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

The Excommunicated Neoliberal: More On Henry Simons

For those interested in more info on Simons, his role as a founder of neoliberalism and his eventual excommunication from neoliberalism, I've pulled together a few documents for you.

The first is a paper from the editors of the Road From Mont Pelerin which appears to be a longer, more detailed version of the Chicago School chapter.  You can find that paper here.

The second is a paper that co-opted the title of Simons' famous essay and labeled him a "democratic socialist."  You can find that paper here.

Finally, here is Brad DeLong's defense of Simons as a true neoliberal (found on the neoliberal Cato Institute's website).  You can find that paper here.

The first paper includes this interesting little reference to seeking funding from Rockefeller:

In expressing his admiration of Simons’ financial savvy, Hutchins writes: “It sounds to me as though you would get us a million dollars from Mr. Rockefeller and another million, by way of apology, from Harry Luce. When the money comes in, I will split it with you” (SPRL, Hutchins to Simons, November 5, 1943, box 3, file 58).

UPDATE: For Ray, here's an interesting section from the first paper, which suggests substantial influence from the organization funding Hayek's work:

In 1946, Leonard Read, a businessman and crusader, had obtained a loan from the

Volker Fund to buy property in Irvington, NewYork and create the Foundation for

Economic Education (FEE), an organization the Volker Fund subsidized in perpetuity.

43

Read tended to see the world in black and white, which was why he had earned

Luhnow’s trust: “There was no big tent in Read’s world. There was only a core group of

ideas. You could either take them or leave them….” Not surprisingly, Read advocated a

inflexible stratagem for defeating socialism: “to move beyond denunciation to ‘upholding

its opposite… expertly, proudly, attractively, persuasively’” (quoted in Hoover, 2003, p.

188).

44

Apparently, the late Simons was not sufficiently infused with political virtue for

Read, because he would shortly criticize Simons’ posthumously published

Policy for a Free Society

Economic:

Some of us here have carefully gone over the galleys of “Economic Policy for a

Free Society’ by Henry Simons. We had hoped this was a piece we might assist

in distributing, but it is so well loaded with the advocacy of collectivistic ideas,

that it falls entirely out of our field. The book states many positions with which

we are in agreement, but personally, I do not believe that the cause of individual

liberty and a free market economy will be aided by it (quoted in HPHI, Letter

from Read to Director, Nov. 24, 1947, Box 58 F William Volker Funds 1939-48).

Undoubtedly passages such as the following from

discomfort at the Volker headquarters:

The afflictions of bureaucracy and ossification fall no less surely on vast private thanon governmental enterprises. The efficiency of gigantic corporations is usually a vestigial reputation earned during early, rapid growth—a memory of youth rather

than an attribute of maturity. Grown large, they become essentially political bodies,

run by lawyers, bankers, and specialized politicians, and persisting mainly to

preserve the power of control groups and to reward unnaturally an admittedly rare

talent for holding together enterprise aggregations which ought to collapse from

excessive size (Simons 1948, p. 246).

Once again, Hayek was called upon to smooth ruffled feathers. He wrote Luhnow:

“I am writing to draw your attention to Henry Simons’ book,

Society…

to be any prospect of preserving the competitive system and a free society generally… it

is certainly in the spirit of that book that Director will conduct his investigation at

Chicago” (Hayek Papers, Hayek to Luhnow, December 8, 1947, box 58, folder: William

Volker Fund: 1939-48).

At this crucial juncture, we can observe the major protagonists engaged in intense

negotiations as to what it would mean to launch the Chicago School. A number of things

become apparent, which have been altogether absent from previous accounts. First, it was

the legacy of Henry Simons that was perceived to be at issue in the fledgling project. The

mere fact of a seminar identifying itself as being “pro-free market” did not cut the

mustard when it came to concocting a credo that all parties could subscribe to. Secondly,

Luhnow and the Volker officers were not mere accessories to the rise of the Chicago

school: they were hands-on players, determined and persistent in making every dollar

count. Third, all and sundry depended upon Hayek to keep the project on even keel: no

one else on home ground seemed to command the intellectual gravitas or deft punctilio to

herd the cats. In particular, Frank Knight was nowhere to be seen in the archival records

of these negotiations. Nevertheless, even with Hayek and Director pulling the strings,

success was not a foregone conclusion.

After all, the objective was to produce an

entailed something more than a minor adjustments of accent when transporting the text

Across the Pond. The politics of postwar America presumed not only a powerful state,

but also a configuration of powerful corporations whose international competitors had

mostly been reduced to shadows of their former selves. In promoting ‘freedom’, they

were primarily intent upon guaranteeing the freedom of corporations to conduct their

affairs as they wished. Thus, the Volker Fund was not interested in bankrolling a classical

liberal economic position like that of Henry Simons, for that position did not adequately

correspond to its objectives. It is our contention that the Volker Fund pushed for a

reformulation of classic liberalism in the American context to conform to its Cold War

anti-socialist agenda.

Hayek, would just have to learn to adjust.Economic Policy were provokingEconomic Policy for a Freeit seems to me to represent the kind of attitude which must be taken if there isAmerican Road to Serfdom, and this45 The participants in the Free Market Study, and even eventually
Footnotes:

43

organizations (see “Leonard E. Read’s Small Tent Strategy,”

North, in this article, also portrays the powerful influence Read had on the libertarian movement and the

adamant, uncompromising philosophical stance of Read.

