oligarchs

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Elections Matter … Right?

Elections Matter … Right?

Well, only if those being elected have an inkling of what their constituents actually want.  And it seems that, here in America at least, there is a considerable gulf between what those who are elected think are the key issues and what those who do the electing think of as the key issues.  The lack of overlap is distinctly upsetting.

We are constantly being told that the US is a relatively conservative nation.  This is why some of the more obvious social democratic remedies for our economic and social ills are considered as beyond the pale. They won’t fly here, we are told, because Americans won’t go for them.

This is odd when we think about how extremely popular programs like Social Security for retirees and Medicare for the elderly are.  Despite the regularity with which the Republican party derides such programs, and despite the dire predictions that said programs will reduce America to some version of abject Soviet-style penury, the voting public simply loves them.  Getting rid of them is impossible.  This is why the only approach that remains to our political right is to starve the government of revenue sufficient to pay for “entitlement programs” so that the debate is shifted away from their efficacy and towards their affordability.  No one doubts their efficacy.  But we seem always to be discussing their affordability.  The US, we are told, despite being the wealthiest economy on earth, just can’t afford entitlements.

Even that word: “entitlements” is an attempt to pervert the narrative.  It makes the programs in question sound as if they are gross luxuries that require the pillaging of one person’s wealth in order to satisfy that of others who feel  entitled to something that is not rightly theirs.  So instead of being a reward for, or right of, citizenship social programs are presented purely as a burden on those unfortunate enough to have sufficient wealth to pay taxes.

The poor dears!

In any case, the gap between the perspective of our elected officials, their staffs, and the commentariat who opine on such matters, and the actual perspective of voters has reached a critical level.  I submit that the gap accounts for a substantial portion of the motivation driving what is thought of as populist politics.

If it is true that our elected officials, and the bureaucracy that administers policy, are tone deaf to the real world experience of the voters, and if officialdom persists in executing policies directed to solve problems that the voters don’t think they have, disillusion will inevitably result.  On both sides.

Officialdom will become cynical as to the apparent surliness of the electorate, and voters will become increasingly cynical about the motives of officialdom.  An opening will exist for the truly cynical populists we see cluttering politics right throughout the western world.

The disconnect is dangerous for the health of democracy.

Today’s New York Times has two columns (one analysis and one opinion) devoted to this issue, so I don’t need to go any further with it.

Except.

For anyone remotely aware of the stranglehold corporate America has on the legislative process via its lobbying efforts none of the above is at all surprising.  As the inestimable work of Gilens and Page  so clearly informs us, corporate America exerts an undue influence in Washington, and one consequence of that influence is the extraordinary bias it gives to the issues deemed important to policymakers.  This is not a question of money in elections, it is more a matter of corporate ability to dictate the legislative agenda subsequent to elections.  The corrosion of officialdom’s ability to understand the needs and/or wants of the electorate is due to the extraordinary capture of the legislative process by a small minority.  Of course policy is ineffective or non-responsive to widely held opinions.  Those opinions are being crowded out.  There is a giant blockage in the workings of our democratic machinery.

Let me leave you with the final paragraph of the Gilens and Page paper I linked to above:

“Despite the seemingly strong empirical support in previous studies for theories of majoritarian democracy, our analyses suggest that majorities of the American public actually have little influence over the policies our government adopts.  Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, and a wide-spread (if still contested) franchise.  But we believe that if policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened.”

Yes, elections matter.  But, apparently, lobbying can neutralize them.

 

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Corporations Cont’d

The key to understanding corporations is to separate the economics from everything else.  We need to do this because the economics, as expressed in various theories of the firm, are usually entirely idealized and bear no resemblance to reality.  Economists, as usual, love to theorize about things that don’t exist but which they wished did exist.

But that may just be me being dismissively judgmental.

Corporations, far from being products of the free market, are actually franchises of the state.  They are sub-contracted jurisdictions.

To be a corporation is to possess a charter from the state.  That charter brings privileges not available to non-corporations. The most notable privilege is that the corporation is recognized as a distinct legal entity separate from any “natural” person who may be associated with it.  And because the corporation is brought into existence prior to it being populated or animated by any natural person, it is not owned by any of them.  It is unowned.  In this sense it is akin to a nation state, the church, most universities, and, at least here in the US, most towns,  It would be odd to describe any of those bodies as being owned by the people who animate them.  Yet we routinely talk of firms being owned by stockholders. It is this misattribution of ownership that leads most economists astray in their theorizing.

