Selection from "The Iron Fist Behind Invisible Hand"

by Kevin Carson

PATENTS.

The patent privilege has been used on a massive scale to promote concentration of capital, erect entry barriers, and maintain a monopoly of advanced technology in the hands of western corporations. It is hard even to imagine how much more decentralized the economy would be without it. Right-libertarian Murray Rothbard considered patents a fundamental violation of free market principles.

"The man who has not bought a machine and who arrives at the same invention independently, will, on the free market, be perfectly able to use and sell his invention. Patents prevent a man from using his invention even though all the property is his and he has not stolen the inven- tion, either explicitly or implicitly, from the first inventor. Pa- tents, therefore, are grants of exclusive monopoly privilege by the State and are invasions of property rights on the market." [Man, Economy, and State vol. 2 p. 655]

Patents make an astronomical price difference. Until the early 1970s, for example, Italy did not recognize drug patents. As a result, Roche Products charged the British national health a price over 40 times greater for patented components of Librium and Valium than charged by competitors in Italy [Raghavan, Recolonization p. 124].

Patents suppress innovation as much as they encourage it. Chakravarthi Raghavan pointed out that research scientists who actually do the work of inventing are required to sign over patent rights as a condition of employ- ment, while patents and industrial security programs prevent sharing of information, and suppress competition in further improvement of patented inventions. [op. cit. p. 118] Rothbard likewise argued that patents elim- inate "the competitive spur for further research" because incremental inno- vation based on others' patents is prohibited, and because the holder can "rest on his laurels for the entire period of the patent," with no fear of a competitor improving his invention. And they hamper technical progress because "mechanical inventions are discoveries of natural law rather than individual creations, and hence similar independent inventions occur all the time. The simultaneity of inventions is a familiar historical fact." [op. cit. pp. 655, 658-659].

The intellectual property regime under the Uruguay Round of GATT goes far beyond traditional patent law in suppressing innovation. One benefit of traditional patent law, at least, was that it required an invention under patent to be published. Under U.S. pressure, however, "trade secrets" were included in GATT. As a result, governments will be required to help sup- press information not formally protected by patents [Raghavan, op. cit. p. 122].

And patents are not necessary as an incentive to innovate. According to Rothbard, invention is rewarded by the competitive advantage accruing to the first developer of an idea. This is borne out by F. M. Scherer's testimony before the FTC in 1995 [Hearings on Global and Innovation-Based Compe- tition]. Scherer spoke of a survey of 91 companies in which only seven "accorded high significance to patent protection as a factor in their R & D investments." Most of them described patents as "the least important of considerations." Most companies considered their chief motivation in R & D decisions to be "the necessity of remaining competitive, the desire for efficient production, and the desire to expand and diversify their sales." In another study, Scherer found no negative effect on R & D spending as a result of compulsory licensing of patents. A survey of U.S. firms found that 86% of inventions would have been developed without patents. In the case of automobiles, office equipment, rubber products, and textiles, the figure was 100%.

The one exception was drugs, in which 60% supposedly would not have been invented. I suspect disingenuousness on the part of the respondants, however. For one thing, drug companies get an unusually high portion of their R & D funding from the government, and many of their most lucrative products were developed entirely at government expense. And Scherer himself cited evidence to the contrary. The reputation advantage for being the first into a market is considerable. For example in the late 1970s, the structure of the industry and pricing behavior was found to be very similar between drugs with and those without patents. Being the first mover with a non-patented drug allowed a company to maintain a 30% market share and to charge premium prices.

The injustice of patent monopolies is exacerbated by government funding of research and innovation, with private industry reaping monopoly profits from technology it didn't spend a penny to develop. In 1999, extending the research and experimentation tax credit was, along with extensions of a number of other corporate tax preferences, considered the most urgent busi- ness of the Congressional leadership. Hastert, when asked if any elements of the tax bill were essential, said: "I think the [tax preference] extenders are something we're going to have to work on." Ways and Means Chair Bill Archer added, "before the year is out... we will do the extenders in a very stripped down bill that doesn't include anything else." A five-year extension of the research and experimentation credit (retroactive to 1 July 1999) was expected to cost $13.1 billion. (That credit makes the effective tax rate on R & D spending less than zero.) [Citizens for Tax Justice, GOP Leaders Distill Essence of Tax Plan].

