Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure* Walter E

JournolojL#krrorian Sludie, Vr.1. I. No. I, pp. 59-79. Pcrgamon Preu 1917. Printed in Great Britain

TOWARD A THEORY OF STATE CAPITALISM: ULTIMATE DECISION-MAKING AND CLASS STRUCTURE* WALTER E. GRINDER Depanrnenl of Socioi Sciences, Poiytechniclnctilule of New York and JOHN HAGEL 111 Harvard Law School andHaward Business School

This paper represents the initial phase of a larger study which will present the outline of an analytical model of the structure and dynamics of the state capitalist system as it has evolved historically in the US. The model will attempt to synthesize the theoretical insights of Austrian economics and the concrete historical and socioloaical. analysis of both Old Klght and Neu Lcit rrmcs of the status quo. This inmal paper iocuscs on tuo related problems: rhe identtficauon oi a key locus oi ultimate dti!,~on.makmg within the aalc cap~tal~st,yslem and the prcsenvdrion of an outline of the broader structuralcharacteristics of this system. This pawin isolation offers a highly static, structural model of the system and our subsequent work in this

field will~~~~~~ focus an~ ~~ a descriotian~ , of the dvnamic orocesses underlvin~. - the evolution of rhc synem. Th!, later work xill mvolre a sysremauc appl~cationofthe Miscs~antheory of inlcrvcntionism and [he Auclrian theory of the busmss cycle in an auempl lo understand hou and why the stale cap~talistsyacm erohes ober tlme. Most lmponantly. this later analysis will reinforce our assertion, somewhat arbitrarily made at this point, that the state capitalist systemis characterized by inherent instability. In view of the broad scope of the problems covered, the analysis which follows will necessarily be highly summary, touching only on the basic outline of the argument, and the details will have to be supplied in lengthier studies which will follow this one.

I. THE CAPITAL MARKET AS A LOCUS OF rationale for identifying the institutional ULTIMATE DECISION-MAKING embodiments of the capital market - and particularly the banking sector - as a locus of Introduction ultimate decision-making within the state The first half of this paper will focus on three capitalist system. fundamental propositions: (1) entrepreneurial decision-making constitutes a particularly Entrepreneurial decision-making within market important category of decision-making within systems any market system since it determines the nature One of the fundamental insights of the and extent of structural transformations within Austrian economists such as von Mises and the economic system over time; (2) as the market Hayek - which emerged prominently in the system evolves and becomes increasingly historic debate with Lange and other economists functionally specialized, the capital market will over the merits of planning as an alternative to emerge as a significant locus of entrepreneurial the market -was the essential role of the market decision-making; and (3) although this trend is system as a mechanism for gathering, transmit- inherent within the market system itself, the ting and evaluating informationl'l. The exogenous factor of state intervention in the competitive market process originates in, and capital market dramatically reinforces the capital presupposes, the imperfect knowledge of its sector's strategic position in the economy participants. Since the market process necessarily through cartellization and inflationary monetary takes place over time, all the participants policies. These propositions constitute our formulate their plans ex ante on the basis of the information then available to them and readjust * The aripinal version of this oaoer. . was delivered at the Second Libertarian Scholars Conference, October 1974, these plans as subsequent events make additional New Yark City. information available to the market participants WALTER E. GRINDER AND JOHN HAGEL I11 through the operation of the price mechanism. While Professor Kirzner, both in his book and in Professor Israel Kirzner in his recent book a subsequent paper on the same subject, stresses Competition and Entrepreneurship has consid- persistently that asset ownership is analytically erably enriched our understanding of the never a condition for pure entreprene~rship'~', functioning of the market process by systemat- we believe that, for the purpose of "real world" ically focusing attention on the role of the economic analysis, entrepreneurial activity and entrepreneur"'. Professor Kirzner identifies asset ownership are inextricably linked - the entrepreneurial activity as an alertness to former presupposes the latter. Exchange previously unnoticed changes in the economic relationship, and particularly production activi- system as revealed through price discrepancies ties, are fidy imbedded in time and the would- between particular products on the product be entrepreneur must either possess, or acquire market and the resources on the factor market access to, the assets which he needs in ortler to required to supply the product. By acting on the act upon his alertness in the market. Either he basis of this alertness to price discrepancies, already owns the capital necessary to act upon the entrepreneur captures entrepreneurial his alertness or else he must obtain the capital profits which alert other market participants to from some other source. In either case, capital previously overlooked profit opportunities and ownership emerges as a critical dimension of provides them with the information necessary to entrepreneurial activity. provoke them to change their own plans so that This additional dimension of entrepreneurial. they, too, might be able to share in these new activity permits us to identify three characteristics profit opportunities. which define entrepreneurship: (1) alertness to Entrepreneurial activity is therefore the price discrepancies; (2) control, or ultimate essential means by which the new information decision-making, over the means required to supplied by the operation of the price mechanism act upon this alertness in the market; and (3) is disseminated among the participants of the responsibility, or uncertainty-bearing, for the market system. As a consequence of the consequences of acting in the market on the dissemination of this new information, economic basis of entrepreneurial One resources are shifted from existing uses to new implication of this analysis is that the entrepre- ones as market participants seek to correct neurial decision-maker - the one who decides previous, mistaken decisions based upon to act upon a perceived price discrepancy - imperfect information and attempt to coordinate must, by definition, represent the ultimate their plans more effectively with other market decision-maker and must, similarly, reap the participants on the basis of the new information profit which results from superior alertness to available. Entrepreneurial activity therefore discrepancies on the market. Thus, performs two related equilibrating functions entrepreneurial alertness cannot be hired since within the market system: it disseminates new the employer, if he captures the profit which information and it stimulates a reallocation of result$ from the superior alertness to price economic resources. This reallocation of discrepancies in the market, himself becomes economic resources in the field of long-term theonly entrepreneur. capital investment results in the structural In the case of the individual alert to new transformation of the market economies over entrepreneurial profit opportunities who must time. borrow the capital necessary to act upon his However, in order for entrepreneurship to be altemess, the lender, in deciding to risk his capital praxeologically significant, it must transcend on the alertness of the borrower, in an important mere mental alertness to new opportunities on sense becomes a "partner" in entrepreneurial the market. In order for price discrepancies to decision-making. The capital market must be be really "seen", to be seen in a sense relevant conceptually distinguished from the labor for economic analysis, the entrepreneur must market or any other factor market since the possess the means necessary to act upon this would-be entrepreneur does not confront an newly acquired information within the market. independently established, uniform market TOWARD A THEORY OF STATE CAPITALISM: ULTIMATE DECISION-MAKING AND CLASS STRUCTURE 61 price for capital. In addition to the pure interest nizes the equally important function of rate and the necessary adjustment for anticipated identifying the relevant ends-means framework inflation, there is an additional variable as an integral part of human activity. Although component in the market interest rate which these two types of decision-making are quite reflects the degree of uncertainty anticipated in distinct, each market participant acts in a wholly each particular investment. The lender in the integrated manner, exhibiting both the decision- capital market, in the normal course of his making characteristic of "economizing" activity affairs, questions prospective borrowers as well as of "entrepreneurial" activity. regarding the purpose of the requested loans. The capital market as a locus for entrepreneurial This line of questioning - what, why, how - decision-making immediately distinguishes in a non-trivial sense The evolution of market economies, however, the capital lender from the supplier of any other suggests that entrepreneurial activity may factor of production. become increasingly concentrated within the The decision by the capital-owning lender capital market as the functional specialization regarding the degree of uncertainty involved in of the economy becomes more pronounced. The each investment is essentially an entrepreneurial natural inequality which distinguishes people decision and the consequent division of the from one another in every field of human entrepreneurial profit between the borrower and endeavor, when combined with the varying the lender supports the contention that both location of natural resources, provide a powerful have become partners in the entrepreneurial impetus towards specialization in any economic decision-making process15'. Frank H. Knight system. While a certain degree of specialization recognized this in the following excerpt from is possible even in primitive, barter economies, his book Risk, Uncertainty and Profit: "...it the emergence of money and a system of indirect must often happen that entrepreneur ability exchange considerably widens the potential will not be associated with a situation on the market available for every product and thereby part of its possessor enabling him to make vastly increases the scope for specialization and satisfactory guarantees of the contractual division of labor[8'. In particular, the emergence incomes promised. Under such circumstances it of a commonly accepted exchange medium may be mutually profitable for him to enter into gives rise to a variety of specialized institutions agreement with someone in a position to under- designed to facilitate the storage and handling write his employment contracts, but not himself of moneylgl. possessed of the ability or disposition to under- As credit becomes an increasingly accepted take the direction of enterprises. The form of method for financing commercial transactions, this partnership and conditions of division of financial institutions possessing large accumu- the profit may be highly vari~us"~~'.Since the lations of liquid capital gradually specialize in capital-owning lender must make the ultimate various fvrms of credit operations, including decision whether to act upon the entrepreneurial long, medium and short-term lending activity. alertness of the borrower and bears the uncer- The evolution of increasingly capital intensive tainty inherent in entrepreneurial activity, there production processes eventually gives rise to a is a