The advantages that the privileges of being a corporation bring have long been recognized.  The ancient Romans set up corporations for business purposes for exactly the same reasons we do nowadays:  it makes the joint ownership and management of property for short term business purposes much more efficient than alternatives such as the traditional partnership.

When a partner leaves a partnership, the remaining partners are obliged to pay out the leaving person’s share of the accumulated resources of the partnership.  This can often strain the organization to breaking point.  In a corporation, anyone withdrawing their financial support simply sells their share to someone else.  It is not the responsibility of the corporation to pay out anything.  The organization persists, and its shareholders are temporary.  This is obviously attractive for any business activity that requires long term investment or complex financing.  Hence the sudden rise of corporations in the business sphere after industrialization.

Prior to that the corporate form was found most often in ecclesiastical or educational settings.  Back in Medieval times it was mostly the church and then the universities who operated under a charter.  A typical bishopric was chartered.  It would be nonsensical to speak of the Bishop owning the bishopric.  Each bishop was simply the temporary custodian of what was a long term, if not perpetual, entity.

It was this clear separation of the assets of the corporation from the people animating it that  was the most advantageous aspect of a charter.  The bishopric, university, or town could own, manage, and buy or sell property in its own name.  They were all regarded as being legal “persons” for such property owning purposes.  This is the origin of the legal personhood that has become so controversial in our modern era.  And those entities were all granted this privilege, and advantage, because they all were assumed to be producing a public benefit.  A benefit that was normally stated in their founding charter as the reason for being given a charter in the first place.

So the original corporations were a hybrid organizational form.  Neither entirely public nor entirely private they were designed to produce public goods using private financing. The quid pro quo being that the private financiers could make a profit as long as the public good was provided as chartered.

It is because of this hybrid design that the theories of the firm found in mainstream economics textbooks totally miss the point.  Capitalists adopted the corporate form because of its property owning advantages over the partnership form.  It was a more efficient vehicle for the concentration of the large amounts of cash needed to undertake the risky activities of long distance trade or industrial production.  Yes, the corporate form economizes on transaction costs, but that is a radical understatement: without the corporate form those transaction costs are permanently prohibitive to the activity.  No sufficient amount of complex contracting — as found in the so-called “nexus of contracts” theory of the firm — is possible in a marketplace.  Not even in an information dense marketplace such we experience on the digital age. And within the walls of the corporation central planning dominates activity.

It is the market that is the anomaly for the organization of production, not the business firm.  In particular not the business firm organized as a corporation.

It is also this dependence of the corporation on the state for its legitimacy that has been the source of friction throughout the industrial era and up to today. The tension between contractor and sub-contractor has ebbed and flowed with both sides claiming victory at different points in history.

The first big break for the corporation here in the US came as far back as 1819 when the original trustees of Dartmouth — which was then not the college we know it as today — challenged the state’s interference in its internal organization.  The US Supreme Court ruled in favor of Dartmouth by asserting that the original charter was a contract and thus could not be violated by the state’s attempted legislation to upend it.  This was the confirmation of corporations having the very property rights that was to be so attractive to later capitalists.  Prior to this, and particularly in the UK, industrialization was still taking place in either family-run or partnership-run organizations.  After the Dartmouth decision the corporate form was dusted off from its Medieval shelf and re-purposed for industry.  With its property rights settled and on a firm footing the corporation became the obvious vehicle for business.

Recent controversy is less about these property rights than it is about civil rights.  The most contentious examples being the frequent use of the Fourteenth Amendment to extend the rights of business.  This is the Constitutional amendment designed to protect former slaves from discrimination, but its overwhelming use in the Supreme Court has been to extend the civil rights of business.  It is this much more fractious attribution of “personhood” to corporations that has gained so much attention, especially since the Citizens United case a few years back.  By granting corporations freedom of speech, which was surely never on the minds of the Founders writing the Constitution, the Supreme Court carried the notion of civil rights further than ever before and, by extension, twisted the American electoral system even further away from any pretense of democracy.

