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Should the Wealthiest Person Be President of the United States?

Friday, 03 August 2012 00:00 By William K Black, SpeakOut | Opinion

Murray's Divine Rights of Plutocrats

Charles Murray believes that the wealthiest person should be made President of the United States. "Who better to be president of the greatest of all capitalist nations than a man who got rich by being a brilliant capitalist?"

If the standard is wealth makes right, then the wealthier the person, the more appropriate that he should be made President. There is no need for elections or fixed terms of office under this standard of political governance. Whoever tops the Forbes list becomes President – that will create the appropriate competitive incentives. Wealth being the full measure of a man there is no need for that the wealthiest person to be a U.S. citizen. Under the Murray governance standard Mitt Romney's problem is that he is not wealthy enough to be our ruler. Carlos Slim can run all of North America south of Canada.

Alternatively, if we limit the eligible list of our rulers to U.S. citizens, Bill Gates will be our President with Vice President Buffett. Larry Ellison will be waiting in the wings. If Charles and David Koch agree to combine their fortunes in a single corporation wholly owned by them ("corporations are people") their corporation will be Gate's Vice President.

Murray does not propose his version of the divine right of plutocrats to rule as a satire of Social Darwinism. He is serious. This is one application of the thesis of his most recent book, which asserts that the wealthy are morally superior to the poor and that the key failure of the wealthy is their unwillingness to get in the face of poor people and upbraid them for their moral defects. The willingness of the wealthy to provide financial assistance to the poor is their greatest moral failing. (As you read this article you will discover that Murray's op ed in the Wall Street Journal contradicts the thesis of his most recent book by showing that the financial elites who dominate our economy are moral cripples.)

Note that Murray's analytics-free claim is simply an act of labeling – "capitalist nation." If we label the U.S. anything else: "democratic," "humane," "warrior," "scientific," etc. we end up with a different type of leader even under Murray's embrace of Social Darwinism.

Murray's Plaint: Our Plutocrats Are Unloved

Murray claims that plutocrats are morally superior and that their problem is "image" not substance. Murray has to play fast and loose with the term "capitalism" to assert his historical claims that capitalism always leads to greater wealth and reduced poverty. It is mixed economic systems that embrace private and public efforts that have demonstrated the greatest economic success in reducing poverty. Social Security, for example, greatly reduced poverty. The nation that best embodies a nonexistent state, unfettered capitalism, an NRA paradise, and ruling elites who delight in flaunting their purported moral superiority is Somalia. Murray's historical fictions are not the subject of this column.

This column focuses on Murray's complaint that plutocrats are not more popular and politically powerful and his explanation for why this is so.

"Capitalist" has become an accusation. The creative destruction that is at the heart of a growing economy is now seen as evil. Americans increasingly appear to accept the mind-set that kept the world in poverty for millennia: If you've gotten rich, it is because you made someone else poorer.

What happened to turn the mood of the country so far from our historic celebration of economic success?

Two important changes in objective conditions have contributed to this change in mood. One is the rise of collusive capitalism. Part of that phenomenon involves crony capitalism, whereby the people on top take care of each other at shareholder expense (search on "golden parachutes").

But the problem of crony capitalism is trivial compared with the collusion engendered by government. In today's world, every business's operations and bottom line are affected by rules set by legislators and bureaucrats. The result has been corruption on a massive scale. Sometimes the corruption is retail, whereby a single corporation creates a competitive advantage through the cooperation of regulators or politicians (search on "earmarks"). Sometimes the corruption is wholesale, creating an industrywide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind.

Creative Construction and Uncreative Destruction

The first paragraph makes a series of false claims. The mainstream media (including MSNBC) and the Obama administration do not criticize Governor Romney as a "capitalist." "Creative destruction" is not "the heart of a growing economy." Creative construction is. Schumpeter's notion was that the creation of superior products and firms led to the creative destruction of inferior products and poorly managed firms. When firms that make products that consumers want fail because firms based in other nations are able to violate labor laws with impunity the result is uncreative destruction. When firms fail because they are looted by their managers the result is uncreative destruction.

Capitalism Was Often Negative Sum

"Capitalist" enterprises often became wealthy by making other people poorer. They did so in some nations by making people serfs, in other nations by making them slaves, and in many colonial nations by stealing their natural resources. The depredations were not limited to making other people poorer – they often made other people dead. The West Indies and Brazil were giant killing fields that made European business owners wealthy through the deaths of tens of thousands of enslaved indigenous peoples and millions of African slaves. European diseases devastated the peoples of the Americas, allowing Europeans to seize their land. It wasn't a "mindset" that warned that colonial capitalists commonly became wealthy by making other people poor or dead that kept people in poverty – it was the reality that they did so that killed tens of millions and left the survivors mired in poverty.

Capitalism, without the restraints of democratic government and infected with the twin poisonous beliefs in the inferiority of the "other" and the need to save the "heathen" from eternal damnation by bringing them to Christianity led to the self-glorification that business men at the forefront of colonialism and imperialism were heroes taking up "the white man's burden." This led to the most infamous phrase the U.S. Supreme Court has ever issued, in the1857 Dred Scott case: non-whites had "no rights which the white man was bound to respect."

