The failures of economic theory have resulted in the failure of capitalism. Capitalism no longer allocates resources efficiently or equitably. Profits are no longer a measure of social welfare. The claim made by economists that capitalism serves social welfare is no longer true.
The Failure Of Laissez Faire Capitalism
Problematic economic doctrines, such as free trade, and the deteriorating information content of price and profit signals caused by rising external costs and shrinking natural capital indicate that empty world economics no longer suffices. We need a new economics for a full world.
Economists will resist such change, because of their investments of their human capital in empty world economics. Status, position, and income flow from one’s stake in the existing economics corpus. Economists will keep a blind eye turned as long as they can.
However, as subsequent sections of this book will illustrate, time is running out for economics as we have known it. Not only have the resurrection of laissez faire capitalism and the claim that markets are self-regulating failed, but also the two main justifications of market capitalism have been destroyed by the emergence of financial institutions that are “too big to fail” and by jobs offshoring. If markets do not eliminate failures, then capitalism’s claim to efficiently allocate resources is undermined. If profits are not a measure of a society’s welfare, the justification of profit maximization no longer exists. The theoretical edifice that associates capitalism with social welfare collapses. The purpose of this section is to make that clear.
The economic and financial mess in which the US and Europe find themselves and which has been exported to much of the rest of the world is the direct consequence of too much economic freedom. The excess freedom is the direct consequence of financial deregulation.
The definition of free markets is ambiguous. At times it means a market without any regulation. In other cases it means markets in which prices are free to reflect supply and demand. Sometimes it means competitive markets free of monopoly or concentration. Free market economists have made a mistake by elevating an economy that is free of regulation as the ideal. This ideological position overlooks that regulation can increase economic efficiency and that without regulation external costs can offset the value of production.
Before going further, let’s be clear about what is regulated. Economists reify markets: the market did this, the market did that. But the market is not an actor. The market is a social institution. People act, and it is the behavior of people that is regulated. When free market economists describe the ideal as the absence of any regulation of economic behavior, they are asserting that there are no dysfunctional consequences of unregulated economic behavior.
If this were in fact the case, why should this result be confined to economic behavior? Why should not all human behavior be unregulated? Why is it that economists recognize that robbery, rape, and murder are socially dysfunctional, but fail to see unlimited debt leverage and misrepresentation of financial instruments as socially dysfunctional? The claim, as expressed by former Federal Reserve chairman Alan Greenspan along with others, that “markets are self-regulating” is an assertion that unrestrained individuals are self-regulating. How did anyone ever believe that?
When Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, Deputy Treasury Secretary Larry Summers, and SEC Chairman Arthur Levitt browbeat Brooksley Born, head of the Commodities Future Trading Corporation, and prevented her from doing her duty to regulate over-the-counter derivatives, we witnessed either the four most stupid public officials in human history or four crooks setting up a new scam for Wall Street.
The financial crisis that resulted has spread its devastating effects everywhere. The explosions in public debt and money creation, which have resulted from efforts to bailout the financial system from its own stupidity and greed, have brought the US dollar and the euro, the two reserve currencies of the international financial system, under pressure, threatening the reserve currency status of the currencies and the international financial system with collapse.
Obviously, the lack of financial regulation was dysfunctional in the extreme, and the social costs of the policy error are enormous.
Thirty-three years ago in an article in the Journal of Monetary Economics (August 1978), “Idealism In Public Choice Theory,” I presented a model to assess the benefits and costs of regulation. I argued that well-thought-out regulation could be a factor of production that increases Gross National Product. For example, regulation that contributes to the quality and safety of food and medicines encourages specialization in production and lower costs, and regulations enforcing contracts and private property rights add to economic efficiency.
On the other hand bureaucracies build their empires and extend their regulations into the realm of negative returns. Moreover, as regulations increase, economic managers spend more time in red tape and less in productive activity. As rules proliferate, they become contradictory and result in paralysis.
I had hopes that my analysis would result in a more thoughtful approach to regulation, but to no avail. Partisans of larger government continued to argue that more regulation was better, and libertarians maintained than none was best.
The ongoing financial crisis has given us a taste of what the absence of regulation can produce. Despite the enormous cost, the financial system remains unregulated. As soon as Wall Street devises a new financial instrument and finds new suckers, debacle will again happen.
The ambiguous concept of freedom in economics has laid other minefields. Until the Clinton administration, economic concentration was seen as impinging on economic freedom. As late as the Reagan administration, AT&T was broken up. The Clinton administration permitted the concentration of the media. Formerly, this concentration would not only have been considered “in restraint of trade,” but also contrary to the American tradition of a diverse and independent press. Today mergers and concentration of economic power are no longer seen as encroachments on competitive markets but as necessary to maintain global competitiveness. In the George W. Bush and Obama administrations, we have witnessed enormous financial concentrations.