strong prima facie case for believing that new category of financial institutions - the the lender in the capital market becomes the key investment banks -which specialize in raising entrepreneurial actor1". the large sums of capital necessary to finance As Professor Kirzner points out, the concept the expansion of production operations. Other of entrepreneurial activity is analytically financial institutions specialize in insuring large- distinct from the limited, Robbinsian image of scale commercial activities to minimize the risks the "economizing" market participant. The to which corporations are exposed. In fact, one of economizing market participant postulated by the key integrative roles of the capital market Lord Robbins acts to maximize goal satisfaction within advanced market systems is to concent- within a given ends-means framework whereas rate the burden of risk within specialized the concept of entrepreneurial activity recog- institutions which, because of the nature of their 62 WALTER E. GRINDER AND JOHN HAGEL 111 activities, are more capable of bearing it than financial institutions, and particularly banks, other market participants. The entire complex perform their entrepreneurial function. The of financial institutions constitutes' an increasingly ultimate decision-maker in the advancing of diverse capital market capable of servicing the capital over time is necessarily the original changing financial needs of a highly specialized owner of fixed or circulating capital. who market economy. determines at any given time the amount of Two distinct characteristics of this capital capital that will be available for investment. market enable its participants to assume an Once this initial decision is made to choose increasing degree of entrepreneurial activity future consumption over present consumption, within the economy as a whole. First, the capital the capital owners must also decide among market by its very nature provides a large reserve every gradation conceivable in the investment of readily mobilizable capital funds which opportunities that are available to them. In increases the flexibility and efficiency of making this decision, the individual investor will response to price discrepancies by the financial choose between investment opportunities~which institutions. Perhaps even more importantly, are relatively secure, offering the prospect of however, the financial institutions in the capital stable returns, and investments which require market develop highly specialized capabilities considerable risk but, in contrast, may produce for the accumulation and evaluation of vast much higher returns. Thus, an entire range of amounts of information regarding market gradations in investment opportunities may be activities and trends. distinguished, extending from "passive" saving Money is a medium of exchange for the in banking institutions to "active" investment entire economy; it provides a mode of integration directly in highly speculative industrial or among highly diversified products, markets and commercial ventures. regions, molding them all into a single, In the case of capital owners who choose to interacting and interdependent system. The deposit their money in banking institutions, financial institutions which specialize in the two subtly differentiated levels of ultimate handling of the exchange commodity are decision-making become discernible. First, the therefore precisely those institutions which are capital owner remains as an ultimate decision- most predisposed to adopt a "systems" maker in a passive sense since his investment perspective transcending individual industries decision is characterized by an orientation or markets. In order for them to perform their towards future consumption, rather than function effectively, they must integrate production. He has chosen the security of a information from all sectors of the economy and reasonably predictable future income stream develop the alertness to price discrepancies which which will accrue to him over time. In his provides the basis for entrepreneurial activity. decision-making, he therefore approaches the Possessing both this highly specialized alertness role of a pure capitalist concerned exclusively and the means to act upon price discrepancies with returns on intertemporal exchange and not revealed by this alertness, the financial with potential entrepreneurial returns. While the institutions in the capital market naturally passive saver is nevertheless still engaged in a emerge as an increasingly significant locus of limited form of entrepreneurial decision- specialized entrepreneurial activity within the making, he has effectively reduced it to a market system. Since banks are precisely those minimum. Of course, the passive saver at any institutions specifically designed to act as time retains the option of withdrawing his funds intermediaries in all monetary transactions (within possible constraints imposed by time occurring throughout the economic system, it is deposits) and either devoting them to present natural that they should acquire an influential consumption, transferring them to another coordinating position within the capital bank or engaging in more "active" forms of market itself. investment activity. To this extent, he does At this point, it is essential to elaborate in retain a passive form of ultimate decision- some detail the precise sense in which making authority. TOWARD A THEORY OF STATE CAPITALISM: ULTIMATE DECISION-MAKING AND CLASS STRUCTURE 63 The bank, however, also emerges as an external financing. The importance of this role ultimate decision-maker, but in a much more of the financial institutions is also greater for active sense, since it is directly involved in the specific industries which are characterized by allocation of loans to specific industrial and capital intensive production processes and commercial ventures. Its decision-making is lengthy lead-times in production since it is explicitly oriented towards production activity precisely these industries which are most heavily and it is this form of decision-making which dependent on external financing. actively determines the parameters within which None of this analysis should be construed as the economic system will evolve. Active postulating an insidious process of monopoliz- planning control is thus delegated to the bank ation of decisionmaking power within non-state as a financial intermediary who exercises it market systems. In the absence of politically subject to the constraint that the depositor may imposed barriers to entry, the unhampered eventually withdraw his funds. Banks serve as competitive market process will act to ensure an institutional risk-bearing device for minimiz- that financial institutions, just as any other ing uncertainty for individual savers and for the market participants, will be constrained by the economy as a whole. In return for this service, prospect of increasing competitive activity if they the banks and not their depositors reap the fail to perform as efficiently as po~sible~'~'.In entrepreneurial returns on their investments. addition, financial institutions are clearly This loan activity by banking institutions in precluded from establishing a monopolistic the capital market is dependent on two forms of control over the commodity with which they ultimate decision-making exercised by distinct deal since money necessarily pervades the groups of individuals. The saver who deposits entire economy. Would-be entrepreneurs who his money with the banks retains a passive form perceive actual price discrepancies and yet who of ultimate decision-making over the allocation are unable to obtain the necessary capital for a of funds but delegates a much more active form specific project from specialized financial to the banks who employ this ultimate decision- institutions can turn to an almost limitless making authority to determine which producers variety of private savers or industrial capitalists. and consumers on the loan market will receive These market factors effectively preclude the the available circulating capital. possibility that entrepreneurial decision- This line of analysis is not inconsistent with making could ever be monopolized by financial our earlier emphasis that entrepreneurial activity institutions. However, the market system does and asset ownership are inextricably linked. On concentrate entrepreneurial activity and an unhampered market, banking institutions decision-making within the capital market would hold both time deposits and demand because of the considerable benefits which are deposits as well as its own separate equity rendered by a certain degree of specialization. capital. In competitive banking, individual This process of specialization continues until an banks will recognize the desirability of synchron- optimum degree of concentration has been izing their pattern of liabilities with their achieved which will maximize the allocative changing pattern of assets to assure their efficiency of the market price mechanism. The capability of responding to all foreseeable evolution of the specialized functions of the contingencies. As a consequence, banks will capital market within the economic system thus always be the owners of the funds which are epitomizes Herbert Spencer's insight that the utilized for loans and will thus reap the entre- market process generates two complementary preneurial returns from the investment of their processes: differentiation and integration. The own assets. decision-making within the capital market The importance of the financial institutions operates within the severe constraints imposed as a locus of ultimate decision-making within a by the competitive market process and these market economy increases in direct proportion constraints ensure that the decision-making to corporate growth which has historically been process contributes to the optimum allocation accompanied by a growing dependence on of economic resources within the system. Thus, 64 WALTER E. GRINDER AND JOHN HAGEL 111 the decision-making exercised within the capital policies. Historically, state intervention in the market reinforces, rather than undermines, the banking system has been one of the earliest operation of the market price mechanism. forms of intervention in the market system. Having said this, it is logical to assume that In the U.S., this intervention initially the specialized capital market, by the very nature involved sporadic measures, both at the federal of its integrative role within the market system, and state level, which generated inflationary will emerge as a strategic locus of ultimate distortion in the monetary supply and cyclical decision-making. Joseph Schumpeter, in some- disruptions of economic activity. The disruptions what exaggerated terms, nevertheless dramatic- which accompanied the business cycle were a ally captured the essence of the role of the major factor in the transformation of the capital market: dominant ideology in the U.S. from a general adherence to laissez-faire doctrines to an The money market is always, as it were, the head- quarters of the capitalist systems, from which orders go ideology of political capitalism which viewed out to its individual divisions, and that which is debated the state as a necessary instrument for the and decided there is always in essence the settlement of rationalization and stabilization of an inherently plans for further development. All kinds of credit requirements come to this market; all kinds of economic unstable economic order. This transfornation in projects are first brought into relation with one another, ideology paved the way for the full-scale and contend for their realisation in it; all kinds of cartellization of the banking sector through the purchasing power, balances of every sort, flaw to it to be sold ... Thus the main function of the money or Federal Reserve System. The pressure for capital