Murray's Moral Myths

Murray's whitewash of historical reality leads him to pine for the days of propaganda aimed at convincing American school kids that rapine theft was "virtue."

Another factor is the segregation of capitalism from virtue. Historically, the merits of free enterprise and the obligations of success were intertwined in the national catechism. McGuffey's Readers, the books on which generations of American children were raised, have plenty of stories treating initiative, hard work and entrepreneurialism as virtues, but just as many stories praising the virtues of self-restraint, personal integrity and concern for those who depend on you. The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived.

What "stern moral obligation to act in certain ways" is Murray's fantasy history pitching? Did male slave masters pass routinely pass up the opportunity to rape their slaves? It is precisely the total absence of any reciprocal rights that the Supreme Court emphasized in Dred Scott. The slave owner, absent a statute, could humiliate, rape, torture, and murder black slaves with impunity. Because slaves were the primary source of wealth, slave owners often used crueler forms of "discipline." They would simply threaten to sell the father or mother "down the river" to another owner and separate the parent from children. Of course, to make the threat credible it was necessary to periodically rip slave families apart so that slaves would not forget their place.

McGuffey's Readers have plenty of passages disparaging Native Americans as "savages," Jews as the killers of Christ, and ignoring the scandal of gaining wealth through slavery. They embrace the sexism of the era (publication began in 1837). They are religious tracts that support the superiority of Protestants and laud Calvinist views (which support Murray's view that God makes the "elect" wealthy in recognition of their moral superiority and his special favor for the elect). The assertion that God makes his chosen wealthy is stunningly contrary to the actual Gospels, and prefigures the modern heresy of the "gospel of wealth." Murray's nostalgia for the good old days of 1837 America is revealing.

Business was not characterized in this era by the highest morals. Sexual abuse of girls providing child labor in British clothing mills was common enough to be a national disgrace. Workers in the U.S. who joined unions were frequently fired. The Robber Barons routinely committed white-collar crimes with impunity. The "stern moral obligation" was to act in a manner that maintained the power and special privileges of the wealthy that freed them from normal moral obligations.

Crony Capitalism

Murray admits the rise of "crony capitalism" in America and admits that it is deserving of condemnation rather than "our historic celebration of economic success." But Murray claims that our descent into crony capitalism is "trivial" compared to:

"The collusion engendered by government. In today's world, every business's operations and bottom line are affected by rules set by legislators and bureaucrats. The result has been corruption on a massive scale."

Murray makes no attempt to support these factual claims. He makes three factual claims:

  1. Legislators and bureaucrats have imposed their will on business
  2. The imposition causes corruption on a massive scale
  3. This form of collusion renders crony capitalism trivial in comparison

Murray asserts that this this massive corruption occurs on the retail and wholesale level.

Sometimes the corruption is retail, whereby a single corporation creates a competitive advantage through the cooperation of regulators or politicians (search on "earmarks"). Sometimes the corruption is wholesale, creating an industrywide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind.

But there is an immediate problem. The "retail" corruption he cites exemplifies crony capitalism. The corporation "creates a competitive advantage" by using its unique political influence. Murray has again stacked the deck through his labels. Here is how he defines crony capitalism:

Part of that phenomenon involves crony capitalism, whereby the people on top take care of each other at shareholder expense (search on "golden parachutes").

"Crony capitalism" as he uses the term involves solely elite private sector actors helping each other at the expense of the shareholders and creditors. What nations were synonymous with the phrase "crony capitalism?" Indonesia under Suharto was the classic example in which businesses that employed his relatives and cronies received special favors from the government that created advantages for those firms. Scholars discussing the East Asian crisis said that the term indicated a "(c) close relationship between government, business and banks, which was termed as indicating crony capitalism."

Murray's attempt to blame the government for corrupt business breaks down immediately once we strip away his false labels. In his own words, the CEO is the corrupt player who uses political contributions and the prospects of lucrative employment in the future with the firm to induce legislators and bureaucrats to structure laws and rules to give his firm unique competitive advantages. This is the core of crony capitalism.

Consider what Murray's example shows us about the virtues of the wealthy. It is hard to get wealthy in truly competitive markets. It takes highly unusual skills to do so. It is easy to get wealthy through crony capitalism. The entire purpose of crony capitalism is to create unfair advantages so that one can defeat even superior competitors. The crony capitalist creates a "sure thing." Note that Murray's example demonstrates the CEOs' total absence of virtue and integrity. It also demonstrates the flaw in assuming that the winners are virtuous and the losers' failure represents "creative destruction." Allowing crony capitalists to destroy superior firms and products is uncreative destruction that creates massive waste and human injury.

