February 5, 2009.

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The Myth of Free-Market Capitalism

By: DI  Senior Associate Editor,  Dr. Leonard Carrier

            People are fond of their myths, especially those that promise better times ahead.  Perhaps myth-making is a means of retaining optimism in the face of what reason sees as good grounds for pessimism.  But, as Hume famously said, reason by itself moves nothing; it is, and ought to be, a slave of the passions. What I wish to expose in what follows is a myth that has come to dominate our economic thinking, which is that of free-market capitalism.  It is common to think that there is no other variety of capitalism rather than the free-market kind, but this is a mistake.  Capitalism is the view that a nation’s economy, for the most part, is better left in private hands rather than being centrally planned by government.  In this respect it differs from Socialism or Fascism, where, although private industry is allowed, it is in all respects directed by government decree or regulation. It is perhaps helpful, then, to distinguish capitalism from “statism,“ allowing that there might be different varieties or degrees of capitalism, some in which private business is monitored carefully by the state, as it is in China; and other varieties in which government regulation of the economy is either stronger or weaker–stronger in the case of Germany, weaker in the United States, and weaker still in Russia.  A free-market capitalism would then be capitalism without any government regulations or restraints.  It would constitute a free market in which property rights are exchanged voluntarily by mutual consent of buyers and sellers, without coercion or constraint, where prices are determined solely by supply and demand, and where government does not directly or indirectly regulate prices or supplies.

            It is obvious that there is no such thing as a free-market capitalism operating in the world today, especially not in the United States.  Even those who champion free markets make exceptions for such things as patents and copyrights. As Dean Baker points out (“Free Market Myth,” Boston Review, January/February 2009), patents and copyrights are “government-granted protections designed for a specific public purpose,” namely, to promote science and the arts.  But whether copyrights are the most effective means for achieving this goal is a matter for empirical investigation. In similar fashion, Baker points out that it is through government-guaranteed patent protection that pharmaceutical companies can sell their brand-name drugs for more than a thousand per cent of what they would cost in a free market.  In any case, copyrights and patents constitute government regulation of the free market, in these cases regulations that favor businesses such as publishing companies and pharmaceutical manufacturers.  There might be other government mechanisms that “promote science and innovation” that are more public-friendly than patents and copyrights, but to say that they would constitute government interference disguises the fact that government has already interfered by protecting certain business interests, perhaps at the expense of the general welfare.  Invention and creativity deserve encouragement, but this might be accomplished by direct government subsidies to those who advance medicine and the arts.

            Free-market economists might agree with the claim that no free market exists, but that (1) if not for government interference free markets would exist naturally, and (2) that it would be better for all if we strived to approximate free market capitalism in the real world.  A defense of (2) is usually called laissez-faire economics, in which government is confined to intervene in economic matters only to regulate against force and fraud among market participants, and perhaps to raise taxes to fund the maintenance of the free market.  It is my contention that (1) and (2) constitute the myth of free-market capitalism, and that both of them are demonstrably false.  I shall argue first against (1).       

            The notion that there is a sort of historical inevitability about the rise of free markets has been championed recently by Thomas Friedman, especially in his book, The World is Flat: A Brief History of the Twenty-first century.  Friedman argues that technological innovation has “flattened” the world in that we now operate in a global economy, one in which inexorable technological advances fuel world-wide economic development and therefore shape society.  Politics and culture serve sometimes to retard human progress, but in the end they cannot prevail against technological innovation and the increase of productivity.  In this respect, Friedman echoes the view expressed in 1848 by Marx and Engels in The Communist Manifesto.  Here is a celebrated passage from the latter work which Friedman accepts as a suitable preface to his own view of global “flattening“:

The similarity of Friedman’s view to that of Marx and Engels lies in the premise that such globalization is compatible with only one economic system.  The difference lies in what sort of economic system that turns out to be.  For Marx, global capitalism would, after many convulsions, revolutions, and wars, finally give way to the communist order, in which nationalism and religion would be left behind, and humanity would no longer experience war and poverty.  For Friedman, such globalization leads inexorably to a free-market economy among nations in which freedom and democracy are spread throughout the world.

            It has been pointed out by John Gray, in his review of Friedman’s book (The New York Review of Books, Vol. 52, No. 13, August 11, 2005) that Friedman’s view adopts all of the weaknesses of Marx’s view while neglecting its strengths.  Marx was aware of the self-destructive aspects of unfettered capitalism, viewing it as a revolutionary force whose world-wide expansion was bound to be disruptive and violent–destroying industries, governments, and ways of life in turning societies upside down.  Friedman simply views such conflicts as friction to be overcome–sand tossed in the machinery, which is bound to be removed by unstoppable technological progress.  It was this sort of optimism that led Friedman to champion our invasion of Iraq, unaware that the forces of nationalism and religion can still provide a stern antidote to the allure of the free market.  Marx would not have been surprised to see capitalism and industrialization give rise to war and revolution.  Friedman ignores this result because he mistakenly identifies the ongoing process of globalization with free-market capitalism, and thinks of the latter as embodying utopian hopes of freedom and democracy.

            Both Marx and Friedman are mistaken in the conflation of globalization and free-market capitalism.  As John Gray points out in his review of Friedman’s book, there is a difference between accepting the view that we live in a period of increasing technological progress that links up events throughout the world, and the view that this process inevitably leads to one worldwide economic system.  The former view is properly called “globalization,” but there is no proven systematic connection between globalization and either free-market capitalism or a communistic society.  Globalization may be unstoppable, but the economic systems that it creates do not necessarily merge into one. 

