August 24th, 2011
in Op Ed
by Derryl Hermanutz
Editor's Note: Derryl is a non-dogmatic free thinker. Like Frank Li, Derryl is not going to let saying non-mainstream thoughts inhibit his writing. Both Frank Li and Derryl have impressive educational pedigrees, and share strong entrepreneurial roots.
In Politics and Economics: Pyramid Theory I, Frank Li wrote that we must,
Clearly accept the human nature tenet: “me first”. Yes, it applies to the politicians too! However, unlike the capitalists who have no problem admitting “me first”, the politicians pretend to be “you first”. Follow up:
Frank seems to adopt the Austrian position that the market will benevolently allocate resources and optimize outcomes whereas government management of the economy will inevitably misallocate those resources and generate perverse outcomes. This position is founded on a number of highly questionable assumptions about the realities of “markets”, which beliefs I will challenge.
It is observably true that the most successful capitalists indeed practice the "me first" policy in their dog eat dog Darwinian quest for supremacy. This is also true of the entity called a "corporation", whose human managers must jettison any human motives other than the urge to maximize profits. But even here, especially here, the managers do not manage the enterprise in the interest of maximizing "shareholder value", in the interest of “the shareholding public”. They manage in the interest of “me”, maximizing their personal income. When the short term shit hits the long term fan, “IBG YBG”. “I’ll be gone, you’ll be gone. The company may be bust and on taxpayer life support, but we get to keep the money we took.” Now who is “misallocating resources”?
Yes, there have been notable attempts to allign management with investor interests, such as the Watson's with IBM, Warren Buffett with Berkshire Hathaway, Bill Gates with Microsoft, etc., but many corporations are run by transient CEOs who skim as many millions as they can before the next guy comes in.
It certainly isn't in shareholder interest as dividend recipients sharing in corporate profits to have these guys pay themselves millions of dollars per year out of the top line come hell or high water, which they do, even in years where they suffer billions of dollars of operating losses. There has come to be a very fine line between managers robbing their company blind, and managers paying themselves an "excessive" compensation package. The title of Bill Black's book on financial fraud, "The Best Way to Rob a Bank is to Own One", is indicative of the kind of kleptocracy practiced by corporate managers against the interests of their shareholders and “the public”.
The Predator State
I have been writing about this topic in my own amateur way since at least 1992. I found it weird that when the idea was accepted at all, it was as a metaphor.
One thing to remember about predators is this: they are animals. By that, I mean they are driven by appetite and competition, and foresight is not part of their repertoire. Perhaps what I mean is that if one is driven by appetite and competition, without foresight, this defines one as an animal despite whatever human potential may be present.
Expecting foresight from predators is to convert them into farmers or feedlot operators, efficient predators who look ahead in the management of their livestock. We really DON'T want to go there.
But aside from the sociopaths, tyrants and other “predators” whose unrestrained appetites drive them to win at any cost, most people do not want to live in the jungle so they restrain their animal urges and act from motives other than bare profit maximization. That is why we call it “civilization”. As James K. Galbraith describes in The Predator State, psychology and behavioral economics find in empirical studies that human beings are not the homo economicus that is assumed in rational choice theory that underpins the various theories of “market” economics. In the real world humans behave as (quoting Galbraith at length),
........social beings, concerned about their standing with their peers, about the fairness of the deal they are offered, and other matters quite irrelevant to the utility of the object or money on offer. These are remarkably subversive findings, for they suggest that even if there were no monopoly, no externalities, perfect information, and perfect foresight, markets composed of real people would still not perform as the conservative vision requires.
...The real world is a different place altogether. And as my father, John Kenneth Galbraith, argued throughout his long career, an economics of the real world requires an altogether different point of departure. In the real world, the autonomous individual is not the active agent who matters most. The business enterprise, the company, the corporation is. And companies do everything they can to take advantage of human changeability. They seek to control markets, even to replace them altogether. And often they succeed.
Control of markets entails measures available only to large organizations, including (1) the capacity to design and develop new products, (2) the capacity to adjust the presentation of such products to what research and experience indicate the public will actually buy, (3) the capacity to influence the public's buying preferences through advertising, and (4) the capacity to coordinate with one's competitors to ensure that the market is not glutted, so that the possibility of profit is open. Needless to say, under such a system, the "free" market is actually a threat, a source of uncertainty and risk. To the greatest extent possible, therefore, it is made to disappear. Only the fiction that the company operates in a market is maintained, for the obvious benefit of shielding the corporation from close scrutiny of its actual business methods.
