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April 10, 2011

My underlying criticism of economics today is what it  leaves out and not what it includes.  Among the many things left out in its idealized systems is that in the real world markets are manipulatable. The basic drive to avoid competition by gaming and controlling either supply  demand or the markets themselves appear to be either downplayed or ignored by resorting to the myth of the “invisible hand.”


Let me begin by repeating the insightful quote by HM Keynes:

“Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all. “

– JM Keynes

I think we all  for the most part agree with his observation. I would, however, substitute Classical (or Neoclassical) Economic Theory for capitalism. It appears  most economic theory essentially ignores the reality that these nasty men won’t work for the benefit of all of us and perhaps more importantly some of them will unduly effect the course of economic events affecting the rest of us in a negative way.   Many economists appear to approach this problem in one or more of the following ways:

1. They wring their hands and call for political intervention (Keynesians, etc.).

2. They ignore it claiming it could never happen (Neoclassical economists).

3. They consider it an externality along with the host of other externalities that are outside of the scope of their discipline (All).

4. They think it is a good thing (Neoclassical again and others).

To some extent they are all right that this and other supposed defects are external to the discipline.  Such things like ethics, fraud and the commons and so on are beyond the tools of their profession. Looked at another way however, these so called “externalities” represent almost everything that is important and necessary in life and in society. Nevertheless, these panjandrums of industry, academia and government are asked to advise us and even to act on our behalf on such things as jobs, education, food supplies and even our national interest all of which are fundamentally determined by ethics, fraud, the commons and a host of other so called externalities. Unless these externalities, especially the thirst for power, are brought into a sociological system, the discipline will remain both defective and dangerous.

A recent article in WIRED discusses the seemingly inevitable domination of goods and serves by the uncontrolled few and examines its genesis.

“It is the cycle of capitalism. The story of industrial revolutions, after all, is a story of battles over control. A technology is invented, it spreads, a thousand flowers bloom, and then someone finds a way to own it, locking out others. It happens every time.

Take railroads. Uniform and open gauge standards helped the industry boom and created an explosion of competitors — in 1920, there were 186 major railroads in the US. But eventually the strongest of them rolled up the others, and today there are just seven — a regulated oligopoly. Or telephones. The invention of the switchboard was another open standard that allowed networks to interconnect. After telephone patents held by AT&T’s parent company expired in 1894, more than 6,000 independent phone companies sprouted up. But by 1939, AT&T controlled nearly all of the US’s long-distance lines and some four-fifths of its telephones. Or electricity. In the early 1900s, after the standardization to alternating current distribution, hundreds of small electric utilities were consolidated into huge holding companies. By the late 1920s, the 16 largest of those commanded more than 75 percent of the electricity generated in the US.

Indeed, there has hardly ever been a fortune created without a monopoly of some sort, or at least an oligopoly. This is the natural path of industrialization: invention, propagation, adoption, control.

Now it’s the Web’s turn to face the pressure for profits and the walled gardens that bring them. Openness is a wonderful thing in the non monetary economy of peer production. But eventually our tolerance for the delirious chaos of infinite competition finds its limits. Much as we love freedom and choice, we also love things that just work, reliably and seamlessly. And if we have to pay for what we love, well, that increasingly seems OK. Have you looked at your cell phone or cable bill lately?”

And the writer  identifies a rule that describes this tendency to control over the so called market by individuals or a small groups:

“Monopolies are actually even more likely in highly networked markets like the online world. The dark side of network effects is that rich nodes get richer. Metcalfe’s law, which states that the value of a network increases in proportion to the square of connections, creates winner-take-all markets, where the gap between the number one and number two players is typically large and growing.”

To me it seems that this dolorous progression,-invention, propagation, adoption and control — and some version of Metcalfe’s law are vital to a valid description of the economic process. But, in the public debates and analysis of economists on the current state of our society, I rarely observe any recognition that this problem even exists.