            There is no historical or technological determinism that naturally creates free markets.  On the contrary, it has been governments that have promulgated and conducted every case of  free-market experiment. This conclusion is defended forcefully by John Gray in his book False Dawn:  The Delusions of Global Capitalism (1998).  Gray points out that laissez-faire capitalism in Victorian Great Britain arose neither from a long process of evolution nor did it occur by sheer happenstance.  Instead, it was engineered by the British government through Enclosures that transferred common land into private property.  This created a capitalistic economy of large, landed estates.  Repeal of the Corn laws in 1846  gave rise to laissez-faire thinking in England that survived until the Great Depression.  It wasn’t until the 1980s and the Thatcherite government that free-market thinking was re-engineered, only to last for as long as Mrs. Thatcher’s tenure in government.  In Japan, Russia, Germany, and the United States through its long history of protectionism, state intervention has always been involved in economic development.  Only recently in the United States has our government, under the influence of economists such as Friedrich Hayek and Milton Friedman, flirted with the notion of creating a global free market.

            Free-market thinking, like the Marxist proposal, is merely a different facet of the Enlightenment project of the 17^th and 18^th centuries.  Spurred on by John Locke’s empiricist thought and his criticism of the Divine Right of Kings, the French philosophes–Diderot, D’Alembert, Condorcet, and Rousseau–championed three main ideas that the influenced political thought of the times.  The first was that through the use of reason human beings could discard the corruptions of superstition and religion and provide an environment in which the natural is distinguished from the artificial, human rights are recognized,  and humanity can begin its progress towards a utopian future.  It is salient that Condorcet held fast to the ideas he expressed in his Sketch for a Historical Picture of the Progress of the Human Spirit, even as he lay dying in the squalor of a French prison. The Enlightenment idea of human progress is present, not only in Marx’s idea of the inevitability of the formation of a communist society, but also in the late twentieth-century doctrine of free markets as the natural outcome of free individuals using reason to progress to a global democratic society in which natural rights to liberty and property are respected and result in the benefit of all.  This idea of human progress has become so ingrained in the popular imagination that the publication of Darwin’s Origin of Species in 1859 did no more than divert the course of utopian thinking, so that the evolution of species became but a stepping stone to dreaming of the evolution of the human spirit to a higher and more rational plane.

            In Great Britain, unlike in France (with the exception of Voltaire), Enlightenment ideas were received with more skepticism.  Even though David Hume, Samuel Johnson, and Edmund Burke found a place for human reason, they did not accept the notion of a potential human rationality that led to a utopian end state.  Even Adam Smith, whom free-market thinkers love to quote, did not believe in the perfectability of man through the use of reason and the free markets.  Both Smith and Hume based their ethical theory on moral sentiments, not on reason, with right and wrong being determined by sympathy and fellow-feeling.  For Adam Smith, the notion of laissez-faire economics was simply a working principle, subject to modifications in practice, a far cry from the free-market belief that the increase of production by itself could determine human well being.  Smith, as did his earlier contemporary Joseph Butler (1692-1752), believed that  acting from enlightened self-interest would probably result in better consequences than acting on impulse or even from altruistic motives, but they both agreed that most of our actions did not stem from such a motive, nor should they.  Voltaire, at the end of his Candide, espouses the same sentiment when he suggests that we would all be better off if we cultivated our own gardens–but he doesn’t say that this is what all of us are bound to do.  John Gray sums it up in False Dawn by claiming that free-market ideology in the United States is simply a relic of the Enlightenment, belonging to John Locke’s world, not to ours. He declares that whereas American free-marketers espouse pieties such as human rights being rooted in a Christian God, that American customs stem from natural law, and that limited government is required to respect private property, these platitudes simply mask the plural world we live in.

            Because Adam Smith was impressed with the way in which the division of labor resulted in increased production, contemporary free-marketers have appropriated Smith’s ideas in order to make productivity the key to world-wide economic well-being.  Most frequently cited is Smith’s reference to an “invisible hand” in The Wealth of Nations, the mechanism by which an individual, being guided solely by self-interest in his economic decisions and behavior, can effect consequences that work to the betterment of all.  Yet Smith mentioned an invisible hand only once in this immense work, and the passage in which the reference occurs really does nothing to support the claims that global free-marketers make for it. This is because the passage in question is concerned with the merits of choosing domestic products over imported ones and has nothing to do with global free markets.  Because the passage has usually been quoted in an abridged form, I shall quote it more fully to make my point.

                        As every individual, therefore, endeavours as much as he can both to employ his capital  in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can.  He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.  By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry        in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.  Nor is it always the worse for the society that it was      no part of it.  By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (p. 572, Bantam Classic edition)

            It seems clear from the this passage that Smith is championing the home market over foreign ones, and claiming that  promoting the home market normally benefits the society in which one lives, even though that benefit was not intended.  Smith goes on to claim that sometimes it is better for the society to buy imported goods when they cannot be more cheaply manufactured at home; but, this is again always with an eye toward benefiting one’s own countrymen and not those in other countries.  Thus, by no means was Smith speaking of how one could best benefit members of a global society.  Put in contemporary terms, what Smith is saying is that we should “look for the union label” when we buy, because giving preference to that which is manufactured at home usually works to the betterment of the society in which we live.

            The foundation of free-market thinking is that rational human beings, each by selfishly seeking his own good, will promote the good of all. Yet this assumes that we humans are or can be rational in seeking our economic good.  It is not that free-marketers are unaware of decisions based on faulty information, or on emotional bias, but they assume that such distortions can be corrected by the use of reason.  It is precisely this assumption that appears to be false.  J. D. Trout, in his book, The Empathy Gap:  Building Bridges to the Good Life and the Good Society (2009), lists several cases in which the use of reason is no antidote to the way we make decisions, suggesting that emotional bias is hard-wired into our central nervous systems and cannot be removed easily, if at all.  Trout mentions “base-rate neglect,” according to which we tend to worry more about exotic disasters that are unlikely to happen than about more familiar ones that are.  For instance, people worry more about avian flu, which has yet killed no one in the United States, and yet they neglect to get an ordinary flu shot to prevent the flu that kills 36,000 Americans each year. This phenomenon has also been called “probability neglect,” according to which people show more worry about dreadful but unlikely happenings, such as terrorist killings in the United States, whereas they tend to ignore the far more likely but mundane happening, such as the levees of New Orleans breaching during a hurricane.