The Government Patent Policy Act of 1980, with 1984 and 1986 amend- ments, allowed private industry to keep patents on products developed with government R & D money--and then to charge ten, twenty, or forty times the cost of production. For example, AZT was developed with government money and in the public domain since 1964. The patent was given away to Burroughs Wellcome Corp. [Chris Lewis, "Public Assets, Private Profits"].

As if the deck were not sufficiently stacked already, the pharmaceutical companies in 1999 actually lobbied Congress to extend certain patents by two years by a special act of private law [Benjamin Grove, "Gibbons backs drug-monopoly bill"].

Patents have been used throughout the twentieth century "to circumvent antitrutst laws," according to David Noble. They were "bought up in large numbers to suppress competition," which also resulted in "the suppression of invention itself." [America by Design, pp. 84-109]. Edwin Prindle, a corporate patent lawyer, wrote in 1906:

"Patents are the best and most effective means of controlling competition. They occasionally give absolute command of the market, enabling their owner to name the price without regard to the cost of production.... Patents are the only legal form of absolute monopoly" [America by Design p. 90].

Patents played a key role in the formation of the electrical appliance, communications, and chemical industries. G. E. and Westinghouse expanded to dominate the electrical manufacturing market at the turn of the century largely through patent control. In 1906 they curtailed the patent litiga- tion between them by pooling their patents. AT&T also expanded "primarily through strategies of patent monopoly." The American chemical industry was marginal until 1917, when Attorney-General Mitchell Palmer seized German patents and distributed them among the major American chemical companies. DuPont^? got licenses on 300 of the 735 patents [America by Design pp. 10, 16].

Patents are also being used on a global scale to lock the transnational corporations into a permanent monopoly of productive technology. The single most totalitarian provision of the Uruguay Round is probably its "intellectual property" provisions. GATT has extended both the scope and duration of patents far beyond anything ever envisioned in original patent law. In England, patents were originally for fourteen years--the time needed to train two journeymen in succession (and by analogy, the time necessary to go into production and reap the initial profit for originality). By that stan- dard, given the shorter training times required today, and the shorter lifespan of technology, the period of monopoly should be shorter. Instead, the U.S. seeks to extend them to fifty years [Raghavan, Recolonization pp. 119-120]. According to Martin Khor Kok Peng, the U.S. is by far the most absolutist of the participants in the Uruguay Round. Unlike the European Community, and for biological processes for animal and plant protection [The Uruguay Round and Third World Sovereignty p. 28].

The provisions for biotech are really a way of increasing trade barriers, and forcing consumers to subsidize the TNCs engaged in agribusiness. The U.S. seeks to apply patents to genetically-modified organisms, effectively pirating the work of generations of Third World breeders by isolating beneficial genes in traditonal varieties and incorporating them in new GMOs--and maybe even enforcing patent rights against the traditional variety which was the source of the genetic material. For example Monsanto has attempted to use the presence of their DNA in a crop as prima facie evidence of pirating--when it is much more likely that their variety cross-pollinated and contaminated the farmer's crop against his will. The Pinkerton agency, by the way, plays a leading role in investigating such charges--that's right, the same folks who have been breaking strikes and kicking organizers down stairs for the past century. Even jack-booted thugs have to diversify to make it in the global economy.

The developed world has pushed particularly hard to protect industries relying on or producing "generic technologies," and to restrict diffusion of "dual use" technologies. The U. S.-Japanese trade agreement on semi-conductors, for example, is a "cartel-like, 'managed trade' agreement." So much for "free trade." [Dieter Ernst, "Technology, Economic Security and Latecomer Idustrialization," in Raghavan Pp. 39-40].

Patent law traditionally required a holder to work the invention in a country in order to receive patent protection. U.K. law allowed compulsory licensing after three years if an invention was not being worked, or being worked fully, and demand was being met "to a substantial extent" by impor- tation; or where the export market was not being supplied because of the patentee's refusal to grant licenses on reasonable terms [Raghavan pp. 120, 138].