Gresham's Dynamics: Bad Ethics and Crony Capitalism Drives Good Ethics Out of the Market

Murray's attempt to segregate retail and wholesale crony capitalism also fails once one considers the "Gresham's dynamic" that inherently results from Murray's example. If a corporation is able to use its political contributions and lobbyists to secure a law granting it a competitive advantage then only firms that mimic its crony capitalism tactics can survive. In a Gresham's dynamic; bad ethics drives good ethics from the markets. A Nobel Laureate in economics explained the process.

"[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence." George Akerlof (1970).

The perverse dynamic, however, has been understood for centuries.

"The Lilliputians look upon fraud as a greater crime than theft. For, they allege, care and vigilance, with a very common understanding, can protect a man's goods from thieves, but honesty hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage" (Swift, J. Gulliver's Travels).

This dynamic can cause fraud or crony capitalism to become endemic. It can also cause cartels – businesses can pool their political influence to secure favorable legislation that will aid an entire industry and erect barriers to competitive entrants. Murray fails to understand that retail crony capitalism must lead to wholesale crony capitalism.

Murray attempts to picture wholesale crony capitalism as (1) not being crony capitalism and (2) being driven by government as perpetrator with the firm as victim. He provides two purported examples of wholesale crony capitalism.

Sometimes the corruption is wholesale, creating an industrywide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind.

I am not a supporter of ethanol, but I believe that labeling it "corruption" stretches that term beyond any reasonable meaning. The subsidy for ethanol never posed any risk of driving gasoline out of the markets and the subsidy has been repealed. There was never any evidence that the public turned on "capitalism" because the ethanol industry secured a subsidy. The ethanol subsidy was a relatively minor example of crony capitalism, not "corruption." The key movant on behalf of the subsidy was the ethanol industry.

Murray's Mortgage Myths

Murray also simply asserts that the public is enraged at "capitalism" because "low-interest mortgages" were made to "people who are unlikely to pay them back." That assertion is again contrary to the facts on multiple grounds that I have documented on numerous occasions. First, it was overwhelmingly lenders and their agents who put the lies in liar's loans. Second, no governmental entity ever required any lender to make or any entity (and that includes Fannie and Freddie) to purchase liar's loans. Third, the regulators warned lenders against making liar's loans. Fourth, the entities that urged the Federal Reserve to use its unique statutory authority under HOEPA to ban liar's loans included ACORN, the NAACP, and a host of prosecutors and housing advocates – while the industry successfully urged the anti-regulators (Greenspan and Bernanke) to refuse to do so. Fifth, the fraudulent liar's loans were high not "low-interest." Sixth, the reason that lenders made fraudulent liar's loans to millions of borrowers who could not repay the loans was that the "recipe" by which a lender's controlling officers maximize accounting control fraud requires it to make massive amounts of bad loans at a premium yield. Seventh, as George Akerlof and Paul Romer explained in their 1993 article ("Looting: the Economic Underworld of Bankruptcy for Profit"), accounting fraud is a "sure thing" that in conjunction with modern executive compensation ensures that the controlling officers will promptly become wealthy through accounting fraud. Eighth, the same recipe that maximizes fictional accounting income and real executive compensation also maximizes real losses. Senior bank officers did grow wealthy by impoverishing millions of borrowers.

It was ability of the controlling officers of our most elite banks to become wealthy by committing endemic frauds with impunity that hyper-inflated the housing bubble and drove our financial crisis. The senior bank officers committing these frauds cost households trillions of dollars in losses and many millions of people their jobs. They don't have an "image" problem, they are the substantive problem. Elites that grow wealthy by harming working class people are despicable and the public is disgusted by them. Their attempt to evade responsibility based on the big lie that "the government made me do it" only adds to our disgust. The fraudulent elite bankers' exceptional influence over regulators and politicians is what makes this a case of crony capitalism. The influence of the crony capitalists explains why they were able to commit millions of frauds annually for several years with impunity.

Murray's Efficient Markets Myth

Murray concludes that during the financial crisis: "The good that these rich people have done in the process of getting rich is obscure." It is obscure, because it is non-existent. They grew rich by looting their customers and the shareholders their fiduciary duty was to protect. Murray says the problem is that the finance plutocrats are so much smarter than us than we cannot understand the good that they do. "The benefits of more efficient allocation of capital are huge, but they are really, really hard to explain simply and persuasively." It's particularly hard to explain when the frauds have systematically misallocated capital – producing the largest and most destructive real estate bubbles in history and the resultant financial crises and the Great Recession. When the largest banks in the world conspire to manipulate Libor capital is misallocated. When HSBC aids drug cartels, terrorists, and helps Iran develop nuclear weapons capital is misallocated. When the banks engage in systemic foreclosure fraud they misallocate capital. When the banks form cartels to raise fees for bond issuers they misallocate capital. When banks are systemically dangerous institutions (SDIs) they receive a large, implicit governmental subsidy that misallocates capital. When banks deceive their customers on credit card fees or overdraft fees they misallocate capital.

Murray: It's All Our Teachers' and Mom and Dad's Fault That Our CEOs Are Crooks

Murray ends with two claims as to what has gone wrong. Good capitalists are supposedly unwilling to condemn fraudulent capitalists because American teachers and parents have embraced situational ethics.

