact that large corporations are able to avoid taxes points to a need for better auditing and enforcement, not for eliminating tax on small business. Large corporations, especially MNCs, are able to make full use of tax havens, transfer pricing, thin capitalization, and so on, to significantly reduce, if not eliminate, taxes. It makes sense to target enforcement at these companies since the greatest tax losses occur there.

Finally, small businesses make use of the public infrastructure that taxes support. They should help pay for it.

Declan said...

Ideally, we would have global agreement on global corporate tax rates to avoid all the game playing, but that may be a long ways off. In the mean time getting more tax from income and less from corporations is one way around.

As for large companies, I think the biggest threat poised by size is that large businesses are capable of bending the political process to their will, with the global warming 'debate' being a prime example. As such, measures to limit corporate influence on politics are crucial.

Building some disincentives to increasing size (making it easier for companies to defend themselves from takeover bids would be a good start) into the system is probably not a bad idea either.