Blogs > Liberty and Power > BP, the Gulf spill, and classical liberal theory

Jun 29, 2010 6:46 pm

BP, the Gulf spill, and classical liberal theory

The Gulf oil spill is offering a teachable moment as to how understanding emergent processes in the social sciences deepens and improves classical liberal analysis. Classical liberals more than any other branch of liberalism have emphasized the role of spontaneous orders in society, particularly the market. In this they offered a powerful corrective to managerial liberal ambitions of bringing society under rational administration and egalitarian suspicion of inequality, let alone earlier Marxist ideals of planning the economy. But every emphasis means not looking somewhere else, and the classical liberal emphasis on the achievements of spontaneous orders brought with it its own blind spot.

Today the Gulf of Mexico crisis is helping to illuminate it.

An unnecessary and usually unexamined assumption by most classical liberals is that voluntary contractual processes generate patterns of resource allocation that reflect individual preferences. It is this belief that underlies a frequent argument, particularly by libertarians, that government is always inferior to the market in doing whatever the market can be said to do. Government, even democratic government, is supposedly intrinsically inferior to markets in reflecting and facilitating our desires.

This frequently encountered classical liberal belief stands in theoretical and practical tension with another even more basic argument by classical liberals: that feedback processes generated in spontaneous orders facilitate cooperation and coordination by simplifying the information people need to act effectively to attain their own goals. Prices make possible far more complex chains of cooperation than would otherwise be possible. Absent prices, economies would fall back on barter, and absent market generated prices the feedback signals economies generate would fail to coordinate different plans. This insight is central to classical liberals' devastating critique of socialist planning.

The Gulf crisis shows us why assuming these two arguments are compatible is wrong. The second insight is vitally true and the first is disastrously false.
Any simplification eliminates information. A useful simplification does not eliminate vital information. With market prices, all I need to know in making a transaction is its money cost and what I expect to gain from it. At the individual level this is often true, and when it is not true, it usually causes only limited difficulties that can be rectified by product differentiation (although too much differentiation eliminates much of the utility of prices).

As such, most prices reflect instrumental values: something’s value in terms of other things. As individuals we weigh instrumental value with non-instrumental values. My house may also be my home that I love, and so is “not for sale.” I may buy locally and not from a chain because I value a vital local community in which to live over a few dollars saved by buying elsewhere. Values like living in a prosperous community and having a home are difficult to express in money terms. When we exchange these kinds of values for money (someone offers a big enough inducement to sell my home) there is always a sense of loss that would not be the case if it had only instrumental value. For example, I grew up in this home, inherited it from my parents, and it is a storehouse of cherished memories. But the price I am offered is too good to pass up, perhaps because I need the money for medical bills.

Corporations are created to serve only market values, to generate money income for their shareholders. No other values matter. A CEO who sacrificed share value to preserve any other value would risk a hostile takeover. Thus, for a publicly held corporation EVERYTHING is instrumental, and ultimately is valued only in terms of the money it can generate. Were it a human being, a corporation would be appropriately classified as a sociopath: it is unable to sympathize with others, it has no conscience. Any damage it causes to others is evaluated only in terms of what it costs the company. It the damage brings in more money than the corporation has to pay out in recompense to its destructiveness to others, then so be it.

BP’s actions in the Gulf of Mexico are in perfect accord with corporate sociopathy, as this short talk by Kindra Arnesan, a Louisiana fisherman’s wife, makes crystal clear. Assuming most of my readers will not speak with an accent similar to hers, you will have to listen closely. It will be worth the effort. BP’s actions are entirely in terms of saving money and whenever any more humane value intervenes, it is cast aside. As recent news from Massey Energy an Goldman Sachs indicates, BP is not along. We are dealing with systemic features of advanced market economies, not individual failings of bad managers.

The flaw in the usual classical liberal perspective is assuming that acting within systems of coordination has no impact on how our choices are translated into signals able to guide others in their plans. By translating our choices and their impact into prices, the market process enables them to help coordinate the exchange and production of instrumental values. This is a wonderful achievement.