The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived.

To accept the concept of virtue requires that you believe some ways of behaving are right and others are wrong always and everywhere. That openly judgmental stand is no longer acceptable in America's schools nor in many American homes. Correspondingly, we have watched the deterioration of the sense of stewardship that once was so widespread among the most successful Americans and the near disappearance of the sense of seemliness that led successful capitalists to be obedient to unenforceable standards of propriety.

Murray's myth is that capitalists used to be virtuous and exercised effective peer restraints that prevented other capitalists from acting unethically. When was this golden age of peerless capitalist peers? It is lost in myth. Capitalists are the victims of those awful teachers and parents and their fraud-friendly homilies.

(An aside about ethics and virtue: Murray does not understand virtue ethics. It does not hold that "some ways of behaving are right and others are wrong always and everywhere." It was virtuous to lie to the Gestapo.)

All That is Necessary to the Triumph of Evil...

Note that Murray concedes in the passage I have just quoted that today's "capitalists" don't have an "image" problem. Their problem is that the "near disappearance" of any "sense of seemliness." This has led to them to no longer adhere to "standards of propriety." "Capitalists" have also lost their "sense of stewardship." They no longer feel a "stern moral obligation" to act properly.

Murray also admits that even honest business people made no effort to prevent their fraudulent counterparts' crimes or even to criticize their frauds.

Many senior figures in the financial world were appalled by what was going on during the run-up to the financial meltdown of 2008. Why were they so silent before and after the catastrophe? Capitalists who behave honorably and with restraint no longer have either the platform or the vocabulary to preach their own standards and to condemn capitalists who behave dishonorably and recklessly.

Does Murray seriously want us to believe his assertion that honest financial CEOs lack the "vocabulary" and the "platform" to criticize the actions of fraudulent financial CEOs? The CEOs of massive financial firms can have a "platform" to speak about finance any time they want. They have PR departments and lobbyists that can arrange unparalleled platforms to reach the public, the regulators, Congress, and the White House. What "vocabulary" do they lack? They all know the word "fraud." They lacked the will and the ethics, not the vocabulary.

"Kinship" Among the Plutocrats, Murray's Disdain for Class Traitors – Why Isn't Prosecuting the Elite Financial Frauds a Top Priority of the Right?

Indeed, while promulgating another myth, Murray unintentionally explains why honest plutocrats lacked the will to criticize fraudulent plutocrats.

[L]arge numbers of today's successful capitalists are people of the political left who may think their own work is legitimate but feel no allegiance to capitalism as a system or kinship with capitalists on the other side of the political fence. Furthermore, these capitalists of the left are concentrated where it counts most. The most visible entrepreneurs of the high-tech industry are predominantly liberal. So are most of the people who run the entertainment and news industries. Even leaders of the financial industry increasingly share the politics of George Soros.

The supposed "large" and "increasing" numbers of "successful capitalists" "of the political left" are a myth. Soros and Buffett are (1) moderates and (2) have been willing to criticize the banksters. The Plutocrats sometimes contribute to both political parties in order to maximize their access, but they are overwhelmingly people of the right and the Kochs and Ellison are ultra-far right. What is revealing about the passage is that Murray considers Soros to be a class traitor.

Murray bemoans the loss of "kinship with capitalists on the other side of the political fence." The "kinship" that he implicitly acknowledges characterizes Plutocrats of the right is the problem. The honest Plutocrats feel more kinship with their increasingly numerous fraudulent Plutocrats than they do with the American people. The result is that it is difficult to find any meaningful criticism or demand for honesty by the financial plutocrats of the right during or even after the crisis. Indeed, Murray remains conspicuously silent even now. The paper is which he wrote, the Wall Street Journal, is notorious for its domination by apologists for elite frauds. James Q. Wilson, the scholar most associated with the "broken windows" theory of policing that rested on the vital need to crack down on even the most minor of status offenses by the poor in order to build virtuous behavior remained silent as even the most egregious elite financial frauds became endemic and caused a global catastrophe.

Capitalism v. Government is a False Dichotomy – Mixed Systems are Essential

The classic economists knew that the government was essential to provide a rule of law and that private ownership of property did not lead to any assurance of prosperity or ethical conduct. Murray does not understand that the financial regulators must serve as the effective "cops on the beat" for "capitalism" to function well. Rules are not synonymous with crony capitalism. Intelligent rules on prudent underwriting impose no costs on honest lenders and protect them from the Gresham's dynamic under which cheaters prosper and markets become so perverse that they uncreatively destroy honest firms. Prosecuting the elite financial frauds that drove the crisis, under Murray's reasoning, is the single most desirable thing that we could do to begin to restore morality and make financial markets safer and more effective. When will Murray cease pandering to the often fraudulent plutocrats and develop a "kinship" with the 99 percent rather than the one percent?

This article is a Truthout original.

William K Black

William K. Black, J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City.


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Should the Wealthiest Person Be President of the United States?