            Trout also mentions an “over-confidence bias,” which makes us underestimate challenges and risks.  For example, we elect to drive rather than fly because we think we’re in control of our automobiles, whereas we know that traffic accidents account for far more fatalities than airline travel.  Another irrational spring to our thought and action Trout calls an “anchoring bias,” according to which misinformation lodges in our brains, even after proven to be false.  This is why “negative advertising” in political campaigns proves so effective.  Everyone claims to deplore the spread of such misinformation,  but it has results.

            In 1979, Daniel Kahneman and Amos Tversky made a study of irrational behavior in various risk and financial situations.  Their article, “Prospect Theory:  An Analysis of Decision under Risk,”  gave rise to the discipline of Behavioral Economics. Their work provides evidence that, not only is such behavior ingrained in us, but that it can be manipulated.  Free-marketers assume that in the ideal situation, agents are well-informed, that their preferences are well-ordered and stable, and that their actions are controlled, self-centered, and calculating. The psychological research shows, however, that people’s judgments are biased, and their preferences are changeable and unstable. If this is so, then one’s everyday actions cannot be made to fit into the frame of rational self-interest.

            In financial matters, research has shown that people are “loss aversive,” so that, for example, they hold onto a losing stock even though they have rational justification that it will continue to fall. Some studies even suggest that the fear of a loss has twice the psychological impact as the lure of a gain.  People also fail to regard sunk costs, fail to consider opportunity costs, and fall prey to money illusion. The latter phenomenon occurs when people mistake the face-value of currency for its purchasing power.  For instance, people tend to think of a 2% cut in pay when there is no inflation as unfair, whereas they believe that a 2% raise where there is 4% inflation as fair.  Money illusion allows employers to offer nominal raises during high inflation, thereby cutting the real purchasing power of their employees without raising any protests.

            People also have a difficult time predicting their future preferences, even though they have the necessary information to do so. For instance, although a person might know that he won’t be driving a sports car at age 80, he might continue researching the futuristic models in Car and Driver.  Far from being calculatingly selfish, we tend to put a value on fairness in our dealings with others.  This is shown in what behavioral economists call the “Ultimate Game.” In the game you and your partner are given $100, which you are called upon to split. Whatever division of the money you propose, if your partner accepts it, you are both richer by that amount. Reason suggests that a partner should accept even a $90 – $10 split, but the experiment showed that any split less than $70 – $30 was usually rejected.  We also tend to make important financial decisions based on a passing whim or emotion, usually overestimating risk over reward. With regard to risk, we seem to evaluate it with a pre-historic brain which hasn’t adapted to our relatively predator-free environment in which most dangers are gone.  Our perception of risk is based largely on our feelings, not our reason, which is why people constantly make bad financial decisions.

            How irrational a consumer might be is illustrated in the “$.99” factor in retail pricing.  According to the classical economic theory adopted by the free-marketers, consumers make rational choices based on price comparisons and other objective factors. But people actually think they are getting a bargain by buying something for $19.99 rather than for $20.00.  Researchers explain this phenomenon according to the “right digit signal” and the “left digit signal” in one’s brain. Because people read from left to right, we place more importance of the first number we read.  When students were asked to compare $99.99 with $150.00 and then compare $100 to $150, they saw the gap between $99.99 and $150.00 as being significantly larger. Even though the students understood what they were doing, they still rated $99.99 as a significantly better price than $100.  This phenomenon allows retailers to convince people that items priced at $99.99 are “on sale,” whereas, similar items priced at $100.00 are not.  Though it defies reason, the emotional kick of getting a $.01 discount actually makes a difference to consumer spending, though I doubt whether many of us would bother to stoop and pick up a penny that was lying in the street.  All these examples show that the classical notion of homo economicus has no basis in reality, and therefore premise (1), which assumed that free markets are the natural outcome of rational decisions cannot be true.

            Free-market economists, however, are not fazed by such criticism. Members of the so-called “Austrian School” of economics, whose most notable lights are Ludwig von Mises and Friedich Hayek, would dispute the psychological evidence as showing that human beings are fundamentally irrational.  Michael Rozeff of the Ludwig von Mises Institute defends free-market capitalism in “What Do Austrians Mean by ‘Rational’?” (07/26/2006)  by claiming that the conclusions of the Behavioral Economists are false because they are based on a faulty model of rationality.  Rozeff cites von Mises in claiming that all voluntary action is rational.  This is because it has some aim in satisfying the desires of the agent. Thus, even though individuals might make systematic errors in their choices, this does nothing to show that they are irrational in doing so or that government interference in free markets can “cure the human race of whatever limitations it might possess.”  For Rozeff, there is no excuse to resort to “statism“ to correct any human defects, because these defects are always magnified by government interference, exerting unnecessary control over free individuals.

            There are two main defects in Rozeff’s criticism.  The first is his view that there is an exclusive disjunction between free markets and “statism,” and that if you do not support free markets, you are committed to an economy that must be centrally planned.  This error is due to viewing free-market capitalism as the only sort of capitalism, so that if you reject free markets you must thereby reject capitalism and be committed to a “statist” view of economics, such as socialism.  This mistake is made obvious by considering the capitalist economies of other countries such as Germany, Japan, and China, all of which have capitalistic economies but which are regulated in some measure by their governments, even though they are not “statist” economies.  Capitalistic economies have a variety of forms. The individualistic Anglo-Saxon varieties in place in the United States, Great Britain, Australia, and New Zealand are different from those in Asia and Europe, where cultural differences lead to different economic models.