The central motivation in the GATT intellectual property regime, how- ever, is to permanently lock in the collective monopoly of advanced technology by TNCs, and prevent independent competition from ever arising in the Third World. It would, as Martin Khor Kok Peng writes, "effectively pre- vent the diffusion of technology to the Third World, and would tremendously increase monopoly royalties of the TNCs whilst curbing the potential devel- opment of Third World technology." Only one percent of patents worldwide are owned in the Third World. Of patents granted in the 1970s by Third World countries, 84% were foreign-owned. But fewer than 5% of foreign-owned patents were actually used in production. As we saw before, the purpose of owning a patent is not necessarily to use it, but to prevent anyone else from using it [op. cit. pp. 29-30].

Raghavan summed up nicely the effect on the Third World:

"Given the vast outlays in R and D and investments, as well as the short life cycle of some of these products, the leading Industrial Nations are trying to prevent emergence of competition by controlling... the flows of technology to others. The Uruguay round is being sought to be used to create export monopolies for the products of Industrial Nations, and block or slow down the rise of competitive rivals, particularly in the newly industrializing Third World countries. At the same time the technologies of senescent industries of the north are sought to be exported to the South under conditions of assured rentier income" [op. cit. p. 96].

Corporate propagandists piously denounce anti-globalists as enemies of the Third World, seeking to use trade barriers to maintain an affluent Western lifestyle at the expense of the poor nations. The above measures--trade barriers--to permanently suppress Third World technology and keep the South as a big sweatshop, give the lie to this "humanitarian" concern. This is not a case of differing opinions, or of sincerely mistaken understanding of the facts. Setting aside false subtleties, what we see here is pure evil at work--Orwell's "boot stamping on a human face forever." If any archi- tects of this policy believe it to be for general human well-being, it only shows the capacity of ideology to justify the oppressor to himself and enable him to sleep at night.

INFRASTRUCTURE.

Spending on transportation and communications networks from general revenues, rather than from taxes and user fees, allows big business to "externalize its costs" on the public, and conceal its true operating expenses. Chomsky described this state capitalist underwriting of shipping costs quite accurately:

"One well-known fact about trade is that it's highly subsidized with huge market-distorting factors.... The most obvious is that every form of transport is highly subsidized.... Since trade naturally requires transport, the costs of transport enter into the calculation of the efficiency of trade. But there are huge subsidies to reduce the costs of transport, through manipulation of energy costs and all sorts of market- distorting functions" ["How Free is the Free Market?"].

Every wave of concentration of capital has followed a publicly subsi- dized infrastructure system of some sort. The national railroad system, built largely on free or below-cost land donated by the government, was followed by concentration in heavy industry, petrochemicals, and finance. The next major infrastructure projects were the national highway system, starting with the system of designated national highways in the 1920s and culminating with Eisenhower's interstate system; and the civil aviation system, built almost entirely with federal money. The result was massive concentration in retail, agriculture, and food processing.

The third such project was the infrastructure of the worldwide web, originally built by the Pentagon. It permits, for the first time, direction of global operations in real time from a single corporate headquarters, and is accelerating the concentration of capital on a global scale. To quote Chomsky again, "The telecommunications revolution... is... another state component of the international economy that didn't develop through private capital, but through the public paying to destroy themselves...." [Class Warfare p. 40].

The centralized corporate economy depends for its existence on a shipping price system which is artificially distorted by government intervention. To fully grasp how dependent the corporate economy is on socializing transportation and communications costs, imagine what would happen if truck and aircraft fuel were taxed enough to pay the full cost of maintenance and new building costs on highways and airports; and if fossil fuels depletion allowances were removed. The result would be a massive increase in shipping costs. Does anyone seriously believe that Wal-Mart could continue to undersell local retailers, or corporate agribusiness could destroy the family farm?

Intellectually honest right libertarians freely admit as much. For example, Tiber Machan wrote in The Freeman that

"Some people will say that stringent protection of rights [against eminent domain] would lead to small airports, at best, and many constraints on construction. Of course--but what's so wrong with that?"

"Perhaps the worst thing about modern industrial life has been the power of political authorities to grant special privileges to some enterprises to violate the rights of third parties whose permission would be too expensive to obtain. The need to obtain that permission would indeed seriously impede what most environmentalists see as rampant--indeed reckless--industrialization."

"The system of private property rights--in which... all... kinds of... human activity must be conducted within one's own realm except where cooperation from others has been gained voluntarily--is the greatest moderator of human aspirations.... In short, people may reach goals they aren't able to reach with their own resources only by con- vincing others, through arguments and fair exchanges, to cooperate ["On Airports and Individual Rights"]."