The actual world therefore cannot be what a conservative means by a "free-market system". In the actual world, the "freedom to choose" among a menu of items set out for sale--however vast--does not give to the consumer an equal weight in the decisions over what is produced. Instead it merely reproduces, in conditions of comparative but far from complete disorder, the phenomenon of planning, rationing, queuing, indoctrination, and control that characterize unfree systems.
So who is "market freedom" for? It is for the freedom of what my father called "The Planning System". It is a real, practical, secure, and highly valued form of freedom. But it is a freedom for business alone, and even less than that: it is a freedom for stable large corporations with substantial political power, for only such businesses can muster the power to exercise that freedom in its fullest: from disposition of the resources and command over labor, to the design of its products, to the pricing and the distribution and the planned obsolescence, and to the management of all the consequences, including environmental and political ones. The freedom to shop, for the rest of us, is an incident to this freedom.
I have been writing the same things, but Galbraith says it far better so I quoted his whole explication of the fact that our modern post-classical bastard version of “free markets” only applies to behemoth multinational corporate entities, NOT to human beings like you and me. Even corporate managers, insofar as they remain human beings with human feelings like compassion, are crushed by the demands and commands of this non-human thing called a “corporation”, as former long term corporate manager David Korten explains in his 1995 book, “When Corporations Rule the World”.
Free Market for Predators
Adam Smith (pic on left), the Enlightenment in general, and classical liberals in particular, wanted to free the individual FROM “Big”: big powers, monarchs, the landed aristocracy, mercantilist corporations and their colluding and enabling government functionaries, all of whom practiced monopoly and imposed “conformity” on the people and their minds and their economies.
If there is to be any such thing as a “free market economy” in the classical sense, then it must be “free” for individual people and their small enterprises. JS Mill’s essay, “On Liberty”, is the classic statement of just how far this individual non-conformity must be tolerated and even encouraged.
Government of the economy by corporate managers is no different in practice than government of the economy by government managers. It’s just a choice, as Frank Li notes, between whether the managers pretend to care about “the people” (as government agents pretend, and sometimes actually do) or whether they (corporate agents) explicitly say fuck the people.
Milton Friedman told us we’re only allowed to go after profits for “our guys”—which in recent reality means “for our managers”, “for ourselves”, and to a lesser extent “for our shareholders”. Governments say they care about jobs and middle class incomes, but their economic, trade and taxation policies almost exclusively serve the corporate interests. These corporate interests effectively eliminate middle class jobs and incomes - to the benefit of the Corporate Management thieves.
The Rule by Thieves
“Kleptocracy” means “rule by thieves”. That is what we have in the modern corporatist world. Corporate managers and their bureaucratic minions oppress us from the “private” side of Big, while politicians and their bureaucratic minions squeeze us from the “public” side of Big. Our “liberty”, our freedom to not conform to how “they” want us to live, is crushed by Big in whatever guise it presents itself. “Big” means “collectivist”, powerful beyond human scale, as contrasted with “small” and “vulnerable” individual human beings and their families and their privately owned and operated businesses.
Free market actors are exposed to the vicissitudes of fortune and to the market discipline of competition that directly affects their personal income. A small businessman’s “personal income” is whatever is left over from his total sales after paying all his employees and materials and other input costs and taxes and fees and all other costs of having and running a business. Low income is frequent. Zero income and negative income are not rare. Small businesses routinely suck up the savings and the dreams of their owners and cease to operate.
That is a “free market”. Small business “capitalists” lose as often as they win. Corporate managers, despite their reputation for being ‘risk-taking capitalists’, are nothing but extremely well insulated “employees” of the large scale company that they manage.
Increasingly thieving employees, I might add, especially but not exclusive to the managing employees of financial corporations. They get paid the big bucks whether their company gains or loses under their “management”. And they get paid whether their company benefits or harms the economic interests of the nation that formally incorporated their legal construct “employer” as a limited liability business enterprise.
There is no invisible hand working here to secure the public good out of the self interested actions of corporate managers. They are more powerful than the puny “market forces” that are supposed to constrain them and optimize outcomes. Instead, they bestride the narrow world like a supranational colossus.
Corporate managers may suffer some social or moral opprobrium for losing billions of dollars of company money, but they still get their inflated personal income and golden parachute. Even fired, he is financially secure for the rest of his life. The bankrupt small businessman suffers both kinds of losses, and it is the loss of personal savings and personal income that is the real effective enforcer of “market discipline”. Without meaningful, life changing personal monetary loss, there is no “discipline” of the person who unfortunately or incompetently oversaw the loss. You can’t really “discipline” against devastating bad luck, but “the market “ is an arbitrary whore and nobody ever convicted her on the charge of being “fair”.