            The second mistake of Rozeff’s analysis is lodged in his claim that all voluntary action is rational.

This is not the view of rationality that is embodied in the claim by free marketers that people act with a view to their self interest in making economic decisions.  The psychological experiments have shown that people do not act in their own best interests in making economic decisions.  To claim that “all human action is rational,” even though this action is emotionally biased, is to confuse rationality with causation.  To insist that all human action is rational is then no more than to say that it has a cause in the desires, however much emotionally colored, of the agent. This is to confuse action which has a rational justification with an action that “has a reason,” that is, an action that is caused by some desire or other.  The psychological experiments mentioned above did not deny that voluntary actions are caused by reasons.  What they denied is that these reasons are ones that are rationally justifiable in leading to the actual interest of the agent.  Another way of expressing this is to distinguish between actions that are performed with regard to one’s self interest, which is what free marketers really must claim is the foundation of one’s economic freedom, and actions that are taken because one just happens to be interested in them.  The latter allow for voluntary actions that ensue even though they occur through emotional bias; but it is the former that free marketers must insist is the basis for economic decisions.  Actions that stem from emotionally influenced desires, such as smoking, eating fast foods, and driving after drinking, do not usually result in one’s actual self interest.

            Still, it is the free-marketer’s claim that if individual economic decisions are flawed, then so much more so must be the decisions of those who would regulate a free market, especially since the possession of power over our economic decisions is likely to exacerbate whatever defects individuals have and create even more.  As Rozeff puts it, “The institutional apparatus of government is always less responsive and less accountable to human needs and desires than free markets.” (ibid.)  It is this claim that I shall now examine:  the view expressed in (2) that, regardless how any free-markets actually arose, of whether they really exist at all, it would be better for everyone if they did exist, and it would be best of all if they existed globally, with no government regulation or hindrance whatsoever.

            The trouble with this claim is that it has no empirical evidence at all to back it.  It rests solely on the notion that the exercise of individual freedom in one’s economic behavior is a good above all others, and that this applies not only to individual people, but also to corporations and companies that are treated as “persons” under the law.  In its extreme form, this view results in Libertarianism, in which the rights to one’s life and property trump all other rights, so that one should have the unfettered freedom to protect these rights against those who would override them in the name of a common good.  One does not have to criticize Libertarianism, however, in order to present counterexamples showing that individuals acting selfishly from perfect economic freedom rarely enhance the good of others, or even themselves.

            The first counterexample involves what is known as “the tragedy of the commons.”  This especially of note when resources are scarce.  For example, if  an island nation depends on its livelihood on fishing harvests, it is in the interest of each individual fisherman to catch as many fish as possible, especially if the fish grow scarcer.  If each fisherman competes more and more vigorously for the remaining fish, this behavior will ensure that the supply of fish is depleted and that eventually no one will have any fish.  An actual example of this kind has been documented by Jared Diamond in his book, Collapse:  How Societies Choose to Fail or Succeed (2005).  Diamond’s research lists severe deforestation as the reason for the collapse of the Easter Island society in the 18^th century, because there was no wood available for the sea-going canoes that Easter Islanders needed for deep-sea fishing.  One of the reasons for the deforestation was that the islanders used enormous quantities of wood to transport and raise the large stone statues the remnants of which remain there today.  Apparently, there was a competition between rival clans to erect the most imposing statue, and so the wood supply was gradually depleted and the society failed.  What was once a prosperous society of as many as 30,000 in 1680 destroyed itself largely through a self-interested competition that overexploited its resources, leaving only 111 islanders by 1872.

            Another example of the tragedy of the commons concerns how self-interested behavior offers no benefit to society during a recession.  During such economic downturns it is in each economic agent’s self-interest to increase his savings and cut his expenditures, because the recession threatens his income.  But if each agent’s pursues his own individual interest in this way, the overall spending of the economy will be reduced, the recession will deepen, and everyone will suffer more. This has been called “the paradox of thrift.”  Classic Keynesian economics calls for having government increase national spending, thereby stimulating the economy and thus end the recession to the benefit of all.  If such government intervention offers the best course of action, then this falsifies (2)–although unless these funds are directed toward job creation and improvement of the infrastructure the effort is likely to fail.

            A second sort of counterexample to what free-marketers claim in (2) is the phenomenon known as “the race to the bottom.”  For example, if a state acts in its own self-interest by underbidding others in lowering taxes, reducing spending, and eliminating regulation, so as to make it more attractive to financial interests, then other states can only compete by doing more of the same; so a “race to the bottom” ensues with each state being worse off than it would have been had the states cooperated rather than acting in a purely self-interested way.  The race to the bottom is a special case of The Prisoner’s Dilemma, in which the optimal outcome for an entire group of participants results from cooperation of the participants, whereas the optimal outcome of each individual is not to cooperate while others do cooperate.

            A simple example of a race to the bottom concerns tax competition among nations. Each nation may benefit from having a high tax on corporate profits to promote income equality.  But nations can benefit individually with a lower corporate tax rate to attract businesses from other nations.  This would hurt all the nations except the one that lowered the tax rate.  In order to be competitive, each of the other nations would have to lower its tax rate, thereby “racing to the bottom” with a result that is less favorable in promoting income equality and the good of all.