One consequence has been that financial corporations can no longer be held accountable as they “are too big to fail.” Thus, the economists’ story of how the market weeds out the failures can no longer be told. The failures accumulate and are subsidized with public money. This is the antithesis of economic efficiency.
The dispersed power that made the market a socially functional institution is disappearing. For example, capital is free to concentrate, but labor unions, a “countervailing power” to capital, are being destroyed. Jobs offshoring has destroyed the manufacturing unions, and now politicians are using the state and local budget crises to destroy public sector unions. Unbridled capitalism, no longer restrained by regulation or by countervailing power, has reemerged. The Robber Barons have been resurrected.
Developments since the collapse of the Soviet Union 20 years ago have confused economists and produced results that threaten the edifice of economic theory. Economists have confused jobs offshoring with free trade. However, as we have seen, jobs offshoring is not trade at all. It is labor arbitrage. Free trade theory is based on comparative advantage. Labor arbitrage is the pursuit of absolute advantage.
Profits resulting from jobs offshoring raise questions about economic theory’s justification of profit maximization. Theoretically, profits are justified, because they are evidence that resources were efficiently used in producing consumer satisfaction and are a measure of the economic welfare of the society. This conclusion no longer holds when profits are produced by rendering a country’s work force unemployed. Offshoring separates consumers from the incomes and careers associated with the production of the goods and services that they consume. The profits from offshoring reflect the economic welfare of the foreign country. Therefore, the edifice that economists have built that justifies market capitalism as the deliverer of economic wel
fare to society no longer stands.
PART TWO
The New Dispossession
Class war is raging in the US and Europe. It is the political elites and the monied interests that control them against everyone else. In the US class war of the “one percent” against the “99 percent” has created the Occupy Wall Street (OWS) movement as a response from the “99 percent.” In Europe it has brought citizens into the streets in Greece, Spain, and Italy.
The dispossession of the people has gone beyond economic dispossession; citizens are being dispossessed socially and politically as well. The US is no longer a model of “freedom and democracy.” Citizens have been stripped of representative government and the Constitution’s guarantee of civil liberty. Citizens who still vote find that the ballot box is unable to bring change.
Americans have been dispossessed politically, because (1) they have lost representative government, (2) they have lost the accountability of government to law, and (3) they have lost their civil liberties that protected them from a police state and the use of law as a weapon by government.
Americans have been dispossessed economically, because (1) millions of middle class jobs have been moved offshore to China, India, and other low wage locations, (2) the burden of massive losses in the financial sector has been placed on taxpayers and on the US dollar’s credibility as world reserve currency, and (3) continued high immigration and work visas for foreigners further impair the ability of unemployed Americans to find a job.
Americans have been dispossessed socially, because (1) the ladders of upward mobility have been dismantled, (2) a university education is no longer a path to a middle class existence, (3) millions have lost their homes and careers, (4) median income has been falling for a number of years, and (5) the income and wealth distribution is now so skewed toward the top that a small number of people control the wealth, the income that wealth produces, and the political power that money buys.
I will discuss these elements of dispossession in the order in which they are listed.
Political Dispossession
Elected representatives are unresponsive to voters. Election outcomes are almost always determined by money. Therefore, representatives are responsive to those who provide their campaign funds. Seldom are these people the voters. Campaign funds are provided by interest groups, such as Wall Street, the military-security complex, agri-business, the American-Israeli Public Affairs Committee, and large corporations in general. In 2010 the US Supreme Court ruled that it is merely the exercise of free speech, a constitutionally protected right, when powerful corporations purchase the US government with campaign donations.
This “protected right” is not protected for war protesters and other dissidents, as we will see.
President Richard Nixon was the last US president to be held accountable to law. There was an unsuccessful effort to hold president Bill Clinton accountable. However, the George W. Bush administration succeeded in elevating the president above the law. President Bush succeeded in violating the Foreign Intelligence Surveillance Act (FISA) and spied on Americans without obtaining warrants from the FISA court.
Bush also succeeded in violating both US and international laws against torture. In placing the president above the law, the Bush administration had the help of the Federalist Society, an organization of Republican lawyers who believe that the president has unique powers that place executive decisions above the reach of the legislature and the courts.
By failing to hold Bush and officials of his administration accountable for their unambiguous violations of law, the Obama administration has, in effect, accepted the constitutional coup that has elevated the president above the law. The American president is now a Caesar.
The transformation of the president into a caesar coincided with “the war on terror.” The Bush regime used fear created by the “terrorist threat” to deny to detainees and accused people both constitutional protections and the protections of the Geneva Conventions. Initially, it was only foreign “enemy combatants” who were held without due process. However, accused American citizens soon found themselves denied habeas corpus, right to an attorney, and due process. (See, for example http://www.informationclearinghouse.info/article29167.htm ) Unconstitutional laws, such as the PATRIOT Act, were passed to provide legal cover for constitutional violations by the executive branch.
