THE BLOG
of John Gelles
May 1, 2006At a rally in favor of American foreign policy, including regime change in Iraq (in Fall 2003), Karen Loberg (the Ventura Star) took the picture. It made the front page. I was famous for a day.
I received James Galbraith's article (below), The Predator State, from Curtiss Priest and our Cyberspace Society---just after John Kenneth Galbraith, (father of James, Peter and Alan,) died. I am an admirer of James Galbraith from one personal visit and many years of membership in Post Keynesian Thought---an email list once read by a wide lay and academic audience, and where I met Curtiss Priest. I admire, too, Peter Galbraith---from TV appearances. Alan I do not know. But he is a lawyer, (that can be good,) and he is his father's son. My previous entry here reprints stories of John Kenneth Galbraith from the Times and the AP.
The Predator State is a fair critique of America's plight and of Law and Economics. I share its views----but with a difference:
As both an accountant and a lawyer (who fancies himself an economist in the tradition of Abba Lerner's functional finance and a lawyer in the tradition of Felix Cohen's functional law) I believe the heart of the problem we face is less a matter of predator-prey cultural genes than a matter of lousy accounting.
The American bottom line is measured in rigid monetary terms---and these terms are measured in nominal money and inflation adjusted money.
The proper measure of a sustainable and just bottom line must be in money created for democratic uses as defined below by James Galbraith.
James Galbraith defines the uses of money in a Keynesian monetary system of production: but he does not emphasize that our business and government culture has not yet redefined money to end the conflict between capital and labor---by adding to monetized wealth the enormous amount of money that modern technology and productivity create---but our culture until now ignores.
Who's is to blame for government not paying, to the worker-consumer, money it creates by fiat ---that would correct the damage done by debt?
Readers of feeble efforts on this website know that we promote computer assisted human lawful management of demand required money---to be spent into circulation by government to minimize debt and taxes, and maximize the minimum standard of living.
This site promotes, at the same time, supply required money for investment by government and private sector contractors---to minimize inflation--- and to maximize both the minimum standard of living and full bore protection and defense of the environment and human rights.
Law and Economics, as a conservative doctrine, fails to reject accounting for a bottom line without moral content or arithmetic possibility:
There is no way a system can sell, for money doled out as wages, enough of what it will produce for the system to be moral, stable or self-regulating.
Wages must have added to the employer's payment, subsidies from and computed by government---to reflect wealth produced beyond sales; to pay all union dues; to balance demand to supply; and to balance supply to need.
If I am on the right track, the attack on the predator-prey model must take a fresh look at money, taxes, wealth and debt---and the need to connect outcomes to rules: this is the connection of results to what we do that all of science demands and that functional finance and functional law suggest in the instant discussion.
Law and Economics will argue that debt-free spending by government, and subsidies for wages and investment, (as well as inflation protected savings to defer private bidding for items in short supply), will breed corruption in Congress and sloth among private firms and individuals.
This argument is met on my side by the fact that people like to do their best and, also, by the powerful tools of inspection, audit, freedom of the press, public and private ombudsmen, protection of whistle blowers by law, the rationality of functional systems, and, finally, by criminal prosecution as necessary.
However, this final resort to courts and crime fighting creates another profound problem---as difficult to address as the arithmetic error of carving wages out of sales instead of out of the wealth (safely monetized) that wages, robots and systems produce:
Once we resort to the criminal law we have the example of Soviet police state outcomes---and prosecutions as idiotic as the one of Martha Stewart.
Let me plead with you to read all of James Galbraith's indictment of contemporary American failure. He and his father are extraordinarily gifted writers---and fair by nature. They have pointed the way to a democratic future which we have tragically lost track of for six decades after 1944.It was on January 11th in that year that the second bill of rights was born. It makes concrete what we need. It will never be too late to enact it. And it is certainly not too early.
John Gelles
Copyrighted work reprinted here is for educational non profit purposes --- and at the teachable moment. It was offered free to me on the internet (as a member of a wide audience) and is copied here free to others adding to its value) --- it is fair use of the work.
Received from: Information Clearing House
The Predator State
Enron, Tyco, WorldCom... and the U.S. government?
By James K. Galbraith
04/29/06 "Mother Jones"WHAT IS THE REAL NATURE of American capitalism today? Is it a grand national adventure, as politicians and textbooks aver, in which markets provide the framework for benign competition, from which emerges the greatest good for the greatest number? Or is it the domain of class struggle, even a “global class war,” as the title of Jeff Faux’s new book would have it, in which the “party of Davos” outmaneuvers the remnants of the organized working class?
The doctrines of the “law and economics” movement, now ascendant in our courts, hold that if people are rational, if markets can be “contested,” if memory is good and information adequate, then firms will adhere on their own to norms of honorable conduct. Any public presence in the economy undermines this. Even insurance—whether deposit insurance or Social Security—is perverse, for it encourages irresponsible risktaking. Banks will lend to bad clients, workers will “live for today,” companies will speculate with their pension funds; the movement has even argued that seat belts foster reckless driving. Insurance, in other words, creates a “moral hazard” for which “market discipline” is the cure; all works for the best when thought and planning do not interfere. It’s a strange vision, and if we weren’t governed by people like John Roberts and Sam Alito, who pretend to believe it, it would scarcely be worth our attention.
The idea of class struggle goes back a long way; perhaps it really is “the history of all hitherto existing society,” as Marx and Engels famously declared. But if the world is ruled by a monied elite, then to what extent do middle-class working Americans compose part of the global proletariat? The honest answer can only be: not much. The political decline of the left surely flows in part from rhetoric that no longer matches experience; for the most part, American voters do not live on the Malthusian margin. Dollars command the world’s goods, rupees do not; membership in the dollar economy makes every working American, to some degree, complicit in the capitalist class.
