Saturday, March 12, 2016

Shark Tank

Laissez-faire is a system of predation.

A few years back, I scanned through the TV listings and saw a show called "Shark Tank". Sounds nice.. one of those discovery channel nature shows, right? No, it turned out to be a celebration of cut-throat business, a reality show where many are called, few are chosen, and the rest are fired. Capitalism is a system of many faces and contradictions, but a central one is that while competition sometimes gives the consumer a better deal, the same competition also generates criminal activity, corruption at business and government levels, inefficiencies, conspiracies against consumers, and other antisocial effects, on the system as well as on individuals.

Take the sub-prime lending fraud that led to the recent recession. Mortgage lenders and brokers showered money on poor and uninformed purchasers who were pleased to find that they could afford far more house than they thought, virtually no questions asked. Who cared if the ultimate rate was a bit high or the balloon payment unimaginable? These mortgages were sold on to other suckers in an unvirtuous circle that sent millions of homeowners into bankruptcy and bondholders into insolvency. At the heart of this process were fraudulent practices that threw legal and underwriting standards to the winds so that the immediate mortgage lenders could make a quick killing, in return for lying to their clients about their ability to fully afford what they were buying, and for lying to their mortgage bundlers and buyers about the quality of their underwriting.

In advertising, fooling the customer is the standard of practice. Health insurance is a constant battle against adverse incentives. Buying a car is notoriously assymetric. Political corruption by companies and the rich buys favored treatment for them and unfavored treatement of the little people. Lying about the risks of smoking, or the reality of climate change ... the list goes on endlessly. The problem is that while the justification for capitalism, private enterprise, and laissez-faire relies on its efficiency and ultimate good services, embedded within that system is quite another system of brutal predation. While wolves would never represent to the moose that they are interested in its welfare and have some really great long-term care insurance to offer, the human economy runs on putative offers of service that all too often turn out to serve the servers much better than the recipients.

That, of course, is why regulation exists; to keep the knowledgeable from taking advantage of the rubes. One can rely that every time a Republican or libertarian bleats about the horrors of government regulation, they are shilling for business practices that belong on the predatory side of the ledger. Milton Friedman and his fellow prophets of laissez-faire were always careful to choose examples of appalling government corruption (communism, most commonly) to set against examples of efficient and competitive private enterprise. But corruption is possible everywhere. The 1% are set upon by private predators of their own, such as Bernie Madoff and the whole financial wealth management industry, more or less. Donald Trump exemplifies the type as well- a salesman suckering a succession of banks and investors into deal after deal, some of which turn out well, but more of which are losers, or even end up in bankruptcy.

On the other end of the spectrum, the destitute and disabled are cast out of this ruthless system entirely, homeless and on the street, forced upon the charity of those with a modicum of compassion, certainly not those at the top of the food chain who are preoccupied with finding their next unwitting meal.

How should we view this system? On the one hand, the "job creators" insist, with the fawning support of their endowed minions in academia, that they are the risk-takers and wealth creators. It is their phenomenal productivity and accumen that deserves the hundreds of times higher pay than other workers. But at the same time, is obvious that high pay, like that in the financial industry, for example, is able to extract for the priviledge of handling our money, involves virtually no societal benefit. The purveyors of 401Ks are right this minute fighting tooth and nail against being held to a fiduciary standard of service, because this would inhibit them (slightly) from stealing as much money from their marks as they have up till now. The financial industry in particular is the exemplar of competition without remorse, soul, or point, its sole justification being that they are the ones who control the sluices of money.

Likewise, CEO pay scale is clearly more related to how compliant the board is than how well the person or company performs. It also relates to the size of a company, which leads to a mania for acquisitions and debt, even if the business gets impaired in the long run. Pay relates to power much more than to productivity. Even the most morally upright get caught in the vortex heading to the lowest denominator, due to Greshams' dynamic, where the race goes to those most willing to bend and break the law (or have it changed by Congress!), forcing everyone else in the business to adopt the same practices or lose out. Regulation is the key bulwark against this dynamic, helping good businesses and good practices prosper.