The productive elements of society, middle class workers and businesses and lower level corporate employees who do the actual work (which includes even some government workers who perform economically useful tasks), are being robbed by the overpaid managers and underlings of both the public and private collectivist sectors. They can rob us because they have monopolized major chunks of our economic necessities of life, so they charge us whatever prices and taxes are required to pay themselves their millions and promise their workers their ‘pensions’ that we, the non corporate, non government, non Big, “independent” middle class who have no pensions and no security are supposed to pay for.
Capitalism vs Corporate Capitalism
So Frank’s conclusion that, “Specifically, we must stick to capitalism and dramatically improve our democracy with one fundamental change: Term limits for the politicians”, might work in a world of “free market” capitalism where government interference was subverting “the market’s” virtuous economic organization. But it won’t solve the problems of our real world of “corporate” capitalism (more accurately, state sponsored corporate capitalism), because corporate capitalists are not subject to free market discipline, and “free markets” do not exist for all the too big to discipline sectors, and humans are not merely rational economic actors.
Indeed, as James K Galbraith observes, humans are not even “mostly” economic rational actors. We are “social beings” with interests that have nothing to do with economics. We work to live, not live to work, though many of us have been brainwashed into accepting the opposite as we render our harried obeisance to Mammon with our lives as “consumers” and “workers”. An economic system that serves “human” interests would be designed to optimize our need to work and maximize the economic benefit we derive from our work, freeing us to pursue our other interests (with Irving Fisher and Hyman Minsky and more recent monetary reformers, I believe humans “need” to work, so I wrote “optimize” rather than “minimize” work).
Political economists of the industrial revolution era, especially Karl Marx, worried about the coming “Age of Leisure”, as machines replaced human labor and eliminated the economic need for much of humanity’s “work”. In his 1848 “Principles of Political Economy”, (published, incidentally, the same year Marx and Engels published their dreary Manifesto) John Stuart Mill advocated a “steady state economy”, as contrasted with the classical model of eternal economic “growth”, in which issues of “distribution” of economic costs and benefits would have to be addressed politically because “the market” was bifurcating between the winners and losers of industrialization and ‘growth’ was not going to solve these inequality problems for us. Replace “industrialization” in the above sentence with “globalization”. Sound familiar?
I routinely quote David Ricardo’s 1817 admission, in “Principles of Political Economy and Taxation”, that essentially the Luddites were right, that, “I am (now) convinced that the substitution of machinery for human labor is very often injurious to the interest of the class of laborers.” and that increased machinery use would stabilize the returns to capital so that capitalists could maintain profit levels even with a smaller labor force and reduced gross revenue, which would “render the population redundant”. Since 2008 the world’s corporations have taken up Ricardo’s offer and scarified their labor force to keep up profits in the face of declining demand, rendering 10s of millions of unemployed and un-homed Americans “redundant” to corporate profits and corporate interests.
As John K Galbraith pointed out in his 1958, “The Affluent Society”, big business and big government decided there would be no age of leisure but rather they would create all manner of new human economic “needs”, via the wildly successful new medium of advertising. His son Jamie finds it “subversive” to report that there is no “free” market in the real world. His father found it subversive that demand does not cause supply, because via advertising the suppliers could create demand where none existed, which turned “market morality” on its head. If capitalism is not humbly serving the needs of consumers, but rather, advertising-manipulated consumers are serving the needs of capitalists, then we can see that capitalism is not our servant but our master. And “market economics” becomes the operative creed of our masters, which is sold to us as our “freedom”, which it utterly is NOT.
Capitalists preach the sanctity of “private property”, but build a pig farm on YOUR private property upwind of THEIR private property, and you will discover how deep their devotion to this sacred principle actually runs. They will use whatever political and economic and social force they can muster to deprive YOU of your ‘right’ to use your property as you so desire in your own interests as YOU define your interests. In the unlikely event these efforts fail, violence is the next level of coercion to force you to conform to THEIR desires or eliminate you if you won’t repent. Like virtually all the tenets of ‘market morality’ in the real world, “private property” is being used as a sales job whose ideological attractiveness suppresses middle class revolt at the violations of what we feel are our economic rights, while securing the self-serving interests of “The Big”.