Friday, 03 August 2012 00:00 By William K Black, SpeakOut | Opinion

Murray's Divine Rights of Plutocrats

Charles Murray believes that the wealthiest person should be made President of the United States. "Who better to be president of the greatest of all capitalist nations than a man who got rich by being a brilliant capitalist?"

If the standard is wealth makes right, then the wealthier the person, the more appropriate that he should be made President. There is no need for elections or fixed terms of office under this standard of political governance. Whoever tops the Forbes list becomes President – that will create the appropriate competitive incentives. Wealth being the full measure of a man there is no need for that the wealthiest person to be a U.S. citizen. Under the Murray governance standard Mitt Romney's problem is that he is not wealthy enough to be our ruler. Carlos Slim can run all of North America south of Canada.

Alternatively, if we limit the eligible list of our rulers to U.S. citizens, Bill Gates will be our President with Vice President Buffett. Larry Ellison will be waiting in the wings. If Charles and David Koch agree to combine their fortunes in a single corporation wholly owned by them ("corporations are people") their corporation will be Gate's Vice President.

Murray does not propose his version of the divine right of plutocrats to rule as a satire of Social Darwinism. He is serious. This is one application of the thesis of his most recent book, which asserts that the wealthy are morally superior to the poor and that the key failure of the wealthy is their unwillingness to get in the face of poor people and upbraid them for their moral defects. The willingness of the wealthy to provide financial assistance to the poor is their greatest moral failing. (As you read this article you will discover that Murray's op ed in the Wall Street Journal contradicts the thesis of his most recent book by showing that the financial elites who dominate our economy are moral cripples.)

Note that Murray's analytics-free claim is simply an act of labeling – "capitalist nation." If we label the U.S. anything else: "democratic," "humane," "warrior," "scientific," etc. we end up with a different type of leader even under Murray's embrace of Social Darwinism.

Murray's Plaint: Our Plutocrats Are Unloved

Murray claims that plutocrats are morally superior and that their problem is "image" not substance. Murray has to play fast and loose with the term "capitalism" to assert his historical claims that capitalism always leads to greater wealth and reduced poverty. It is mixed economic systems that embrace private and public efforts that have demonstrated the greatest economic success in reducing poverty. Social Security, for example, greatly reduced poverty. The nation that best embodies a nonexistent state, unfettered capitalism, an NRA paradise, and ruling elites who delight in flaunting their purported moral superiority is Somalia. Murray's historical fictions are not the subject of this column.

This column focuses on Murray's complaint that plutocrats are not more popular and politically powerful and his explanation for why this is so.

"Capitalist" has become an accusation. The creative destruction that is at the heart of a growing economy is now seen as evil. Americans increasingly appear to accept the mind-set that kept the world in poverty for millennia: If you've gotten rich, it is because you made someone else poorer.

What happened to turn the mood of the country so far from our historic celebration of economic success?

Two important changes in objective conditions have contributed to this change in mood. One is the rise of collusive capitalism. Part of that phenomenon involves crony capitalism, whereby the people on top take care of each other at shareholder expense (search on "golden parachutes").

But the problem of crony capitalism is trivial compared with the collusion engendered by government. In today's world, every business's operations and bottom line are affected by rules set by legislators and bureaucrats. The result has been corruption on a massive scale. Sometimes the corruption is retail, whereby a single corporation creates a competitive advantage through the cooperation of regulators or politicians (search on "earmarks"). Sometimes the corruption is wholesale, creating an industrywide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind.

Creative Construction and Uncreative Destruction

The first paragraph makes a series of false claims. The mainstream media (including MSNBC) and the Obama administration do not criticize Governor Romney as a "capitalist." "Creative destruction" is not "the heart of a growing economy." Creative construction is. Schumpeter's notion was that the creation of superior products and firms led to the creative destruction of inferior products and poorly managed firms. When firms that make products that consumers want fail because firms based in other nations are able to violate labor laws with impunity the result is uncreative destruction. When firms fail because they are looted by their managers the result is uncreative destruction.

Capitalism Was Often Negative Sum

"Capitalist" enterprises often became wealthy by making other people poorer. They did so in some nations by making people serfs, in other nations by making them slaves, and in many colonial nations by stealing their natural resources. The depredations were not limited to making other people poorer – they often made other people dead. The West Indies and Brazil were giant killing fields that made European business owners wealthy through the deaths of tens of thousands of enslaved indigenous peoples and millions of African slaves. European diseases devastated the peoples of the Americas, allowing Europeans to seize their land. It wasn't a "mindset" that warned that colonial capitalists commonly became wealthy by making other people poor or dead that kept people in poverty – it was the reality that they did so that killed tens of millions and left the survivors mired in poverty.

Capitalism, without the restraints of democratic government and infected with the twin poisonous beliefs in the inferiority of the "other" and the need to save the "heathen" from eternal damnation by bringing them to Christianity led to the self-glorification that business men at the forefront of colonialism and imperialism were heroes taking up "the white man's burden." This led to the most infamous phrase the U.S. Supreme Court has ever issued, in the1857 Dred Scott case: non-whites had "no rights which the white man was bound to respect."