The Founders were all intimately aware of the corporate from of organization because most of the original colonies were established under corporate charters from the state in England.  Indeed when they were searching for a basis for their new nation they adopted the chartered corporation as their model, with “we the people” being the sovereign conferring legitimacy on the charter, now called a constitution, and all the usual trappings of corporate existence — by-laws, methods for limiting the charter, etc simply transferred over.  The US is itself a giant corporation in this view.

Th Citizen’s United case, and the subsequent Holly Lobby case a few years later, the latter extending religious freedoms to corporations, demonstrate the confusion the law has with corporations.

On the one hand the law states that the corporation is its own entity, unowned but with ownership rights separate from those people animating it.  This is the property rights tradition of law.  On the other hand, at its convenience, the  law has looked past that separate entity and attributed the rights of the people within the firm to the firm itself.  This is the civil rights tradition of law.  All the modern controversy extends from this latter tradition.

The Supreme Court oscillates between these two traditions. Sometimes treating corporations as mere associations of people, in which case it attributes personal rights to the aggregate of those people i.e. the corporation, and other times protecting that same association from the downside of personal property problems stemming from corporate failure i.e. by creating and then extending limited liability rights that natural persons do not have.

So the tension between the state and its offshoot corporations persists and is magnified by troubling inconsistencies in the attribution of which rights belong with the privileges that corporations are given in their charters.

If corporations want the privileges that give them their transaction cost advantage, then they ought sacrifice their appetite for civil rights.  Or the other way around.  Until they do they will incur the anger and hostility of many more commentators than otherwise.

The aggressive assertion of corporate rights, especially those that allow business to interfere in the legislative process, is detrimental to democracy.  Those of us who seek to defend democracy from the oligarchs need to remind ourselves of the franchisee status of corporations.  They exist to provide public goods — even if those goods are produced with private means they are public because they flow from the corporate form of organization.  Regulating business to this end is entirely legitimate and not at all an interference in the so-called free market.  Corporations are sub-contractors of state authority.  They have franchised privileges that give them advantages over other types of organizations.  The regulatory “cost” of adhering to their chartered course is actually not a burden: it is the price for those advantages.  It is the market price for their very legitimacy.

And the contradictions between reality and theory will continue to befuddle economists of all ideological ilks.

But clearing that up would ruin our fun, wouldn’t it?

 

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The Market Turn

I am going to be writing an extensive review of Avner Offer and Gabriel Söderberg’s excellent book: “The Nobel Factor” in the near future. Meanwhile allow me to share a a couple of early comments because they bear heavily on how we all approach the Trump administration.

Offer and Söderberg clarify the circumstances behind the shift in economics that occurred in the late 1970’s and came into full effect in the subsequent decades. Their  focus is heavily on how the Nobel Prize in economics has reinforced that shift and how the very origins of the prize were steeped in political bias on the part of the Swedish Central Bank, which was involved at the time in a guerrilla war against the then prevailing (in Sweden) economics of social democracy.

This history is, perhaps, the clearest indication of the inherent anti-democractic intentions of modern economics.

Democratically aware economics and the more commonly quoted mainstream or neoclassical economics have very different attitudes towards the mitigation of lifetime risks that we all experience.

In a socially democratic world such risks are borne by the community via the redistribution of wealth, taxation, and the establishment of government provided safety-net programs of various sorts. In the world of modern economics the libertarian approach dominates: people provide their own risk mitigation through the purchase of private insurance. In this latter world the government plays no role. Indeed, any attempt on the part of government to play a positive role is regarded as, by definition, an attack on the ability of so-called free markets to produce maximal social welfare.

The two approaches rest on totally different bases. The democratic version assumes the existence of community with citizens bearing collective responsibility towards each other. The libertarian version expunges the collective altogether and assumes that all activity is best left to individuals pursuing purely individual interests.

There are, of course, anomalies. Especially in the libertarian version. For instance the community is suddenly brought back from the dead and presumed to be the locus of the provision of certain services including defense, and the enforcement of laws that protect private property. Libertarians also tolerate the collective action of the market with its emergent properties of prices, supply and demand quotients and so on. This tolerance brings into full view the political nature of their agenda: the elimination of a role for democratically inspired government in the economy.

In contrast, the democratic version limits the activity of the community to the provision of risk mitigation. It allows plenty of space for the activities of the private sector to innovate and create wealth. It simply takes a collective view of the allocation of that wealth.

This is far better presented in the Offer and Söderberg book and I urge you to read it.