market is trading in credit for the purpose of systematic state intervention in the banking financing de~elopment'"~. sector originated both among the banks While the process of concentration of entre- themselves and from certain industries which, preneurial decision-making within the capital because of capital intensive production processes market is constrained by the competitive market and long lead-times, sought the stability necessary process, banking institutions are nevertheless for the long-term planning of their investment susceptible to a persistent temptation to expand strategies. The historical evidence confirms their asset base by pursuing inflationary policies. that the Federal Reserve legislation and other Murray Rothbard's analysis of banking forms of state intervention in the banking sector practices in pure market systems suggests that during the first decades of the twentieth century the competitive market will check this inflationary received active support from influential banking tendency within narrow limits and tend to and industrial intere~tsl'~'. preserve full reserve banking policies'"'. In State intervention serves to reinforce consid- particular, the attempt by individual banks to erably the inherent importance of the banking engage in fractional reserve banking practices sector both within the capital market itself and will eventually be frustrated by the clearing- within the economic system as a whole. Inter- house function performed by other banks. Any vent~onistmeasures enforce wtel arrangements, attempt to cartellize the leading banks will be insulate banks from the risks of failure and exposed to the weaknesses characteristic of all impose barriers to entry against potential cartels in pure market economies and will be competitors. One historian has perceptively further limited by the need to preserve customer summarlzed the consequences of the establish- confidence in the banking enterprises. ment of the Federal Reserve System in the U.S.: The trend in the national banking system until 1913was State intervention in the capital market: the toward a reduction in the tankers' balances and Cartellization of banking individual deposits in New York, and in favor of the relatively more rapid growth in the Midwest and the Banks have historically failed to achieve their West. The Federal Reserve System, for the most part, inflationary objectives on a free market and, as a stabilized the financial power of New York within the result, these financial institutions have ultimately economy, reversing the longer term trend toward decentralization by the utilization of political means of turned to the political means embodied in the control over the central money market'"'. coercive state apparatus in order to implement their cartellizing and inflationary monetary Most importantly, however, cartellization of TOWARD A THEORY OF STATE CAPITALISM: ULTIF VlATE DECISION-MAKING AND CLASS STRUCTURE 65 banking activity permits banks to inflate their the capital market does have serious operational asset base ~ystematically"~~.The creation of consequences. Not only does the scope of assets made possible by these measures to a ultimate decision-making expand considerably, great extent frees the banking institutions from but the constraints which ensure that decision- the constraints imposed by the passive form of making in a pure market system will be responsive ultimate decision-making exercised by their to the market price mechanism are gradually depositors. It thereby considerably strengthens abandoned. To the extent that the market price the ultimate decision-making authority held by mechanism continues to operate as an effective banks vis a vis their depositors. The inflationary constraint, the information flow which it trends resulting from the creation of assets tend regulates will be progressively more distorted as to increase the ratio of external financing to a consequence of political intervention in the internal financing in large corporations and, as capital market and elsewhere within the a consequence, the ultimate decision-making economic system. In fact, the market price power of banking institutions increase over the mechanism is gradually replaced as an alloca- activities of industrial corporations. Since the tional device by an increasingly centralized and capital market naturally emerges as a strategic arbitrary (from the market point of view) system locus of ultimate decision-making in market of political decision-making. The result, of economies, it is reasonable to assume that, by course, is a systematic distortion in the allocation virtue of their intimate ties with the state of economic resources. It is at this point that apparatus, banking institutions will acquire an the precise locus of decision-making assumes additional function within the state capitalist decisive importance since it permits the social system, serving as an intermediary between the analyst to indentify in whose interests the leading economic interests and the state. alternative system of allocation will operate. Banking institutions similarly preserve their integrative function within the state capitalist State capitalism and finance capitalism: a system, transcending the narrow "interest comparison of the analytical models consciousness" characteristic of representatives Since the preceding analysis stresses the role of specific industries and promoting "system of financial institutions as an increasingly consciousness" and "class consciousness" strategic locus of ultimate decision-making among members of the ruling class. As a result within the state capitalist system, it would of all these factors, the banking institutions perhaps be useful at this point to compare this significantly expand their role as ultimate model of state capitalism with the more orthodox decision-makers within the capital market and, Marxist model of "finance capitalism". Such more generally, within the economic system, and a comparison would be useful in highlighting the they emerge as a key locus of ultimate differences and similarities between the two decision-making within the state capitalist system. models while at the same time permitting a This is the result of a dual process which occurs more detailed statement of certain characteristics within the state capitalist system: there is a of the state capitalist model. As an example of process of concentration of ultimate decision- the Marxist model of finance capitalism, this making within the banking sector and, even paper will focus on a series of articles written more importantly, this is accompanied by an by Robert Fitch and Mary Oppenheimer entitled increasing insulation of this decision-making "Who Rules the corporation^^'^'?" since these activity from the countervailing competitive articles offer a recent and systematic exposition pressures inherent in a free market. of the model as applied to the US. The Fitch and Whereas the concentration of ultimate Oppenheimer analysis concentrates on two decision-making which occurs in a pure market central propositions: (1) that banking institutions system does not have any significant operational exercise a growing amount of control over the consequences since it merely serves to reinforce activities of industrial corporations and the allocational efficiency of the market price (2) that there is an inherent antagonism between mechanism, the impact of state intervention in the interests of the banking institutions and 66 WALTER E. GRINDER AND JOHN HAGEL 111 the interests of the industrial corporations. profit opportunities. However, such conflicts The first proposition may, without much are limited and sporadic and are not a systematic difficulty, be translated into the contention characteristic of state capitalism. made by this paper that the state capitalist system One insight which the state capitalist model is characterized by an increasing concentration shares with the Marxist model of finance and consolidation of ultimate decision-making capitalism, particularly as elaborated by Victor power by the banking institutions. Fitch and Perlo and S. Menshikov, concerns the tendency Oppenheimer present extensive empirical data for distinct financial interest groups to confirming the existence of several trends: emergel'". However, the state capitalist model (1) the sustained expansion of the assets of the treats these financial interest groups as a financial sector in comparison with the rest of symptom of the general tension existing between the economy, (2) the increasing concentration old and new economic groups within society. and merger of enterprises within the financial Changing conditions and increasing information sector, emphasizing in particular the growing concerning those conditions provide the basis importance of the bank holding company, (3) the for the emergence of new economic groups increasing dependence of industrial enterprises which challenge thk established position of older on external financing, and (4) the role of stock groups that rose to prominence under a different ownership and interlocking directorates as set of conditions. These older groups generally reinforcing control mechanisms by the banking tend not to adapt as readily to these new institutions. conditions and tensions naturally result as The model of state capitalism presented in their positions are increasingly eroded by the this paper diverges fundamentally from the Fitch newer groups. and Oppenheimer model of finance capitalism In the final analysis, the Marxist model of with regard to the second proposition: that an finance capitalism suffers from two profound inherent antagonism exists between banks and weaknesses which stem from its flawed economic industrial corporations. Paul Sweezy and analysis: (I) it does not adequately account James O'Connor in later articles in response to for the crucial role of state intervention in the Fitch and Oppenheimer analysis persuasively reinforcing the position of the banking sector rebutted the contentions made by Fitch and within the state capitalist system nor does it Oppenheimer in support of this second proposit- recognize the role of state intervention in ion, and those interested are advised to consult transforming the character of decision-making these articles ' As one of their leading activity within the banking sector and (2) it fails arguments in support of this second proposition, to identify the true nature of the inherent Fitch and Oppenheimer place great importance instability of the system. upon the fact that banks promote "new modes Perhapsihe most important insight of Austrian of capital accumulation" by acting as inter- economic theory with regard to an analysis of mediaries in facilitating. the shift of ca~italfrom contemoorarv~-~~~~~~~-~~~ , state canitalism is that cartelliz- low profit industries to high prof~tindusrr~e\. ation oi the banking sector and the subsequenr Whcreas titch and Oppenheimer regard this as intlatlonary policies are incapable of producing a "decadent and destructive" pro~ess"~',this the stabilization and rationalization so urgently argument in fact supports this paper's analysis desired by the leading economic interests in the of the banking sector's entrepreneurial role as an system. Instead, it creates an inherent instability intermediary in the transfer of capital from characterized by increasingly widespread distor- one industrial sector to another and does not tions in the pricing mechanism. Rather than necessarily imply that antagonism between attempting to remove the original causes of banks and industrial enterprises exists on a these distortions, the response of policy makers class level. This is not to deny the possibility that has been to expand state intervention in ihe localized conflicts of interest may frequently market system, thereby aggravating the original emerge between particular banks and particular distortions even further. The Misesian