Murray's Moral Myths

Murray's whitewash of historical reality leads him to pine for the days of propaganda aimed at convincing American school kids that rapine theft was "virtue."

Another factor is the segregation of capitalism from virtue. Historically, the merits of free enterprise and the obligations of success were intertwined in the national catechism. McGuffey's Readers, the books on which generations of American children were raised, have plenty of stories treating initiative, hard work and entrepreneurialism as virtues, but just as many stories praising the virtues of self-restraint, personal integrity and concern for those who depend on you. The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived.

What "stern moral obligation to act in certain ways" is Murray's fantasy history pitching? Did male slave masters pass routinely pass up the opportunity to rape their slaves? It is precisely the total absence of any reciprocal rights that the Supreme Court emphasized in Dred Scott. The slave owner, absent a statute, could humiliate, rape, torture, and murder black slaves with impunity. Because slaves were the primary source of wealth, slave owners often used crueler forms of "discipline." They would simply threaten to sell the father or mother "down the river" to another owner and separate the parent from children. Of course, to make the threat credible it was necessary to periodically rip slave families apart so that slaves would not forget their place.

McGuffey's Readers have plenty of passages disparaging Native Americans as "savages," Jews as the killers of Christ, and ignoring the scandal of gaining wealth through slavery. They embrace the sexism of the era (publication began in 1837). They are religious tracts that support the superiority of Protestants and laud Calvinist views (which support Murray's view that God makes the "elect" wealthy in recognition of their moral superiority and his special favor for the elect). The assertion that God makes his chosen wealthy is stunningly contrary to the actual Gospels, and prefigures the modern heresy of the "gospel of wealth." Murray's nostalgia for the good old days of 1837 America is revealing.

Business was not characterized in this era by the highest morals. Sexual abuse of girls providing child labor in British clothing mills was common enough to be a national disgrace. Workers in the U.S. who joined unions were frequently fired. The Robber Barons routinely committed white-collar crimes with impunity. The "stern moral obligation" was to act in a manner that maintained the power and special privileges of the wealthy that freed them from normal moral obligations.

Crony Capitalism

Murray admits the rise of "crony capitalism" in America and admits that it is deserving of condemnation rather than "our historic celebration of economic success." But Murray claims that our descent into crony capitalism is "trivial" compared to:

"The collusion engendered by government. In today's world, every business's operations and bottom line are affected by rules set by legislators and bureaucrats. The result has been corruption on a massive scale."

Murray makes no attempt to support these factual claims. He makes three factual claims:

  1. Legislators and bureaucrats have imposed their will on business
  2. The imposition causes corruption on a massive scale
  3. This form of collusion renders crony capitalism trivial in comparison

Murray asserts that this this massive corruption occurs on the retail and wholesale level.

Sometimes the corruption is retail, whereby a single corporation creates a competitive advantage through the cooperation of regulators or politicians (search on "earmarks"). Sometimes the corruption is wholesale, creating an industrywide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind.

But there is an immediate problem. The "retail" corruption he cites exemplifies crony capitalism. The corporation "creates a competitive advantage" by using its unique political influence. Murray has again stacked the deck through his labels. Here is how he defines crony capitalism:

Part of that phenomenon involves crony capitalism, whereby the people on top take care of each other at shareholder expense (search on "golden parachutes").

"Crony capitalism" as he uses the term involves solely elite private sector actors helping each other at the expense of the shareholders and creditors. What nations were synonymous with the phrase "crony capitalism?" Indonesia under Suharto was the classic example in which businesses that employed his relatives and cronies received special favors from the government that created advantages for those firms. Scholars discussing the East Asian crisis said that the term indicated a "(c) close relationship between government, business and banks, which was termed as indicating crony capitalism."

Murray's attempt to blame the government for corrupt business breaks down immediately once we strip away his false labels. In his own words, the CEO is the corrupt player who uses political contributions and the prospects of lucrative employment in the future with the firm to induce legislators and bureaucrats to structure laws and rules to give his firm unique competitive advantages. This is the core of crony capitalism.

Consider what Murray's example shows us about the virtues of the wealthy. It is hard to get wealthy in truly competitive markets. It takes highly unusual skills to do so. It is easy to get wealthy through crony capitalism. The entire purpose of crony capitalism is to create unfair advantages so that one can defeat even superior competitors. The crony capitalist creates a "sure thing." Note that Murray's example demonstrates the CEOs' total absence of virtue and integrity. It also demonstrates the flaw in assuming that the winners are virtuous and the losers' failure represents "creative destruction." Allowing crony capitalists to destroy superior firms and products is uncreative destruction that creates massive waste and human injury.

Gresham's Dynamics: Bad Ethics and Crony Capitalism Drives Good Ethics Out of the Market

Murray's attempt to segregate retail and wholesale crony capitalism also fails once one considers the "Gresham's dynamic" that inherently results from Murray's example. If a corporation is able to use its political contributions and lobbyists to secure a law granting it a competitive advantage then only firms that mimic its crony capitalism tactics can survive. In a Gresham's dynamic; bad ethics drives good ethics from the markets. A Nobel Laureate in economics explained the process.