            Free-market capitalism has precipitated a race to the bottom in the United States, beginning in 1980 with the adoption of what has been called “supply-side economics,” credited to Arthur Laffer.  According to this view, if corporations were given tax cuts and given free rein to seek out the most favorable business environment world-wide, they would increase their own wealth and thereby increase the wealth of American citizens.   Opponents of this view called it “trickle-down economics,” in which the riches of American producers would trickle down American workers.  Unfortunately, the wealth did not trickle down.  Instead, the tax cuts gave rise to large deficits in the Federal budget, American manufacturers lost out to foreign competition that could produce goods more cheaply, and American workers lost their jobs to those in other countries.  Through increased productivity, tax cuts, and a lower wage base, the producer class became extremely wealthy, but average citizens became worse off.  As John Gray points out in False Dawn, the United States became the only advanced society in which corporate productivity increased whereas the income of the majority has stagnated or fallen.  Between 1973 and 1993, $200 billion that used to go the worst-off 3/5 of the population now went to the 1/5 that was best-off.  A study by Emmanuel Saez and Thomas Piketty (2006) showed that total reported income increased by 9% in 2005, with the mean income of the top 1% increasing by 14% while the bottom 90% dropping by 0.6%.  Thus, free-market competition, tax cuts for the wealthy, and massive borrowing to finance government spending has resulted in increased income inequality in which most of the population are worse off than they would otherwise be.  As of this writing our national debt stands and $10.7 trillion and counting.

            The loss of jobs created by this race to the bottom has also damaged families, neighborhoods, and increased the crime rate.  In the United States today mass imprisonment acts as a surrogate for community controls that have been destroyed or weakened.  In 1994 more than 5 million Americans were under some form of legal restraint.  One and a half million people were in jail, which is ten times the number in European countries, and legal restraint has become the only effective means of social control, especially for drug offenses. The problem is exacerbated by creating prison dependency, as well as having those with minor offenses exposed to the teachings of seasoned criminals. When the Welfare Reform Act of 1996 was signed by President Clinton, it divested government of most of its responsibility for welfare, creating a permanent underclass that is effectively managed only by incarceration or the threat of it.

            Free-market capitalism thrives on privatization and deregulation.  One of the most notable examples of how this practice has backfired concerns the Glass-Steagall Banking Act of 1933.  This Act prohibited a bank holding company from owning other financial institutions, thus separating commercial from investment banking, and it was passed in order to control speculation when much of the banking system collapsed in 1933.  The Glass-Steagall Act was repealed in 1999, and in 2008 many U.S. financial institutions failed because banks had taken on too much debt with risky mortgages. This could not have taken place had Glass-Steagall not been repealed.  A similar case concerns the Federal National Mortgage Association (Fannie Mae), established as a government agency to make mortgages more available to low-income families.  In 1968 Fannie Mae was converted to a private shareholder corporation in order to remove it from the Federal budget.  In 1999, Fannie Mae was pressed by institutions in the primary mortgage market to ease credit requirements so that loans could be made to sub-prime borrowers.  At the same time, shareholders pressed Fannie Mae to maintain its record profits, and the Clinton administration wanted more loans to be made to lower-income borrowers.  As a result, Fannie Mae made some very risky loans; so when the housing bubble burst in 2008, the government was forced to place Fannie Mae into conservatorship.  If Fannie Mae had not first been privatized and then been so loosely regulated, this could not have happened.

            What the free-market ideologues apparently refuse to accept is that there are other goods that might override that of economic freedom.  Among other things valued are physical security, adequate food and shelter, the availability of health-care, a sense of community, and having the opportunity to find structure and meaning in one’s life.  All the counterexamples to free-market capitalism concern the clash between the freedom to gain economic advantage and one or more of these other human goods.  If the purpose of having a sound economy is to benefit the society that enjoys it, then these counterexamples show that the society as a whole does not benefit. Treating economic freedom as if it had no other result than one’s profit is to blind oneself to its other deleterious consequences.  If one wonders why the free-marketers  in the Ludwig von Mises Institute refuse to accept these counterexamples, perhaps it is due to an “anchoring bias” on their parts.  The ideology of the free market has become so firmly entrenched in their conceptual scheme that counterexamples do not touch it.

            John Gray wrote False Dawn before the world-wide financial collapse of 2008. In it he warned of such events taking place as a result of globalization and free-market capitalism–world-wide financial cataclysms that exaggerate the cyclical booms and busts that are endemic to capitalism itself.  It is not that capitalism simply falls prey to crooked speculators as the Enron, WorldCom, and Adelphia scandals have demonstrated.  Instead, it is part of the fabric of capitalism itself, made worse by the global reach of free markets.  What is to be done to ameliorate these effects?  Gray is not sanguine about our economic futures.  A reversion to statism will not help, as witness the failures of the Soviet Union and of Maoism, which resulted in far more killings and human suffering than capitalism has, without any of the economic benefits.  Nor does Gray hold out much hope in trying to regulate markets, especially in the United States, which he sees as “…riven by class conflicts, fundamentalist movements, and low intensity race wars.” (p. 130). Only if Americans could admit that free markets are at odds with social stability might this conflict be moderated.  But Gray sees little hope for that.

            In a later work, Straw Dogs:  Thoughts on Humans and Other Animals (2003), Gray makes an even stronger case for pessimism, not only about the future of capitalism, but also the human race.  His thesis here is that humans are what Darwin showed all animals to be, “…a result of blind evolutionary drift” (p. 5). But humans are worse than other animals by virtue of their capacity to cause untold pain and suffering to their fellow creatures.  The human species is Homo Rapiens, made even more fearsome by its development of technology to such an extent that it threatens the planet that has nurtured it.  Technology has taken on a life of its own, and, like global markets, it cannot be stopped.  Whether it can be harnessed for human wellbeing is, for Gray, a vain hope, given its widespread destructive use.  Perhaps when the human species has ceased to exist, the planet can begin to heal itself in the way that the Gaia Hypothesis contends.  This is the hypothesis that the earth is a self-regulating system; and, according to Gray, if humans disturb its delicate balance, they will be trampled and tossed aside like the straw dogs used in ancient Chinese rituals (p 34).