A massive new federal police agency, Homeland Security, was created in 2002 to protect Americans from a non-existent “terrorist threat.” By 2011 this federal police agency had shifted its focus from terrorists to “domestic extremists,” defined as war protesters, environmentalists, animal rights activists, and everyone else of whom elites disapprove. In 2011 FBI agents burst into the homes of peace activists in Michigan, North Carolina, Wisconsin and other states seizing the residents’ computers and other possessions that could possibly be misconstrued as evidence in behalf of the charge that the peace activists had given material support to foreign terrorist organizations by opposing America’s wars. (See, for example, http://www.opednews.com/articles/How-the-Road-from-9-11-Led-by-Jess-Sundin-110908-814.html ) Federal grand juries are now convened in efforts to indict peace activists under terrorism laws.
The government is working to shut down all its critics. US citizen-soldier Bradley Manning has been held for two years mainly in solitary confinement under abusive conditions that many equate with torture without any charges presented to a court on suspicion that he leaked documents to Wikileaks. A federal grand jury is at work in Alexandria, Virginia, concocting spy charges against Wikileaks founder Julian Assange. Obama regime official Cass Sunstein wants the 9/11 Truth movement to be infiltrated by intelligence agents and shut down.
A distinguished international attorney, professor Francis A. Boyle of the University of Illinois, was put on the terrorist watch list because he refused a FBI/CIA request to violate the attorney-client privilege and inform on his clients.
Justin Raimondo, proprietor of the Internet news site, antiwar.com, discovered that his site was under surveillance by the FBI for suspect activities.
The CIA is prohibited from domestic spying. However, a report from the Associated Press revealed that the CIA in conjunction with the New York Police Department has been conducting a “human mapping program.” According to news reports, “undercover officers known as ‘rakers’ have been dispatched into minority neighborhoods” to monitor “daily life in bookstores, bars, cafes and nightclubs.” Informants are used “to monitor sermons, even when there’s no evidence of wrongdoing.”
The police obtain informants by such means as framing Pakistani cab drivers and dropping the charges if the Pakistani agrees to infiltrate and inform on the Muslim community. The next step, of course, is to have the informer bring false charges. This illegal and unconstitutional activity is justified in the name of “preventing another 9/11.”
Wired magazine reports that the FBI conducts a training program for its agents that teaches that Muslim-Americans are “violent” and “radical,” even though there is no evidence that American Muslim citizens are violent and radical. ( http://www.wired.com/dangerroom/2011/09/fbi-muslims-radical/all/1 )
Americans are being turned against Muslims in a way similar to how Germans were turned against Jews. According to Wired magazine, “The FBI is teaching its counterterrorism agents that ‘mainstream’ American Muslims are likely to be terrorist sympathizers; that the Prophet Mohammed was a ‘cult leader;’ and that the Islamic practice of giving charity is no more than a ‘funding mechanism for combat.’ At the Bureau’s training ground in Quantico, Virginia, agents are shown a chart contending that the more ‘devout’ a Muslim, the more likely he is to be ‘violent.’ Those destructive tendencies cannot be reversed, an FBI instructional presentation adds: ‘Any war against non-believers is justified’ under Muslim law; a ‘moderating process cannot happen if the Koran continues to be regarded as the word of Allah.’”
Think about that for a moment. No Muslim country has atta
cked the US. According to the official reports, the 9/11 hijackers were mainly Saudi Arabians and were not acting on behalf of any Muslim government. Yet, the US government has launched wars against three Muslim states--Afghanistan, Iraq, and Libya--and conducts military operations against alleged terrorists in three other Muslim states--Pakistan, Yemen, and Somalia, operations that have resulted in countless civilian deaths. General Wesley Clark has reported that Syria, Lebanon, and Iran remain on the target list.
Which is the violent state? Who is invading who? Which state is committing the war crime of unprovoked aggression?
The United States went to war against Iraq based on intentional lies about non-existent “weapons of mass destruction” and conjured up images of “mushroom clouds” from non-existent nuclear weapons programs. How does this differ from Adolf Hitler’s claim that “last night Polish troops crossed the frontier and attacked Germany?”
These criminal violations of US statutory law by the US government are chosen at random among numerous similar examples. They are powerful evidence that the United States is now a police state comparable to the early stages of Stalinist Russia and Nazi Germany. This statement will seem extreme to Russians and Germans who remember the Stalin and Nazi eras. However, a police state does not require that the population of a country is put into concentration camps. Neither Stalin nor Hitler had more than a small percentage of the populations in camps. A police state is a state in which citizens do not have the protection of law and in which the government and its police agencies are not accountable to law. As the George W. Bush and Barack Obama regimes have made clear, the US government can violate its own laws, and nothing is done about it. The US government can deny its citizens their constitutional rights and nothing is done about it. The US government can announce that it has assassinated its own citizens, and nothing is done about it. The situation will worsen.
B00BLPJNWE EBOK Page 8