"[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence." George Akerlof (1970).

The perverse dynamic, however, has been understood for centuries.

"The Lilliputians look upon fraud as a greater crime than theft. For, they allege, care and vigilance, with a very common understanding, can protect a man's goods from thieves, but honesty hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage" (Swift, J. Gulliver's Travels).

This dynamic can cause fraud or crony capitalism to become endemic. It can also cause cartels – businesses can pool their political influence to secure favorable legislation that will aid an entire industry and erect barriers to competitive entrants. Murray fails to understand that retail crony capitalism must lead to wholesale crony capitalism.

Murray attempts to picture wholesale crony capitalism as (1) not being crony capitalism and (2) being driven by government as perpetrator with the firm as victim. He provides two purported examples of wholesale crony capitalism.

Sometimes the corruption is wholesale, creating an industrywide potential for profit that would not exist in the absence of government subsidies or regulations (like ethanol used to fuel cars and low-interest mortgages for people who are unlikely to pay them back). Collusive capitalism has become visible to the public and increasingly defines capitalism in the public mind.

I am not a supporter of ethanol, but I believe that labeling it "corruption" stretches that term beyond any reasonable meaning. The subsidy for ethanol never posed any risk of driving gasoline out of the markets and the subsidy has been repealed. There was never any evidence that the public turned on "capitalism" because the ethanol industry secured a subsidy. The ethanol subsidy was a relatively minor example of crony capitalism, not "corruption." The key movant on behalf of the subsidy was the ethanol industry.

Murray's Mortgage Myths

Murray also simply asserts that the public is enraged at "capitalism" because "low-interest mortgages" were made to "people who are unlikely to pay them back." That assertion is again contrary to the facts on multiple grounds that I have documented on numerous occasions. First, it was overwhelmingly lenders and their agents who put the lies in liar's loans. Second, no governmental entity ever required any lender to make or any entity (and that includes Fannie and Freddie) to purchase liar's loans. Third, the regulators warned lenders against making liar's loans. Fourth, the entities that urged the Federal Reserve to use its unique statutory authority under HOEPA to ban liar's loans included ACORN, the NAACP, and a host of prosecutors and housing advocates – while the industry successfully urged the anti-regulators (Greenspan and Bernanke) to refuse to do so. Fifth, the fraudulent liar's loans were high not "low-interest." Sixth, the reason that lenders made fraudulent liar's loans to millions of borrowers who could not repay the loans was that the "recipe" by which a lender's controlling officers maximize accounting control fraud requires it to make massive amounts of bad loans at a premium yield. Seventh, as George Akerlof and Paul Romer explained in their 1993 article ("Looting: the Economic Underworld of Bankruptcy for Profit"), accounting fraud is a "sure thing" that in conjunction with modern executive compensation ensures that the controlling officers will promptly become wealthy through accounting fraud. Eighth, the same recipe that maximizes fictional accounting income and real executive compensation also maximizes real losses. Senior bank officers did grow wealthy by impoverishing millions of borrowers.

It was ability of the controlling officers of our most elite banks to become wealthy by committing endemic frauds with impunity that hyper-inflated the housing bubble and drove our financial crisis. The senior bank officers committing these frauds cost households trillions of dollars in losses and many millions of people their jobs. They don't have an "image" problem, they are the substantive problem. Elites that grow wealthy by harming working class people are despicable and the public is disgusted by them. Their attempt to evade responsibility based on the big lie that "the government made me do it" only adds to our disgust. The fraudulent elite bankers' exceptional influence over regulators and politicians is what makes this a case of crony capitalism. The influence of the crony capitalists explains why they were able to commit millions of frauds annually for several years with impunity.

Murray's Efficient Markets Myth

Murray concludes that during the financial crisis: "The good that these rich people have done in the process of getting rich is obscure." It is obscure, because it is non-existent. They grew rich by looting their customers and the shareholders their fiduciary duty was to protect. Murray says the problem is that the finance plutocrats are so much smarter than us than we cannot understand the good that they do. "The benefits of more efficient allocation of capital are huge, but they are really, really hard to explain simply and persuasively." It's particularly hard to explain when the frauds have systematically misallocated capital – producing the largest and most destructive real estate bubbles in history and the resultant financial crises and the Great Recession. When the largest banks in the world conspire to manipulate Libor capital is misallocated. When HSBC aids drug cartels, terrorists, and helps Iran develop nuclear weapons capital is misallocated. When the banks engage in systemic foreclosure fraud they misallocate capital. When the banks form cartels to raise fees for bond issuers they misallocate capital. When banks are systemically dangerous institutions (SDIs) they receive a large, implicit governmental subsidy that misallocates capital. When banks deceive their customers on credit card fees or overdraft fees they misallocate capital.

Murray: It's All Our Teachers' and Mom and Dad's Fault That Our CEOs Are Crooks

Murray ends with two claims as to what has gone wrong. Good capitalists are supposedly unwilling to condemn fraudulent capitalists because American teachers and parents have embraced situational ethics.