            Whether, as Gray contends, hope for the future is just another illusion to which the human race is prone, or whether we can harness technology before we destroy ourselves, is still at issue.  Gray looks at our historical record and sees little hope, apparently distrusting the deliverances of reason and opting for quiescence in the face of necessity.  Perhaps, like Sisyphus, we are condemned to roll the stone uphill only to have it roll back again to the bottom.  But if we can learn to discern myth from reality, perhaps we can also learn something by exposing the myth.  Gray has shown the enormous productivity that can be generated by a  capitalistic system.  Perhaps, through selective regulation, such a system can be tamed so as to be responsive to human needs.  Although Gray has shown that human progress is not inevitable, he has not yet shown it to be impossible. 

            Time does not permit my proposing how such progress can be achieved, nor would it be an easy task because globalized capitalism, replete with its multi-national corporations, has become so convoluted that it is hard to unravel its many strands.  But that, as my friend Robert Schoch has suggested to me, itself proposes at least the form of a solution.  It does so by way of the Parable of the Zen Sculptor, in which the student approaches the master and asks, “How will the stone appear when finished?”  The master replies, “I cannot presently tell; but with each swing of the hammer and chisel, I can determine what it is not.”  Analogously, although we cannot presently tell what form our capitalism will take, we can at least discern what it will not be.  For instance, it will not be more laissez faire; it will not be more tax cuts for the wealthy; it will not be a “bail out” for failing banks without any supervision; it will not be the funding of defunct corporations so that their CEOs can escape with golden parachutes.  This we can determine because these things have been tried and they have failed to promote the general welfare.  Perhaps we can fashion our own brand of capitalism just by saying “no” at the right time.  At least it’s a start.

L. S. Carrier

2 27 2009

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New Revolution for a New Imperialism

By: DI Editor, Dusty Schoch

I keep a picture of Che Guevara on the wall in front of me to remind myself that, like that ancient eastern sage said… “If you want to be beautiful, then be thou a lotus flower; If you would be strong, then be thou a mighty oak; but if your desire is to attain your own ultimate humanity, then thou must then be a revolutionary.”

That’s all Che ever was, even when he was living his “motorcycle diary” days. He left his native Argentina and led revolutionary resurgencies all over the world, recognizing even then (mid 50’s thru late 60’s) the global nature of “the” enemy – imperialism. To me, today, the root of imperialism is the multinational corporation (and the national corporations, as Halliburton and Blackwater, acting globally through a Pentagon controlled by multinational corporations…principals, agents…all the same.)

Che wouldn’t—at least readily–know what to do today. The Batistas of today are seldom native tyrants and warlords, seldom visible. I might have selected a poor exemplar there because Batista was in a way a corporate puppet, if we can deem our native Mafia the equivalent of a multi-national corporation, which it’s always been in effect.

That’s the why and where people like you fit in. It’s the philosophers (artistic historians) looking at the big picture of history and current events who must lead/inspire the masses to recognize the old villains in their new chameleonic embodiments and colorings by exposing the legerdemain and misdirections of the tricky corporate bastards running all the shows on all the economic stages and fronts; the fat cats who rake in the billions from their perches on palm islands off Dubai….regardless of the consequences occurring on the cutting edges of modern day capitalistic imperialism.

Imperialism, Che’s ubiquitous and perennial enemy, has always been capitalist, but in the past it was more corporeally capitalist. You could see and touch Batista and Iran’s Shah. In India, you could see and touch the British colonialists (capitalistic imperialists). They had flesh and blood and did their colonial thing out there in the open. When all the fat cats, with comic book efficiency, were enabled to incorporate, they were ipso facto enabled to act as though they were “invisible”. They are able to hire corporate mercenaries (e.g. Halliburton>Blackwater) to do their dirty work and take the flak and fall by invisible proxy. Because they effectively are (invisible).

My point? The “mythology” in which “free market capitalism” is all wrapped up and obfuscated is itself all wrapped up and obfuscated (thus insulated) by the macro-mythology of the transnational corporation. It’s a case of historically- nonpareil involute obliquity. The legal figment (myth) is the “invisible cloak” (image from an implement of wizardry found in Harry Potter’s school of magic) of corporate “being”. When a corporation becomes “de jure” (legally functional), its constituents (fat cat imperialists) become shielded by this cloak of invisibility, which enables them to act with total narcissistic self interest and without regard for the effect their actions will have on their country, countrymen or the oppressed peoples they enslave in the third world nations where their corporate cyborg exoskeletons export the onus of their industry’s labor.

Your provocative paper dwells on the mythology inherent in the microcosm of free market capitalism. It was my feeling on awakening that there could be drawn a powerful analogy (corollary to your thesis’ postulate) that it is the mythology in today’s macro capitalistic imperialist that must be contended with today…and that would be the transnational corporation. They are like the “octopus” which Che always used to characterize the imperialist monster (in the–ubiquitous–singular) of his day. When he went abroad to fight “the” monster, it didn’t seem to matter to Che where he found it. He led anti-imperialist insurgencies on every continent before he finally succumbed to the beast (our C.I.A. – led corporate counter-insurgency). It’s the same monster everywhere and this has not changed today. The monster is that tendency in man that makes him lethal to his fellow man and his earth when he is allowed to join and operate anonymously in a mob. The difficulty with today’s mobs is exponentially aggravated. The Batista’s of the world are now the Halliburtons. Another apt parallel – the insurgents who arise to resist the transnational imperialists (the Gaia “antibodies” or modern-day Che’s) are–enabled by modern technology– equally “stateless”, equally anonymous and invisible, and to the indigenous global populace, equally malignant in tendency and potential. These would be our invisible “terrorists”. We (our petro-pipeline corporate capitalists) created bin Laden and Al Qaeda intentionally in Afghanistan during its period of Soviet imperialism, and inadvertently every time we (through our corporate military complex) armed and allied Israel against her indigenous neighbors.

I know this is somewhat a freely—associated flood of ideas, but that is evidently what your essay provoked in me that waited til today to assume shape.