theory industrial corporations over the perception of of interventionism suggests that the initial TOWxAD ATHEORY OFSTATE CAPITALISM: ULTlM ATE DECISION-MAKING AND CLASS STRUCTURE 67 intervention in the monetary system sets in aspects of changing conditions than other motion a process of retrogression from a members of the population"". As conditions relatively free market to a system characterized continue to change, further adjustments will by an increasingly fascistic set of economic become necessary and there is no a priori reason relationships. But, the dynamics of retrogression to believe that the people and groups of people within state capitalist systems canot even begin who best adapted to previous change will also to be outlined here and it will therefore have to be best suited in adapting to subsequent wait until a later paper. For the moment, let it changes. Of course, some will prove themselves suffice to say: it cannot, it will not last. consistently over time 2nd important elements of inherited meritocracy must be acknowledged, although care must be taken not to over- 11. THE CLASS STRUCTURE OF STATE emphasize them. Change often occurs in the CAPITALIST SYSTEMS most unexpected areas in a decentralized market system. Innovators, in the Schumpeterian sense, Introduction constantly arise from the most obscure corners The first part of this paper identified the of society to initiate and adjust to change in all capital market as a repository of ultimate areas of human endeavor1"]. decision-making within a market economic Because of the uneven distribution of ability, system and described the tendency for many elites will tend to emerge from the ranks of the key decision-makers to resort to extra-economic better qualified through a natural process of methods, i.e. state intervention, in an effort to emerging hierarchy in all areas of human minimize unpredictability and insulate economic activity. In all areas there will be natural leaders decision-making from the constraints of whose legitimacy is based on natural expertise competitive market pressures. The rest of this and authorityt2']. Once again, in the Schump- paper will present a sociological analysis of the eterian sense, there will be the innovators and class structures which emerge and crystallize the imitators (and even more distant followers during this process of interventionism and who are even too dull to imitate, just followers). "rationalization" of the economic system. The free market society, then, is a society of evolving (ascending and descending) elites or, The circulation of elites in market systems as Vilfredo Pareto put it, a "circulation of Decentralized and private ownership of the elites". Since change is the fundamental means of production constitutes the essential, characteristic of the free market society, the identifying characteristic of the market system emergence of elites and their continuing of ownership and of the market solution to the circulation is both natural and desirable for it economic problem of relative scarcity1201.Since promotes .optimization of both economic all factors of production, including labor efficiency and social services and the ability to anticipate the future, Just as SchumpeterV6' discusses innovation are unevenly distributed, the conditions for concerning the entrepreneur and the business specialization, the division of labor and exchange firm as leading to the health and progress of the are met, and the market process is set in economy, so too must there be a process of both rnoti~d"~.The price system and the market the growth of new elites and the decline of old mechanism then become the principal means of elites in all institutions and areas of social social coordination. intercourse. Such processes ensure the health Since all owners of the factors of production and viability of society as a whole. The free are unequal both in natural talent and in the market society is a system in which there are ability to adjust to changing conditions, and neither interventionistic barriers or aids to the since all market activity is necessarily future process of social innovation, to the free and oriented, it is inevitable that at any moment dynamic process of the birth and decay of natural there will be people and groups of people who elites. Of course, this process of the rise and are more adept at responding to the various decline of elites takes time, thus ensuring the 68 WALTER E. GRINDER AND JOHN HAGEL I11 continuity which is also necessary to preserve a state, as the institutionalization of the political viable social organization'"'. means, necessarily generates a process of continuing class conflict since the political Political intervention as the source of class means, by its very nature, creates a series of conflict negative sum relationships - that is, one As in the case of monopoliesw8', political individual or group gains only at the expense of intervention in the market process of innovation another. This is in comparison to the economic and adaptation constitutes the ultimate source means characteristic of market systems where all of both stratified class relationships and the exchanges necessarily lead ex ante to increases consequent economic exploitation of one class of utility for all participants entering into them by the otherlzg'. Political intervention inevitably (otherwise the exchanges would never have been transforms the market system from a matrix of consummated in the first place)['". Antagonistic purely "economic means" for the acquisition interests therefore emerge from the application and preservation of wealth to a system far more of the political means between those who gain infused with the principles and institutions of from the use of the political means and those the "political means". These terms - whose wealth is e~propriated'~". "economic means" and "political means" The class structures of state societies are were coined by the German sociologist Franz defined by the relationships existing between Oppenheimerl"' and are defined as follows: specific groups of individuals and the two modes (I) the "economic means" involve the acquisition of acquisition of wealth in society - the of wealth through one's own labor and subse- economic means and the political means. For quent voluntary exchange relationship while example, the net beneficiaries from the applica- (2) the "political means" covers all other means tion of the political means in society may be of acquiring wealth. The latter therefore designated, quite appropriately, as the political encompasses the direct or indirect expropriation class. This class encompasses all those of previously produced wealth either through individuals or groups of individuals whose direct coercion or through the threat of coercion. position in society is dependent on the institu- The prevalent means of expropriation (and tionalization of the political means. While such a hence exploitation) is taxation. Taxation is also class is defined primarily in economic terms, the the source of most other indirect forms of concept also incorporates the more subjective intervention which, in turn, lead to even notion of status - a dimension which becomes greater exploitation. increasingly important in the shift from a While a free market society represents the contract society to a status society that is institutionalization of the economic means, characteristic of the evolution of political Franz Oppenheimer has defined the state as the capitalism. Within the broad category of political organization of the political means. The class, there are numerous distinct subgroups introduction of the political means into a market which will be outlined later in this paper. system creates a system of state capitalism or, in The designated class position of any given Gabriel Kolko's terms, political capitalism, i.e., individual does not necessarily imply a full a market oriented system with increasing understanding by him of his own class position - elements of monopoly and class privilege that he has a close similarity or identity of incorporated within it'"'. The state is antithetical interests with others in his class. However, it to the free market and statist intervention seems reasonable to assume that individuals produces a hampered market system: a system sharing certain objective interests will tend of monopoly privilege and the systematization toward an emerging and at least hazy common of exploitation, class antagonisms and socio- "class consciousness". This is particularly true economic disharmony of interests. for producers within each industry and net In fact, as long as the application of the beneficiaries of state intervention rather than political means continues, social evolution will widely dispersed consumers and net losers from be shaped by a process of class conflict. The state intervention13". As a consequence, there

I TOWARD A THEORY OF STATE CAPITALISM: ULTIMATE DECISION-MAKING AND CLASS STRUCTURE 69 tends to be an uneven development of class inevitable. For, although the unhampered consciousness in which the political class attains market is the "natural" system for the individual a critical advantage by developing a much more (in the sense that it maximizes material welfare in clearly defined awareness of their own interests a manner consistent with a normative moral and this in turn tends to promote a broad code based on natural rights), it does not consensus within these classes regarding the necessarily follow that the individual will measures necessary to protect these intere~tsl'~'. naturally receive a "natural" social system'3g1. It must be stressed that the beneficiaries of The interaction of two fundamental sociologi- the political means in a market oriented cal laws-in human action in fact persistently economy are dependent on the existence of the militate against the free market society. The economic means in order to survive and prosper. first is the basic praxeological law of human The political means presupposes the economic action, that human action will be undertaken means since the political means alone is only if it is anticipated that the actor will be unproductive and parasitic whereas the able to substitute a more satisfactory state of economic means can exist and, in fact, thrives affairs for his present, and less satisfactory, best in the absence of the political means"6'. In condition'"'. While an important methodolo- view of the dependence of the political means gical insight, the "action axiom" alone on the economic means, the optimal strategy represents an otherwise innocuous observation. for the political class to pursue will not be to However, when it is combined with the second maximize short-term returns, but rather to insight, "Epstean's Law", one begins to discern promote as productive a system as possible, a compelling tendency towards increasing consistent with the preservation of its exploita- intervention in the market place by some at the tive position in that system. The contradictions expense of others - once again, however, this inherent in such a strategy epitomize the assumes the absence of a strong libertarian profound contradictions underlying the entire ideology. Epstean's Law, as formulated by political capitalist system. Albert Jay Nock, states that "man tends to This parasitic relationship cannot persist satisfy his needs and desires with the least indefinitely, for the political means inevitably exertion". It follows that, since expropriation distorts the price mechanism necessary for the requires the least exertion, then systematized successful operation of the economic means in exploitation (the organization of the political an advanced market economy. Distortion of the means) will tend to become a prevailing price mechanism produces market dislocations social relationship'"'. which necessitate one of two actions: either the initial intervention through the political means Until, and unless, the intellectual elite within must be eliminated or additional intervention society fully understands and appreciates the will be introduced in an effort to remove the fact that the economic means characteristic of existing dislocation. The latter option will market systems is in the long-run best interests simply result in further dislocations within the of all individuals in society, we will be very market system, once again confronting policy- unlikely to achieve anything approximating a makers with the same dilemma'"'. The political truly unhampered market system. There is not means is therefore both parasitic and expan- good reason, therefore, to trust in the gradualism sionist and its institutionalization in the state of social evolution to achieve a free market, apparatus generates an ultimately unviable classless society. Instead, it is necessary to system characterized by inherent instability and improve our understanding of the intervention- deepening contradiction^"^' . istic, exploitative and stratified class system of In the absence of a strong, persistent and state capitalism, for it is the one within which we widely held libertarian ideology, the transition shall be living for the foreseeable future and it is, from a market system to an interventionistic more importantly, the one which we shall have system (that is, from a non-fixed class society to change in such a manner that it will not into a stratified class society) appears all but re-emerge in the future. 