Saturday, March 12, 2011

The Excommunicated Neoliberal: Henry Simons' Proposal Re: Corporations and Monopoly Generally

The following is an excerpt from Henry Simons’ 1934 essay “A Positive Program for Laissez Faire.”  I’ve referred to Simons as “the excommunicated neoliberal” because of his role in founding the neoliberal movement, which started out with the intention of a return to classical liberalism without the tendency to devolve into socialism.  What set Simons apart from his colleagues Hayek (who Simons brought to the University of Chicago) and Friedman is that Simons distrusted the concentration of power, regardless of whether it resided in state or private hands.  Simons’ insistence on eliminating private monopoly, even to the point of socializing private industries that become anti-competitive, is what most likely got him “disappeared” from neoliberal history.  If he knew what a monster neoliberalism ultimately became, I’m sure he’d be happy to know that nobody associates him with it today.
The best way to consider what Simons has to say is within the context of the Great Depression and the New Deal proposals that were being discussed at the time he wrote the essay.  Where the New Deal ultimately broke the power of banks to create new industrial monopolies and control existing ones, it also entrenched the existing industrial monopolies and elevated national unions as a check on industry’s political power.  Simons was not hostile to unions, but he hoped they would not be necessary in a truly competitive environment cleared of the evils of financial and industrial monopoly.
Regarding Simons' proposal for corporations, I agree with the goals of eliminating monopoly and promoting competition.  I also agree with many of the details of his proposal.  Where I get hung up is on his view that the FTC should be the primary mechanism for preventing monopoly.  As we've seen, adminstrative agencies can and do get captured by the industries they're supposed to regulate (e.g., the SEC).  I'd decentralize enforcement and administration to prevent such capture.
On a related note, check out this link to access the complete reports of FDR’s Temporary National Economic Committee, which was established to study monopolies and the concentration of economic power.
And now, to the Simons excerpt (please forgive any typos):
The case for a liberal-conservative policy must stand or fall on the first proposal, abolition of private monopoly; for it is the sine qua non of any such policy.  Reasonable differences of opinion may appear as to methods; but there can be no intelligent dispute, among liberals or conservatives, as to the objective.
This proposal contemplates deliberate avoidance of the regulation expedient— or, if you please, adherence to the kind of regulation which works only through the preservation of competitive controls.  It implies that every industry should be either effectively competitive or socialized and that governments should plan definitely on socialization of the railroad and utilities and every other industry where competitive conditions cannot be preserved.  On the other hand, it should be a main objective of policy to prevent the development, in the case of other industries, of conditions which would necessitate political control of prices, or socialization.  It must suffice here merely to sketch some of the requisite measures.
There must be outright dismantling of our gigantic corporations and persistent prosecution of producers who organize, by whatever methods, for price maintenance or output limitation.  There must be explicit and unqualified repudiation of the so-called “rule of reason.”  Legislation must prohibit, and administration effectively prevent, the acquisition of any private firm, or group of firms, of substantial monopoly power regardless of how reasonably that power may appear to be exercised.  The Federal Trade Commission must become perhaps the most powerful of our governmental agencies; and the highest standards must be maintained, both in the appointment of its members and in the recruiting of its large technical staff.  In short, restraint of trade must be treated as a major crime by a vigilant administrative body.
As a main feature of the program, there must be a complete “new deal” with respect to the private corporation.  As many writers have pointed out, the corporation is simply running away with our economic (and political) system— by virtue merely of an absurd carelessness and extravagance on the part of the states in granting power to these legal creatures.  The following proposals, while tentative in detail and obviously inadequate in scope, will suggest the kind of reform which seems imperative:
             I.        Transfer to the federal government of the exclusive power to charter ordinary, private corporations, and subsequent annulment of all charters granted by the states
          II.        Enactment of federal incorporation laws, including among other the following provisions:
1.    That no corporation which engages in manufacture or merchandising of commodities or services shall own any securities of any other such corporation
2.    Limitation upon the total amount of property which any single corporation may own
                                                a.    A general limitation for all corporations, and
                                                b.    A limitation designed to preclude the existence of any industry of a single company large enough to dominate the industry— the principle being stated in legislation, the actual maxima for different industries to be fixed by the Federal Trade Commission
3.    That corporations may issue securities only in a small number of simple forms prescribed by law and that no single corporation may employ more than two (or three) of the different forms
4.    Incorporation of investment corporations under separate laws, designed to preclude their becoming holding companies or agencies of monopoly control— with limitations on their total property, on percentage holdings of securities of any single operating company, and on total investment in any single industry (again under the immediate control of the Federal Trade Commission)
5.    That investment corporations shall hold stock in operating companies without voting rights, and shall be prohibited from exercising influence over such companies with respect to management
6.    That no person shall serve as an officer in any two corporations in the same line of business and that no officer of an investment corporation shall serve as an officer of any operating company
7.    That corporate earnings shall be taxed on shareholders in such manner as to prevent evasion of personal income tax with respect to undistributed earnings (see below, pp. 66-68)
The corporation is a socially useful device for organizing the ownership and control in operating companies of size sufficient to obtain the real economies of large-scale production under qualified management.  It should not be made available, however, for financial consolidation of operating enterprises which are (or which, without serious loss of efficiency, might be) essentially independent as to production management.  Horizontal combinations should be prohibited, and vertical combinations (integration) should be permitted only so far as clearly compatible with the maintenance of real competition.  Few of our gigantic corporations can be defended on the ground of their present size is necessary to reasonably full exploitation of production economies: their existence is to explained in terms of opportunities for promoter profits, personal ambitions of industrial and financial “Napoleons,” and advantages of monopoly power.  We should look toward a situation in which the size of ownership units in every industry is limited by the minimum size of operating plant requisite to efficient, but highly specialized, production— and even more narrowly limited, if ever necessary to the maintenance of free enterprise.
Only a special class of investment corporations should be permitted to hold stock in other corporations; and their powers should be circumscribed narrowly, in order to assure that they continue to confine themselves to performing the important and legitimate functions of the investment trust.  These corporations should be merely passive investors, protecting their own stockholders by diversification rather than by exercising control over operating companies; and full precautions should be taken against their becoming, in effect, holding companies or devices of producer organizations.
All corporations should be held to a Spartan simplicity in their capital structure.  There should be the sharpest distinction between owners and creditors; and, where this distinction becomes impaired through financial adversity, reorganization should be compulsory and immediate.  It would seem wise, indeed, to require the maintenance of a predominant residual equity to limit narrowly (say to 20 per cent) the percentage of contractual obligations to total asse