The freedom to act and a stern moral obligation to act in certain ways were seen as two sides of the same American coin. Little of that has survived.

To accept the concept of virtue requires that you believe some ways of behaving are right and others are wrong always and everywhere. That openly judgmental stand is no longer acceptable in America's schools nor in many American homes. Correspondingly, we have watched the deterioration of the sense of stewardship that once was so widespread among the most successful Americans and the near disappearance of the sense of seemliness that led successful capitalists to be obedient to unenforceable standards of propriety.

Murray's myth is that capitalists used to be virtuous and exercised effective peer restraints that prevented other capitalists from acting unethically. When was this golden age of peerless capitalist peers? It is lost in myth. Capitalists are the victims of those awful teachers and parents and their fraud-friendly homilies.

(An aside about ethics and virtue: Murray does not understand virtue ethics. It does not hold that "some ways of behaving are right and others are wrong always and everywhere." It was virtuous to lie to the Gestapo.)

All That is Necessary to the Triumph of Evil...

Note that Murray concedes in the passage I have just quoted that today's "capitalists" don't have an "image" problem. Their problem is that the "near disappearance" of any "sense of seemliness." This has led to them to no longer adhere to "standards of propriety." "Capitalists" have also lost their "sense of stewardship." They no longer feel a "stern moral obligation" to act properly.

Murray also admits that even honest business people made no effort to prevent their fraudulent counterparts' crimes or even to criticize their frauds.

Many senior figures in the financial world were appalled by what was going on during the run-up to the financial meltdown of 2008. Why were they so silent before and after the catastrophe? Capitalists who behave honorably and with restraint no longer have either the platform or the vocabulary to preach their own standards and to condemn capitalists who behave dishonorably and recklessly.

Does Murray seriously want us to believe his assertion that honest financial CEOs lack the "vocabulary" and the "platform" to criticize the actions of fraudulent financial CEOs? The CEOs of massive financial firms can have a "platform" to speak about finance any time they want. They have PR departments and lobbyists that can arrange unparalleled platforms to reach the public, the regulators, Congress, and the White House. What "vocabulary" do they lack? They all know the word "fraud." They lacked the will and the ethics, not the vocabulary.

"Kinship" Among the Plutocrats, Murray's Disdain for Class Traitors – Why Isn't Prosecuting the Elite Financial Frauds a Top Priority of the Right?

Indeed, while promulgating another myth, Murray unintentionally explains why honest plutocrats lacked the will to criticize fraudulent plutocrats.

[L]arge numbers of today's successful capitalists are people of the political left who may think their own work is legitimate but feel no allegiance to capitalism as a system or kinship with capitalists on the other side of the political fence. Furthermore, these capitalists of the left are concentrated where it counts most. The most visible entrepreneurs of the high-tech industry are predominantly liberal. So are most of the people who run the entertainment and news industries. Even leaders of the financial industry increasingly share the politics of George Soros.

The supposed "large" and "increasing" numbers of "successful capitalists" "of the political left" are a myth. Soros and Buffett are (1) moderates and (2) have been willing to criticize the banksters. The Plutocrats sometimes contribute to both political parties in order to maximize their access, but they are overwhelmingly people of the right and the Kochs and Ellison are ultra-far right. What is revealing about the passage is that Murray considers Soros to be a class traitor.

Murray bemoans the loss of "kinship with capitalists on the other side of the political fence." The "kinship" that he implicitly acknowledges characterizes Plutocrats of the right is the problem. The honest Plutocrats feel more kinship with their increasingly numerous fraudulent Plutocrats than they do with the American people. The result is that it is difficult to find any meaningful criticism or demand for honesty by the financial plutocrats of the right during or even after the crisis. Indeed, Murray remains conspicuously silent even now. The paper is which he wrote, the Wall Street Journal, is notorious for its domination by apologists for elite frauds. James Q. Wilson, the scholar most associated with the "broken windows" theory of policing that rested on the vital need to crack down on even the most minor of status offenses by the poor in order to build virtuous behavior remained silent as even the most egregious elite financial frauds became endemic and caused a global catastrophe.

Capitalism v. Government is a False Dichotomy – Mixed Systems are Essential

The classic economists knew that the government was essential to provide a rule of law and that private ownership of property did not lead to any assurance of prosperity or ethical conduct. Murray does not understand that the financial regulators must serve as the effective "cops on the beat" for "capitalism" to function well. Rules are not synonymous with crony capitalism. Intelligent rules on prudent underwriting impose no costs on honest lenders and protect them from the Gresham's dynamic under which cheaters prosper and markets become so perverse that they uncreatively destroy honest firms. Prosecuting the elite financial frauds that drove the crisis, under Murray's reasoning, is the single most desirable thing that we could do to begin to restore morality and make financial markets safer and more effective. When will Murray cease pandering to the often fraudulent plutocrats and develop a "kinship" with the 99 percent rather than the one percent?

This article is a Truthout original.

William K Black

William K. Black, J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City.


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