70 WALTER E. GRINDER AND JOHN HAGEL 111 A class within a class: the ruling class as ultimate theinterests of their employers. decision-makers Although these individuals form the nucleus In analyzing the stratified class structures of of the ruling class, there is also a broader political capitalism, it is necessary to focus on definition of the ruling class encompassing a the distinct sub-groups which comprise this group of individuals defined primarily by wider much broader political class. In the following sociological rite ria"^]. It is within this>wider section, each of these sub-groups will be group that the concept of family networks (both enumerated and discussed briefly in turn. First, financial and sociological)["], and highly however, a narrower category should be exclusive socialization processes become most isolated within the political class encompassing relevant. Prep schools, colleges, marriages, those individuals who act as "ultimate decision- social clubs, exclusive resorts, etc. coalesce to makers" within the state capitalist system. This inculcate in their participants a largely subcon- smaller group will be designated the "ruling scious value system which integrates and class". The ruling class in turn covers two reinforces the ruling class as a distinct and separate elements: a "narrow" ruling class and highly exclusive group["'. A definite "we"/ a "broad" ruling class. "they" view of the world is developed; a definite The "narrow" ruling class is restricted to a set of class interests become "second nature" relatively small number of individuals and during the socialization process. This category familiesl"hho are truly "ultimate decision- includes wives, relatives and close associates of makers" in the sense that they seldom become the ultimate decision-makers who, while not involved in the day-to-day problems of current actively participating as ultimate decision- policy formation and implementation. Instead, makers, provide essential links within the family they are primarily concerned with defining the networks. parameters of economic and political formation, from the international level right down to the The taxonomy of thepoliticalclass national, state and often even local levels. In so The remaining sub-groups of the political doing, they determine what is "acceptable" to class encompass a broad spectrum of all those,, the system'"'. For reasons which were outlined other than the ruling class, who derive and earlier, these individuals and families comprising maintain their position in society from the the "narrow" ruling class are to be found institutionalization of the political means. None predominantly in the financial/capital-owning of these remaining sub-groups is an ultimate sector. decision-maker within the state capitalist system, These individuals only rarely seek elective although they each represent subsidiary interest political office, although they are often groups which help to establish certain social appointed, usually for only relatively brief limits that the ruling class acknowledges in its periods, to serve on "blue-ribbon" advisory decision-making. For instance, the ruling class commissions or in government positions. would severely threaten its own stability if it Although these individuals occasionally occupy sought to challenge the entrenched position of prominent government positions, they usually organized labor within the political/economic prefer to remain far from the political lime- system. Although it will probably require some light while occupying their positions as ultimate hard lessons during the course of consolidating economic decision-makers. The actual develop- its position within the political/economic system, ment of the broad outlines of political policy the ruling class eventually learns that its position generally occurs in the various research planning is best secured by preserving some flexibility, associations and university institutes and depart- coopting "junior partners" who might other- ments which are sponsored and underwritten by wise threaten the stability of the system and the economic elite[d''. By such underwriting, the generally perfecting the techniques of "repressive parameters for the formulation of political/ tolerance". economic policy are subtly established and A prominent sub-group of the political class academics soon become adept at identifying with is the government bureaucracy. This group TOWARD ATHEORY OF STATE CAPITALISM: ULTIMATE DECISION-MAKING AND CLASS STRUCTURE 71 clearly derives both its position and its income there is an element of truth in this myth, it from direct reliance on the political means and, neglects the critical role of funding of both the while its influence in policy-making is often political parties and specific political campaigns exaggerated, it does play an active and important in determining who will get the various role in articulating the policy options available to nominations and between whom the electorate the ruling class. Although, over time, burea- is then permitted to choose. ucracies begin to acquire considerable autonomy While elected politicians have greater leverage and are eventually able to exercise substantial in policy formation than the members of the discretion in shaping the form, and occasionally bureaucracy, their success in the electoral arena even the substance, of specific policie~~'~',it is is usually directly related to their ability to only rarely that the government bureaucracy will demonstrate at least a close similarity between succeed in actually affecting the parameters of their own ideology and the ideology of those who decision-making. are funding their campaigns. Moreover, most One particular branch of the government politicians draw their policy ideas from the bureaucracy deserves special attention: the "establishment" policy research associations military. As virtually a state within a state, the and universities, and their staffs are populated military has emerged in the post-World War 11 largely by those who have been trained in these period as a key intermediary between the state various "think tanks" and who have proven apparatus and the "private" sector. The their reliability in the past. sprawling military-industrial complex encom- Another sub-group of the political class passes a broad range of corporations, and even includes the owners and managemeot of entire industries, which retain their formal "private" corporations which derive a signifi- identity as "private" but which in fact are cant portion of income through reliance on the critically dependent on government subsidies political meansL501.This reliance may occur in a and contracts for their continued existence. The variety of forms: either through government influence of the military on ruling class policy- contracts or subsidies, state-enforced restrictions making has often been greatly exaggerated by on competitive practices (tariffs, CAB, FTC and the Left. While civilian control over the military ICC regulation, etc.) or through the socialization remains effective, the military resembles any of costs (government financed R & D, under- other bureaucracy which seeks to expand its writing bankrupt corporations and banks, etc.) position and it has developed powerful vested One useful standard which may be employed interests which it seeks to protect in the policy- in isolating and identifying this sub-group is the making process. Thus, while the military has Calhoun criterion, i.e. determining which never successfully challenged the parameters of corporations are net tax payers and which are decision-making elaborated by the ruling class, net tax consumer^'^". However, total reliance the military has acquired an influential role in on this qllantitative standard can be both the formulation of specific policies designed to inadequate and misleading. The criteria should achieve the objectives of the national security be qualitative as well as quantitative so that paradigm of the ruling class. instances of marginal assistance from the state To a somewhat lesser degree, the same may be identified which, although relatively conclusion regarding measure of influence minor in comparison with over-all income, applies to another sub-group in the political nevertheless permit the firm in question to class: the politicians and the individuals who preserve or increase its competitive position on comprise the broad support structure for the the marketi5". Since the criteria are necessarily politicians within the political parties. The qualitative as well as quantitative, the unique prevailing pluralistic ideology insists that the position of each corporation must be analyzed elected politicians, within the broad constraints in detail to ascertain its precise position visa vis imposed by a democratic electorate and the the political means. Constitution, have considerable freedom in the A further political class sub-group is that of formulation of government p~licy"~'.While organized labor. These unions critically depend 72 WALTER E. GRINDER AND JOHN HAGEL 111 on state-enforced arbitration legislation to on the transfer'of wealth through the political maintain their privileged restrictive position in means, there is no apriori reason to be confident the labor market's11. Of course, the role of that welfarerecipients, as a class, are necessarily minimum wage legislation in maintaining net beneficiaries of the political means. At the organized labor's position within the labor very least, an unresolved ambiguity exists in this market has already been analyzed in detailr5']. area and it is in fact possible that the position Another less well-known, and yet highly of the welfare recipient may deteriorate within important, device for strengthening the relation- the state capitalist system. ship between the labor movement and the state For example, minimum wage laws and restric- apparatus and the ruling class is government tive labor legislation create a growing reserve of contracts, especially the highly lucrative unemployed labor. This reserve naturally construction contracts awarded at all levels of consists of the more disadvantaged groups in governmentiSsi. society -racial minorities, unskilled labor and The position of organized labor, while youth in general. Thus, unemployed individuals subordinate to the ruling class, is that of a junior who would presumably be employed on the partnership in much of political