Modern economics is famous for believing in the rational economic actor, almost entirely concerned with his or her own utility. (In normal parlance, a selfish bastard). This is a model of how people behave, but it’s an oversimplification of human nature so severe as to be wrong. Most people don’t behave like that most of the time: they cooperate, and they share and most of them don’t free ride.However, Welsh notes, there are people who fully embody the selfish bastard model of the rational economic actor. Individuals who have had formal economics training tend, more more than other people, to act more in accordance with the theoretical model. Then Welsh points to two other groups, which leads him to make a crucial point.
Who else behaves that way? Senior executives in large corporations and rich people. The people who control the economy, act as economic theory says they should.What we must understand, Welsh argues, is that we do not have to unquestioningly accept the current ideology, which legitimizes and enables the rich and their greed. Welsh concludes:
Be clear, all elites in all places and times have not acted this way... It is not even the case that executives in the 50s and 60s acted this way. When John Kenneth Galbraith investigated why executives back then didn’t pay themselves more, he came to the conclusion that they didn’t because they believed, as a group, that doing so would be wrong, and they took out anyone who tried to pay themselves more than they considered appropriate.
So why do executives act that way now?
Ideas lead culture and policy produces the outcomes one would expect. Thatcher and Reagan and intellectuals like Dawkins made being greedy and taking whatever you could get, screw the hindmost, acceptable... We were told this is how humans are; and this is how humans should be; and that doing this would produce better outcomes for everyone. This was legislated into law: the removal of protections from financial abuse put in place in the 30s, the lowering of top tax rates; the emphasis on consumption taxes over wealth taxes, the dropping of corporate tax rates; the “free trade” movement which allowed elites to avoid taxes and make goods in sweatshop nations.
The previous generation, those who experienced the Great Depression as adults, and who remembered the 20s and what the last great unregulated economy had wrought, were old, and out of power. Those who believed; who knew; that economic success had nothing to do with any sort of virtue, were gone. The new generations accepted a premise they desperately wanted to believe: that they could be selfish assholes, acting in their own interest and not caring about other people, and that it would all work out for the best.
Ethics are socially bound, and are created and recreated by each generation. To be sure, they are related to the means of production and the incentive system; but we create the incentive system. The executives of the 50s and 60s, by and large, chose something different than the executives of the 80s through today.Welsh's post elicited some negative comments, which are quite interesting, in a clinical sort of way. They suggest to me people who are desperately looking for some piddling difference to argue over, to save themselves from having to deal with the implications of the need to crush the plutocrats and their apologists. One commenter inveighed that it was absurd to argue that "Reagan and Thatcher invented greed." But that is not what Welsh wrote at all; he wrote that Reagan and Thatcher "made... greed... acceptable." (The full sentence is in the second excerpt, above.)
What has been chosen, can be changed. If we want an economy which works for everyone, we can have it.
But we have to choose it, and we have convince or crush those who would chose otherwise. And for those who wince at the word crush, remember, inequality means death and illness for many people. The crushing has already happened, the class war occurred, and the rich won. And the casualties are piling up.
Of course Reagan and Thatcher did not "invent greed." That hardly disproves the point Mr. Welsh is making: How does a society create a system of incentives and punishments that check the worst manifestations of greed, and steer individual desires and actions in a direction that comports with the general welfare?
Central to Welsh's argument is his observation of the duality of human nature. Yes, there are some people who are fully the cold, calculating, self-serving bastards that are the worst embodiment of economists' model of the rational economic actor. But this is a caricature of general humanity. Thankfully, humanity is richly ornamented with glittering examples of selflessness, charity, and even sacrifice. As Welsh noted, people have died trying to save their pets. Not to mention relatives, friends, and even complete strangers. Isn't that so impressed us and the rest of the world, when we witnessed the heroism of New York City police and fire fighters struggling to rescue and assist complete strangers at the World Trade Center on 9-11, entering a burning skyscraper from which they never came out alive?
The genius of the USA Constitution, in my considered opinion, was that it began with an understanding of this duality of human nature: mankind is deeply flawed, and all through history a privileged few have abused the powers of state entrusted to them to oppress, loot, and even murder, their subjects. But despite this wretched history - actually, because of it - the Founders of the United States deployed the full power of their reason to create a framework of national government in which those the political manifestations of those human flaws are supposed to be checked and balanced, and in which the promotion, protection, and furtherance of the general welfare was one of three preeminent goals of the new national government. And to make sure the point was not missed, "general welfare" is mentioned twice: in the Preamble, and in Article 1, Section 8, the great and famous "General Welfare Clause."
