Veblen and Tarbell were often pilloried by their contemporaries, yet they were both proved correct again and again, throughout the twentieth century and beyond. After her exposé of Standard Oil, Tarbell was vilified by sections of the media. “The dear girl’s efforts … are pathetic,” wrote one academic. She and her followers were “sentimental sob sisters,” wrote another. Rockefeller called her “Miss Tar Barrel,” a socialist, and “that misguided woman.” She pretended to be fair, he said, but “like some women, she distorts facts … and utterly disregards reason.” The vilification made her long to “escape into the safe retreat of a library” and be liberated from “harrowing human beings confronting me, tearing me.”23 But in 1911 her investigations bore fruit. Standard Oil was broken up into thirty-four different companies, to become the forerunners of today’s oil giants ExxonMobil and Chevron, and even a part of British Petroleum. The breakup didn’t last, though: at a meeting in 1928 at Achnacarry Castle in Scotland, the heads of some of the biggest fragments of Standard Oil got together with some foreign rivals and hammered out a secret criminal deal to carve up the world’s oil industry into profitably collaborating fiefdoms.
Veblen died in 1929, a few weeks before the great financial crash vindicated his big ideas. The crash, and the ensuing turmoil, fed dark forces that eventually plunged the world into bloody global warfare, still in the lifetime of Tarbell, who died in 1944. The work of Tarbell and Veblen, and history, contain warnings: these great financialized malignancies of capitalism must be tackled.
Sometime in the mid-1950s a disagreement took place in the cafeteria of Northwestern University, in Chicago’s northern suburbs, between Meyer Burstein, a conservative economist, and his colleague Charles Tiebout, a high-spirited left-winger who was teaching microeconomics on the faculty there. The argument, when it started, was simply about high rents, but by the end it had developed into something bigger: a grand and influential new theory about how states and nations “compete” with each other. The two colleagues got on well enough as friends, but Tiebout was irritated that Burstein had become one of the fast-growing band of what he called Friedmaniacs, a group that blindly followed Milton Friedman, the Chicago School economist who was then on his way to becoming America’s financial godfather of the Right.
Tiebout was “one of the funniest guys I have ever known,” said Lee Hansen, one of his only surviving close friends. Tiebout would imitate academic bigwigs in his classes, give them silly nicknames, and turn up to meetings in dungarees despite the university’s traditional suit-and-tie uniform. When a student’s father complained about a “socialist” book Tiebout had assigned as part of his course, Tiebout impishly got the dean to send a letter back stating, “This is to inform you that Professor Tiebout is not a socialist; he is a communist.”1
Tiebout was not in fact a communist; he was just a mischief-maker. Back then, though, communism was a risky thing to even joke about: Senator Joseph McCarthy had been conducting anticommunist witch hunts in Hollywood, government, academia, and other parts of American society. He had even accused George Marshall—originator of the Marshall Plan to block global communist expansion by providing aid to Europe after World War II—of having communist leanings.2
Behind the fun, though, Tiebout did believe that government could do good. And at that lunch in the Northwestern cafeteria he felt the need to defend this belief when Burstein started griping about the high rents in the part of Chicago where he lived, which reflected high property taxes that paid for public services he didn’t use.
“Why should I pay for good schools when I have no children?” Burstein asked.
“But Meyer,” Tiebout said, “you don’t have to pay those high rents! Why don’t you just move to Rogers Park?”3
Later that day Tiebout was chatting with an undergraduate student, Charles Leven. “You know, Chas,” Tiebout said, “I was absolutely right. People do have a choice over their local public goods and a way of showing it through their revealed preference simply by moving. In fact, that’s a damn good idea. I should stick to my guns and write it up!” In less than a week he had written a first draft, and he submitted it to the conservative Journal of Political Economy, which published it in October 1956 under the dull title “A Pure Theory of Local Expenditures.” Tiebout could not know it then, but his hastily drafted article would become, a few decades later, one of the most widely cited articles in economics.4
A phrase in that conversation with Leven—“revealed preference”—ought to twitch the antennae of any mainstream economist. Tiebout was referring to Revealed Preference Theory, a concept the US economist Paul Samuelson had put forward in 1938. The basic idea was that while you can’t insert psychological probes directly into people’s minds to figure out their consumer preferences, you can do the next best thing: if you study their buying habits you can reveal their preferences and plug this data into the Chicago School’s elegant mathematical models and graphs. This data will allow you to study the effects of government policies and subject them all to the penetrating analyses of market economics.
By the 1950s Revealed Preference Theory was already quite widely used for understanding consumer behavior. But when you switched away from consumers and markets and tried to apply the model to public services like schools, roads, or hospitals, there was a problem, which Samuelson himself had laid out in a paper in 1954. And it was a big one: the so-called free-rider problem. People will happily consume public services, Samuelson explained, but they like to dodge the taxes that pay for these things. The free-rider problem means that you can’t get people to reveal their preferences regarding taxes and public services, so you can’t shoehorn this stuff into the Chicago School’s elegant mathematical models to determine optimal levels of taxes and public spending. Government and democratic politics had to step in and deal with this one, and the economists wouldn’t get a shot at it. Ouch.
Tiebout’s 1956 paper claimed to have found the riposte. There was a way to envisage a market for public services and taxes after all, he explained. Samuelson might be right that you couldn’t apply market analysis to the US federal government, Tiebout reasoned, but you could do so with local governments. After all, each state or local government zone offers a different package combining a particular bundle of taxes with a particular bundle of public services, and people can move among these jurisdictions according to which mix of taxes and public goods works best for them. (Burstein, as it happens, did move to Rogers Park. He paid less rent and “was happy as a clam and stayed there.”) Shopping for better public services like this was, Tiebout wrote, like shopping in a mall: public services are analogous to consumer goods, while taxes are akin to the prices of those consumer goods. Communities will “compete” to provide the best mixes of tax and public services, just as in a private market.5
If people can vote with their feet, he went on, then not only could economists reveal Americans’ preferences for the right mix of public goods and taxes and fit this data into their mathematical models, but you’d also get a “competitive sorting” of people into optimal communities, thus bringing the efficiency of private markets into the government sphere. With a little mathematics, governments could discover the ideal equilibrium, balancing taxes against public services. Countering the rising tide of antigovernment Friedmaniacs, Tiebout felt he had shown how government could be efficient after all. Tax cuts weren’t the magic elixir to entice productive companies and people to move across borders; those firms and people needed good tax-financed public services too. It was a trade-off, and when people moved across borders to make this trade-off work best for them, this improved overall welfare. All this amounted to a rather progressive agenda—or so he thought.6
Tiebout himself never really pursued