The great historian Fernand Braudel pointed out that a “capitalist” does not participate willingly in markets or specialize but instead he searches the world to find whatever it is that would give him control over supply. In other words the last thing he wants is competition.

Perhaps instead of capitalist (which like the word Capitalism) has become defined more by emotion, politics and private interest than any referent , we should call them by the name coined by Buckminster Fuller, “The Great Pirates”.

Although individuals may open shops and small businesses as alternatives to working for someone else, the Great Pirates enter into an enterprise only if in fact there is sizable unmet demand that can be easily controllable, or they perceive the potential for controlling the supply of some good or service. No other purpose makes any sense. To the Great Pirates competition is anathema.

Nor do the Great Pirates plan much beyond the next quarter or to counter immediate perceived threats to their own income and wealth. Nothing else appears to be of particular significance to them except to game whatever system is available for their own benefit (They hire consultants, economists, accountants and attorneys for everything else). As Stephen Herrington put it:

“I’ve never met anyone that was that smart and that ruthless at the same time. Maybe I’ve just not met the man in charge. Bernie Madoff was not that smart, only ruthless. He, like our global finance system, adapted to conditions as they presented themselves. He had no plan other than the next paycheck… Madoff gamed the low interest rates arising from government policy of monetary easing necessitated by tax cuts. He promised higher returns and security where banks and stocks could not. He created a Ponzi scheme not too dissimilar too what global finance undertakes internationally right now. Global finance is loaning, secured by nation/state assets, on assets that will eventually run out and leave the countries loaned to in default and the banks failing because of defaults. They, like Madoff, do not have a plan.

Global finance now preys on government’s obligations to meet the needs of peoples. They loan and government pays, never quite reaching the horizon in which the returns on Keynesian investments in national economies pays off. This has become a global socioeconomic hamster treadmill in which no one benefits except the brokers. Eventually the global economic decline this predicts will affect bankers too. They just refuse to see it coming, like Madoff.” The Huffington Post, May 13, 2010

These Great Pirates individually or in concert exert  a significant  influence in the creation of distortions of the so called market. Failure to account for their influence as sooner or later a given in every market is a core defect in economic theory and if it is treated at all it is treated as an anomaly or dismissed as impossible.

Exacerbating this problem with market capture or dominance is that we are also currently experiencing a fundamental shift in the nature of the institutions that provide the vehicle for this. Corporations were originally created by government for a specific manufacturing or trading venture or task intended to benefit the state.  Because often the uncertainty was so high and the potential size of the loss so great, the then existing debtor laws placed the investor’s estate at risk for confiscation on account of the debts occasioned by the potential failure of the enterprise, therefore it was necessary for the state to protect the investors estate in order to encourage investment in these ventures. After a certain amount of time estimated to be required to achieve the goals of the venture, they were supposed to go out of existence and the market system returned with all its risks intact.

This governmental intrusion (the creation of corporate institutions exempt from individual responsibility) into the supposed normal workings of the market for a public purpose, has over the centuries evolved first into exempting them from any time limit on the existence of the enterprise except organizational suicide or bankruptcy. The latter in most cases merely being a reorganization of their immortality.

Currently, this public  exemption from the basic risks upon which the entire edifice of classical economics is founded  has progressed to where these publicly chartered entities appear to be successfully grasping for the right to be treated as individual citizens under the Constitution but with fewer, if any, duties (including paying taxes should the corporate tax structure be shifted onto a consumption tax as these entities clearly desire).

Nor are they required to adhere to any standard of patriotism other than that needed to sell their products. (When has a corporation gone to war like the citizen solider is required to do?) As one of our founding fathers put it:

“Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.” Thomas Jefferson

As an aside, if the so called bond market vigilantes as so dead set on threatening the government by raising their bond ratings if their income from prior bonds purchased by government are put at risk, shouldn’t they be considered to be traitors or terrorists. The kings of old were willing to throw a few of them in jail whenever they attempted that brand of extortion.