Unfortunately, this is also the glittering allure of Anglo-American capitalism and its most basic premise: that the individual pursuit of self-interest, through the magic of the market - and if left alone by the "damn gubmint" - will omnisciently effect the best allocation of society's resources and provide the greatest benefit to the greatest number of people.
Where capitalism and its glittering promise fail, of course, is that "the market" has no mechanism to restrain, punish, or prevent some of the worst predatory behavior by some individuals who are - let us be brutally honest - sociopaths. There is nothing in "the market" that is malum in se. Milton Friedman followed his own logic to its ultimate conclusion, and argued for removing legal prohibitions against all drugs, including heroin, and even prostitution. Only by the imposition of intrusive government laws and regulations do you get market restraint. And this is strictly malum prohibitum: something is wrong only because it is against the law. Wall Street and big corporations spend a lot of money [mis]employing some very bright and talented people to limit or skirt malum prohibitum as much as possible.
Only by conceiving of society and its economy as an interdependent system - as political economy - can you begin to identify and attack economic problems of greedy misbehavior, and, begin to understand the depth of the hostility and enmity of conservative thinking to the USA form of government. Because conservatives and libertarians openly argue that the very idea of the general welfare is the slippery slope to statist totalitarianism.
The historical period leading to the American Revolution is generally called the Enlightenment. And reading the works of such as Franklin, and Adams, and Hamilton is pure joy. What they write is enlightening, and it is uplifting. But to read Friedman, von Hayek, von Mises, and, yes, Ayn Rand, is depressing, horribly depressing. There is no nobility of the human spirit in their world view. There is no concern for the welfare of other people. There is only base and disgusting selfishness, made slightly more presentable by renaming it self-interest. Madison, in his classic discussion of factions in The Federalist Number 10, observes that factions arise from selfish economic interests, and argues that the most important role of government is to regulate and restrain those interests. The conservative insistence that the markets must have priority over the state is a direct frontal attack on the American system of government, and its constitutional enthronement of the general welfare.
Markets simply do not function for the common good without the state imposing incentives and punishments. The state is an absolute necessity for imposing the rule of law on markets which by their very nature are completely devoid of moral suasion. And, it must be firmly understood why markets are morally bankrupt: markets are susceptible to falling under the control of the most greedy, acquisitive, ruthless, and malevolent people. Economics will thus always be a flawed way to look at society and how society uses and allocates resources - especially schools of economics that are grounded in an ideological hostility to the state, such as modern conservatism and libertarianism. Political economy is superior to economics exactly because the role of the state is a central concern of political economy.
So, Reagan and Thatcher did not "invent greed." That still leaves the question of the system of incentives and punishments society must impose to ensure that the impulses of human greed do not overwhelm and gain ascendancy over the impulses of our better natures. What Reagan and Thatcher did do, was profoundly change the culture by bringing to power a new economic ideology that not only apologized for greed, but celebrated it. Mr. Welsh alluded to a turning point in the period between the 60s and the 80s, and many of Welsh's readers commented on this. One commenter pointed to Greta Krippner’s recent book, Capitalizing on Crisis: The Political Origins of the Rise of Finance, or, rather, Matt Stoller's review of Krippner's book. According to Stoller, Krippner argues that the origins of our economic devolution lie not solely in the 1980s and the Reagan regime, but actually a decade or two earlier:
Krippner in her account ... shows how financial deregulation - the removal of laws key to the New Deal system of political economy - started in the late 1960s. Much of the architecture of the political economy of financialization, the decision-making that would or could take place when credit markets were ascendant - was in place by 1980. She shows how this architecture was designed by state actors, with a meticulous grounding in original sources.
According to Krippner, deregulation wasn’t a nefarious set of choices by Reagan and his Republican banking cronies, it was a response by policymakers (a Democratic Congress and Democratic President) to the failures of the liberal state. After it was put in place, Reagan of course was a key player in setting its direction. Along with Paul Volcker and Alan Greenspan, Reagan took financialization in unexpected directions, but the basic contours were clear before Reagan came to power.
In my conversations with policymakers who were working at the time, such as Jane D’Arista, and in my readings of 1960s and 1970s Congressional hearings, the timing seems accurate. For example, long before usury caps were removed in 1980, Nixon pushed for their removal and Congressmen like Wright Patman complained about how credit cards were making usury caps obsolete. The Supreme Court’s 1978 Marquette decision, which helped deliver the death knell to the old regulatory model, was a move by the judicial branch, not regulators or politicians. And the plaintiff, Marquette bank, sued as far back as the early 1970s. Change to the New Deal political economy was in the air, due to inflation.