decision- free market are now "beneficiaries" of makingrS6].The evolution of this relationship unemployment compensation and welfare between the ruling class and organized labor programs designed to maintain their acqui- constitutes one of the central themes in the escence. This is merely one- example of the emergence of political capitalism both in the various policies which promote a growing . United States and in Europe where the position dependency on government subsidy that has in of organized labor is far more powerful than in turn led to the emergence of a distinct sub- the United States. In fact, in Europe and society within the framework of state capitalism. England the process of "demagogic plu- This welfare subsociety is "seniced" by its own to~racy"'~" - the combination of rising bureaucratic network which serves to reinforce democracy and falling old plutocracy consoli- dependency relationshipswithin the society and dated in the form of a Social Democratic/Labor the resulting system has appropriately be en^ grand alliance -has dramatically strengthened designated "welfare colonialism". Taxes, the position of organized labor within the especially the more regressive types, are political/economic system. However, the labor especially burdensome on the poorer strata of unions in the United States have historically society so that the marginal aspirants trying to remained far more conservative than their escape this welfare cycle are often pushed back European counterparts. They have focused their down into the mire of disillusionment and attention on narrowly defined economic issues dependency. This disincentive to seek and retain concerning wages and working conditions and productive employment thus becomes very they have limited their participation in the high'"'. political process to mobilizing rank and file support on behalf of "sympathetic" politicians The agents of ideological hegemony: legitimating through such political action organizations as the illegitimate COPE. The relatively conservative union The final sub-group of the political class to leadership has been instrumental in containing be discussed in this paper performs a crucial the aspirations of the more radical rank and intermediary role within the state capitalist file minority, thereby assisting in the develop- system, coordinating and legitimating the social ment of a relatively quiescent labor force and system. The term "agents of ideological effectively forestalling any challenge to political hegemony" will be used to designate the capitalism from the Left. members of an intricate network of intelle~tuals'~~' Another suh-group of the political class both in a broad sense and a narrow sense'601. covers the broad range of recipients of all state These intellectuals are affiliated with a wide social welfare programs. While it is certainly range of institutions - educational institutions, true, on one level, that this group is dependent foundations, policy research associations and TOWARD A THEORY OF STATE CAPITALISM: ULTIMATE DECISION-MAKING AND CLASS STRUCTURE 73 the media - whose primary function is the hegemonic hierarchies emerge within the state inculcation and reinforcement of the society's capitalist system'631. Thus, a very restricted values and beliefs. Ultimately, these institutions network of institutions serves to reinforce the are designed to ensure subservience to the social and ideological cohesivesness of the ruling prevailing authority by presening the legitimacy class itself while simultaneously preparing of the ruling class. another generation of intellectuals to occupy Although the threat of coercion is inherent in positions within this network. Prep schools, the concept of the political means and therefore Ivy League colleges, business research and policy in the institution of the stateL6'],the stability institutions and periodicals such as Fortune, and the success of the ruling class is critically Business Week, etc. are just a few of the links dependent on the degree to which the population in this network. internalizes a "consensus" ideology compatible A distinct institutional network, benefitting with the specific policies adopted by the ruling from extensive socialization of costs, supplies class. Such a consensus ideology maximizes the economy with a highly skilled and literate "voluntary" support for various exploitative labor force inculcated with "technocratic" policies, thereby minimizing the reliance of the values. The evolution of the state-financed ruling class on physical coercion to attain its educational system has been profoundly ends. influenced by the changing needs of the corporate While it is necessary to avoid a mechanistic economy and this intimate, if somewhat theory of crude economic determinism, it is inefficient, relationship has been a prominent nevertheless essential to stress that economic characteristic of state capitalist ~ocietiesl~~'. interest has been, and will continue to be, one of Compulsory education also inculcates a value the central motivating factors throughout system encouraging subservience and docility social history. After all, the concept of economic among unskilled labor and the lower strata of interest is an idea; it is an idea about how the societyLBS1. individual relates both to nature and to society. The idea of economic interest and economic While direct state and ruling class subsidies hegemony or exploitation is directly related to a play an increasingly important role in sustaining sense of legitimacy and, as such, it is of key this hierarchy of networks, intellectuals often importance in determining all socioeconomic derive a significant degree of "remuneration" and political relationships. Ultimately, the in non-monetary psychic income. The "court question of how individuals will relate to each intellectual" who articulates and propagates the other in economic matters and in the broader values of the ruling class acquires a high status matrix of social organization (i.e., whether it position as well as a sense of participation in the will be exploitative or not) will be determined exercise of power within the state capitalist in this realm of ideas. society. It is nevertheless also true that the The agents of ideological hegemony are, thus, "court intellectual" usually seems to be much the critical variable in the transformation of better endowed financially than his colleagues class from the merely objectively defined socio- outside the political class and it would seem economic categories into cohesive groups acting unrealistic to attribute this to mere coincidence. on the basis of subjectively perceived identity The agents of ideological hegemony within the of interests - from economic class to socio- state capitalist system represent a highly mobile political class. These intellectuals at once both class - they shift from academia to the clarify and mystify the idea of economic foundations, to government positions, to hegemony and stratified class relationship, business research associations, and often to adding both coherence and legitimacy to this Wall Street itself, then back to the university to idea of exploitative social relationshipL"]. begin once again. In all of these moves the As the tasks of ideological hegemony become intellectuals promote a vital sense of cohesion more complex and vaied in a highly advanced and ideological coordination among the various industrial society, increasingly well defined sectors of the socio-economy. 74 WALTER E. GRINDER AND JOHN HAGEL 111 Social stratifcation within the state capitalist the absence of such regeneration, ruling classes system have historically collapsed either through a The emergence of a political class around its process of gradual decay or through a wide- strategic decision-making core - the ruling spread loss of authority, resulting in re~olution''~'. class - fundamentally alters the dynamic and The historical dilemma confronted by alf spontaneous circulation of elites. The free ruling classes has been identified by Pareto as market is a synonymous term for the process the "Persistence of Aggregates": old and which generates socially necessary institutions. obsolescent classes have been unwilling to listen This "spontaneous" adjustment to changing to, to learn from, and to give way to the newer conditions tends to generate the institutions and classes. The efficient and enduring ruling classes associated elites necessary to optimize the socio- are precisely those which have been able to economic harmony at any given time1'". In accomodate to change and new ideas while contrast, interventionism by the state on behalf maintaining a continuity of control. of the ruling class disrupts and distorts this free market tendency towards social equilibrium. The "Foxes" and the "Lions": tension within Interventionism causes social maladjustment, the ruling class bottlenecks, and retrogressive distortion in the Pareto distinguished between two different socio-economic mechanism. psychological types within ruling classes. First, The ruling class, as the wielder and principal there are the "Lions" who are inherently beneficiary of the political means, naturally conservative, valuing stability in a static sense, seeks to consolidate its position further, relying and who are therefore antagonistic to change on the protective intervention of the state to and "newcomers". The term "Persistence of prevent the previously unhampered circulation Aggregates" clearly refers to the psychological

of elitesI6". Since any social~ system that-- departs attitudes most characteristic of the "Lions". from the free market is inefficient and The "Foxes" represent a second type, retrogressive, there is an inherent tendency for encompassing speculators who seek out state capitalist societies, in time, to retrogress innovation, thrive on change and are masters of into increasingly static "caste" systems charac- Machiavellian manipulation. The term ''instinct teristic of feudal and militaristic ~ocietiesl~~'.for combination" describes the "mind-set" of Real social progress depends on the freely the "Foxes"~"'. moving circulation of elites and the state In the circulation of natural elites in market capitalist system therefore constitutes a systems, the interaction between the "instinct retrogressive social phenornen~n~~~~.Stratified for combination" and the "persistence of class societies represent a futile attempt to aggregates" generates an optimum of both suppress change. Since change is both a funda- change and continuity, resulting in the pope< mental reality and a necessity in any social amount of socially desirable and necessary system, interventionist policies designed to halt "progress". However, the introduction of or divert natural social change are dysfunctional artificial barriers to the natural circulation of and ultimately disastrous for the entire social elites, and thus to the proper flow of socio- system. economic activity, creates a maladjustment of The ruling class in state capitalist systems socio-economic relations. At any particular must somehow counteract the inherent tendencies moment, there will be either too much continuity within such systems towards increasing stratifi- (excessive "persistence of aggregates") or too cation, declining social mobility and, ultimately, much discoordinating change (excessive "instinct stagnation throughout the socio-economic for combination"). system. Social mechanisms must be devised to The "Foxes" and the "Lions",differ funda- preserve the existence and privileges of the ruling mentally regarding appropriate methods of class while simultaneously permitting limited government. For example, the "Foxes" of recruitment and advancement into the class to ascendant ruling classes recognize the importance avoid internal atrophy and incestuous decay. In of the management of recruitment to permit TOWARD ATHEORY OF STATE CAPITALISM. ULTlMATE DECISION-MAKING AND CLASS STRUCTURE 75 marginal