Gary North, a previous Volker staff member, refers to FEE as the granddaddy of all libertarianwww.lewrockwell.com/north/north117.html).

44

conveyed a similar philosophy: “We lean to freedom (speaking for myself) mainly because the world seems

to be moving in the opposite direction at an accelerating and, we think, a dangerous pace” (quoted in

Director 1952, p. 296).

Many felt that the left was winning the war for hearts and minds in the late 1940s. In 1952, Knight

 

The Excommunicated Neoliberal: Henry Simons' Proposal - On Banking and Currency

Simons' banking and currency proposals are an interesting mixture of Damon Vrabel's "sovereign money" and the Austrian "sound money," with sovereign money (complete public control over the money supply) being dominant.

From Simons' 1934 A Positive Program for Laissez Faire:

The proposals with reference to banking and currency arise out of the conviction that extreme fluctuations of production and employment may be prevented by rather simple (if drastic) measures with respect to money and credit.  The proposals may be defined tentatively in terms of the following measures:

• Outright federal ownership of the Federal Reserve banks.
• Annulment of all existing bank charters (as of a date, say, two years in the future), and enactment of new federal legislation providing for complete separation, betwen different classes of corporations, of the deposit and lending function of existing deposit banks.
• Legislation requiring that all institutions which maintain deposit liabilities and/or provide checking facilities (or any substitute therefor) shall maintain reserves of 100 per cent in cash and deposits with the Federal Reserve banks.
• Provision during the transition period for gradual displacement of private-bank credit as circulating medium by credit of teh Federal Reserve banks. [parenthetical ommitted]
• Displacement by notes and deposits of the Reserve banks of all other forms of currency in circulation, thus giving us a completely homogeneous national circulating medium. [parenthetical ommitted]
• Prescription in legislation of an explicit, simple rule or principle of moneytary policy, and establishment of an appointive body ("National Monetary Authority"), charged with carrying out the prescribed rule, and vested with no discretionalry powers as regards fundamental policy.
• Abolition of reserve requirements against notes and deposits of the Reserve banks, and broad grants of powers in the "National Monetary Authority" for performance of its strictly administrative function. [parenthetical ommitted]

There will be wide differences of opinion as to what the specific rule of monetary policy within such a system would be, but this is not the place to discuss the relative merits of different possible rules.  Two observations, however, may be submitted dogmatically: (1) that the adoption of one among the several definite and unambiguous rules proposed by competent students is more important than the choice among them and (2) that rigid stabilization of exchange rates on other (gold-standard) countries is totatly inadequate and undesirable as a rule of national currency policy.  . . .

The proposals with reference to banking contemplate displacement of existing deposit banks by at least two distinct types of institutions.  First, there would be deposit banks which, maintaining 100 per cent reservers, simply could not fail, so far as depositors were concerned, and could not create or destroy effective money.  These institutions would accept deposits just as warehouses accept goods.  Their income would be derived exclusivel from service charges . . .

A second type of institution, substantially in the form of the investment trust, would perform the lending functions of existing banks.  Such companies would obtain funds for lending by sale of their own stock; and their ability to make loans would be limited by the amount of funds so obtained . . .

These banking proposals define means for eliminating the perverse elasticity of credit which obtains under a system of private, commercial banking and for restoring to the central governmetn complete control over the quantity of effective money and its value . . .

NEXT UP: Simons' view on taxation.

The Excommunicated Neoliberal: Henry Simons' Proposal - The Broad Outline

This post will be the first of a series that sets forth Henry Simons' proposal set forth in his 1934 essay A Positive Program for Laissez-Faire, which Hayek initially praised.  As discussed in Chapter 4 of The Road from Mont Pelerin, Henry Simons played a significant role in founding the modern neoliberal movement.  Simons ultimately was deemed a social democrat by the neoliberal establishment.

Simons' proposal is important because it establishes an example of legitimate "neoliberal" thought at the time the movement was founded and, thus, provides a benchmark for understanding how and why neoliberalism morphed from an attempt to reform classical liberalism into an entirely different animal.

Without further ado, here is Simons' proposal as he outlined it:

The main elements in a sound liberal program may be defined in terms of five proposals or objectives (in a descending scale of importance):

• Elimination of private monopoly in all its forms
• Through drastic measures for establishing and maintaining effectively competitive conditions in all industries where competition can function as a regulative agency (as a means for insuring effective utilization of resources and for preventing exploitation), and
• Through gradual transition to direct government ownership and operation in the case of all industries where competition cannot be made to function effectively as an agency of control
• Establishment of more definite and adequate "rules of the game" with resepect to money, through
• Abolition of private deposit banking on the basis of fraction reserves
• Establishment of a completely homogeneous, national circulating medium, and
• Creation of a system sunder which a federal monetary authority has a direct and inescapable responsibility for controlling (not with broad discretionary powers, but under simple, definite rules laid down in legislation) the quantity (or, through quantity, the value) of effective money
• Drastic change in our whole tax system, with regard primarily for the effects of taxation upon the distribution of wealth and income
• Gradual withdrawal of the the enormous differential subsidies implicit in our present tariff system
• Limitation upon the squandering of our resources in advertising and selling activities

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 and conservatives, as to the objective