Meanwhile we can trace the emergence of the libertarian and anti-democratic strain of economics from its rise and ascendancy right through to the 2017 agenda in American politics. The vocal opposition of the Republican Party to the Affordable Healthcare Act [aka “Obamacare”] rests squarely on the political agenda that the libertarians introduced into economics under the false guise of “positive” theory subsequent to the work of Hayek. So we can see the enabling role that economics plays in our political discourse. There is nothing “positive” at all about it. Indeed the libertarian version of economics sits proudly in the van of the Republican efforts to get rid of any semblance of entitlement.

Think about that for a moment: even the word “entitlement” drips with a scornful dismissal of the possibility of community action. Someone who presumes to be “entitled” cannot be said to have earned it as an individual. They simply stake a claim because they are a citizen, and citizens have certain rights to collective protection. The libertarian attitude is based, as Offer and Soderberg remind us, on a vision of a “Just World Theory”. In such theories individuals earn outcomes that they deserve. Luck, accidents of birth, and other adjustments to the experience of lifetime risk are inconsequential. Outcomes are fully earned.

We hear this dismissal in the voices of right of center politicians who are fully invested in Just World Theories. To them people earn and deserve whatever outcome they experience. There is no concept of citizenry egalitarianism in such a position. Inequality is simply a just outcome of the hurly burly of life. Corporate CEO’s fully deserve their riches even if the results of their actions don’t seem to accord with them. Innate talent must account for all outcomes and no one does well because of privileged upbringing.

Along the way the libertarian version of economics spawned corporate technologies such as the notion of “shareholder value”. So it is not simply economic policy making that is in the thrall of anti-democratic theory. Corporate governance is too. The current version  of capitalism that dominates our economy is managerial and oligarchic. It is ossified. It is creaking under the weight of the failure of the logic of its libertarian theoretical underpinnings. Innovation is stifled by big businesses who fear competition. Business start-ups are less frequent. Young businesses, the epicenter of employment growth, are fewer. Why? Because the asymmetrical burden of risk on everyday workers has made them risk averse, less able to consume the goods being produced by big business, and far less optimistic. This version of capitalism is suffocating itself.

This augers well for social democracy.

To re-ignite growth, to make that growth sustainable both through time and with respect too our environment, and to offset the fragmentation of employment — the so-called “gig economy” — we need more explicit collectively driven responses. Workers will have to act together to re-capture a decent share of our collective prosperity. And since they are now bearing more risk than their former employers and big business, that share can justifiably come from the taxation of those former employers and big businesses. After all, aren’t we all taught atet risk and reward ought be in balance?

After forty years of drift into the desert created by libertarian driven economic theory, it is time for a push back. That’s an agenda we can embrace while Trump does whatever he does.

So ignore him. Focus on the future.

 

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Quick Note: Simon Johnson Interview

This interview of Simon Johnson by Andrew Leonard in Salon is worth a read. I have quoted Johnson many times here and his blog at Baseline Scenario is always worth a read.

The main point to emerge from this interview is that Johnson, an early and persistent advocate of ‘nationalization’, is now preferring to call it something like a government sponsored receivership.

OK. I get it. I see that nationalization is a dirty word in American politics, so we need to call the process something else. That’s fine with me. Just as long as we use the power of the government to intercede and clean out the directors and managers who brought the banks to their knees. Quickly. Getting lost in the nuances of nationalization versus receivership versus bankruptcy, while very important at the moment of execution, can distract us from the principle we need to absorb: at some point the government will need to be an active agent in cleaning up this mess. That means getting involved directly with the day to day activities of a bank until it can be packaged up and sold off back into private hands. If there is public money involved in bailing out these failed banks, then the payback should be something more than a warm and fuzzy feeling that we ‘did the right thing’. I don’t see any purpose in the government owning banks other than as a short term expediency. The action should be short and decisive. The current shareholders should be eliminated and new shareholders found: presumably the salutary lesson they will have learned is that they need to ensure the managers they hire don’t repeat the destruction the last lot did. But to get from here to that day requires more than a gentle nudge now and again. Hence my support for ‘nationalization’ or ‘receivership’, ‘conservatorship’ or any other term that implies government action. Call it what you will. Get it done.