I noticed that your essay was principally expository. Nowhere do you propose a solution to the problems you surgically dissect and debride, so precisely and commendably–other than (with your Zen Sulptor parable)  listing what must be etched away from our present capitalistic monolith.  If there were time, you might consider what I have come to conclude: We in fact need a new revolutionary form (or leader) for a new (evolved) imperialistic beast. Free market capitalism is merely the means the transnational corporate imperialistic beasts “use”. Their end (exploitation of the weak for…capital) will never change…only their means and their appearance. We need to disinter Che and find a fiscal Dr. Frankenstein capable of revitalizing him in time to muster a following to challenge this brooding beast, before he has ravaged and warmed OUR globe to the terminal boiling point.

Best,

Dusty

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Thomas L. Friedman: There’s no magic bullet

By Thomas L. Friedman

Published: February 1, 2009

DAVOS, Switzerland: In its own unpredictable way, the Davos World Economic Forum usually serves as a crude barometer of the latest mood or mania on the world stage. This year did not disappoint. What has struck me is the quiet urgency that infused so many panel discussions and private conversations here between investors, politicians and social activists. To put it crudely: Everyone is looking for the guy – the guy who can tell you exactly what ails the world’s financial system, exactly how we get out of this mess and exactly what you should be doing to protect your savings.

But here’s what’s really scary: The guy isn’t here. He’s left the building. Elvis has left the mountain. Get used to it.

What do I mean? First, if it is not apparent to you yet, it will be soon: There is no magic bullet for this economic crisis, no magic bailout package, no magic stimulus. We have woven such a tangled financial mess with subprime mortgages wrapped in complex bonds and derivatives, pumped up with leverage, and then globalized to the far corners of the earth that, much as we want to think this will soon be over, that is highly unlikely.

We are going to have to learn to live with a lot more uncertainty for a lot longer than our generation has ever experienced. We keep pouring money into the dark banking hole of this crisis, desperately hoping that we will hear it hit bottom and start to pile up. But so far, as hard as we listen, we can’t hear a thing. And so we keep pouring …

A broker friend told me it reminded him of when he was a teenager and his doctor first diagnosed him as unable to digest wheat products.

He said to the doctor, “Well, just give me a pill.” And the doctor told him: there is no pill. “You mean I’m just going to have to live with this?” he asked. That’s us. There is no pill – not for this mess.

The fact that there is no single pill doesn’t mean there’s nothing to be done. We need a stimulus big enough to create more jobs. We need to remove toxic assets from bank balance sheets. We need the U.S. Treasury to close the insolvent banks, merge the weak ones and strengthen the healthy few. And we need to do each one right. But even then, the turnaround will be neither quick nor painless. Indeed, the whispers here were that what has been an exclusively economic crisis up to now may soon morph into a domino of political crises – as happened in Iceland, where the bankruptcy of the banks toppled the government on Monday.

(Davos humor: What is the capital of Iceland? Answer: $25.)

Second, we’re going to have to get used to a loss of trust. All those rock-solid people and institutions that we trusted with our money, our pensions and our kids’ piggybank savings – like Citigroup, Merrill Lynch, Bank of America – do not seem trustworthy anymore.

Never before in my adult life have I looked around at every bank in my town and said, “I’m not sure I wouldn’t prefer to put my paycheck in a mattress.”

The Bernard Madoff scandal, of course, has only reinforced that loss of trust. His degree of betrayal – his alleged willingness to embezzle the life savings of people whom he had known his whole life – is so coldhearted that it charts new territory in human behavior. He’s on his way to becoming an adjective. Money managers are already being asked prove to prospective new clients that their internal safeguards are “Madoff proof.”

I’ve written a lot about the Indian outsourcing community, so I knew B. Ramalinga Raju, the Satyam chairman accused of embezzling $1 billion from his own company. What’s really sad is that I didn’t get to know him through his business but through an interest in his family’s charitable work. They created India’s first 911 emergency system in their home state and call centers in Indian villages, so young people there could get service jobs. Was all that a fake, too? Or was he just an embezzler with a good heart? Don’t know. When you can’t even trust a person’s charitable work, you’ve hit a new low.

“We’re all going to have to learn to live with a lower level of trust in our lives,” an African banker friend said to me here. But the mind recoils at that, which may explain why so many people I talked to here are hoping that President Barack Obama will turn out to be the guy.

Like Harry Truman, Obama is definitely present at the creation of something. He is arriving on the scene “not after a war but after the same kind of shattering of institutions that a war does,” said Peter Schwartz, chairman of the Global Business Network. “His job is to restore confidence to these institutions that have been at the foundation of our economy.”

That may be Obama’s most important bailout task: to educate the country that there is no easy escape here, except taking our medicine, getting our fundamentals right again and working our way out of this, brick by brick, by getting back to making money – what was that old Smith Barney ad? – “the old-fashioned way” – by earning it.

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Creeping Corporate Capitalism -

The  “Rand Syndrome”

(corollary to “The China Syndrome”)

By: Dusty Schoch, DI Foreign-Policy Editor  (http://declaringindependents.com/)

With the sub-caption, “The China Syndrome” we allude to and invite you to review previous essays by Schoch (by using the “articles” link) on the topic of corporate America’s exporting jobs and industry to India and China.

My previous postulate was this:  The China Syndrome (exporting America’s jobs and industry to China and other countries with “slave labor”) is exporting (destroying) America.  Corporate greed and governmental laissez-faire policies coincide to fuel the China Syndrome, with Enron and Halliburton scandals being only the top of the catastrophic ice berg.

 With the revelations that corporate-controlled Pentagon officials deceived us with false grounds for war (WMD’s etc) and further revelations that these same petro-munitions consortiums are guiding us to pursue our illegal conquest and occupation of Iraq, we saw Orwell’s nightmarish 1984 “fictional” forecast loom into actuality.  “Big brother” and the “big lies” were in fact being told the American public by a neo-con manipulated press (and, let’s concede it – a dreadfully dumbed-down American press and …America).