This question of a systemic shift in the 1960s to 1970s is something I can claim a bit of knowledge about. In the 1990s, I worked as an economic researcher and writer, trying to warn people about the machinations of organized crime "going legit" and the rapidly worsening destruction of USA industrial base that was the result.
One area I looked at was the phenomenal rise of spending in corporate mergers and acquisitions, including a small but highly significant part, called leveraged buyouts (LBOs). I tried to raise warnings by comparing the dollar amount of mergers and acquisitions, with the dollar values of such indicators of basic economic health as spending on research and development, expenditures for new capital equipment, and total spending on public works. Here is one graph from an article I wrote in October 1990.
I cannot now find the graph comparing mergers and acquisitions with research and development, but I can give you the numbers. In 1960, total USA spending, government and private, on R&D was $13.5 billion, nearly ten times the $1.5 billion spent on m&a. By 1980, the numbers were still heavily lopsided in favor of R&D, at $112.6 billion, compared to $32.9 billion for m&a. It actually is during the Reagan years that this measure is turned on its head: In 1984, there were $126.1 billion in mergers and acquisition, significantly more than the $101.2 billion spent on research and development. There has not been a year since in which the United States spent more on R&D than on m&a.
Had we the time, we could point to a number of other historic systemic shifts. I will just mention some here, that relate to the issue of midallocations of money, credit, and capital. Ever since Morgan "reorganized" USA industry in the 1880s and 1890s by creating dozens of trusts, a significant number of American business elites have been increasingly adverse to actual industrial investment. This, of course, is not true for all business elites - otherwise, how would infant industries such as motor vehicles, aluminum, aircraft, and electronics ever got started? But the simple fact is that USA "captains of industry," often were not. This is abundantly clear in Eric Hammel's account of how US industry was actually mobilized for World War II, How America Saved the World: The Untold Story of U.S. Preparedness Between the World Wars. Contrary to the popular view, US business leaders were strongly opposed to the drastic changes asked of them to build up the U.S. military in the late 1930s. It was only through the heroic efforts of a small number of Army officers, grouped around future Army Chief of Staff George C. Marshall, that business leaders were persuaded, cajoled, or coerced into line. Investment by the national government was much greater than private investment in creating the aircraft the industry, rural electrification, the aluminum industry, and nuclear power.
Similarly, after the war, U.S. business leaders were only too happy to coast on the massive competitive advantage handed them by the literal destruction of the industrial bases of Europe and Japan. The reluctance to invest in new plant and equipment was already evident as one of the causes of the severe recession 1958, when the economy contracted 3.7 percent. (Though it should also be noted this is one of the historical examples of economic contraction that invariably follows the "achievement" of a balanced national government budget - an issue that is a key point of modern monetary theory.)
But another large factor - one that is apparently "not polite" to mention openly, is the role of organized crime as it began looking for ways to invest millions, then billions, of dollars of its loot. It was this dirty money that banlkrolled a significant part of the 1960s "go-go years" of merges and acquistions - companies buying each other out to create "multi-national corporations." The role of dirty money loomed even larger in the 1970s and 1980s creation of what became the leveraged buyout boom. Much of the seed money for Michael Milken's LBO operations was tainted from the beginning, long before it was fed into Milken's criminal machinations.
But the key point Mr. Welsh is making is that what people believe - a society's ideology - is a large part of what determines that society's economic system and policies. So let me just note a few facts, and suggest a few points of reflection. Guess who it was that convinced Angelo Mozillo and Roland Arnall to focus on sub-prime mortgage financing in the 1980s? A couple of guys who had worked under Milken at Drexel Burnham Lambert. Among them, Howard Sosin and Joseph Cassano, the two guys who ran ran, one after the other, AIG's financial-products unit. That's the AIG unit that developed and sold credit default swaps, which were the detonators of the March and September 2008 financial collapses.
If the entire Drexel Burnham Lambert staff - not just Milken - had been locked up, would the culture have shifted the way it did? Even with Reagan and Thatcher making greed acceptable? Especially if the whole crew of supporting players outside of Drexel had also been hauled off and locked away. People like Robert Rubin, who in the 1980s was the head of the Goldman Sachs arbitrage team - the department that tracked mergers and acquisitions, and tried to profit from them by getting in ahead of the formal bids.
