Coordination, Cooperation, and Control: The Evolution of Economic and Political Power

My latest book is titled Coordination, Cooperation, and Control: The Evolution of Economic and Political Power. The book’s ultimate conclusion is that when the same people hold both economic and political power, the result is stagnation. When the people who hold economic power are not the same people who hold political power, the result is progress.

One important difference between those two types of power is that economic power is exercised only through voluntary cooperation with others. Political power is exercised through the threat of force against those who do not comply.

Even the most powerful corporations cannot obtain resources from others unless those others voluntarily agree to transact with it. Of course, those with economic power can use some of it to buy political power to force people to deal with them, but economic power by itself operates through mutually agreeable transactions.

Political power operates by threatening force against those who resist it. Even for those who are fully supportive of government action, government still threatens them if they do not pay their taxes, or if they do not abide by government regulations. That’s true for those who favor the taxes and regulations and for those who oppose them.

If economic and political power do become separated, there is always the tendency for them to recombine. They can do so through cooperation between the economic and political elite–cronyism–and they can also do so if those who have political power use it to confiscate resources from those who have economic power, as happened in Cuba in 1959, in the formation of the Soviet Union in 1917, and more recently in Venezuela.

The challenge is how to keep them separated, to produce progress and prosperity.

The relative importance of factors of production has a substantial impact on the ability of those with political power to also acquire economic power. I discuss this in detail in my book, but here’s a quick overview. Thinking of factors of production as land, labor, capital, and entrepreneurship:

In pre-agricultural societies, labor is the primary factor of production, and power is not clearly differentiated. All power is social power: power over others. But there is a check on the abuse of power in pre-agricultural societies, because its members can easily leave, and when they do, they take their labor with them.

The agricultural revolution, which began more than 10,000 years ago, made land the primary factor of production, and those who controlled the land also controlled the people who worked on it. Those people could not easily leave, because they could not take their land with them.

Those who controlled the land had, as a result, both economic and political power. Political motives tend to dominate economic motives. Those with power wanted to keep it, which meant maintaining the status quo. Agricultural societies are stagnant societies because those with political power also have economic power.

Capital is the primary factor of production in capitalist economies, and capital is mobile, unlike land. Even if it cannot be physically relocated (a factory, for example), it depreciates if it is not maintained, so the use of political power to confiscate economic power ends up eroding the economic power, as happened in the Soviet Union, in Cuba, and in Venezuela.

The mobility of capital, and the even greater mobility of entrepreneurship, offers some (but not complete) protection against its confiscation. Those with political power fare better using it to protect economic power, and taxing it.

Even this is no guarantee that these two types of power will remain separated, as I’ve already noted. Those with political power do sometimes use it to confiscate economic power, and the cronyism in contemporary capitalist economies shows that those with economic power can use it to buy political power. The cooperation of the economic and political elite combines them and leads to stagnation.

Joseph Schumpeter talked about the creative destruction of capitalism. Those who want to build economic power in a capitalist economy are the creators, but creative destruction threatens to destroy those who are already established. They want stability, not the creative destruction of capitalism.

Preserving that separation between economic and political power is a major challenge to those who want a classical liberal social order. That’s an overview of some issues I discuss in Coordination, Cooperation, and Control.