Recently I had an exchange of views with someone who seemed to fear large, multi-national corporations more than government. John Kenneth Galbraith seems to suffer the same fear, according to this review of his latest book, The Economics of Innocent Fraud. The reviewer, Daniel Ben-Ami, recaps Galbraith’s fear:

For Galbraith, the all-powerful role of companies defines contemporary society. As he argues in his latest work: “Central to my argument here is the dominant role in the modern economic society of the corporation and of the passage of power in that entity from owners, the stockholders, now more graciously called investors, to the management. Such is the dynamic of corporate life. Management must prevail.” (2) He rejects the view that consumers are sovereign. Instead he says it is producers, in the guise of corporate management, who truly control the economy.

Galbraith goes on to argue that corporations dominate the state; that government institutions are forced to obey the narrow interests of companies. From here it is a small step to his argument that the recent Iraq war was fought for the military establishment and weapons industries. Younger authors are more likely to point to energy firms such as Halliburton, but the view is the same.

Ben-Ami’s response to that line of reasoning echoes my own:

But Galbraith misjudges the power of the state relative to the corporation. During his seven decades as an economist, the state has come to play an increasingly central role in economic life. State spending accounts for a high proportion of gross domestic product (GDP) in all the developed economies. The state is also highly active, through a wide variety of institutions such as central banks and financial regulators, in maintaining economic activity. In fact, today’s corporations could almost be seen as an arm of an ever-growing state.

Moreover, the extent to which large corporations have a lot of influence on laws and regulations is an argument for restricting laws and regulations to those that protect us from force and fraud. Show me a heavily regulated industry and I’ll show you an industry that’s sheltered from competition.

Jeremy Bentham (English, 1748-1832) devised modern utilitarianism, which is best captured in the John Stuart Mill‘s phrase “the greatest amount of happiness altogether” (Chapter II of Utilitarianism).

From Bentham’s facile philosophy grew the ludicrous notion that it might be possible to quantify each person’s happiness and, then, to arrive at an aggregate measure of total happiness for everyone (or at least everyone in England). Utilitarianism, as a philosophy, has gone the way of Communism: It is discredited but many people still cling to it, under other names.

Modern utilitarianism lurks in the guise of cost-benefit analysis. Governments often subject proposed projects and regulations (e.g., new highway construction, automobile safety requirements) to cost-benefit analysis. The theory of cost-benefit analysis is simple: If the expected benefits from a government project or regulation are greater than its expected costs, the project or regulation is economically justified. Luckily, most “justified” projects are scrapped or substantially altered by the intervention of political bargaining and budget constraints, but many of them are undertaken — only to cost far more than estimated and return far less than expected.

Here’s the problem with cost-benefit analysis — the problem it shares with utilitarianism: One person’s benefit can’t be compared with another person’s cost. Suppose, for example, the City of Los Angeles were to conduct a cost-benefit analysis that “proved” the wisdom of constructing yet another freeway through the city in order to reduce the commuting time of workers who drive into the city from the suburbs.

Before constructing the freeway, the city would have to take residential and commercial property. The occupants of those homes and owners of those businesses (who, in many cases would be lessees and not landowners) would have to start anew elsewhere. The customers of the affected businesses would have to find alternative sources of goods and services. Compensation under eminent domain can never be adequate to the owners of taken property because the property is taken by force and not sold voluntarily at a true market price. Moreover, others who are also harmed by a taking (lessees and customers in this example) are never compensated for their losses. Now, how can all of this uncompensated cost and inconvenience be “justified” by, say, the greater productivity that might (emphasize might) accrue to those commuters who would benefit from the construction of yet another freeway.

Yet, that is how cost-benefit analysis works. It assumes that group A’s cost can be offset by group B’s benefit: “the greatest amount of happiness altogether.”

Here’s the proper “utilitarian” rule: If it must be done by government, it isn’t worth doing unless it is done “to establish Justice, insure domestic Tranquility, [or] provide for the common defence.”

Eugene Volokh objects to “spending about half a billion dollars of taxpayer money for a paid holiday for federal employees.” The half billion dollars is the reported cost of giving federal workers the day off on Friday, in honor of President Reagan.

Here’s how I look at it:

1. They would have been paid anyway, so taxpayers really aren’t shelling out an extra $500 million.

2. We’re better off when federal employees aren’t at work.

I think it’s a very fitting way to honor the memory of Ronald Reagan.