But the problem of complexity and traps for the unwary exists at all levels and in government as well. The destitute are mired in a swamp of government programs that require offices to be visited, forms to be filled out, and rules to be observed, often far beyond their capability. It takes a PhD to do one's taxes. The expectations placed on regular citizens to nagivate through the mazes of modern society, including those of red tape and of business predation, can be overwhelming. Thus the society becomes, in toto, a competitive and dispiriting rat race where getting some kind of leg up, whether through family money, credentials, native intelligence, ruthlessness, charm, union or other organizational affiliation, or a particularly nefarious business plan, is the name of the game. Granted, the system in the US is far more civil, lawful and regulated that those elsewhere, such as Russia. But it still diverts far too much effort towards unproductive ends, rewarding antisocial behavior directly, and requiring everyone else to be on their guard with constant vigilence.

It can be granted that competition is pervasive in any case- in politics, in personal life, in the market for mates. There is no way to make life into a utopia of free love. The trend of human civilization and political philosophy, however, is one of reducing predation progressively. At first we put up with any kind of despot who could protect us from outside predators- i.e. the other despots. Then we came up with Magna Cartas, laws, justice, as ways to reduce predation inside the society, holding the rulers within some bound of decency. Next came democracy and civil services, which definitively put the reigns of power under popular control rather than the winners of a dynastic or military competition.

These have been great advances in making our societies more just and less subject to the baneful effects of total struggles for power. And these democratic states have over the last couple of centuries also made great strides in limiting & regulating the natural competitive forces pervading the rest of society, especially the private sector, to serve those whom we (collectively) want them to serve, rather than themselves. This project has taken an enormous step backward over the last couple of decades, under the ideology of laissez-faire. Predators were unleashed at all levels, and the result is the astonishing inequality from bottom to top that we see today. And contrary to its proponents, this regression has not served the overall economy or the middle class, which are sputtering and anemic.

Worst of all, this regression has corrupted our democracy itself. Donald Trump is ultimate expression of a system which does not attract its most talented members to political service, and whose elected officials depend utterly on begging the wealthy and corporations for their sustenance. We have seen the B-team in this campaign, and it has not been pretty. The voters seem to agree that the system must be blown up. But how and to what end?

Obviously raising consciousness about the bizarre defenses of the predatory system within the larger system is one place to start, which Bernie Sanders is doing so well. Republicans and Chicago school economists who sing the praises of freedom of organization for the employer and feudalism for the employee are, on the other hand, part of the problem. Then comes stronger regulation on behalf of workers and consumers. But above all, the political system has to be made safe from corruption by private and corporate interests. Right now it is open season. Trump himself crows about how his past political contributions were strictly business, nothing to do with good policy or public interest, but purely about access and corruption. And these kinds of statements have lost their ability to shock.

Many schemes for public funding of the political system have been advanced and work elsewhere. We could set up something like giving each voter a fund of golden credits, say $200, to contribute to any campaign at any level. This would add up to $60 billion, which is just a guess about how much the political system costs, in terms of elections. The credits would only turn into real money when given to a registered political candidate, with the money itself coming from the federal government, as part of the tax system. Secondly, public official contacts with private entities such as unions, corporations, and officers thereof, would all have to be strictly on the public record, such as in open hearings or other meetings, or in written form.

Such steps in our political system would help decouple it from the predatory private sphere as well as raising its level of transparency and fairness. That would in turn enable it to more seriously serve its constituents by progressively regulating to reduce the costly and unjust predatory aspects of the private sphere.

  • Cooperation is risky, so making it pay off better through fair social policy fosters more cooperation generally across a society. Encouraging predation and victimization has the reverse effect.
  • How it works in Norway.
  • Pay and productivity... where is the relation?
  • 401Ks are, and were designed to be, a disaster.
  • The evolutions of the GOP.
  • Does the economy have capacity to grow?
  • Then let's do it" .. the one policy that nearly all economists are confident will always have traction on nominal demand."
  • Bill Black on control fraud and intimidation at the federal home loan agencies.
  • Corruption just begets more corruption.
  • Democrats and Keynes. Where are they?
  • Labor mobility... is lower when effective unemployment is high, and wages are not rising.
  • Here's someone who probably pays no income taxes: Donald Trump.
  • The Afghan government keeps losing.
  • IBM is dying.

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