[R-G] [BillTottenWeblog] The Predator State

[Bill Totten]

by James K Galbraith

MotherJones.com (May 01 2006)


WHAT IS THE REAL NATURE of American capitalism today? Is it a grand
national adventure, as politicians and textbooks aver, in which markets
provide the framework for benign competition, from which emerges the
greatest good for the greatest number? Or is it the domain of class
struggle, even a "global class war", as the title of Jeff Faux's new
book would have it, in which the "party of Davos" outmaneuvers the
remnants of the organized working class?

The doctrines of the "law and economics" movement, now ascendant in our
courts, hold that if people are rational, if markets can be "contested",
if memory is good and information adequate, then firms will adhere on
their own to norms of honorable conduct. Any public presence in the
economy undermines this. Even insurance - whether deposit insurance or
Social Security - is perverse, for it encourages irresponsible
risktaking. Banks will lend to bad clients, workers will "live for
today", companies will speculate with their pension funds; the movement
has even argued that seat belts foster reckless driving. Insurance, in
other words, creates a "moral hazard" for which "market discipline" is
the cure; all works for the best when thought and planning do not
interfere. It's a strange vision, and if we weren't governed by people
like John Roberts and Sam Alito, who pretend to believe it, it would
scarcely be worth our attention.

The idea of class struggle goes back a long way; perhaps it really is
"the history of all hitherto existing society", as Marx and Engels
famously declared. But if the world is ruled by a monied elite, then to
what extent do middle-class working Americans compose part of the global
proletariat? The honest answer can only be: not much. The political
decline of the left surely flows in part from rhetoric that no longer
matches experience; for the most part, American voters do not live on
the Malthusian margin. Dollars command the world's goods, rupees do not;
membership in the dollar economy makes every working American, to some
degree, complicit in the capitalist class.

In the mixed-economy America I grew up in, there existed a
post-capitalist, post-Marxian vision of middle-class identity. It
consisted of shared assets and entitlements, of which the bedrock was
public education, access to college, good housing, full employment at
living wages, Medicare, and Social Security. These programs, publicly
provided, financed, or guaranteed, had softened the rough edges of Great
Depression capitalism, rewarding the sacrifices that won the Second
World War. They also showcased America, demonstrating to those behind
the Iron Curtain that regulated capitalism could yield prosperity far
beyond the capacities of state planning. (This, and not the arms race,
ultimately brought down the Soviet empire.) These middle-class
institutions survive in America today, but they are frayed and tattered
from constant attack. And the division between those included and those
excluded is large and obvious to all.

Today, the signature of modern American capitalism is neither benign
competition, nor class struggle, nor an inclusive middle-class utopia.
Instead, predation has become the dominant feature - a system wherein
the rich have come to feast on decaying systems built for the middle
class. The predatory class is not the whole of the wealthy; it may be
opposed by many others of similar wealth. But it is the defining
feature, the leading force. And its agents are in full control of the
government under which we live.

Our rulers deliver favors to their clients. These range from Native
American casino operators, to Appalachian coal companies, to Saipan
sweatshop operators, to the would-be oil field operators of Iraq. They
include the misanthropes who led the campaign to abolish the estate tax;
Charles Schwab, who suggested the dividend tax cut of 2003; the
"Benedict Arnold" companies who move their taxable income offshore; and
the financial institutions behind last year's bankruptcy bill.
Everywhere you look, public decisions yield gains to specific private
entities.

For in a predatory regime, nothing is done for public reasons. Indeed,
the men in charge do not recognize that "public purposes" exist. They
have friends, and enemies, and as for the rest - we're the prey.
Hurricane Katrina illustrated this perfectly, as Halliburton scooped up
contracts and Bush hamstrung Kathleen Blanco, the Democratic governor of
Louisiana. The population of New Orleans was, at best, an afterthought;
once dispersed, it was quickly forgotten.