Next: I think Johnson is correct in arguing that the current administration policy of avoiding irreversible actions, while it sounds conservative, is actually likely to raise the cost of the bailouts and delay the timing of an economic recovery. That’s why the administration is wrong and needs to told so.

Finally, Johnson is also right to argue that the banks are simply too large. I have been reading a lot lately arguments against this ‘size is a problem’ position. Those arguments usually simply focus on the economics of large banks, saying that size is not what brought down the system, incoherent or poor business models did. I agree that the big banks were executing bad business models. What I think is more dangerous is their ability to perpetuate themselves and distort the administration’s response because of the political power they are able to muster because of their size. Johnson uses the inflammatory word ‘oligarchs’ to draw attention to this issue. He is correct in trying to advocate solutions to it. In particular his ‘anti-trust’ attack on the banks is worth thinking through in more detail.

In any case I hope you read the article.

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More on Capitalism: Is America Russia?

We really are at an important point in our history. The model of capitalism that dominated the Reagan era has been manifestly revealed as a failure. So the search is on for what to replace it with. At the risk of being repetitive I think it a subject worth continuing to discuss.

Which is why the current series in the Financial Times under the general rubric of “The Future of Capitalism” has been so interesting to follow. Today’s issue is no exception: one of my favorite economics writers, Martin Wolf, weighs in on Simon Johnson’s Atlantic Monthly article describing America as in the thrall of an elite. Here is the Wolf comment: Cutting Back Financial Capitalism is America’s Big Test .

There is a growing consensus that the financial sector needs to be constrained. Johnson pushes the argument to the limit by saying that such is the power of the financial sector that we are prevented from adopting policies sufficient to cure our systemic problems. We are therefore doomed to repeat the current crisis sometime in the future. In a nutshell Johnson says we have become an ’emerging market’ economy: think Russia or Thailand in the 1990’s. Those nations failed to solve their economic crises effectively because both had within them an elite group powerful enough to prevent legislation that harmed it. Consequently what damage did accrue was deflected onto the general populace and the elite managed to persist or even grow in influence with the result that subsequent crises became inevitable.

So the question Wolf asks is: has America become Russia?

Is America so controlled by its financial sector that solutions necessary for long term stability are not even discussed because they would harm the economic interests of the elite?

Wolf answers with a qualified no.

He agrees that the banks are far too influential in Washington and that such things as the stress tests designed to reveal bank weaknesses have therefore been biased to allow most if not all banks to pass. But he also argues that the elite has less direct power than its equivalent in Russia. This, I think, is a valid point. Our banks indisputably wield enormous influence in Washington, but not in the Russian way where corruption is endemic and oligarchs literally make life and death decisions with respect to legislation. Here the influence is more subtle: lobbying is our form of corruption. Where I disagree with Wolf is in his distinction between the two. Just because our corruption is more subtle doesn’t mean that the elite has less influence. On the contrary: because lobbying is seen as an extension of free speech it can be wrapped in the flag. It has constitutional authenticity. The elite can mobilize America’s citizenry to protect its lobbying power by arguing that limits on the ability to buy legislative privilege are actually attacks on the American way of life itself. Overcoming the patriotic ardor of a citizenry thus threatened has become, arguably, the biggest hurdle to getting strong regulation of finance on the agenda.

While Obama and Geithner both mouth strong bromides about getting regulation back in place, it takes no effort at all to see the continuing power of the banking lobby: the Geithner plan is a thinly veiled giveaway of taxpayer money to the elite; bank accounting rules were changed recently to accommodate relaxed reporting of asset values; and any suggestion of a centralized regulatory authority is met with gales of protest. This is hardly evidence of strength. The elite looks very comfortable even within the storm of criticism swirling around it. On the contrary: given the reduced number of players left in the market the central core of the elite looks more powerful. Goldman Sachs earnings reflect an ‘enhanced market position’ according to its CEO. What he means is that his company has reinforced its oligopolistic rent seeking capability – rent seeking is what economists call any activity that allows an economic actor to extract profits above ‘market norms’.

So, overall, I err on the side of Johnson. We have an inherently unstable political and economic structure presently. For the democratic process to re-assert itself we need to break the elite’s ability to channel wealth for its exclusive use. While that power exists, as it has for the past three decades, America is a lot more like Russia than any of us would care to admit.

Wolf is right too: the title of his comment says it all.

Cutting back financial capitalism is America’s big test.

We are failing thus far.