social mobility into the ruling class. The institution of the state, in fact, virtually Such a strategy would seek to coopt the natural ensures that the collapse of the traditional elites of society both to strengthen the position elites and the emergence of new ones will be of the ruling class and to eliminate potential surrounded by violence, for the institutionali- opposition. In contrast, "Lions" would zation of the political means inevitably creates prefer to consolidate the ruling class as a self- coercive barriers to social mobility which perpetuating caste insulated from other social reinforce stratification, stagnation and frustra- strata. tion, culminating in outbreaks of violence. The process of recruitment, however, often When social mobility is no longer permitted sets in motion various contradictions which through a process of evolutionary change, intensify the dynamics of intra-class rivalry. The revolutionary violence increases in importance inability to manage the process of recruitment as a mechanism for social mobility. The within acceptable limits may lead to excessive politicizing of economic relationships which change in the opinion of the conservative emerges as a prominent characteristic of state "Lions". The new recruits, occasionally with capitalist systems leads to a disharmony of some of the old "Foxes", may form the interests that is manifested in constant tension, nucleus of a new ruling class. The response of the confrontation and finally violence. "Lions" will be to adopt a defensive policy of As Hayek perceptively notes, in these retrenchment, seeking to dismantle the recruit- confrontations between the political class and ment mechanisms which were responsible for therest of society, and between the "Lion" and increasing ruling class heterogeneity and thereby "Fox" factions of the ruling class, those who intensifying intra-class tensions. If fully success- are most adept in the use of the political means ful, such policies will generate a widening gap (ultimately brute, naked force) will tend to rise between the ruling class and the natural elites to the top'"'. Once at the top of the social within society which will be progressively barred pyramid, they tend to become increasingly from entry into the ruling class. Cut off from defensive against new "Foxes". As the members infusions of new talent, the atrophying ruling of the ruling class become more preoccupied class will experience increasing difficulty in with the protection of their privileged social maintaining social control, particularly as the position, they become less concerned with rising natural elites are driven into opposition ensuring the smooth and productive operation movements in increasing frustration over the of the social system. They become more obstacles to social mobility. vulnerable and lose their sense of legitimacy. If, on the other hand, the "Foxes" prevail, The demise of the existing ruling class will they will replace the older "Lions" who are eventually occur but, as long as the state unable to adjust to changing social institutions. apparatus institutionalizes the political means As the ascendant "Foxes" succeed in consoli- within the socio-economic system, new ruling dating their position within the ruling class, classes will be prepared to try where others however, they will increasingly display the have failed. psychological traits of their "Lion" predecessors as they too seek to defend their privileged social position against the challenge of rising new 111. CONCLUSION elites within the social system. The ruling class ideally strives to promote an optimal balance A detailed analysis of the process of social between change and continuity within the social stratification which occurs in all state capitalist system but, since this objective can only be systems is essential for an understanding of the attained in unhampered market systems, the dynamics of our present social system. The system of state capitalism will ultimately prove mechanisms for the consolidation of both the unable to duplicate the market process and the ruling class and the broader political class and natural circulation of elites accompanying this the contradictions within the state capitalist process. system which ultimately assure the disintegra- 76 WALTER E. GRINDER AND JOHN HAGEL 111

tion of the ruling class require a much more entrepreneurial profits, both partners are engaged in careful scrutiny than has just been undertaken. entrepreneurial activity. 6. Knight, op. cir., p. 289. It is our hope that the analytical framework 7. Contemporary bankruptcy laws perform an important which we have elaborated will contribute to a function in shifting a large burden of the risk to the more comprehensive understanding of the state lender of capital and it would be relevant to inquire how this situation might be altered in a pure market system. capitalist system, thereby strengthening our Lawrence White, a student in the Economics Depart- ability to transform the system into one which ment at Harvard, has written an interesting. paper on more nearly satisfies our hopes, our needs and this subject from an Austrian p~rspective entitled "Bankruptcy and Risk", March 25, 1975. our strong sense of justice. As a leading social 8. For an analysis of the importance of indirect exchange analyst of the last century noted, "the and money in market economies, see Ludwig von philosophers have only interpreted the world, Mises, Human Aclion, op. cir., pp. 398471; Ludwig von Mises, The Theory of Money and Credif, Henry in various ways; the point, however, is to change Regnery (Chicago, 19.531, pp. 29-37; and Murray N. it"1731.We seek to interpret the existing state Rothbard, Man, Economy and Srare, Van Nostrand capitalist system in order to facilitate the final (New York. 1962). on. IMI-2W. See also Rothbard. "~galitarianismga'~evolt Against ~ature",~od& dismantling of that system. Age, Fall 1973. 9. Ludwig van Mises, The Theory of Money and Credit, op. dl., pp. 261-277 discusses the functions performed NOTES by bank& institutions in a market economy: 10. See G. J. Stigler, "Imperfections in the Capital I. For a more detailed presentation of this analysis, see Market", Journol of Polifical Economy, June 1967 Friedrich Hayek. "Economics and Knowledge" and for a refutation of a variety of conventional views "Socialist Calculation 111, the Competitive 'Solution"' regarding the imperfections believed to hamper the in Individualism and Economic Order, Routledge and operation of the capital market. Kegan Paul (London, 1949) as well as the excellent col- I I. Schumpeter, op. cif., pp. 126-127. lection of esiavs in Friedrich Havek. ed.. Collecrivisr 12. Murray N. Rothbard, Whar Has GovernmenlDone to Economr Plannmg, George Koutlcdgc and Sons our Money? Pine Tree Press (Santa Ana, California, (1.ondon. 1935) In addlllon to thc artdc appearing in IW), pp. 22-26. Rothbard also cites Amasa Walker, Hayrk's cdltrd collect~on.ion hliscs has dr.\cloped hl, The Science of Wealth, Little, Brown and Co. (Boston, argument on economic calculation in market systems 1867), pp. 139-141, 126-232 for an excellent discussion in his book Socialism, Yale University Press (New of the prelems of fractional reserve banking. Haven, 1951) and Humon Action, Henry Regnery 13. Four essential studies exploring the emergence al (Chicago, 1966). political capitalism and the leading role of business 2. Israel Kirzner, Compelifion and Entrepreneurship, interests in the elaboration and implementation of this University of Chicago Press (Chicago, 1973). See also ideology are Gabriel Kolka. The Triumph ofconservo- Professor Kirzner's paper entitled "Capital, Competi- tion, The Free Press of Glencoe (New York, 1963); tion and Capnalism" which is reprinted in Chompions James Weinstein, The Corporore Ideol in the Liberal of Freedom, Hillsdale College Press (Hillsdale, Mich- State, Beacon Press (Boston, 1968): Robert Wiebe, The iean. 1974) and which exolores in ereater detail his Search for Order, 1877-1920, Hill and Wang (New &&on ["at pure enrrrp;cneurship"docr not rrqulrc York. 1967). A more recent collection of highly capltal ounrr.>h~p.Txa carl~oaudm ~hxhprowde illuminating essays is available in Ronald Radosh and important xmnhut~on~to the theory of enlrrprencur- Murray Rothbard, A New History of Levialhan, ship in market economies are Joseph Schumpeter, The Dutton (New York. 1972). Theory ofEconomic Development, Harvard U~versity 14. Gabriel Kolko, op. cif., pp. 252-253. Press (Cambridge, 1961) and Frank H. Knight, Risk. 15. For a brief discussion of the significance of the Federal Uncertainly and ProJil, University of Chicago Press Reserve System in permitting member banks to expand (Chicago, 1921). their asset base, see Murray N. Rothbard, America's 3. Israel Kirzner, Comperirion ond Entrpreneurship, op. Greor Depression, Van Nostrand (Princeton, l963), cil., pp. 4445,4849. and Kirzner, "Capital, Competi- pp. 29-33. In his study, Whar Hos Governmenr Done tion and Capitalism", op. cir., pp. 7-8, 9, 10, 11. ro Our Money? op. cir., pp. 36-38, Rothbard stresses 4. Frank H. Knight, op. cit., is particularly useful in his the consequence of government intervention which insistence that ultimate control and ultimate respons- permits banks to refuse to pay their obligations while ibility are inseparable. continuing in operation. Sam Pelman has published an 5. One possible measure of the extent to which each partner interesting attempt to measure the impact of the has engaged in entrepreneurial activity might be to Banking Act of 1935 in restricting entry into commercial focus on the subsequent division of entrepreneurial banking in "Entry in Commercial Banking", Journol profits. The relative shares of entrepreneurial activity ofLowondEconornics, No. 8, October 1965, pp. 11-50. may vary from the extreme case in which the borrower He concludes that without this regulation entry into succeeds in capturing virtually the entire entrepreneurial commercial banking would have been SO-1W% higher orofit to the eauallv. . extreme case in which the lender than it actually has been. suicrcds in upturlng almost [he entm entrcpreneurlal 16. Thesearticles appeared in a three part series inSocialisr prol~t.Honrver, rcgardlcsr 01 the d~str~buuonof the Revolurion, Vol. I, Nos. 4, 5 and 6, Summer 1970, TOWARD A THEORY OF STATE CAPITALISM: ULTIMATE DECISION-MAKING AND CLASS STRUCTURE 77