Perhaps one of the most fundamental concepts imbedded in the United States Constitution is the objection to and prohibition of the establishment of hereditary nobility  controlling the resources and power of the nation. After 200 years or so the corporate entities created by we the people for a limited and comprehensible reason, now stand on the threshold of something the nobles of old could only dream about, immortal control of wealth and power.

Add to this creep to an enduring aristocracy of the corporate elite is the evidence that these same entities originally created by us but now almost laws onto themselves have begun to take over (as did the nobles of old) the very functions of government that here in the United States were reserved by our Constitution to we the people.

Corporate officials and employees are involved in all aspects of governing and negotiating “over policy making, implementation, and enforcement,” as one legal scholar has noted. Yet contractors’ imperatives are not necessarily the same as the government’s imperatives. Contractor companies are responsible for making a profit for their shareholders; government is supposedly answerable to the public and the nation in a democracy.

“Amid this environment complicated by mixed motives, new institutional forms of governing have gathered force as government and contractor officials interact (or don’t) in the course of projects; as chains of command among contractors and the agencies they supposedly work for have become ever-more convoluted; as contractors perform inherently governmental functions beyond the capacity of government to manage them; and, as contractors standing in for government are not subject to the same rules that apply to government officials.” Wedel and Keenan, Shadow Elite The Huffington Post, August 26, 2010.

One cannot have a market system where major players in the market are exempt for the risks inherent in the concept. Instead of focussing on returning capital to the rules of the market, the elite seek the Economists as their mouthpieces who dutifully  obsess with other thing things  like breaking up community land holdings in order to bring them into the market (See DeSoto______)

Despite the obviousness of it all and irrespective of the fact that these entities (The Great Pirates and the Multi-national Corporations) are major players on the economic stage and have garnered to themselves the power and ability to destroy and enslave whole societies,  should the worst occur, the economic consultant community I expect, once again, will claim they could not have seen it coming.

Make no mistake about it, this is not Capitalism. Marx was wrong. He did not comprehend the sociology or psychology of it all. This lust for wealth, power and control is fundamental to humanity and the various so called economic systems (Capitalism, Feudalism, Mercantilism, yes and even Socialism and Communism) are merely the mechanism used to assure that the fruits of society are reserved for its most socially irresponsible members. Fraud is endemic to all these systems and yet mostly ignored in their intellectual underpinnings.

As a result of this, the basic concepts of supply and demand are ephemeral at best since both are almost infinitely manipulable (e.g., advertising manipulates demand and monopolization manipulates supply).

Another thing missing in most economic discussions that I have read or listened to, is the impact of transition costs (fees, etc.)inherent in a market as well as the independent entities (brokers, etc) managing the transactions in distorting the ephemeral efficient market (ultimately it is the parasite who usually does the best).

While many astute and responsible people call for a paradigm shift in the essential bases of economics (such as Krugman [New York Times September 2, 2009]) they must be approached with caution since they themselves are practitioners of that very discipline that has been found so wanting.

In Science a physical theory that is logically consistent may be considered to be the truth only until it is falsified.  Once falsified the theory looses its status and should be thrown away.  The Economists wish their discipline to be considered the next best thing to a hard Science but they seem unable accept their theories may be added to the trash heap of history.  Not only is it lacking in its central concepts but almost without exception its practitioners work for the very interests that seek to preserve their hard won ascendency. You would be considered a fool to believe an attorney retained by his opponent when he tells him that is looking out for  your best interests. Why then do we believe the economists?

It we must choose a discipline with which to begin a reformation of this world view, I would much prefer sociology at least there the pretense of a panglossian world is muted. It also does not look back to a founding prophet (Adam Smith) from which all deviations can be described as evolution of the essential truth (whether or not referred to as paradigm shifts). That is a religion and not a science.

What I think is required now is to begin with the basic concept of the society that we wish to live in and the social science we call Economics today should be developed as a mechanism to describe how to get there, that is if we the people hire them before they go to work for those who would prefer we not get there at all.

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