Do you want an even more specific point at which the culture changed? Reading the discussion on Welsh's blog about the 1960s to 1980s period, immediately brought to mind one of the most powerful, and most important, passages from Ron Suskind's book, Confidence Men: Wall Street, Washington, and the Education of a President. In the tenth chapters, around page 240, Suskind discusses the hearings by Massachusetts Congressman Ed Markey, into the Wall Street scandals of the time, the late 1980s:
As for the "type of behavior" that "led us to our crisis," Markey could cite the moment he saw the culture shift, like some geological event.Suskind then recalls the difference in how President Obama treated Wall Street executives in early 2009, and Rick Wagoner, CEO of General Motors, and draws out the cultural implications, which are extremely interesting in the context of Mr. Welsh’s discussion of belief systems and their cultural manifestations. What Suskinbd writes next I consider one of the most important and most devastating criticisms of Obama’s Presidency.
It was in 1988, after the 1987 stock market crash, and the prosecution of insider trading and various securities frauds was well underway. "Something very basic, very fundamental, had changed on the Street, and we on the subcommittee couldn't put our finger on what was different," Markey recalled. So they decided to bring in an expert. Dennis Levine, one of the major Wall Streeters convicted of securities fraud, was serving time in New Jersey. Markey's staff got in touch with the Bureau of Prisons and arranged to have him transported for an afternoon to a sub-committee conference room. Levine, who couldn't be forced to cooperate, was asked what the subcommittee could do to persuade him to come. He said he'd do it for a McDonald's Big Mac, fries, and a chocolate shake. Once a self-proclaimed "Master of the Universe," those were the things he'd found he missed the most. Soon enough, Levine, in prison blues, was eating his Big Mac and describing how the rewards on Wall Street had suddenly grown so large, and the opportunities for self-dealing and misuse of insider information—so-called informational advantage—so widespread, that it would only get worse. "He said, we were 'just at the very start,"' Markey recalled, "and that they'd figured out how to turn the investing of others people's money into a kind of game, where they were constantly changing the rules in a way that was subtly fraudulent, against the basic principles of fairness or fiduciary duty. He said that with this much money to be made for doing very little, it was worth the risk of getting caught doing what you had to do, but that they were working on lowering that risk as well, with lawyers working overtime to make sure many of these activities were legal, or at least hard to prosecute."
After an hour, Markey said that he and the committee members had heard enough and asked the felon what might be done. Levine, sucking on his shake, thought this over for a minute or two and then said, "You need to send out a slew of indictments, all at once, and at three p.m. on a sunny day, have Federal Marshals perp-walk three hundred Wall Street executives out of their offices in handcuffs and out on the street, with lots of cameras rolling. Everyone else would say, 'If that happened to me, my mother would be so ashamed.'
"Levine was saying we should take a dramatic stand on principle to reverse the direction we were moving in . . . before things progressed any further and the problems got even bigger," Markey said. "Culture is destiny and the only way you create real change is by acting in a way that changes the culture."
Presidents are among the few mortals who are sometimes graced with chances to change a culture. Throughout a windswept March , the country had been working to dislodge some of the era's prevailing certainties about markets being efficient, about people—economically, at least—getting what they deserve, along with the concomitant belief that financial barons are brilliant and indispensable, and manufacturing executives are dinosaurs.
With the eyes of the country on him, Barack Obama ended the month by shielding Wall Street executives against these winds of cultural change, while he fired a man who had effectively managed four hundred thousand workers in their making of seven million cars a year—without ever bothering to meet him.
In the spring and summer of 1765 - a decade before the American Revolution flared into open combat - John Adams was preparing A Dissertation on the Canon and the Feudal Law. It was a review of how religious canon law and feudal law has served, systemically, as instruments of tyranny by a small ecclesiastical and oligarchic elite oppressing a vast majority of unschooled, illiterate, and ignorant peasants. One of the major themes Adams struck was that mass education of all citizens is one of the most important bulwarks of freedom - something that apparently modern conservative advocates of private education and charter schools have never read, or have conveniently forgotten. In his first draft, Adams wrote:
Property monopolized or in the Possession of a few is a Curse to Mankind. We should preserve not an Absolute Equality.—this is unnecessary, but preserve all from extreme Poverty, and all others from extravagant Riches.Adams unfortunately dropped that paragraph from the final draft, and never again made so open an attack on wealth and the unfair advantages of the rich, though he never lost his innate hostility to, and suspicion of money, banks, and financiers. This grudging concession to the rich has been one of the great flaws of the Founders, and it is a flaw that today threatens to become fatal. It is now our duty to remedy this flaw, and restore a moral direction to our economy.