September-October 1970 and November-December Reconstruction of Utility and Welfare Economics", in 1970. This was fallowed by a "Reply" to various M. Sennholz, ed., Freedom ond Free Enterprise, Van criticisms of the original series of anicles which appeared Noarand (Prm~elon.19561. in Socialist Revolulion, January-February 1971. 33. Rolhbard. lbrd.. and L. Rubbm. The Cconom~ctlaclr 17. James O'Connor, "Question: Who Rules the ulClui, Confltcr. 5la:millan IL.ondun. 1939). Corporations? Answer: The Ruling Class", Socialist 34. i.~obbins,ibid; Revolution, January-February 1971 and Paul Sweezy, 35. Hilaire Belloc, The Smile Stare, T. N. Foulis (London, "The Resurgency of Financial Control: Fact or Fancy" 1912). Socialist Revolulion, March-April 1971. 36. It should be stressed that the elements of this analytical 18. Filch and Oppenheimer, op. cir., Part Ill, pp. 47-75. model are rarely encountered in their pristine purity in 19. Victor Perlo, The Empire of High Finance, International the "real world". Instead, historical class formations Publishers (New York. 1957) and S. Menshikov, usually represent varying mixtures of the political means Millionaires andManagers: Structure 0fU.S. Finoncial and the economic means. The historian and social Oligarchy, Progress Publishers (Moscow, 1969). researcher must resolve the empirical question of the 20. Ludwig von Mises, Socialism. op. cir. extent to which a particular class in any given historical 21. Murray N. Rothbard, "Freedom, Inequality, Primi- period relies on either of these two methods for the tivism and the Division of Labor", Modern Age, acquisition of wealth. It is useful, however, to isolate Summer 1971; Rothbard, "Egalitarianism as a Revolt the distinct elements of this analytical model in their Against Nature", op. cil.; Knight, op. cit.; Ludwig M. purest form in order to describe their unique character- Lachmann, "The Role of Expectations in Economics istics...~ and therebv~~~~ ~ achieve a deeoer understandina of as a Social Science". Economicn, February 1943; their interaction in various historical epochs. L. M. Lachmann. "Professor Shackle and the Signifi- 37. The interventionist dynamic is occasionally disrupted, cance of Time". Metroeconomica. September 1959. and even temporarily reversed, by certain crisis periods 22. H. A. Hodges. The Philosophy o/ Wilhelm Dillhey, in which the contradictions inherent in earlier interven- Routledge, and Kegan Paul (London. 1952); R. G. Coll- tionist measures confront the ruling class with the ingwood, The Idea ofHislory, Oxford University Press necessity of repealing these earlier measures, e.g., the (London. 1946); and Ludwig von Mises, Theory and acute housing shortage resulting from New York's History, Yale University Press (New Haven, 1957). rent control legislation confronted policy makers with the 23. Schumpeter, op. cit.; J. A. Schumpeter, Capitolism, option either of repealing this legislation or authorizing Socialism end Democracy, Harper and Brothers (New massive state intervention in the housing market in York, 1942); and Kirmer, Compelition and Enrrepre- the form of public housing projects. The fundamental neurrhip, op. cil. social transformations that would have resulted in 24. S. E. Finer, "Pareto and Pluto-Democracy: The the latter option made it un~ceptable. Usually, Retreat to Galapagos", The American Political Science however. policy makers will be reluctant to admit Review, June 1968; S. E. Finer, Parelo: Sociological the mistake of their earlier intervention (mainly for Wririnrs. Praeeer lNew York. 1966); F. Koleaar, political reasons) and instead will adopt further inter- "The Elite andUthe'~ulinglai is: pareto and ~&ca ventionist measures to "cure" the previously caused Re-Examined", Review of Polilics; J. H. Meisel, distortions. Porero and Mosco, Prentice-Hall (Englewood Cliffs, 38. For-a more detailed investigation of the nature and N.J.. 1965); J. H. Meisel, The Mylh of the Ruling effects of interventionism, see Walter Grinder and Class: Gaelano Mosco and the Elite, University of John Hagel, "From Laissez-Faire to Zwongswirtschaft: Michigan (Ann Arbor. 1962); Robert Michels, Political The Dynamics of Interventionism", delivered to the Parties, Collier Books (New York, 1962); and Gaetano Austrian Economics Symposium, University of Mosca, The Ruling Class, McCraw-Hill (New York, Hartford, June 1975. See also Ludwig von Mises. .--.,.IPW> "The Middle of the Road Leads to Socialism", 25. Ludwig von Mises, Human Aclion, op. cir. Planning for Freedom, Libertarian Press (South 26. J. A. Schumpeter, The Theory of Economic Develop- Holland, Illinois, 1962) and F. A. Hayek, The Road to ment, op. cir. Serfdom, University of Chicago Press (Chicago, 19-34), 27. The circulation of elites over time is illustrated by the 39. Of course, any system which interferes with the market popular maxim: "from shirtsleeves to shirtsleeves in process embodies inherent contradictions which threegeneratiom". progressively hamper the functioning of the social 28. Herbert Spencer, Social Slnrics, A. M. Kelley (New system over the long run. Hence reality is a strong York, 1969); Isabel Paterson, The GodoftheMachine, teacher and market oriented reforms will probably Caxton Press (Caldwell, Idaho, 1943); Gabriel Kolko, accompany each cumulative crisis but, in the absence The Triumph o/Conservatism, op. cir. of a continuing libertarian ideology, even the harsh 29. Albert Jay Nock, Our Enemy the Slate, Free Life lessons of reality will soon be forgotten and the inter- Editions (New York, 1973); Franz Oppenheimer, The ventionist dynamic will resume its relentless course. Stare, Free LifeEditions (New York, 1975); Murray N. F. A. Hayek, Individualism andEconomic Order, op. Rothbard, "The Anatomy of the State", Egolirorionirm cit.; Ludwig von Mises, "Economic Calculation in the os n Revolt Against Nolure and Orher Essays, Liber- Socialist Commonwealth" in Hayek, ed., Colleclivisl tarian Review Press (Washington. 1974); and Murray Economic Planning, op. cit.; and Murray N. Rothbard, N. Rothbard, For o New Liberfy (New York, 1973). "Lange, Mises and Praxeology: The Retreat from 30. Oppenheimer. ibid. Marxism" in Hayek. Harper, el. a/., e&., Towords 31. Gabriel Kolko, op. cil. Liberty, Institute for Humane Studies (Menlo Park, 32. Carl Menger. Principles of Economics, Free Press California, 1971). (Glencoe, 1950) and Murray N. Rothbard. "Toward a 40. Von Mises, Human Action, op. cil.; Ludwig M. 78 WALTER E. GRINDER AND JOHN HAGEL 111

Lachmann, "On the Method of Interpretation", and an ostensibly "private" corporation such as Dow The Legacy of Max Weber, Glendessary Press Chemical Company which emphasized that its Contracts Wkeley, 1971); and Murray N. Rothbard, ''~axeology for the manufacture of napalm account for less than 3% as the Method of Economics" in M. Natanson, ed., of its total revenue. Phenomenology and rhe Social Sciences, Northwestern 53,. Sylvester Petro, Labor Policy of the Free Society, Ronald Press (New York, 1957) and Murray N. University Press (Evanston, 111.. 1973), Vol. 11, ~pp. ~ 311- 339. Rothbard. PowerandMarker, op. cil. 41. Albert Jay Nock, Memoirs of a Superfluous Man, 54. Yale Brom. "Is Government the Source of Monooolv?" Regnery (Chicago, 1964). lnterc,,lleg,& Revw*. 1968; Milton ~ri&m&, 42. E. Digby Baltrell, Philadelphia Genrlemen: The Making Cdp~lalrsnrrrnd Freedom, Un~vers~t)of Chicago Prcrs of a Narionol Upper Class, The Free Press (Glencoe, ~Chicacs.-.1961,: 1. $1. PctcrsonandC.f. Stewart.. Jr... Ill., 1958); G. William Domhoff, Who Rules Americo? "~mploymenl ~ffectsof Minimum Wage Rates", Prentice-Hall (Englewood Cliffs, N.J.. 1968); American Enterprise Institute pamphlet, Washington, G. William Domhoff, The Higher Circles, Vintage 1969; and Murray N. Rothbard. Power and Market, (New York. 1971); and Ferdinand Lundberg, Americu's op. cit. Sixty Families, Vanguard Press (New York, 1937). 55. Other prominent examples of government contracts 43. Gabriel Kolko, "The Men of Power", Roots of include the interstate highway network, the Albany American Foreign Policy, Beacon Press (Boston, 1968) Mall, the World Trade Center Towers, etc., etc., ad and G. William Domhoff, The Higher Circles, op. cit. infiniturn. 44. David Eakins, "Policy Planning for the Establishment" 56. Ronald Radosh, "The Corporate Ideology of American in Radosh and Rothbard, eds., A New History of Labor Leaders from Gompers to Hillman", in James Leviathan, op. cil.; David Eakins. "Business Planners Weinstein and David Eakins, eds., ForoNewAmerica, and America's Postwar Expansion" in William A. Random House (New York, 1970); Ronald Radosh, Williams, ed., Corpororions and the Cold War, American Lobor and Unired Sfales Foreign Policy, Monthly Review Press (New York, 196g); and David Vintage (New York, 1970); and Murray N. Rothbard, Eakins, "The Development of Corporate Liberal Power andMarket, op. cif. Policy Research in the United States, 1885-1965", 57. S. E. Finer, Pareto: Sociological Writings, op. cil. and unpublished Ph.D. thesis, University of Wisconsin, Vilfredo Pareto, Mind and Sociery (New York, 1935). Madison. 1966. 58. F. Piven and R. Cloward, Regulaling the Poor, 45. G. ~illikDomhoff, Who Rules America? and The Pantheon (New York, 1971); Pechman, "The Rich, the Higher Circles, op. cif. Poor and the Taxes They Pay" The Public Interest, 46. Baltzell, Philadelphia Genrlemen, op. cif.; Stephen Fall 1969. Preliminary studies by an Institute of Policy Birmingham, The Righr People, Little. Brown and Co. Studies research group in low income areas in (Boston, 1968): 0. William Domhoff, The Hizher Washington, D.C. also indicate that these areas pay out ~ircles,op. cit.; Lundberg, op. cir.; S. ~enshikov, more in taxes than they receive in welfare benefits. Of Millionnires andMonagem, op. cir.; and Victor Perlo, course, purely quantitative studies of transfers in this op. cir. field suffer from the same limitations characteristic of 47. Cleveland Amory, The Lost Resorts, Harper and Raw such studies in other areas of the economy. (New York, 1952); Baltzell, op. cir.; Birmingham, op. 59. A. Gramsci. The Modern Prince ond Olher Essavs.. . cir.; G. William Domhoff, The Bohemian Grove, Inlcrnational Pubhrhers (New York, 1957); Bertrand Harper and Row (New York, 1974); G. William dc Jou\cnel, On Power, rh~ton.IY6Y); and J. A Domhoff. The Higher Circles, op. cil.; C. Wright S~humpctcr. t~dprtolrrm, .Sor.idrsm ond Democracy, Mills, The Power Elire, Oxford University Press (New op. cir. York. 1956). M). F. A. Hayek, "The Intellectuals and Socialism", 48. Raymond Arm, "Max Weber", Main Currents in University o/ChicogoLow,Review, Spring 1949. Sociologicnl Thought, Basic Books (New York, 1965); 61. De Jouvenel, On Power, op. cif. J. A. Schumpeter, Copilnlism, So&lism and 62. Murray N. Rothbard, "Anatomy of the State", op. cir. Democracy, op. dl.; Max Weber, The Theogv of and a brilliant but, as yet, unpublished manuscript by Social and Economic Organization, Oxford University Murray Rothbard, "A Parable for Our Time". Press (New York, 1947); Ludwig von Mises, Bureou- 63. James Gilbert, Designing the IndustrialState, Quadran- cracy, Yale University Press (New Haven, 1944). gle (Chicago, 1972) and G. William Domhoff, The 49. J. H. Meisel, TheMyrh of rheRulig Class, op. cir. and Higher Circles, op. cir. G. W. Domhoff. The Higher Circles, op. cir., especially 61. Joel Spring, Education and the Rise of the Corporate chapter 9. Srare, Beacon Press (Boston, 1971). 50. Seymour Melman, Pentagon Capirallrm, McCraw-Hill 65. Ibid. and Edgar 2. Friedenberg, Coming of Age In (New York. 1969); Seymour Melman, The Permanent America, Random House (New York, 1963). War Economy, Simon and Schuster (New York, 1974); 66. Ludwig M. Lachmann, "On Institutions", TheLegacy Murray Weidenbaum, The Modern Public Sector, ofMax Weber, op. dl. Basic Books. (New York, 1970); and H. L. Nieburg, 67. This defensive role of political interventionism is best In rhe Nome of Science, Quadrangle (Chicago, 1966). identified and explained by the "Broren-Friedman- 51. J. C. Calhoun, A Disquisirion on Governmenr, P. Smith Kolko Thesis", an unified thesis which may be (New York. 1943) and Murray N. Rothbard, Power and developed from the following works: Brozen, "Is Market, Institute for Humane Studies (Menlo Park. Government the Source of Monopoly?", op. nf.; 1970). Milton Friedman. "Occupational Licensure", 52. These broadened criteria are essential to isolate and Copiralism ond Freedom, op. cir.; and Gabriel Kolko, define the precise relationship existing between the state The Triumph o/Come~y(~Iism,op. cil. Seealso Vilfredo TOWARD A THEORY OF STATE CAPITALISM: ULTIMATE DECISION-MAKING AND CLASS STRUCTURE 79

Pareto, Mindand Society, op. cit. and Gaetano Mosca, improvement on this level. TheRuling Class, op. ett. 70. Gaetano Mosca, The Ruling Class, op. cil. 68. Herbert Spencer, Social Statics, op. cit. 71. Raymond Aron, "Pareto" in Moin Currents in 69. A retrogressive social phenomenon is defined through a Sociological Thought, op. cil. and S. E. Finer, comparison between existing conditions and the Pareto: Sociological Writings, op. d~ conditions which probably would have prevailed had 72. F. A. Hayek, TheRoodtoSerfdom, op. cil. the intervention not taken place. It would be misleading 73. Karl Marx, ''Theses on Feuerbach", TheEconomic and to compare the present conditions with earlier conditions Philosophical Manuscripts of 1844, International since, for other reasons, there in fact may have been an Publishers (New York, 1%5).