In the mixed-economy America I grew up in, there existed a post-capitalist, post-Marxian vision of middle-class identity. It consisted of shared assets and entitlements, of which the bedrock was public education, access to college, good housing, full employment at living wages, Medicare, and Social Security. These programs, publicly provided, financed, or guaranteed, had softened the rough edges of Great Depression capitalism, rewarding the sacrifices that won the Second World War. They also showcased America, demonstrating to those behind the Iron Curtain that regulated capitalism could yield prosperity far beyond the capacities of state planning. (This, and not the arms race, ultimately brought down the Soviet empire.) These middle-class institutions survive in America today, but they are frayed and tattered from constant attack. And the division between those included and those excluded is large and obvious to all.
Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature—a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.
Our rulers deliver favors to their clients. These range from Native American casino operators, to Appalachian coal companies, to Saipan sweatshop operators, to the would-be oil field operators of Iraq. They include the misanthropes who led the campaign to abolish the estate tax; Charles Schwab, who suggested the dividend tax cut of 2003; the “Benedict Arnold” companies who move their taxable income offshore; and the financial institutions behind last year’s bankruptcy bill. Everywhere you look, public decisions yield gains to specific private entities.
For in a predatory regime, nothing is done for public reasons. Indeed, the men in charge do not recognize that “public purposes” exist. They have friends, and enemies, and as for the rest—we’re the prey. Hurricane Katrina illustrated this perfectly, as Halliburton scooped up contracts and Bush hamstrung Kathleen Blanco, the Democratic governor of Louisiana. The population of New Orleans was, at best, an afterthought; once dispersed, it was quickly forgotten.
The predator-prey model explains some things that other models cannot: in particular, cycles of prosperity and depression. Growth among the prey stimulates predation. The two populations grow together at first, but when the balance of power shifts toward the predators (through rising interest rates, utility rates, oil prices, or embezzlement), both can crash abruptly. When they do, it takes a long time for either to recover.
The predatory model can also help us understand why many rich people have come to hate the Bush administration. For predation is the enemy of honest business. In a world where the winners are all connected, it’s not only the prey who lose out. It’s everyone who hasn’t licked the appropriate boots. Predatory regimes are like protection rackets: powerful and feared, but neither loved nor respected. They do not enjoy a broad political base.
In a predatory economy, the rules imagined by the law and economics crowd don’t apply. There’s no market discipline. Predators compete not by following the rules but by breaking them. They take the business-school view of law: Rules are not designed to guide behavior but laid down to define the limits of unpunished conduct. Once one gets close to the line, stepping over it is easy. A predatory economy is criminogenic: It fosters and rewards criminal behavior.
Why don’t markets provide the discipline? Why don’t “reputation effects” secure good behavior? Economists have been slow to answer these questions, but now we have a full-blown theory in a book by my colleague William K. Black, The Best Way to Rob a Bank Is to Own One. Black was the lawyer/whistle-blower in the Savings and Loan and Keating Five scandals; he later took a degree in criminology. His theory of “control fraud” addresses the situation in which the leader of an organization uses his company as a “weapon” of fraud and a “shield” against prosecution—a situation with which law and economics cannot cope.
For instance, law and economics argues that top accounting firms will protect their own reputations by ferreting out fraud in their clients. But, as with Enron, Tyco, and WorldCom, at every major S&L control fraud was protected by clean audits from top accountants: You hire the top firm to get the clean opinion. Moral hazard theory shifts the blame for financial collapse to the incentives implicit in insurance, but Black shows that the large frauds were nearly all committed in institutions taken over for that purpose by criminal networks, often by big players like Charles Keating, Michael Milken, and Don Dixon. And there’s another thing about predatory institutions. They invariably fail in the end. They fail because they are meant to fail. Predators suck the life from the businesses they command, concealing the fact for as long as possible behind fraudulent accounting and hugely complex transactions; that’s the looter’s point.
That a government run by people rooted in this culture should also be predatory isn’t surprising—and the link between George H.W. Bush, who led the deregulation of the S&Ls, his son Neil, who ran a corrupt S&L, and Neil’s brother George, for whom Ken Lay sent thugs to Florida in 2000 on the Enron plane, could hardly be any closer. But aside from occasional references to “kleptocracy” in other countries, economic opinion has been slow to recognize this. Thinking wistfully, we assume that government wants to do good, and its failure to do so is a matter of incompetence.
But if the government is a predator, then it will fail: not merely politically, but in every substantial way. Government will not cope with global warming, or Hurricane Katrina, or Iraq—not because it is incompetent but because it is willfully indifferent to the problem of competence. The questions are, in what ways will the failure hit the population? And what mechanisms survive for calling the predators to account? Unfortunately, at the highest levels, one cannot rely on the justice system, thanks to the power of the pardon. It’s politics or nothing, recognizing that in a world of predators, all established parties are corrupted in part.
So, how can the political system reform itself? How can we reestablish checks, balances, countervailing power, and a sense of public purpose? How can we get modern economic predation back under control, restoring the possibilities not only for progressive social action but also—just as important—for honest private economic activity? Until we can answer those questions, the predators will run wild.
James K. Galbraith teaches economics at the Lyndon B. Johnson School of Public Affairs at the University of Texas-Austin. He previously served in several positions on the staff of the U.S. Congress, including executive director of the Joint Economic Committee.(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Information Clearing House has no affiliation whatsoever with the originator of this article nor is Information ClearingHouse endorsed or sponsored by the originator.)
Information Clearing House has NO connection to TIEA. TIEA respects ICH and reprints James Galbraith's words for their wisdom and to remember John Kenneth Galbraith.