But at the same time this makes non-instrumental values, the recognition of which are what makes us human, largely invisible except at the level of individual choice, where we take our own non-instrumental values into consideration when acting. When powerful organizations systemically unable to take non-instrumental values into consideration act on human beings, the results are inhuman, and when the organizations are powerful enough, ghastly.

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Gus diZerega - 6/30/2010

I was looking over the critical comments and was struck with the many seem to disagree with Milton Friedman's argument that a corporate CEO would be misusing his or her position of trust by allowing any value whatsoever to get in the way of maximizing share holder income.

I was looking at the shadow side of Friedman's point - but if someone disagree with me it seems they would also disagree with Friedman. Yes?

Also, a transcript of Kindra Arnesan's talk I referred to in my original post now exists:;forum=385&topic_id=478663&mesg_id=478844

Gus diZerega - 6/30/2010

Possibly true. What's your point? That BP decided to drill even though they anticipated losing money in their deep commitment to helping America's security?

Tim Sydney - 6/30/2010

There are some reports that the US government may have had a hand in encouraging BP to drill deep in the Gulf. And, of course, the US government motives are, surprise, surprise, "national security."

See article here.

Gus diZerega - 6/29/2010

I agree of course.

The point I was making was not to abolish corporations or to demonize them - it was to argue that everything they do (when well managed) is entirely for purely instrumental reasons. In certain contexts this can and does lead to a serious disconnect between how purely financial signals are interpreted by institutions designed to react only to them, compared to the much more complex interpretations normal human beings make when using financial feedback to help give them a better sense of how to attain their goals.

Classical liberalism has equated two propositions, one correct, one not, and this leads to theoretical myopia on some important cases. The talk Arnesan gave is a good example of such a case.

William J. Stepp - 6/29/2010

Corporations are created to serve only market values, to generate money income for their shareholders. No other values matter.

Corporations employ millions of people, and enable them to earn incomes and to improve their standard of living. They do this by producing goods and services demanded by consumers (and businesses in the case of capital goods). They also contribute philanthropy, such as FedEx's flying food and other supplies to areas devasted by disasters. And not to mention the billions of dollars they pay in taxes, including your bete noire, Wal-Mart. (What's their "return" on their "invested" taxes?)
The latest issue of The Independent Review just came in the mail. It has an interesting review of a book by Jennifer Delton, _Racial Integration in Corporate America, 1940-1990_, in which she points out that firms such as International Harvester integrated their work forces and implemented fair-employment policies. Many firms implemented a sort of private "affirmative action" long before it came in with a sledgehammer attached under Dick Milhous.

I also agree with Josh Weil's points.

Gus diZerega - 6/29/2010

Josh- Publicly held corporations do not exist to create "value" they exist to make money.

That is what keeps share prices up, and if those prices fall, no matter what other values are served, they are subject to unfriendly take over bids by those who believe they can up share value and so profit from what, in money terms, is taking a mismanaged company and making it better managed. It happens. Frequently.

Josh Weil - 6/29/2010

"The corporation exists to make money."

That's trivial. The corporation exists to create value to others over the cost they incur.

The price system signals to people how to use resources efficiently.

Under classical liberal thought, when somebody transforms the property of somebody else, they are accountable.

I'm not sure if we are just talking around eachother at this point.

Gus diZerega - 6/29/2010

You completely misunderstood me. The corporation exists to make money. Serving paying customers enables it to do so. Paying attention to nonpaying people is not of any consequence except as to the extent the law levies penalties or it upsets customers.

At its best the law is an external force influencing prices. It is part of the environment. Property rights are also external to the price system. They are established not on ability to pay, but on other criteria - even if afterwards the market makes use of them in the patterns of production that arise from it.

I think my analysis survives quite nicely.

Josh Weil - 6/29/2010

This analysis is surprisingly weak.

1) The government owned the land and oversaw the safety of the well. They set up the rules of the game.

2) The government set a liability cap. Yes, BP is going to pay more but that's largely out of goodwill.

3) Accidents happen. Whether or not this spill shows that the costs of deepwater drilling override the benefits is unclear.

4) Corporations are created to serve customers. That's how they make money. Do you really think this spill was good for BP's bottom line?


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