The logjams and bottlenecks in the transportation system are an inevitable result of subsidies. Those who debate the reason for planes stacked up at O'Hare airport, or decry the fact that highways and bridges are deteriorating several times faster than repairs are being budgeted, need only read an economics 101 text. Market prices are signals that relate supply to demand. When subsidies distort these signals, the consumer does not per- ceive the real cost of producing the goods he consumes. The "feedback loop" is broken, and demands on the system overwhelm it beyond its ability to respond. When people don't have to pay the real cost of something they consume, they aren't very careful about only using what they need.

It is interesting that every major antitrust action in this century has involved either some basic energy resource, or some form of infrastructure, on which the overall economy depends. Standard Oil, AT&T, and Microsoft were all cases in which monopoly price gouging was a danger to the economy as a whole. This brings to mind Engels' observation that advanced capitalism would reach a stage where the state--"the official representative of capitalist society"--would have to convert "the great institutions for intercourse and communication" into state property. Engels did not foresee the use of antitrust actions to achieve the same end [Anti-Duhring].

"MILITARY KEYNESIANISM".

The leading sectors of the economy, including cybernetics, communications, and military industry, have their sales and profits virtually guaranteed by the state. The entire manufacturing sector, as a whole, was permanently expanded beyond recognition by an infusion of federal money during World War II. In 1939 the entire manufacturing plant of the U.S. was valued at $40 billion. By 1945, another $26 billion worth of plant and equipment had been built, "two thirds of it paid for directly from government funds." The top 250 corporations in 1939 owned 65% of plant and equipment, but during the war operated 79% of all new facilities built with government funds [Mills, The Power Elite p. 101].

Machine tools were vastly expanded by the war. In 1940, 23% of machine tools in use were less than 10 years old. By 1945, the figure had grown to 62%. The industry contracted rapidly after 1945, and would probably have gone into a depression, had it not returned to wartime levels of output during Korea and remained that way throughout the Cold War. The R & D complex, likewise, was a creation of the war. Between 1939 and 1945, the share of AT&T research expenditures made up of government contracts expanded from 1% to 83%. Over 90% of the patents resulting from government-funded wartime research were given away to industry. The modern electronics industry was largely a product of World War II and Cold War spending (e.g., mini- aturization of circuits for bomb proximity fuses, high capacity computers for command and control, etc.) [Noble, Forces of Production pp. 8-16].

The jumbo jet industry would never have come about without continuous Cold War levels of military spending. The machine tools needed for producing large aircraft were so complex and expensive that no "small peacetime orders" would have provided a sufficient production run to pay for them. Without large military orders, they would simply not have existed. The aircraft industry quickly spiraled into red ink after 1945, and was near bankruptcy at the beginning of the 1948 war scare, after which Truman restored it to life with massive spending. By 1964, 90% of aerospace R & D was funded by the government, with massive spillover into the electronics, machine tool, and other industries [Noble, Forces of Production pp. 6-7; Kofsky, Harry S. Truman and the War Scare of 1948].

OTHER SUBSIDIES.

Infrastructure and military spending are not the only examples of the process by which cost and risk are socialized, and profit is privatized--or, as Rothbard put it, by which "our corporate state uses the coercive taxing power either to accumulate corporate capital or to lower corporate costs." ["Confessions of a Right-Wing Liberal"]. Some of these government assumptions of risk and cost are ad hoc and targeted toward specific industries.

Among the greatest beneficiaries of such underwriting are electrical utilities. Close to 100% of all research and development for nuclear power is either performed by the government itself, in its military reactor program, or by lump-sum R & D grants; the government waives use-charges for nuclear fuels, subsidizes uranium production, provides access to government land below market price (and builds hundreds of miles of access roads at taxpayer expense), enriches uranium, and disposes of waste at sweetheart prices. The Price-Anderson Act of 1957 limited the liability of the nuclear power industry, and assumed government liability above that level [Adams and Brock pp. 279-281]. A Westinghouse official admitted in 1953,

"If you were to inquire whether Westinghouse might consider putting up its own money.., we would have to say "No." The cost of the plant would be a question mark until after we built it and, by that sole means, found out the answer. We would not be sure of successful plant operation until after we had done all the work and operated succes- sfully.... This is still a situation of pyramiding uncertainties.... There is a distinction between risk-taking and recklessness [Ibid. pp. 278-279]."