Big Collectivists brainwash the people to think “our” interests are identical with “their” interests, when in fact they are often diametrically opposed. In a truly free market that respected individual’s property rights there could be no such thing as “zoning laws”. People would use their property however they pleased. There could be no such thing as “building codes”. People would build whatever they wanted, whatever shacks they could afford, even if their construction is structurally flawed and ‘dangerous’, just like they already do in Third World shantytowns. There could be no “collectively” funded “public” infrastructure. There could be no such thing as a “public” interest in what individuals do with our “private” property, and there could be no such thing as “property taxes” to pay our private share of the “public” goods whose use we enjoy.
But that is only a consistent application of market ideology, which is an incomplete description of human life. The real human world is more complex, and our problems are less amenable to solution-by-slogan. In the real world, “the market” does not automatically solve all our problems by some omnipotent and benevolent invisible hand, despite how often this slogan is implored to the god. We have to solve these problems ourselves or they don’t get solved. For the most part we are not self-sufficient human autarks, “hermits” who foresake the benefits of life in society, and we have to work out our “social” issues politically. So the first step toward rational political discourse is to eradicate faith in the narrow and deeply impractical ideological sloganeering, by exposing its contradictions and hypocrisies to the light of day, as Jamie’s “Predator” book does so well.
A Shot at the Libertarian View
Libertarians fantasize of “voluntary” conformity to “community” standards, but all they are really doing is instituting “government” on a small scale, agreeing that they have a “social” interest in “controlling” each other’s land use, contract enforcement, and other issues of ‘private’ property. But when somebody breaks ranks with the ‘voluntary’ delusion and uses their property for “prohibited” purposes, “the collective” comes down on them just like any other non-free coercive governing authority.
So to defend their anti-historical utopia libertarians claim it would be “irrational” to break ranks and lose the benefits of their voluntary society, and the individualist would tell them he doesn’t give a rat’s ass for their collectivist version of ‘rationality’, he’s going to do what he damn pleases with his private property, and he will defend his “property rights” with the muzzle of his gun.
In, “An Inquiry Concerning Human Understanding”, the 18th century Scottish philosopher (and political economist, as most students of human nature have been) David Hume wrote, “Reason is, and should be, nothing but the servant of the passions.”1 Our “values” come first. Our “reasons” come second, to support those values. So it is fully rational for someone who values his personal liberty to shoot his neighbors to support his “interest” in being left alone.
Libertarians assume a rationalist convergence of human values and interests as we all come to see by their light. “Come, let us reason together”, says the Lord to recalcitrant humanity in Isaiah 1:18. But alas, after 2600 years we are still waiting for the enlightenment to take root in the hearts and minds of humanity that induces us to “turn, and be healed”. Our values and interests remain divided and at odds with each other.
And we descend into Hobbes’ state of nature, “a war of all against all”, until in desperation we agree to institute a governing Leviathan of sufficient power “to keep them all in awe”. Non-government leads to government, because it better serves human interests. This is the lesson of history.
My Final Shot
Human beings do not share common economic interests. A significant portion of economic reality is zero sum: I have it, or you have it, which sets our interests at odds with each other. The dream of ‘voluntary’ conformity to a code of ‘shared’ interests and principles is as delusory now as it was hopeful in 600 B.C. when Isaiah was preaching it. That’s why the real world has, and has always had, governments and armies and police and laws and courts and the use of deadly force. Beyond the “extended family” level of social cooperation that we call “tribal”, real people do not ‘voluntarily’ conform to “your” ideals of how “people ought to live”. Some degree of coercion is necessary to mass society.
The reality of our life on this Earth is that we have social interests that are logically and materially inconsistent with radical individualism. Americans did not swim naked across the Atlantic and forge a continent with their ruggedly individual sweat and blood. They were the beneficiaries of centuries of social development of economic resources like clothing and ships and iron tools and cultivated seeds and agricultural and building techniques, to say nothing of their religion and culturally “agreed” values and techniques of social organization.
Like early Americans, modern corporations are also the beneficiaries of trillions of dollars worth of economic, social and political technology and infrastructure that we the people DID build with our minds and our sweat and blood over the course of centuries. If THEY need to use OUR national infrastructure, then they have to pay taxes for the privilege. But instead, they now want overly indebted governments to sell THEM that infrastructure for 1% of its replacement cost, so they can own it as their ‘private property’ and charge us eternal rents for using the very roads and ports and farms and cities and nations that we ourselves built up with our hands. In short, they want to steal the country in a debt-induced fire sale that they themselves financially engineered by gaining the power in 1913 to issue the nation’s money and ‘lend’ this financial fiction to our governments.
And that, my friends, would be a kleptocratic master stroke.
The Case Against the Rating Agencies by Michael Hudson