The predator-prey model explains some things that other models cannot:
in particular, cycles of prosperity and depression. Growth among the
prey stimulates predation. The two populations grow together at first,
but when the balance of power shifts toward the predators (through
rising interest rates, utility rates, oil prices, or embezzlement), both
can crash abruptly. When they do, it takes a long time for either to
recover.

The predatory model can also help us understand why many rich people
have come to hate the Bush administration. For predation is the enemy of
honest business. In a world where the winners are all connected, it's
not only the prey who lose out. It's everyone who hasn't licked the
appropriate boots. Predatory regimes are like protection rackets:
powerful and feared, but neither loved nor respected. They do not enjoy
a broad political base.

In a predatory economy, the rules imagined by the law and economics
crowd don't apply. There's no market discipline. Predators compete not
by following the rules but by breaking them. They take the
business-school view of law: Rules are not designed to guide behavior
but laid down to define the limits of unpunished conduct. Once one gets
close to the line, stepping over it is easy. A predatory economy is
criminogenic: It fosters and rewards criminal behavior.

Why don't markets provide the discipline? Why don't "reputation effects"
secure good behavior? Economists have been slow to answer these
questions, but now we have a full-blown theory in a book by my colleague
William K Black, The Best Way to Rob a Bank Is to Own One (2005). Black
was the lawyer/whistle-blower in the Savings and Loan and Keating Five
scandals; he later took a degree in criminology. His theory of "control
fraud" addresses the situation in which the leader of an organization
uses his company as a "weapon" of fraud and a "shield" against
prosecution - a situation with which law and economics cannot cope.

For instance, law and economics argues that top accounting firms will
protect their own reputations by ferreting out fraud in their clients.
But, as with Enron, Tyco, and WorldCom, at every major S&L control fraud
was protected by clean audits from top accountants: You hire the top
firm to get the clean opinion. Moral hazard theory shifts the blame for
financial collapse to the incentives implicit in insurance, but Black
shows that the large frauds were nearly all committed in institutions
taken over for that purpose by criminal networks, often by big players
like Charles Keating, Michael Milken, and Don Dixon. And there's another
thing about predatory institutions. They invariably fail in the end.
They fail because they are meant to fail. Predators suck the life from
the businesses they command, concealing the fact for as long as possible
behind fraudulent accounting and hugely complex transactions; that's the
looter's point.

That a government run by people rooted in this culture should also be
predatory isn't surprising - and the link between George H W Bush, who
led the deregulation of the S&Ls, his son Neil, who ran a corrupt S&L,
and Neil's brother George, for whom Ken Lay sent thugs to Florida in
2000 on the Enron plane, could hardly be any closer. But aside from
occasional references to "kleptocracy" in other countries, economic
opinion has been slow to recognize this. Thinking wistfully, we assume
that government wants to do good, and its failure to do so is a matter
of incompetence.

But if the government is a predator, then it will fail: not merely
politically, but in every substantial way. Government will not cope with
global warming, or Hurricane Katrina, or Iraq - not because it is
incompetent but because it is willfully indifferent to the problem of
competence. The questions are, in what ways will the failure hit the
population? And what mechanisms survive for calling the predators to
account? Unfortunately, at the highest levels, one cannot rely on the
justice system, thanks to the power of the pardon. It's politics or
nothing, recognizing that in a world of predators, all established
parties are corrupted in part.

So, how can the political system reform itself? How can we reestablish
checks, balances, countervailing power, and a sense of public purpose?
How can we get modern economic predation back under control, restoring
the possibilities not only for progressive social action but also - just
as important - for honest private economic activity? Until we can answer
those questions, the predators will run wild.

_____

James K Galbraith teaches economics at the Lyndon B Johnson School of
Public Affairs at the University of Texas-Austin. He previously served
in several positions on the staff of the US Congress, including
executive director of the Joint Economic Committee.

This article has been made possible by the Foundation for National
Progress, the Investigative Fund of Mother Jones, and gifts from
generous readers like you.

(c) 2006 The Foundation for National Progress

http://www.motherjones.com/commentary/columns/2006/05/predator_state.html


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