My present postulate is this: Now the neo-cons are moving in for the final kill…that’s where (as Hitler burned the books in 1933) the neo-con corporate fat cat bullies are starting to change history.  Not literally by burning books this time, but rather by a much more subtle, sinister and insidious manner…by controlling (that means revising) what is taught in our universities. By starting the propaganda in full force with our sons and daughters as they enter the cusp of the job market…as they begin to take over the leadership of our society.

If Hitler’s “Mein Kampf” became required reading at UNC Chapel Hill, would you be upset?  OK.  I’m telling you now, our University has now agreed to make required reading out of a book which I submit to you preaches a doctrine of capitalist fascism.

The scoop is the subject of a well-written (by  Pam Kelley and Christina Rexrode) article appearing in the Charlotte Observer (March 23, 2008) available in full-print at this link:

http://www.newsobserver.com/news/story/1010249.html and will be printed below.

Long story short – Fat cat neocon banker, John Allison, C.E.O. of BB & T  has given the University of North Carolina a million dollars on the condition our students of the benefited universities read a book by Ayn Rand you may or may not have heard of entitled “Atlas Shrugged”.  Our (publicly-funded) University has agreed to the deal.

Ayn Rand is, for those out of this particular end of the neo-con loop, is a recently disinterred poster-child capitalistic “intellectual” who wrote some very popular fiction a half-century ago entitled “The Fountainhead” (also a movie) and “Atlas Shrugged”.  Both novels preached  the same essential socio-economic sermon, coined “enlightened selfishness”.  If Karl Marx and Lenin authored the “socialist” or “populist” end of the socio-economic spectrum of  Twentieth Century ideology , Ayn Rand founded its “individualist” polar opposite.

The fat corporate cats of today are able and willing today to export America’s industry and jobs to foreign slave-labor (Indian and Chinese laborers earn the American equivalent of $30-$40 a month)  centers in order to skim the profits while our country is tossed towards its second depression because of its blind adherence to Randian philosophy – that our government should do nothing…absolutely nothing to stand in the way of either its citizens’ creativity or their (corporate) productivity. This philosophy of unrestrained corporate dominance has given us terminal  air and water pollution, global warming, war in Iraq and economic collapse.  And now, the fat cats want that philosophy added to the required reading of any student who attends business school in our university system.

Sound like  Hollywood mythology to you?  Don’t really think that Orwell’s 1984 scenario can really come true? Think again. Not only is it possible–our university staff and boards of trustees are going along with it. Wonder if this has anything to do with the fact that every member of our University Board of Trustees is a corporate fat cat him/her self, and probably a dedicated disciple of Ayn Rand since his own college days (when reading her sophomoric crap was optional).

Why “sophomoric crap”?  I’ll give you an example to illustrate.  I read “The Fountainhead” when I was 20. My very intellectual mother was a real devotee of Rand.  Rand is, if nothing else, a great story teller. But so’s Spephen King. You want Kujo’s creator ethically grooming your children? Back  in Rand’s day, corporations were a lot better behaved, I’ll say in my mother’s (and Rand’s)  defense. Back then, General Electric really did (occasionally) “bring better things to life”. Now the most important thing they bring to life is instant death (as the world’s largest supplier of nuclear warhead triggers); and by the way…GE has now exported (entirely) all its appliance service department to New Delhi.  If your stove or refrigerator goes on the blink – sorry; there aren’t any GE repairmen in the U.S. They’ve been “down-sized” (fired) and their jobs exported to India and China.

This has happened because America is run by a government whose statesmen are on corporate payrolls (i.e., they don’t get elected without corporate campaign contributions, which is the same thing. The corporations get them elected; un-restricted corporate lobbyists then come straight to their (public) offices to collect the quid pro quo.

Now- back to the “example” (literary) in “The Fountainhead” that illustrates my designation of Randian Philosophy as morally bankrupt “sophomoric crap”.  The “Fountainhead’s” hero is an architect named Howard Roark.  He’s got the hots for the female protagonist, “Dominique Francon”.  She doesn’t immediately have the hots for him in return, so he does his laizzez-faire thing and rapes her.  She turns out liking it, but it was clearly rape being endorsed by this intellectually-pretentious excuse for the “great American novel” as the fat cat neo-cons call it. 

But that’s not where the corporate megalomania ends.   At the end of the book, Roark has designed and his client (big American city) has constructed a high-rise apartment complex for thousands of its middle class and  poor. Millions of public and private funds have been invested. But midway in construction, because of cost and other factors, some of Roark’s original blue prints were compromised. The residents wouldn’t each have a balcony where they could hang out flowers and sit in the sun.  Yes, this was a bad thing for the people and their visionary architect, but does Roark take them to court and make them fix what they’d done wrong? Nope. He torches the whole project. Yes sir; yes mam. His answer…and Rand’s philosophy is just that ego-centric and narcissistic.  If the government steps in the way of its artists or architects, the answer is…burn the place down. To the ground. 

In her novel, Ayn Rand makes Roark’s arson not only morally acceptable, but  heroic.  In the process, a nearly-complete habitat for thousands of the poor and middle class is torched because of the ego and pissed-off pride of a single man. Perhaps he was the original neo-con. Or perhaps  Ayn Rand herself was. In her other book, “Atlas Shrugged”, the business fat cats quit their noble narcissistic pursuits and there’s “hell to pay”.  Message – Do what the corporations say, or else.

Better watch out— Now– thanks to our fat cat corporate bankers–Ayn Rand is now required reading for your University of North Carolina student.

Read the following article with the insight—and fright—I hope it engenders in you. Fascism has many faces. Unrestrained corporate-controlled plutarchy is one of them.