So much for profit as a reward for the entrepreneur's risk. These "entrepreneurs" make their profits in the same way as a seventeenth-century courtier, by obtaining the favor of the king. To quote Chomsky,

"the sectors of the economy that remain competitive are those that feed from the public trough.... The glories of Free Enterprise provide a useful weapon against government policies that might benefit the general population.... But the rich and powerful... have long appre- ciated the need to protect themselves from the destructive forces of free-market capitalism, which may provide suitable themes for rousing oratory, but only so long as the public handout and the regulatory and protectionist apparatus are secure, and state power is on call when needed (Chomsky, Deterring Democracy p. 144]."

Dwayne Andreas, the CEO of Archer Daniels Midland, admitted that "[t]here is not one grain of anything in the world that is sold in the free market. Not one. The only place you see a free market is in the speeches of politicians." [Don Carney, "Dwayne's World"].

Big business also enjoys financial support through the tax code. It is likely that most of the Fortune 500 would go bankrupt without corporate welfare. Direct federal tax breaks to business in 1996 were close to $350 billion [Based on my crunching on numbers in Zepezauer and Naiman, Take the Rich Off- Welfare]. This figure, for federal corporate welfare alone, is over two-thirds of annual corporate profits for 1996 ($460 billion) [Statistical Abstract of the United States 1996].

Estimates of state and local tax breaks is fairly impressionistic, since they vary not only with each critic's subjective definition of "cor- porate welfare," but involve the tax codes of fifty states and the public records of thousands of municipalities. Besides money pimps in the state and local governments are embarassed by the sweet deals they give their corporate johns. In my own state of Arkansas, the incorruptible Baptist preacher who serves as governor opposed a bill to require quarterly public reports from the Department of Economic Development on its special tax breaks to businesses. "[K]eeping incentive records from public scrutiny is important in attracting business," and releasing "proprietary information" could have a "chilling effect." [Arkansas Democrat-Gazette 3 Feb. 2001]. But state and local corporate welfare could easily amount to a figure com- parable to federal.

Taken as a whole, direct tax breaks to business at all levels of government are probably on the same order of magnitude as corporate profits. And this understates the effect of corporate welfare, since it disproportionately goes to a handful of giant firms in each industry. For example, accelerated depreciation favors expansion by existing firms. New firms find it of little benefit, since they are likely to lose money their first few years. An established firm, however, can run a loss in a new venture and charge the accelerated depreciation against its profits on old facilities [Baratz, "Corporate Giants and the Power Structure"].

The most outrageous of these tax expenditures is the subsidy to the actual financial transactions by which capital is concentrated. The interest deduction on corporate debt, most of which was run up on leveraged buyouts and acquisitions, costs the treasury over $200 billion a year [Zepezauer p. 122-123]. Without this deduction, the wave of mergers in the 1980s, or the megamergers of the 1990s, could never have taken place. On top of everything else, this acts as a massive direct subsidy to banking, increasing the power of finance capital in the corporate economy to a level greater than it has been since the Age of Morgan.

A closely related subsidy is the exemption from capital gains of securities transactions involved in corporate mergers (i.e. "stock swaps")--even though premiums are usually paid well over the market value of the stock [Green p. 11]. The 1986 tax reform included a provision which prevented corporations from deducting fees for investment 'banks and advisers involved in leveraged buyouts. The 1996 minimum wage increase repealed this provision, with one exception: interest deductions were removed for employee buyouts [Judis, "Bare Minimum"].

Right libertarians like Rothbard object to classifying tax expenditures as subsidies. It presumes that tax money rightfully belongs to the govern- ment, when in fact the government is only letting them keep what is rightfully theirs. The tax code is indeed unfair, but the solution is to elim- inate the taxes for everyone, not to level the code up [Rothbard, Power and Market p. 104]. This is a very shaky argument. Supporters of tax code reform in the 1980s insisted that the sole legitimate purpose of taxation was to raise revenue, not to provide carrots and sticks for social engineering purposes. And, semantic quibbling aside, the current tax system would be exactly the same if we started out with zero tax rates and then imposed a punitive tax only on those not engaged in favored activities. Either way, the uneven tax policy gives a competitive advantage to privileged industries.